Andrew Heaven of WealthPartners has been publishing a weekly informative article about finance in The Australian, entitled The Coach. As part of this series, you can send your questions here (scroll to the bottom, to the “Your Questions” section) and they will be answered by Andrew.
Over the following weeks, we will be re-publishing a selection of Andrew’s articles on the WealthPartners blog, so stay tuned!
Q: Is it correct that if you have your own Self Managed Super fund, of which you are a trustee, you can’t leave the country for more than six months in any one year? My wife and I had been considering spending a good chunk of our retirement in a cottage in France.
A: Self Managed Super Fund (SMSF) doesn’t preclude regular overseas travel, so you can feel free to enjoy your cottage in France. You can even stay there for longer than six months at a time; however, there is some careful planning required to make sure you don’t get caught out with unintended financial consequences to you and your fund. If your fund gets declared to be a non-resident fund, the government will tax all of the assets of the fund at 45 per cent. Note that’s not tax on earnings, that’s tax on all assets of the fund!
In order to avoid these penalties, you first need to ensure that central management and control of your fund is ordinarily in Australia. There is an exemption provided for absences of two years or less, even if the actual central management and control is outside of Australia during this time. This means a trustee can effectively travel overseas for periods of up to two years and still make decisions concerning investment strategy without causing problems. When travelling overseas for longer periods, the trustees run the risk of failing to satisfy these criteria. Due to the massive financial penalties involved in getting this wrong, it is advisable to never be out of the country for more than two years at a time unless you have very good records regarding where management of the fund occurs.
Additionally, further restrictions apply for the fund to accept contributions where members of the fund are overseas. An active member is defined as a member who has a contribution paid to their fund. The trustees must ensure that, of the active members, at least 50 per cent (weighted by balance in the fund, not number of members) must be located in Australia at the time of contribution. Assuming that you don’t have other members of the fund who account for over 50 per cent of the assets, then your fund can’t accept any contributions while you are overseas, without being immediately declared non-resident and facing stiff tax penalties.
While not insurmountable, the requirements for keeping your SMSF an Australian Resident Fund can sometimes be quite onerous and mistakes expensive. If meeting residency requirements will cause problems, alternatives should be considered. It can be prudent to consider converting the fund to a Small APRA Fund. Small APRA Funds have an external approved trustee, which is always resident in Australia, thus solving all residency problems in one go. While not exactly the same as an SMSF, they can often achieve the same outcomes and can be worth considering.
Alternatively, the simplest solution is often to close the SMSF in favour of a retail superannuation fund. Either of these solutions allows complete freedom to travel the world while still enjoying tax concessions on your super in Australia.
This article was published in The Australian on 10 August 2011. A direct link to the article can be found here.
If you have a question you would like Andrew to answer, you can go here and click on the “Your Questions” section.