Legislation, SMSF, SMSFA

Residency rules need changing now

SMSF residency rules

The SMSF Association has urged the government to complete reforms to the residency rules first put forward by its predecessors two years ago.

The existing SMSF residency rules are burdened by excessive complexity and administrative constraints and need to be comprehensively reformed to reflect the evolving dynamics of an increasingly globalised workforce, according to the SMSF Association (SMSFA).

In a submission tabled in response to Treasury’s “Modernising Individual Tax Residency” consultation paper, the SMSFA urged the government to revisit previously proposed SMSF residency law reforms from the May 2021 and October 2022 budgets, which were not included in the current round of consultations.

Specifically, the industry body advocated for the removal of the active member test, asserting it offers no substantial benefits to the superannuation system and has been a significant source of concern as evidenced by the large volume of technical questions about the issue received from professionals via the association’s technical research service.

“The active member test is an unnecessary source of red tape, especially for SMSFs and small APRA (Australian Prudential Regulation Authority) funds, adding unnecessary costs and reducing the efficiency of the superannuation system,” the submission stated.

“Removing the active member test would ensure that SMSF members who are working overseas can still contribute to their fund irrespective of whether their fund balance exceeds 50 per cent of the fund’s assets.

“This would mean if the fund was established in Australia and the central control and management ordinarily remains in Australia, then an SMSF member can continue to contribute to a fund of their choice.”

Additionally, the SMSFA recommended extending the temporary absence period of the central management and control test, similar to the emergency measure introduced during the COVID-19 pandemic.

“The existing two-year exemption is too short in the context of modern work arrangements, where executives and other staff are often expected to commit to an overseas placement of greater than two years. Often, what initially starts out as a one or two-year overseas assignment also gets extended for greater than the initial period,” it said.

“Extending the central control and management exception will reduce red tape and compliance issues for Australians working overseas while not compromising the integrity of the superannuation or taxation systems.

“In response to COVID-19, the ATO issued temporary relief where the individual trustees of an SMSF or directors of its corporate trustee were stranded overseas. This has been a successful introduction of a more practical application of SMSF residency rules that has not resulted in negative outcomes.”

It argued the proposed reforms are geared towards simplifying the superannuation system, cutting down on unnecessary administrative complexities and ultimately fostering better retirement savings for SMSF members, all of which could be achieved through relatively simple adjustments to existing legislation.


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