Fund residency requirements generally
For an SMSF to be a 'complying fund' and receive concessional tax treatment, the SMSF must be an Australian resident fund. SMSFs are at risk of losing their complying status, if their members spend time working overseas. This is because the residency rules require trustees and the majority of contributing members to reside in Australia.
For a fund to remain resident, the fund has to satisfy the residency rules throughout an income year -- unless an exception applies.
The trustees' presence rule
Generally speaking, for SMSFs, the individual trustees of the fund must be the same people as the fund's members. Similarly, if a fund has a corporate trustee, then the directors of the trustee company must be the same people as the fund's members.
Under the residency rules, central management and control of the SMSF must be in Australia: this implies that the trustee directors or individual trustees must function in Australia. Although these are commonly called residency rules, on closer examination they actually involve a physical presence test, rather than a residency test.
The exception to the trustees' presence rule
However, there is one exception: a trustee or director may be absent from Australia for a continuous period of up to 2 years and still not jeopardise the fund's complying status. To start the 2 year period again, the person must return to Australia for a visit of more than 28 days.
The risk to the SMSF by a breach of the trustees' presence rule
The problem then, is that an overseas assignment of more than 2 years may well pose a residency problem for an SMSF -- unless the assignment is broken by a return to Australia for a month or more.
The active members asset rule
Non-resident members must not have more than 50% of the total fund of active members
Member residency requirements revolve around the concept of an "active" member. Generally speaking, an active member is a member who is resident in Australia and currently contributing to the SMSF, or having contributions made by their employer to the SMSF.
Under another rule, the accumulated entitlements of non-resident active members must not exceed 50% of the entitlements of total active members -- unless an exception applies.
The exception to the active members asset rule
However, there is also an exception to this rule. The amount of active member entitlements does not include those of a member:
- who does not contribute to the fund when they are non-resident; and
- who does not have contributions made by their employer to the fund in respect of periods of non-residency
This exception is available because the member is considered non-active.
Non-active, non-resident members still cause a problem…down the track
Even if that exception applies, a non-active, non-resident member will still present a problem to the SMSF if they are overseas for more than 2 years. This is because the SMSF will not be able to comply with the trustees' presence rule.
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