SMSF Residency Rules that Trustees Must Know

Self-Managed Superannuation Funds (SMSFs) must satisfy strict residency rules in order to be recognised as a complying super fund by the Australian Taxation Office (ATO).

Remaining compliant is essential, as failure to meet the residency tests can result in the SMSF losing its concessional tax treatment and being taxed at the highest marginal rate.

SMSF Residency Rules

The Three SMSF Residency Tests

An SMSF must meet three key residency tests to remain compliant. First, the fund must have been established in Australia, or hold at least one asset located in Australia. Second, the central management and control of the fund must ordinarily be exercised in Australia. This refers to high-level decision-making, such as formulating investment strategies and overseeing compliance. Third, the active member test requires that at least 50% of the fund’s assets by value are held by active members who are Australian residents.

The Two-Year Rule

Trustees can spend limited time overseas without affecting residency status. Generally, the ATO considers that central management and control may remain in Australia if trustees are temporarily absent for up to two years, provided their absence is not intended to be permanent. Longer or indefinite absences could risk the fund’s residency status, even if trustees return earlier than expected.

What Happens if an SMSF Becomes Non-Complying

If an SMSF fails the residency rules, the ATO may issue a Notice of Non-Compliance. This means the fund will be taxed at the top marginal rate on its assessable income, rather than the concessional 15% rate. In addition, the value of the fund’s assets may be included in assessable income in the first year of non-compliance, which can significantly increase tax obligations.

Planning Considerations for Trustees

Trustees who plan to spend time overseas should carefully consider how this will affect their SMSF. In some cases, appointing a power of attorney to act on behalf of the trustee may help maintain compliance, but this requires careful structuring and advice. Because residency breaches carry significant tax and compliance consequences, it is important for trustees to seek professional guidance before leaving Australia for extended periods.

Summary

Maintaining residency status is central to keeping an SMSF compliant and retaining concessional tax benefits. Trustees should plan carefully if considering time overseas, ensure their fund’s management remains in Australia, and regularly review their compliance with the ATO’s rules.

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(GENERAL INFORMATION ONLY)

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