It is important for members and trustees of self-managed superannuation funds (SMSFs) to consider appointing an Enduring Power of Attorney when they go overseas for an extended period. If this is not done, it is possible that the fund may not meet the definition of an Australian superannuation fund for the purposes of the Income Tax Assessment Act 1997. This may mean that the SMSF could lose the tax concessions it enjoys.
To be considered an 'Australian superannuation fund':
The fund must have been established in Australia, or any asset of the fund is situated in Australia.
The central management and control of the fund is ordinarily in Australia. Australian Taxation Office (ATO) Taxation Ruling TR 2008/9 shows the Commissioner's interpretation of what constitutes central management and control. This centres on the strategic and high-level decision-making processes, which must be made in Australia.
Either the fund had no member that is an "active member" or at least 50 per cent of:
- The total market value of the fund's assets attributable to superannuation interests held by active members; or
- The sum of the amounts that would be payable to or in respect of active members if they voluntarily ceased to be members;
Is attributable to superannuation interests held by active members who are Australian residents. An 'active member' basically means a member who makes contributions to an SMSF.
If any of the above conditions are not satisfied, the fund will be treated as a non-complying, with potentially disastrous tax consequences. If the fund cannot meet the definition of an Australian superannuation fund, an amount equal to the market value of the fund's total assets (less any contributions the fund has received that are not part of the taxable income of the fund – such as non-concessional or undeducted contributions) will be included in the fund's assessable income and taxed at the highest marginal tax rate.
Case Study
Richard and Sandra are trustees and members of the Smith Family Superannuation Fund, which is an SMSF. Richard is seconded to work for an extended period in Dubai, and Richard and Sandra have no planned return date to Australia.
They earn income in Dubai and are Dubai residents for tax purposes. Neither Richard nor Sandra intend contributing to superannuation whilst they are overseas.
However, in this instance, central management and control – the high level and strategic decision making – of the Smith Family Superannuation Fund will most likely be conducted outside Australia by Richard and Sandra.
Tasks performed by accountants, administrators or investment managers would not normally constitute high-level central management and control, but rather operational and day-to-day management of the fund's activities.
The Smith Family Superannuation Fund had the following value and components at the end of the financial year:
Therefore the Smith Superannuation Fund will lose $360,000 in tax.
The Tax Commissioner is not able to exercise any discretionary powers where a fund is made non-complying due to it failing to meet the definition of an 'Australian superannuation fund'. As can be seen from the above example, this is a disastrous outcome for Richard and Sandra's retirement savings.
One effective way to ensure central management and control remains in Australia is for members to execute an Enduring Power of Attorney in favour of someone who will remain in Australia and be able to make decisions about the operation of the fund.
An Enduring Power of Attorney is simply an instrument that enables a person (the donor) to empower another person (the attorney) to make financial and property decisions on their behalf.
Therefore, whilst fund members and trustees are outside Australia, they may establish Enduring Powers of Attorney in favour of someone else to ensure central management and control remains in Australia and maintain the fund as a complying superannuation fund.
The attorney stands in the non-resident trustee's place and can act as individual trustee or director of the corporate trustee, undertaking the high level and strategic decision making in Australia.
As outlined in TR 2008/9, it is important the central management and control is being made by the attorney, and they are not acting on instruction from the trustee/member whilst they are overseas.
If this is the case, central management and control may be considered to reside with the trustee/member who is not in Australia and the SMSF may not satisfy the definition of an 'Australian superannuation fund'.
Implementing an Enduring Power of Attorney is a crucial consideration for those who have their own SMSF and are considering working or residing overseas. Planning prior to the trustees/members leaving overseas can mitigate against the fund becoming non-complying and the adverse tax consequences that come with it.
Nicholas Ali is a technical services specialist at Super Concepts.
