Threat to overseas holidaymakers – SMSF’s risk 49% tax

For an SMSF to be a complying SMSF, it must satisfy the 3 residency tests. One of those tests is that central management and control of the SMSF remains in Australia.

The ATO allows SMSF members to leave the country for up to 2 years. But if a member leaves Australia for more than 2 years, the central management and control test fails. Then, the SMSF is no longer a complying SMSF.

A non-complying SMSF is taxed up to 49%.

ATO taxation ruling

In response to the High Court decision of Bywater Investments Limited & Ors v Commissioner of Taxation; Hua Wang Bank Berhad v Commissioner of Taxation [2016] HCA 45, the ATO published ruling TR 2017/D2. The ruling sets out the Commissioner’s considered view on how to apply the central management and control test of company residency.

While the draft ruling is not SMSF-specific, it affects the application of the ‘residency test’ and therefore whether overseas holidaymakers continue to operate a complying SMSF in Australia.

Paragraph 17 of the ruling says a person who has power or authority to control and direct a company but does not use it, does not exercise central management and control.

Paragraph 18 says:

In limited circumstances a person may control and direct a company without ongoing active intervention in the company’s affairs provided they:

  • have appointed agents or managers whom they tacitly control to conduct the company’s day-to-day business
  • tacitly control and regularly exercise oversight of the affairs of the company, including monitoring the company’s performance, and
  • do not need to actively intervene because the company’s affairs are running

The ruling makes it necessary for overseas holidaymakers to have their SMSF documents reviewed and updated, or run the risk of having their SMSF taxed at 49%.

All Members must be Trustees or Directors of the Trustee - but no always

Section 17A SISA states that all SMSF fund members must be trustees or directors of the corporate trustee.

There are exemptions to this blanket rule. However, other persons may be trustees or directors where a member dies, is physically or mentally incapacitated or is a minor. Section 17A(3)(b)(ii)  allows the member's legal personal representative to be a trustee or director. This is in place of the member during any period when they hold an Enduring Power of Attorney.

What is a Legal Personal Representative?

Traditionally we know that an LPR is the executor in your Will or an administrator if you have no Will. However, under section 10(1) SIS an LPR includes:

'a person who holds an enduring power of attorney granted by a person'

Avoiding the penalty tax

Members can leave Australia for more than 2 years without suffering 49% tax on their SMSF. But necessary precautions are taken to ensure that central management and control of the fund remains in Australia.

Our law firm specialises in SMSFs. We review your SMSF. We draft the necessary documents enabling central management and control to remain in Australia.

Our Overseas SMSF kit includes:

1. Specialised Power of Attorney

2. Deed of Variation to the SMSF Deed

3. Deed of Indemnity and Warranty (donors carry out the duties of trustee and director in their personal capacity. Not as an agent for someone else)

4. Pre and Post Minutes

5. Letter of Advice with step by step instructions

Why a Specialised Power of Attorney?

The Australian Taxation Office states in SMSFR 2010/2 on how POAs operate. This is when they are used by SMSF members going overseas. (This mostly replaces SMSFR 2009/D1.)

Section 17A(3)(b)(ii) SIS Act allows the legal personal representative (LPR) of a member to be a trustee or director in place of the member. This is during any period when they hold a Sepceialised Enduring Power of Attorney for that member. This section applies to SMSFs.

To be effective for an SMSF the POA must:

1. Not general or common law - it must be 'enduring'

2. Effective in the applicable State or Territory

3. Only appointing a single person to be the donor in that POA (see 17A(3)(b))

3. Four additional express powers are written into the POA for the donee to act for the member’s 1. financial 2. business 3. property affairs and 4. member’s superannuation affairs (see SMSFR 2010/2)

How to instruct us

Get your Accountant, Financial Planner or Lawyers to email us the SMSF Deed, any variations and what the clients are doing. We will email them back a quote.

Your adviser can also speak to us anytime.

Adjunct Professor, Dr Brett Davies, CTA, AIAMA, BJuris, LLB, LLM, MBA, SJD
National Superannuation Partner
Legal Consolidated Barristers and Solicitors
Australia wide law firm
39 Stirling Highway, Nedlands, WA
Mobile: 0477 796 959
Direct: 08 6389 0400
National: 1800 141 612
Skype: brettkennethdavies




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