The pitfalls of moving overseas with a Self Managed Super Fund
10 Nov 2013
If you have a Self Managed Super Fund (SMSF) then like many trustees the chances are you are probably unaware of a rule which requires what is known as the central management and control of your SMSF to be conducted within Australia.
You can think of your fund's central management and control as being the day-to-day operations of your SMSF including trustee activities such as:
- Formulating and reviewing the investment strategy of the fund
- Reviewing the portfolio's assets
- Making decisions on the payment of members' benefits.
Unfortunately the rules surrounding the central management and control test for a SMSF are not very specific, and are applied on a case-by-case basis - making it a minefield for the unwary. For example, there are allowances for temporary periods of up to two years where the central management and control function can be conducted outside of Australia.
The need to plan ahead
What is critical to consider is your intentions at the time of your overseas departure. If you are a trustee and are planning to leave Australia indefinitely while continuing to manage your SMSF from your overseas residence, your SMSF will fail the central management and control test.
However, if you only intend to relocate overseas on a temporary basis, with the aim of returning inside the two year window, your SMSF fund will pass the central management and control test.
A common rule of thumb that is applied by the Australian Taxation Office's (ATO) is whether a trustee maintains their home and other assets in Australia, indicating an ongoing association with Australia and an intention to return at some point. Arrangements with children's schools and the nature of employment contracts are other aspects that can also support a trustee's case.
Heavy penalties apply if you get it wrong
You may be wondering why it is so important to be aware of, and understand, this amongst the myriad of rules which apply to SMSFs. Quite simply, if you fail the central management and control test this can result in your fund losing its complying status. Ultimately this means that your fund will be deemed to be non-complying and its assets (less certain contributions) and income will be taxed at the highest marginal tax rate. In simple terms the value of your fund can be halved!
That's a pretty good reason in my book for any trustees to ask themselves some careful questions before heading overseas and then making sure they have taken the necessary steps to protect their nest egg if there is any doubt. These might include winding up the SMSF and transferring the benefits to a public offer superannuation fund (where an arms length, Australian trustee oversees the fund's operations) or considering appointing an Enduring Power of Attorney who is based in Australia to assume the role of trustee.
This is an area that clearly needs careful planning prior to departure to avoid a significant erosion of capital and that's where seeking professional financial planning advice now can help save you both in time and dollars later.
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