Retirement, Superannuation

New residency rules lack precision

SMSF residency rules

Changes to residency rules announced in last week’s federal budget may not eliminate harsh outcomes resulting from breaches of the law covering this area.

The changes to the SMSF residency rules contained in the 2021/22 federal budget could have been more effective in simplifying the retirement savings framework if the extension of the safe harbour period was more definitive, a technical manager has said.

This year’s budget contained a measure increasing the number of years SMSF trustees can spend overseas without breaching the Australian superannuation fund status requirements – the safe harbour provision – from two to five years.

Commenting on the change, Heffron head of SMSF technical and education services Lyn Formica pointed out the nature of the legislation has not changed, which means the announcement may not be as effective in addressing some of the issues arising from the current residency rules.

“In my view it still requires us to be temporarily absent. Perhaps it’s easier to satisfy in the sense that perhaps I can look longer [and think] two years was a good guide for a temporary [absence] before, so is now five years a good guide to a temporary [absence]? That may be the way that we look at it, [but] obviously we’ll need to wait [until] we see the amending legislation,” Formica said during a post-budget webinar last week.

“It would have been preferable for the government to have given us a true safe harbour [that is, rules stipulating] you can be gone for five years and then you need to return. That type of concept.

“Or given us some sort of amnesty rule so that if we’ve got someone that inadvertently breaches the residency rule, we don’t have this draconian tax treatment whereby we’re automatically becoming a non-complying fund.

“[Right now] I think what a lot of people do is try and hide the situation because they know the ATO doesn’t have any discretion to overlook [a breach of the safe harbour provisions.]”

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