Depending on your family situation, it can often make great sense to add your children to your Self-Managed Superannuation Fund (SMSF). The benefits can include:
- Cost savings;
- Flexibility around estate planning; and
- Increased purchasing power when buying assets such as property.
However, while the benefits can be significant so too can the risks. Unbeknown to many parents, one such risk lurks when your child is added to a SMSF and that child (or any other member for that matter) chooses to move overseas, or travels overseas and decides to stay.
When Australians move or travel overseas, there are certain instances where they can be deemed non-Australian residents for tax purposes (even though they may still be an Australian Citizen).
If a non-resident SMSF member(s) receives a rollover or a contribution in a particular year:
- There must be a resident member who has also received a contribution or rollover in that year; and
- The balance of the non-resident member must not be greater than 50% of the combined balances of all contributing members (see example below).
A relatively unknown catch with this law is that those SMSF members who do not receive a contribution or rollover are not included in this calculation. Therefore, whilst most parents have substantially larger member balances than their children (easily greater than 50% in most cases), if they do not receive a contribution or rollover in the same year that a non-resident members (e.g. their child) does, the entire SMSF fails.
Let’s assume a SMSF has three members; Mary (Mum), Robert (Dad) and John (Son).
Mary and Robert’s member balances total $1 million and John’s balance is $45,000. John moves to London and his new employer makes a $2,000 contribution to his SMSF. Mary and Robert do not make any contributions or rollovers in that year. In this instance their SMSF would be in breach of the law and would be subject to a very large tax bill.
This issue can easily arise when a fund’s only resident members are over the age of 65 and not working as they are ineligible to make contributions.
The result of a breach is a loss of up to 47 per cent (depends on the year) of your SMSF assets and earnings in year one. Each subsequent year will also attract tax on earnings of up to 47 per cent.
In the example above, Mary, Robert and John’s SMSF would lose $492,090.
If you find yourself in this situation, it is essential that either;
- The non-resident member does not make or receive contributions or rollovers;
- They are removed from your SMSF; or
- Any contributions or rollovers they do receive are paid into a retail super fund.
It is important to point out that these particular rules for SMSFs are an ongoing requirement. Even though parents may be making or receiving contributions now, if at any time they stop and a non-resident member continues to contribute, a breach arises.
Personally, I think these rules are highly oppressive but nonetheless consideration of future intentions can save significant heartache down the track.
Would this law stop you from adding children to your SMSF?