It is very important that your SMSF meets the residency test because the consequences of non-compliant status can be harsh. If in case, your SMSF fails the residency test requirements, you as an SMSF owner will have to pay the tax at the rate of 45% on the entire amount of SMSF asset less non-concessional contributions in the non-compliant year (the tax rate was increased to 47% during temporary budget repair levy financial years of 2014-2015, 2015-2016 and 2016-2017). The non-compliant status of the fund strips it essentially from all the tax concessions it had for years.
But you can take preventive actions to avoid this by following the SMSF residency kit offered by DBA lawyers which provides information and strategies to trustees and advisors to help them meet the residency test for their SMSF.
List of things included in a residency test kit
- How to plan for the residency test?
- Detailed description of issues and operation of laws relating to residency test compliant SMSF.
- Examples and practical tips to guide you in different scenarios.
- Template that can be used for trustee resolution purposes.
Three conditions that SMSF needs to satisfy for qualifying as an Australian superannuation fund:
- The Self-managed superannuation fund should have been established in Australia itself.
- The central management and control of your SMS fund should lie in Australia.
- Third condition is that the fund should either have no active member or, have active members who are Australian residents and hold at least 50% of the total market value of SMSF asset or the amounts that would be payable to the active members if they voluntarily leave the SMS fund.
An active member of the SMSF is a person who is contributing to the fund at the time or contributions are being made to the fund on behalf of that person.
The ATO always keep matching active member data by applying various techniques:
- The ATO can match the list of Active members of the fund by personal and SMSF tax returns.
- The ATO can also apply other filters on data like entries to and exits from Australia.
SMSF trustees need to be proactive about SMSF residency laws especially in today’s time when family members are living across countries and the world is becoming a global village because SMSF can easily lose compliant status if family member living overseas takes over the trustee position by succession.
As per the decision of Bywater Investments Limited & Ors v. Commissioner of Taxation; Hua Wang Bank Berhad v. Commissioner of Taxation  HCA 45; 2016 ATC 20-589 (‘Bywater’), it is clear that risk pertaining to this area is increasing.
ATO comments in TR 2018/9, clearly depict that, only figurehead directors for your SMSF fund to establish the Australian central management and control would not be sufficient. In the Bywater case, it was found that the Director controller residing in Sydney was holding control of numerous overseas companies. Therefore, it is recommended to appoint a resident director in place of the overseas member for avoiding the risk of non-compliance status.