You can take it with you – for a while

Resident regulated superannuation fund

A fund is a resident regulated superannuation fund at a particular time (the “relevant time”) if it satisfies the definition of an Australian superannuation fund at that time by meeting the following conditions:

> either the fund was established in Australia or any asset of the fund at the relevant time is situated in Australia;

> at the relevant time, the central management and control of the fund is ordinarily in Australia; and

> if the fund has at least one “active member” at the relevant time, the total superannuation interests of resident active members are 50 per cent or more of the total superannuation interests of active members of the fund at the relevant time. A fund without an active member at the relevant time will therefore only need to satisfy the first three conditions.

The Superannuation Industry (Supervision) Act 1993 states that an entity is a complying superannuation fund if the entity was a resident regulated superannuation fund at all times during the year of income when the entity was in existence.

On the other hand, if the fund is not a resident regulated superannuation fund at all times during the year it is non-complying for tax purposes and will forgo the tax concessions otherwise afforded. The tax rate applicable to a non-complying superannuation fund is 45 per cent.

This should be motivation enough to ensure the fund is a resident regulated superannuation fund at all times.

However, if the fund is unlikely to satisfy the definition, trustees should consider winding up the fund, appointing an approved trustee or restructuring the fund to ensure compliance.

Central management and control

Implied in the central management and control condition is the requirement for the trustees to be a resident, as the ‘central management and control’ of a fund is usually where the trustees (or directors of the corporate trustee) meet to attend to the business of a fund.

As the place where trustees’ decisions are made is critical, it is possible that if the majority of individual trustees (directors of the corporate trustee) are located overseas (eg, they work overseas), the central management and control condition cannot be met.

Changes in the legislation ensure that central management and control is ordinarily in Australia if the management and control is outside of Australia for a period no longer than two years.

Temporary absence

Prior to July 1, 2007, a superannuation fund was able to satisfy an alternative test to the central management and control condition known as the two-year temporary absence rule. This was mainly directed at self-managed superannuation funds (SMSF), where all members must be trustees or directors of the corporate trustee of the fund.

The key to this test was that trustees could return to Australia for a period greater than 28 consecutive days and re-start the two-year rule. From July 1, 2007, this alternative test has been removed.

Active member

An active member is one who:

(a) is a contributor to the fund at the particular time; or

(b) another person had made before that time, or makes at or after that time, contributions to the fund on the member’s behalf in respect of the year of income in which that time occurs.

For the purposes of this definition, contributions include rollovers.

Trustee options

It can be assumed that most if not all SMSFs will satisfy the first condition to be an Australian superannuation fund.

Therefore, the issues of concern are non-resident members contributing to the fund and/or satisfaction of the central management and control test.

If a fund is confronted with these issues the following points should be considered.

In the case of a non-resident member wishing to contribute to a public offer/retail fund:

> Ensure resident active member interests remain greater than 50 per cent of total superannuation interests of all active members. If balances are similar between resident and non-resident members this may require resident members to match any contribution made by non-resident members.

To maintain central management and control in Australia:

> delegate trustee powers to a resident trustee for period of absence;

> appoint a legal personal representative who holds an enduring power of attorney to act as trustee for the period of absence;

> appoint an ‘approved trustee’ and change the status of the fund from a SMSF to a small APRA fund. This will satisfy the central management and control test but the member must still give consideration to the active member requirements. The transfer to an approved trustee will not incur a capital gains tax liability as there is no beneficial change of ownership of the underlying assets of the fund.

The Australian Taxation Office (ATO) has released a number of Interpretive Decisions on this matter.

ATO ID 2001/592 raises the issue of a fund with a member who is a non-resident but is also not an active member for the purposes of the law.

The fund appointed a new resident trustee and the ATO concluded that if “the non-member resident trustee will be looking after the affairs of the fund while the inactive member remains outside of Australia, the central management and control of the fund will be in Australia”. This ensured that the fund continued to be a resident regulated superannuation fund.

In ATO ID 2002/559 a SMSF with two non-resident members and a corporate trustee was considered a non-resident superannuation fund. In this particular case, both members were active non-resident members as they were contributing to the fund.

They failed the test on two counts, as, firstly, the central management and control was outside of Australia, but secondly the total accumulated benefits of active non-resident members was greater than 50 per cent of the total accumulated benefits.

Even if these members had not been active members of the fund they still would have failed, the test due to the central management and control.

Planning ahead

While a fund’s residency status is often clouded by the uncertainty associated with a member travelling from and to Australia, the rules are very specific and clearly outlined for all trustees.

The problems usually stem from trustees not giving consideration to the circumstances until it is too late or their two years are about to expire.

These issues can be avoided with some forward planning, and in most instances trustees will want to implement the strategy that results in the least amount of impact on their fund.

Tim Miller is technical services manager at Cavendish Superannuation.