For a superannuation fund, becoming 'unAustralian' can mean disaster. Expat fund members who don't keep track of their fund's residency status could see almost half their fund's assets lost to the tax commissioner, and miss out on valuable tax concessions.
The risk has increased from 1 July 2007, when the government amended the residency rules. It is critical that a fund's central management and control ordinarily be in Australia, and the rules allow this to move temporarily off-shore for a period of not more than two years. But the new provisions give no guidance about what length of return to Australia might restart a two-year temporary absence.
Further, the term 'ordinarily' is not defined. Applying its natural meaning, trustees would need to show that the central management and control of their fund is habitually and normally in Australia, apart from temporary absences when the trustees are overseas.
So long as a temporary absence is less than two years, no residency issues arise. But with a longer absence, or absences that are broken by periods back in Australia, it becomes very important to be confident about where the fund's central management and control is ordinarily located.
Problems often arise for members of self-managed superannuation funds where overseas postings are extended or planned returns are postponed. The fund can slide towards non-residency without there necessarily being any trigger point that causes the fund or its advisers to identify and address the issue.
This means that all but the shortest of absences from Australia should be viewed with suspicion by members of self-managed superannuation funds and their advisers, and potential residency issues headed off well in advance.
Only those funds that comply with the residency requirements under the Income Tax Assessment Act 1997 are eligible for substantial tax concessions. What's more, resident funds which lose that status face severe tax penalties. On ceasing to be an Australian fund, all the assets of a fund less undeducted contributions are included in its assessable income and taxed at the highest marginal rate. From that point on the highest marginal tax rate applies to fund income.
In practice, it is generally only self-managed superannuation funds which are at risk of breaching the residency criteria. These are that the fund must:
have been established in Australia or have any fund asset situated in Australia
have its central management and control ordinarily in Australia (the central management and control test)
either have no active members or have at least 50 per cent of the accumulated entitlements of all of the active members attributable to active members who are resident in Australia
An active member is one who is contributing to the fund or one who is having contributions made in respect of them, unless they are a foreign resident and contributions made for them only relate to a period when they were an Australian resident.
This means that any contributions made by or for a member who is not an Australian resident may put the residency status of the fund at risk.
The central management and control test effectively requires that the fund's business (generally, all strategic and important decisions) ordinarily be conducted in Australia by the trustees of the fund. Whether this occurs is a question of fact.
Before 1 July 2007 there was an alternative test to the central management and control test known as the temporary absence rule. In effect, it allowed the trustees to be absent from Australia temporarily for a period of less than two years. Returning to Australia for 28 days or less within this two year period was specifically stated not to refresh the two-year period. However, the two years could be restarted upon making a longer visit, provided that it could also be shown that the trustees' absence from Australia was only temporary.
There are some obvious strategies for those who are concerned that their fund might become non-resident.
First, the membership might be able to be restructured to ensure that central management and control will ordinarily remain in Australia, even if one or more members move overseas. In a single member fund it may be possible to admit two or three new members, with the result that a majority of trustees or trustee directors will be Australian residents. In funds that have more than one member it may still be possible to admit one or more additional members, or for one of the existing members to quit the fund, leaving a majority of members based in Australia.
In most cases, however, the affected fund has husband and wife members, both of whom have significant balances and both of whom are moving overseas. In these situations the available strategies require either that the fund be wound up or that the trusteeship be changed.
It is always an option for an 'at risk' fund to be wound up and member balances transferred to another complying fund. Drawbacks with this approach include the inconvenience; difficulties in liquidating assets such as business real property held within the fund; capital gains tax payable within the fund on the sale of assets; and the prospect of incurring the expense of establishing a new self-managed superannuation fund upon the members' return.
Alternatively, the members could arrange for a licensed trustee to take over trusteeship of the fund for the relevant period. Expense, and perhaps difficulty in finding a suitable and willing appointee may make this strategy unattractive.
The most effective strategy is often for the members to rely upon one of the limited exceptions to the rule that all members of a self-managed superannuation fund must be trustees or directors of a corporate trustee.
Section 17A(3)(b)(ii) of the Superannuation Industry (Supervision) Act 1993 (SIS Act) permits a fund to remain a self-managed superannuation fund where a member's trusteeship or directorship of a corporate trustee is effectively taken over by his or her legal personal representative who holds the member's enduring power of attorney.
Fund members who are moving overseas can therefore grant an enduring power of attorney to a trusted individual and then arrange for that person to be appointed as a trustee or as a trustee director in their place.
Although this strategy seems straightforward, it is generally not well understood and sometimes poorly executed.
As a preliminary matter, the fund's trust deed must be reviewed to ensure that it allows for the appointment of a person holding an enduring power of attorney as a trustee or trustee director in place of a member. If necessary, the trust deed must be amended to allow for such appointments.
Importantly, fund members and their advisers must appreciate that the holder of the enduring power of attorney who is appointed to the trustee role does not exercise the duties of that position under that power of attorney. Rather, the holding of the power of attorney is a qualification that puts that person in a position to take on the trustee role for the purposes of section 17A(3)(b)(ii).
Once appointed, they have all the duties, responsibilities and liabilities of any other trustee or director. They must carry out their role independently and make their own decisions about what should be done. They cannot take direction from the member. They may even need to act contrary to what they know to be the member's preference if they can see that following that preference would put them in breach of their duties.
Service providers must communicate with them directly and not continue to take instructions from the member.
The appointee must sign documents as a trustee or as a trustee director and not indicate that they are signing for the member under the enduring power of attorney.
Appointees also bring with them all their own personal circumstances. If they have a material personal interest in a matter before the trustee board, they must disclose that interest and may need to step aside from the decision-making process. If they suffer any of the disqualification events relevant to superannuation fund trustees, they will be disqualified, even if the member who appointed them is not themselves disqualified.
In addition, the member must not seek to direct the action behind the scenes. To do so defeats the purpose. Management and control will be situated where the relevant decision-making is carried on, regardless of whether those making the decisions are properly in a position to do so. If the ATO were to review the fund's operations and to form the view that foreign resident members were acting as de facto trustees or trustee directors, it is likely to conclude that the fund did not have Australian residency.
A member who takes on the role of a trustee or of a director, even though not formally holding office, may also find that the law treats them as if they had been appointed as such and imposes on them all the liabilities that come with those positions.
Of course, members are entitled to consult with the appointees and to obtain regular updates and reports from them about the fund's affairs, and will generally meet with the appointees to discuss fund matters during visits to Australia.
Finding someone suitable to accept the grant of an enduring power of attorney and subsequent appointment as a trustee or trustee director may be difficult. Because the appointee is placed in a position to make decisions about the fund, the fund member must have absolute confidence they will perform these responsibilities with an appropriate level of skill and with integrity.
From the appointee's viewpoint, significant liabilities come with an appointment as a trustee or as a trustee director. Nonetheless, the rule that trustees and trustee directors of self-managed superannuation funds must not be remunerated for their trustee duties continues to apply, even where the individual is not a fund member.
Trustees and trustee directors have rights to be indemnified out of fund assets. But section 56(2) of the SIS Act provides that governing rules of a fund will be void if they would have the effect of relieving a trustee from liability for breach of trust if he or she is dishonest or intentionally or recklessly fails to exercise the necessary degree of care and diligence, or from liability for certain penalties. Section 57 makes similar provision for trustee directors.
There may, therefore, be situations in which an appointee incurs personal liability and is unable to meet that liability out of the fund assets. Some comfort may be obtained from insurance but this is most unlikely to cover all the circumstances in which personal liabilities might arise. If things go wrong, there may even be a nightmare scenario in which the fund members are entitled to take action against the appointees.
Despite these potential pitfalls, fund members who are heading overseas may benefit from maintaining their self- managed superannuation fund while they are away and appointing representatives in their place.
Heather Gray is a partner of law firm Holding Redlich, where she heads the firm's superannuation and financial services practice. She has more than 20 years' experience acting for both large and small superannuation funds and for participants across the superannuation industry.
This article first appeared in INTHEBLACK. Reference: March 2007, volume 78:02, p. 52 54
This page is available online at:
http://www.cpaaustralia.com.au/cps/rde/xchg/cpa/hs.xsl/29062_30692_ENA_HTML.htm
