Super Snippets: September 2015
- ATO rulings on the residency of SMSFs
- Qualifying for tax relief where a UK pension balance is transferred to an Australian super fund
- New publications on income in retirement
While the change of Prime Minister has generated a lot of excitement in Canberra, it’s been a very quiet month on the superannuation front. Fortunately, for SMSF trustees, no news is generally good news.
Let’s take a look at some specific developments.
Residency of your SMSF
The Australian Tax Office (ATO) recently issued private rulings to SMSFs on the question of residency (for example, see the following ruling). They’re a timely reminder that in order to be a complying fund, the fund must remain resident in Australia.
To achieve this, there are three tests that must be satisfied:
1. Establishment and assets.
The fund must be established in Australia or own an asset located in Australia. If the fund is established in Australia, it will always satisfy this test.
2. Central management and control.
The fund’s central management and control (CM&C) must be ordinarily in Australia – and this can only be determined by the circumstances of each case. The key question is where the strategic and high-level decision making processes take place.
Most funds will undertake all activities, including trustee meetings in Australia and so there will be no doubt that the CM&C is in Australia. However, it can be less clear when trustees move overseas (for instance, as part of an overseas job transfer).
In this case, it is possible to ensure that CM&C remains in Australia by granting an Enduring Power of AttorneyAn EPOA is a legal agreement that allows someone to appoint another person to make financial and property decisions on their behalf. Unlike an ordinary power of attorney, an EPOA continues to operate even if the donor (the person who granted it) loses legal capacity (for instance, becomes mentally ill). to a trusted Australian resident and appointing them as a director of the corporate trustee (where relevant). It’s important to ensure that they are empowered to undertake all strategic and high-level decision making and you should seek personal advice before proceeding down this path.
3. Active member test
The final test is the ‘active member’ test, which is satisfied if;
- the fund has no active members; or
- at least 50 per cent of the market value of the fund’s assets attributable to active members is attributable to active members who are Australian residents; or
- at least 50 per cent of the sum of the amounts that would be payable to active members (if they ceased to be members) is attributable to active members who are Australian residents.
Active members are those members making contributions (or having contributions made on their behalf). If a fund has members who aren’t Australian residents, the simplest way to pass this test is to make sure no contributions are made on their behalf while they are non-residents.
The question of whether a member is an Australian resident is a question of fact and typically won’t be an issue for something like a six month holiday or a temporary work transfer, particularly where a house, bank accounts and other assets are maintained in Australia. However, lengthy overseas transfers can be more problematic.
Action point: If you’re intending to live overseas for a period of time you should seek personal advice on whether your SMSF will be able to satisfy tests two and three in your absence. If any of the three tests are failed, the fund can be deemed ‘non-complying’ and subject to substantial amounts of tax.
UK pension scheme transfers
If you’ve worked in the UK, you may have a UK pension fund balance that you’d like to transfer to your Australian super fund. To do so free of tax requires the Australian fund to be recognised as a ‘qualifying recognised overseas pension scheme’ (QROPS).
Unfortunately, changes were made earlier this year that made it difficult for Australian funds to qualify. In fact, up until the past month only one Australian super fund was listed on the UK’s QROPS register.
The main problem for Australian funds is the potential for benefits to be paid (under the governing SIS ActThe Superannuation Industry (Supervision) Act 1993. It is the main piece of law governing the operation of superannuation funds (including SMSFs).) to members under the age of 55.
Recently an SMSF has been added to the QROPS register. It appears to have worked around the problem of qualifying by having a trust deed that only allows members to join the fund once they are over the age of 55. This strategy could potentially be available to other SMSFs.
Action point: If you have a UK pension balance and an Australian SMSF, you may wish to speak with your tax adviser to see if this (or another) option is available to you.
Income in retirement
The Association of Super Funds of Australia (ASFA) has published its latest standard (for the June 2015 quarter) for a ‘comfortable’ and ‘moderate’ lifestyle in retirement. Due to increases in the cost of living, the annual income required for a comfortable retirement (for a couple) has increased to almost $59,000 a year (see Table 1 in the announcement for full details).
Of particular interest is the change in the superannuation balance ASFA say is needed at retirement for a ‘comfortable’ retirement. ASFA has increased its estimate (for couples) by a whopping $130,000, to $640,000. The increase is due largely to the changes made to the age pension taper test in the May budget (see Federal Budget 2015: Video conference).
Keep in mind that these calculations are based on a range of assumptions that may not be relevant to many people. However the message is clear: if you are relying on the age pension to supplement your retirement income, you might need a much larger super balance at retirement than you originally expected.
Accurium have also published another volume in their SMSF Retirement Insights series (you can download the PDF version here). This document looks at the super balances required to fund a ‘comfortable’ retirement (as defined by ASFA) with different levels of confidence, as well as reporting broadly on the SMSF landscape.
Other developments and reading material
Eviser members may also be interested in the following:
- ATO’s approach to ‘speeding ticket’ penalty regime. At a recent conference, the ATO presented a series of case studies highlighting how it would seek to apply the new ‘speeding ticket’ penalties for SMSFs in practice. They also warned that those that combined an aggressive tax approach with regulatory breaches would face disqualification as an SMSF trustee.
- ABN entitlement. The ATO has published an explanation of when an SMSF is entitled to receive an Australian Business Number (ABN).
- ATO case studies on starting an income stream at 60. The ATO has published a series of case studies covering different examples of a super fund member starting a super pension at age 60.
- ATO Q&As. The ATO publishes questions and answers on its website and recently answered a question about the impact of exceeding the 10 per cent maximum annual payment limit for transition to retirement pensions.
- FundFocus: Schroder Australian Equity Fund. Schroders has published an interview with Martin Conlon, head of the Schroder Australian Equity Fund, on key themes driving the Australian share market and the fund performance.
- FundFocus: Schroder Fixed Income Fund. Schroders has also published an interview with Simon Doyle, head of the Schroder Fixed Income Fund, who outlines what investors should expect from their defensive investments.
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