Residency of SMSFs is critical to maintain the benefits of tax concessions. For a SMSF to meet the residency status, three tests must be satisfied:
- The SMSF must be set up in Australia and holds any asset in Australia;
- The central management and control of the SMSF must be in Australia;
- If there are active members in the SMSF, they should hold at least 50% of the assets in the SMSF and they should be Australian residents (i.e. active member test).
The first two tests are relatively easier to comprehend compared to the active member test. It is the active member test that causes many SMSFs to become non-resident.
In order to understand the test, two things need to be remembered;
- The concept of “active member”. An active member is a member who contributes to his/her SMSF or contributions are made to the SMSF on his/her behalf. Additionally, if a member becomes a non Australian resident for tax purposes, he/she will become a non-resident member as well.
- The 50% rule. If an SMSF has both resident members and non-resident members and non-resident members make contributions into the SMSF, then their superannuation balance must not be over 50% of the balance of all resident active members of the SMSF. Trustees should never ignore the word “active”, as they may easily have a delusion that if the balance of non-resident members is less than 50% of balance of all other members, it is safe. However, it is wrong. For example, Garry and Melissa are two members of a SMSF. Gary is an Australian resident for tax purposes, but Melissa is not. Currently the superannuation balance of Gary is $150,000 and the one of Melissa is $20,000. During the year, Melissa makes a contribution into the SMSF of $5,000, but John does not make any contributions. As John is not an active member, Melissa (non-resident member)’s superannuation balance is more than 50% of the balance of all resident active members (i.e. 0). So the SMSF is a non-resident fund even though John’s superannuation balance is more than 50% of the SMSF’s total balance.
Therefore if a SMSF’s non-resident members’ balance is at least 50% of the total balance of resident active members, they should not make any further contributions to the fund as the SMSF may become non-resident. Once the SMSF becomes non-resident, the tax rate on the earnings will soar from 15% to a horrible 45% in the first year of its non-residency. I am sure no SMSF trustees are willing to see that happen.
Disclaimer: Campbell McCart is an SMSF specialist and principal auditor of the SMSF Super Auditors. His advice is general in nature and you should seek professional advice that relates to your specific circumstances before making any decisions.