The federal government have recently announced some relaxation of the residency rules for self-managed super funds (SMSF). The changes could prove to be very good news if you make contributions to your own SMSF.
Here we explain what the changes are, and how you could benefit once they come into force in 2022.
The current residency rules
For your SMSF to receive tax concessions, it must meet several criteria to ensure it’s a compliant scheme. One key criterion is the “residency test”.
The residency test has three elements, the key one being that the management and control of your fund is “ordinarily” in Australia.
The ATO accepts that there may be periods when you’re outside Australia and therefore not resident here when you’re managing and controlling your fund.
Up to now, the maximum time you’ve been able to be outside Australia and still satisfy the terms of the residency test has been two years.
Changes announced by the government
The proposed changes, which were outlined in the 2021/22 federal Budget, will relax the residency requirements for:
- Self-managed super funds (SMSFs), and
- Small Australian Prudential Regulation Authority (APRA) regulated funds.
The measures will allow individuals with an SMSF to continue to contribute to their super fund while living temporarily overseas for up to five years. They do this by:
- Extending the “safe harbour” provisions of the central control and management test from two to five years for SMSFs, and
- Removing the “active member” test for both SMSFs and small APRA-regulated funds.
The changes will provide valuable flexibility for both SMSF and small APRA fund (SAF) members.
It’s long been felt that the two-year exemption does not reflect the reality faced by many Australians who work abroad, as they will often have to commit to a working contract lasting longer than that length of time.
It’s important to note at this point that this change is not yet law. The government have stated that it will come into force from the start of the financial year after it receives royal assent. The expectation is, therefore, that the changes will come into effect from 1 July 2022.
The SMSF Association have welcomed the changes
The SMSF Association lobbying group have been pushing for a relaxation in the rules for some time.
Their deputy chief executive and policy and education director, Peter Burgess, confirmed that the changes were exactly the ones they had been seeking.
He stated that: “Both of those reforms will significantly simplify the residency rules and better reflect the fact that many members, when they go overseas for work, will typically be away for longer than two years. Particularly a lot of executive appointments.
“So, we think it makes a lot of sense and we are particularly pleased with those measures.”
How you could benefit from the changes
The changes will be particularly beneficial to you if you’re internationally mobile, or even just living in another country for up to five years.
They mean that you will still be able to make substantial contributions, up to the discretionary maximum, to your self-managed fund.
You’ll be able to do this for a period of five years, rather than the current maximum of two years.
An additional benefit is that it will make it easier to keep all your pension savings in the same place, rather than invested in different plans, potentially under different financial jurisdictions.
At present, if you’re working abroad for a period of, say, three years, you could only pay two years’ contributions into your SMSF and must set up a different arrangement for any other payments you might want to make.
It also means that you can maximise contributions into your pension, rather than have to invest in other types of plans that might not have the same taxation advantages.
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