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Compliance, Regulation

System fine without active member test

Active member test

The active member test for overseas SMSF trustees would become irrelevant if the current approach to rollovers and personal contributions was improved, an SMSF expert says.

The active member test for SMSFs can be removed without threatening the integrity of the superannuation system, according to a technical expert.

SuperConcepts SMSF technical and strategic solutions executive manager Philip La Greca said the active member test would become irrelevant if the current regulatory approach to rollovers and personal contributions was improved for SMSF members who live overseas.

In a blog post on the SuperConcepts website, La Greca pointed out rollovers did not need to be part of the active member test because the existence of the asset or establishment test and the central control and management test made a third residency test unnecessary.

“Rollovers should be excluded from [the active member test] because if the other two residency tests are met, we are not adding new money to the superannuation system, only moving existing money between different complying superannuation funds,” Le Greca said.

“This would eliminate the current discrimination which would exist where a person who is overseas can move their benefits between Australian Prudential Regulation Authority (APRA)-regulated funds with no consequence and even from an SMSF to an APRA-regulated fund, but would be prevented from rolling from an APRA-regulated fund to an SMSF.”

In addition to excluding rollovers from the active member test, he noted personal contributions should only be permitted if the member making the contribution was a resident for tax purposes in the same financial year the contribution was made.

“Doing this would mean we could remove the active member test entirely,” he said.

In the event a contribution was made by a non-resident SMSF member, the SMSF should not be regarded as non-complying, he added. Instead, the contribution should be refunded using the mechanism currently in place for refunding excess non-concessional contributions, he said.

“All contributions are already reported to the ATO and the information includes the member’s name, date of birth and tax file number. It would thus be possible for the ATO to determine if the member was a resident for tax purposes and if the person was not a resident, issue the equivalent of an excess contribution release authority to the SMSF,” he noted.

“All this would streamline the issues that need to be addressed for SMSF members moving overseas and still maintain the integrity of the superannuation system.”

Last month, the SMSF Association said the active member test should be removed and central control and management exceptions extended to five years to better reflect current overseas working and travel arrangements.

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