Your Guide To SMSF Residency Requirements As An Expat

Imagine you’re an Australian citizen with the chance to work and live abroad long-term. What a dream, right? But what if you have a Self-Managed Super Fund (SMSF)? That’s where things can get a bit complex. We’re here to help break it down for you.

Let’s start with the basics… What's a Self-Managed Super Fund?

A SMSF is a type of superannuation fund, which is a way to save for retirement. What sets it apart is that members (usually also the trustees) manage it and ensure it complies with the law.

With an SMSF, you decide where to invest your money — like in shares, property, or managed funds. It offers more control over your retirement savings but also comes with more responsibilities, such as keeping detailed records and following legal requirements.

The benefits include greater control over investments, more flexibility in asset choices, potential cost savings, tax advantages, and better estate planning options. However, there are compliance costs, time commitments, and higher risks to consider.

Considerations to keep in mind include compliance with strict rules and regulations set by the Australian Taxation Office (ATO), the potential for it to be more costly to establish and maintain than other super funds, the need for expertise beyond your current level, higher risk, and legal responsibilities.

So, what happens if you move overseas with an established SMSF?

Your SMSF can usually continue operating if you meet certain requirements. One key requirement is the ‘Residency Test Rules’.

Here are the rules of the test —

Rule One: The initial contribution to set up the SMSF must have been paid and accepted within Australia OR the fund must have at least one Australian-based asset.

Rule Two: The ongoing management, administration, and decision-making of the fund must usually be conducted in Australia. While some trustee functions can be done temporarily outside Australia for up to two years, this doesn’t apply if the central management permanently moves overseas. However, if you move overseas temporarily for less than two years and end up staying longer due to events out of your control, those circumstances can be taken into account. 

Rule Three: The fund’s active members (those who are making fund contributions or having contributions made on their behalf) must be Australian residents and must hold at least 50% of fund assets (or at least 50% of the amounts payable to members).

For instance, if your SMSF has four members and only three are actively contributing, the fund is considered to have three active members. These members’ balances must collectively be at least 50% of the overall fund balance to meet the 50% test.

However, a fund with no active members that still adheres to residency rules one and two can retain its classification as an Australian super fund.

This framework allows fund members who live overseas and are no longer Australian tax residents to keep contributing to their fund. 

Keep in mind that rollovers received into an SMSF are treated as contributions for rule three of the residency test. So, if you plan on contributing to another non-SMSF super fund while living overseas, do not combine these benefits with your SMSF until you return to Australia as a resident, as the active member test applies to your SMSF in this situation.

What happens if you fail the SMSF residency rules?

If your SMSF doesn’t meet any of the three residency rules, the ATO will likely classify it as non-compliant. This could lead to the freezing of the fund’s assets, and its income (including member contributions and investment earnings) may be taxed at the highest marginal rate (45%).

The ATO can also instruct a non-compliant SMSF to transfer its assets to a public super fund. However, before taking such action, the ATO will consider any mitigating circumstances. 

You might be thinking, “okay, simple, I’ll just fly back to Australia every year for about a week, and then I’ll be compliant with all the rules”.

Unfortunately, it’s not that straightforward. If you’ve been living overseas for more than two years, a trip back to Australia won’t fulfil residency rule two, which requires the ongoing management and decision-making of the fund to occur within Australia.

It’s also important to note that if you make contributions to your SMSF during this time, you’ll breach residency rule number three.

You might also wonder, “Surely there are different rules for those in the retirement phase?”

Unfortunately, that’s not the case. SMSFs in the retirement phase are subject to the same residency rules. Breaching any of these rules could result in the funds losing their tax-free status.

There’s much to consider with SMSFs when relocating overseas and losing your residency status. It can become extremely complex with numerous factors at play. One of the best steps you can take to protect your SMSF from non-compliance is to seek assistance from a financial advisor. Michaela Rankin understands the ins and outs of this intricate landscape and is dedicated to maximising your financial potential, helping you to achieve your financial goals and dreams. Reach out to FRE.DM Wealth today to discover more about safeguarding your SMSF status whilst living abroad.