Self-Managed Super Funds (SMSF) for Australian Expats: Why it’s not a good idea for Aussies Abroad

For Australian Expats, managing your Australian superannuation while living abroad can be tricky. One popular structure many Australians use for retirement savings is a Self-Managed Super Fund (SMSF). However, if you're an Australian Expat, there are several important reasons why you might be unable to maintain an SMSF while living abroad. In this blog post, we’ll explore the key factors preventing Australian Expats from having an SMSF and what options are available for managing your retirement savings.

What is an SMSF?

A Self-Managed Super Fund (SMSF) is a type of superannuation fund where the members are also the trustees, allowing them to manage their retirement savings directly. This gives members more control over the underlying investments of the super fund, which might include shares, real estate (commercial/residential), or other assets such as cryptocurrencies. While SMSFs offer significant flexibility, they also come with strict regulatory requirements, responsibilities and compliance costs.

Does your SMSF meet the Residency Test?

To be compliant with Australian law and receive tax concessions, an SMSF needs to meet a resident test at all times during the financial year, otherwise, it can face significant tax penalties.

An SMSF is compliant if it meets all 3 of these residency conditions:

1. The fund was established in Australia, or at least one of its assets is located in Australia.

The fund was 'established in Australia' if the initial contribution to establish the fund was paid and accepted in Australia.

2. The central management and control of the fund is ordinarily in Australia.  

This means the SMSF's strategic decisions are regularly made, and high-level duties and activities are performed, in Australia. It includes:

• formulating the investment strategy of the fund

• reviewing the performance of the fund's investments

• formulating a strategy for the prudential management of any reserves, and

• determining how assets are to be used for member benefits.

In general, your SMSF can still meet this requirement, even if its central management and control is temporarily outside Australia for up to 2 years. However, if central management and control of the fund is intended to be performed outside Australia for any period, it will not meet this requirement.

3. The fund either has no active members or it has active members who are Australian residents for tax purposes who hold at least 50% of either:

• the total market value of the fund's assets attributable to super interests, or

• the sum of the amounts that would be payable to active members if they decided to leave the fund.

  
  

An active member is defined as an individual who contributes to the SMSF or has contributions made to the fund on their behalf.

An SMSF is considered a compliant Australian super fund only once it meets all 3 of these residency conditions.

Why SMSFs are not a good idea for Aussies Abroad

The reason Self-Managed Super Funds for Australian Expats are generally not a good idea is because of the difficulties in meeting conditions 2 and 3 in the residency test above.

Condition 2 - Central Management and Control

The Australian Tax Office (ATO) requires that SMSFs comply with the "central management and control" condition, which means the fund's decision-making should primarily take place in Australia.

If you, as an Australian Expat, are living overseas and managing your SMSF remotely, it can be difficult to meet this requirement. The ATO expects the central management and control of an SMSF to be conducted from within Australia, and having trustees living overseas often leads to non-compliance.

Condition 3 – Active Members

To satisfy the active member's condition, the SMSF must either have no active members or have active members who are Australian residents holding at least 50% of the fund’s assets. An active member is defined as an individual who contributes to the SMSF or has contributions made to the fund on their behalf.

When you become an Australian Expat, your residency status may change, which means you may no longer meet the definition of an Australian resident. If for example, you and your spouse are the only members of the SMSF and your tax residency changes, you will not be able to contribute to your SMSF as you are not an Australian resident. This can create problems if you have property loans within your SMSF that require servicing through contributions to the funds.

If a member of the SMSF becomes a non-resident but still wishes to make or receive contributions, they would need to do this outside their SMSF, for example through a retail or industry super fund. They could then roll over the contributions to the SMSF when they return as an Australian resident.

In most cases, if an Australian Expat is not using an SMSF to hold illiquid assets such as residential or commercial property, rather, it is being used to hold assets that can be held through a traditional superannuation fund such as shares, it is generally advisable to utilise a retail super fund.

Learn more about the Australian Tax Residency Rules.

Complexity and Compliance Risks Penalties

If you are living abroad, Self-Managed Super Funds for Australian Expats can become even more complex from a regulatory standpoint. For one, the regulatory requirements and tax implications can become confusing, especially when navigating both Australian and foreign tax laws. Some countries may not recognise SMSFs as a valid form of retirement savings, or they may have different rules for how the funds are taxed. For example, the United States imposes additional tax compliance and reporting for Australian Expats with an SMSF.

Furthermore, SMSFs have stringent reporting and auditing requirements. If you're not based in Australia, it can be difficult to meet these obligations, which could lead to penalties or even the fund being deregistered.

What if my SMSF becomes non-complying?

Where an SMSF is a complying superannuation fund, the assessable income in the fund will be taxed concessionally at a maximum rate of 15%. If the fund ceases to be complying in a particular income year, the fund's assessable income will be taxed at the highest marginal tax rate up to 47%.

Additionally, in the income year that it becomes non-complying, it must also include in its assessable income an amount equal to the total of the market values of the fund's assets (as calculated just before the start of the income year). This amount is taxed at the highest marginal tax rate up to 47%. This could see an Australian Expat lose nearly half of their SMSF balance in taxes in the year it becomes non-complying.

What Are the Alternatives for Australian Expats?

While a Self-Managed Super Funds for Australian Expats may not be the best retirement planning tool, there are several other ways Expats can grow their wealth for retirement:

1. Retaining Your Australian Superannuation Fund

Even though you can't run your super fund as an SMSF, you can leave your superannuation in a traditional Australian super fund. This allows you to continue building your retirement savings without the complexities of managing an SMSF while living abroad.

If you're looking for more flexibility without the administrative burden of an SMSF, you can roll your super into a low-cost, professionally managed super fund. Many Australian super funds now offer extensive investment options, allowing you to keep your super invested effectively while living abroad and benefiting from a more hands-off investment approach.

Learn more about Expat Superannuation or Expat Retirement Planning.

2. Make use of overseas retirement funds

In some cases, an overseas pension or superannuation fund in the country where they are living may be an option for Australian Expats. However, depending on where you are residing, this option can be complex and may have tax implications, so it's important to seek professional advice.

Conclusion

While self-managed super funds offer a high degree of control over your retirement savings, self-managed super funds for Australian expats are not typically a viable option, given the significant challenges Expats will face when trying to maintain one. An SMSF while overseas is often impractical and the risk of significant tax penalties with the ATO mean they are often not a good idea for Aussie expats.

Instead, it may be wise for Australian expats to explore alternative retirement savings options like leaving their super in a traditional fund or taking advantage of overseas pension schemes. Staying informed about your superannuation options and understanding the restrictions as an expat will help ensure that your retirement goals remain on track, no matter where you call home.

Runway Wealth Management is the trusted Financial Adviser to the Australian Expat community. Our tailored advice is backed by expertise, education and experience, which allows us to be at the forefront of Australian Expat Financial Planning.

If you would like to speak to one of our Expat Financial Advisers about this blog or if you have other queries, we would be more than happy to speak with you. Feel free to send us an enquiry through the ‘Contact Us’ tab provided in the below link:

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General Advice Disclaimer: The information contained herein is of a general nature only and does not constitute personal advice. You should not act on any recommendation without considering your personal needs, circumstances, and objectives. We recommend you obtain professional financial advice specific to your circumstances.