SMSFs failing the residency test will find the ATO is unable to offer any discretion, leading to substantial tax penalties, and any tax agent is obligated to report a breach of this nature, two technical experts have stated.
Heffron senior SMSF specialist Annie Dawson said a fund will fail the residency test in the eyes of the ATO if it does not meet the central management and control test at all times.
“There are several tax consequences as a result of that. The tax rate on the fund’s income will be 45 per cent in the current financial year onwards,” Dawson stated during an online briefing today.
“There are other tax consequences as well. The fund isn’t allowed to have exempt current pension income. The capital gains tax discount isn’t a third, it’s actually 50 per cent because it gets taxed as a normal trust, and even certain expenses aren’t deductible.
“The other thing that is particularly bad is at the start of the financial year in which a fund ceases to be an Australian super fund, there is a taxation event where the fund has to include in its assessable income for the current financial year an amount equal to the market value of the fund’s assets at the start of the financial year, less any contributions the fund has previously received that weren’t assessable, such as non-concessional contributions.
“That is a very harsh and significant penalty, and the tricky bit is the ATO doesn’t have any discretion about this, even if it was unintended that the fund ceased to meet the rules. There isn’t a mechanism under the law for the ATO to look away when it comes to this particular provision.”
Dawson and Heffron SMSF specialist Sean Johnston noted tax agents were also unable to overlook this breach in their review of an SMSF.
“It’s your job, if you are the tax agent, to self assess if that breach has occurred. There are questions at the start of the annual return where you say whether it is an Australian super fund,” Dawson said.
Johnston added: “For anybody who is a tax agent, you can’t overlook a residency issue either.
“It’s not one of those things that once you know about it you just close your eyes and move on because when you are submitting that client’s tax return, you are making a false and misleading statement. If it all comes to light, and it may well do, you could also be on the hook with that one.
“Residency is one of those things not to be taken lightly and it’s a scary result for nearly everyone involved.”
