ATO, Superannuation, Tax

Relaxed residency rules can still pose risk

residency rules

Trustees unable to return to Australia in order to meet their SMSF residency rules requirements might find themselves ineligible for income tax concessions regardless of the ATO’s more lenient approach as a result of the COVID-19 pandemic, an SMSF audit expert has said.

Highlighting the SMSF residency rules requirement preventing members from being absent from Australia for more than two years in order for the central management and control of the fund to remain in Australia, BDO Australia partner Shirley Schaefer said auditors should not be complacent in light of the ATO’s relaxed response to trustees forced to remain overseas for a longer period because of the COVID-19 pandemic.

Schaefer pointed out trustees who were unable to return to Australia within the two- year period due to the pandemic might still be ineligible for income tax concessions, despite the regulator stating it would not apply compliance resources to chasing down non-resident trustees or non-resident SMSFs.

“[The ATO’s response] doesn’t mean there hasn’t been a breach of the law [if trustees are unable to return to Australia due to COVID-19]. The ATO just won’t pursue it,” she said last week at the SMSF Association Technical Day 2020.

“There may well still be an audit issue. It’s a financial statement audit consideration rather than a Superannuation Industry (Supervision) Act 1993 compliance matter, but certainly if the SMSF is not a tax resident and the residency rules have been breached, then there is always a risk that concessional tax rates will not apply.”

As a result, she said auditors needed to look at the possibility of tax being understated as trustees in this situation could find their SMSF taxed at the top marginal tax rate instead of receiving a 15 per cent tax rate.

“The ATO has said that if it’s due to the pandemic, then that tax is reduced, but it is still something that the auditor does need to address if the trustees are impacted,” she added.

“[Auditors] need to document in their audit file how they’ve [established] the tax risk or financial statements are not materially misstated.”

She also noted trustees will need to provide evidence they have considered the impact of the significant events of 2020 on their SMSF investment strategy even if the strategy ultimately remains unchanged.

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