Residency rules made simpler

SMSF residency rules

Changes to the residency rules for SMSFs, including the scrapping of the active member test, are expected to significantly simplify the superannuation system

SMSF stakeholders have lauded the changes made to the residency rules in this year’s federal budget as a move that enhances simplicity, fairness and practicality in the retirement savings system.

To this end, Treasurer Josh Frydenberg announced the central control and management test safe harbour will be increased from two to five years for SMSFs and the active member test will be scrapped, effectively allowing individuals to make contributions while overseas just as members of public offer funds are allowed to do.

The measures will take effect from the start of the first financial year after the legislation receives royal assent.

“The rules are quite complex and it’s quite easy to be tripped up by them. Once you are tripped up and no longer satisfying the residency rules or the definition of an Australian superannuation fund, the SMSF changes its tax status from complying to non-complying. That change not only means the fund’s tax rate changes from the concessional 15 per cent to the top marginal rate, currently 45 per cent,” Accurium head of education Mark Ellem told selfmanagedsuper.

“Also there is a statutory amount that is included in the fund return for that year the tax status changes, being effectively the opening balance of members’ accounts less any tax-free component, so it’s quite a severe penalty for that.

“So this relaxation of the rules extending the two-year safe harbour to five years and getting rid of the active member test provides flexibility and recognises there will continue to be a global workforce both before and after COVID.”

SuperGuardian education manager Tim Miller agreed the measure is a common-sense amendment and described the easing of the safe harbour parameters from two to five years as appropriate.

“Once you’re looking beyond five years, you’re starting to push the boundaries of what’s permanent anyhow. Also, from a historical perspective, from the lawyers I’ve dealt with, for most people the issue has been that they weren’t going to be away for longer than three or four years, but they were going to be away for longer than that two-year period,” Miller told selfmanagedsuper.

“So extending to five years probably takes away 90 per cent of the problems.”

Ellem pointed out there was one detail SMSF members still needed to recognise, regardless of the announcement.

“One important thing to remember, though, with the safe harbour rule, is that the absence from Australia still has to be established as temporary at the time the member leaves,” he said.

SMSF Association deputy chief executive and policy and education director Peter Burgess told selfmanagedsuper these were the exact changes the industry body had previously recommended.

“Both of those reforms will significantly simplify the residency rules and better reflect the fact that many members, when they go overseas for work, will typically be away for longer than two years, particularly a lot of executive appointments,” Burgess said.

“So we think it makes a lot of sense and we are particularly pleased with those measures.”

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