Superannuation

Reader’s question: I have four children all under 18. Could I set up a do-it-yourself super fund for them with after-tax contributions?

My understanding is as they get older they could roll their super out of the fund individually into their own funds. But what if one of them wished to work and travel overseas for two years – would this risk the fund becoming non-compliant?

Do-it-yourself super funds are limited to four members, so all your children could be members of the one fund. However, they also need to be either individual trustees or directors of a corporate trustee, says Aaron Dunn of The Super Academy.

So there’s a major issue in them all being under 18. While there is no age restriction on being a member of a fund, there is one on being a trustee.

A legal disability

You must be at least 18, otherwise you are considered a minor under the law and described as someone that has a legal disability. If a member is a minor, a child’s parents or guardian can become a trustee until such a time as the child is no longer under this legal disability. A parent can be a trustee for more than one child.

While you can be involved in the running of the fund until your children are 18, once they get there you will no longer have any control over the fund’s decisions. They will rest with the trustees (your children). Before you take this action you need to know that your children will be comfortable with the responsibilities that come with being a trustee.

Residency requirements

Should one or more of your children decide to travel overseas, consideration needs to be given to the residency requirements of the fund. In particular, you need to consider the central management rules and active member tests that satisfy the definition of an Australian superannuation fund. Failure to meet these requirements will mean the fund will lose its tax concessions and become non-complying.

If a fund member is considering spending time overseas, thought needs to be given to whether the absence is temporary.

Tax Ruling 2008/9 states that in the case of a temporary absence the central management and control is still considered to be in Australia, even in some instances where the period outside the country is for a period of more than two years. This is an objective test determined by the facts and circumstances.

Power of attorney

If you are unaware how long someone may be overseas, an alternative to relying on the temporary absence conditions is to appoint an enduring power of attorney to satisfy the central management and control requirements.

The enduring power of attorney will become an appointed trustee with the role of the member’s legal personal representative while they are out of the county.

The member leaving for overseas is removed as trustee or director but still remains a fund member.

There is a range of legal and regulatory documents that need to be prepared to put these appointments into effect.

Finally, when they get older, your children can roll their super out of the fund into their own fund with no tax consequences.