Edited version of private advice

Authorisation Number: 5010080616006

Date of advice: 18 May 2022

Ruling

Subject: Residency of self managed superannuation fund

Question

Will the Fund satisfy the definition of an Australian superannuation fund pursuant to subsection 295-95(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

Relevant facts and circumstances

The Fund is a self-managed superannuation fund (SMSF) established in Australia and all assets are located in Australia.

There are two members (Members) of the Fund.

The Fund has a corporate trustee. The Members are the directors of the corporate trustee.

Assumptions

The Members will leave Australia for an indefinite period of time.

A power of attorney will be appointed to act in the Members' capacity as directors of the corporate trustee.

The control and management of the Fund will be undertaken by the power of attorney for the period the Members are outside of Australia.

The power of attorney will send records, including financial statements, to the Members while they are outside of Australia.

The Members will not make contributions to the Fund while they are outside Australia.

Relevant legislative provisions

Superannuation Industry (Supervision) Act 1993 section 17A

Superannuation Industry (Supervision) Act 1993 section 42A

Income Tax Assessment Act 1997 subsection 295-95(2)

Reasons for decision

For an SMSF to receive the tax concessional rate of 15%[1], it must be a complying superannuation fund as per section 42A of the Superannuation Industry (Supervision) Act 1993 (SISA). To be a complying fund it must satisfy the residency test at all times during a year of income. To satisfy the residency test, a fund must meet the definition of an 'Australian superannuation fund' in accordance with subsection 295-95(2) of the ITAA 1997.

Section 295-95(2) of the ITAA 1997 provides that a superannuation fund is an Australian superannuation fund at a time, and for the income year in which that time occurs, if:

a)    the fund was established in Australia, or any asset of the fund is situated in Australia at that time; and

b)    at that time, the central management and control of the fund is ordinarily in Australia; and

c)    at that time, either the fund had no active member, or at least 50% of the following is attributable to superannuation interests held by active members who are Australian residents:

                      i.        The total market value of the fund's assets attributable to superannuation interests held by active members; or

                     ii.        The sum of the amounts that would be payable to or in respect of active members if they voluntarily ceased to be members.

Each of these three tests must be met for an SMSF to be an Australian superannuation fund.

The Commissioner of Taxation has issued a Taxation Ruling TR 2008/9 titled - Income tax: meaning of 'Australian superannuation fund' in subsection 295-95(2) of the Income Tax Assessment Act 1997 (TR 2008/9) which sets out the Commissioner's view on the interpretation of the definition of 'Australian superannuation fund'.

First test: Fund established in Australia or any asset of the fund is situated in Australia

The first test that an Australian superannuation fund must satisfy is that the fund was either established in Australia, or any asset of the fund is situated in Australia at the relevant time.

An SMSF will be established when the trust deed governing the operation of the fund is signed and executed and money or other property is transferred to the trustee of the fund as an initial contribution, to be held on trust for the beneficiaries (members) of the fund. An SMSF will be established in Australia if the initial contribution is paid to and accepted by the trustee of the fund in Australia.

The establishment of the fund requirement in paragraph 295-95(2)(a) of the ITAA 1997 is a once and for all requirement. That is, once it is determined that a fund was established in Australia, it will satisfy the first test at all relevant times. If it is determined that the fund was not established in Australia, then the alternative requirement in paragraph 295-95(2)(a), namely location of the assets of the fund, must be considered.

In this case, the Fund was established in Australia and all assets are located in Australia. Therefore, the first test under paragraph 295-95(2)(a) of the ITAA 1997 is satisfied.

Second test: Central Management and Control

The second test, and one of the key requirements that an SMSF must satisfy to be an Australian superannuation fund at a particular time, is that the Central Management and Control (CM&C) of the fund is 'ordinarily' in Australia. Generally, the location of where important decisions are made is the location of the relevant management and control.

To determine the location of the CM&C of a fund at a point in time, it is necessary to consider what constitutes the CM&C of a fund and who it is that exercises the CM&C of a fund.

Paragraph 20 of TR 2008/9 states that:

'The CM&C of a superannuation fund involves a focus on the who, when and where of the strategic and high-level decision-making processes and activities of the fund. In the context of the operations of a superannuation fund, the strategic and high-level decision-making processes includes the performance of the following duties and activities:

•         formulating the investment strategy for the fund;

•         reviewing and updating or varying the fund's investment strategy as well as monitoring and reviewing the performance of the fund's investments;

•         if the fund has reserves - the formulation of a strategy for their prudential management; and

•         determining how the assets of the fund are to be used to fund member benefits.'

Establishing who is exercising the CM&C of the fund is a question of fact to be determined by reference to the circumstances of each case. While it is the trustee of the fund who has the legal responsibility or duty to exercise the CM&C of a superannuation fund, the mere duty to exercise CM&C does not, of itself, constitute CM&C. The trustee is required to actually perform the high-level duties and activities of the fund to be exercising the CM&C.

The trustees may seek external advice relating to the performance of their high-level duties and activities. Where they make the actual high level decision to act on this advice, it is considered that they are exercising the CM&C of the fund.

However, there may be situations where a person other than the trustee is exercising the CM&C of the fund. If a person other than the trustee of the fund independently and without any influence from the trustee performs those duties and activities that constitute the CM&C of the fund, that person is exercising the CM&C of the fund.

Location of the CM&C

The location of the CM&C of the fund is determined by where the high level and strategic decisions of the fund are made and where the high level duties and activities are in fact performed (regardless of where the persons exercising the CM&C of the fund actually reside).

Whether the CM&C of a fund is ordinarily in Australia at a particular time involves determining if, in the ordinary course of events, the CM&C of the fund is regularly, usually or customarily exercised in Australia. There must be some element of continuity or permanence if the CM&C of the fund is to be regarded as being 'ordinarily' in Australia.

If the CM&C of the fund is being temporarily exercised outside Australia, this will not prevent the CM&C of the fund being 'ordinarily' in Australia at a particular time.

Paragraph 32 of TR 2008/9 states:

While the CM&C of a fund can be outside Australia for a period greater than 2 years, the period of absence of the CM&C must still be temporary. Furthermore, if the CM&C of the fund is not temporarily outside Australia, it will not be 'ordinarily' in Australia at a time even if the period of absence of the CM&C is 2 years or less.

Whether an absence is temporary must be determined objectively by reference to all the relevant facts and circumstances on a 'real time' basis. That is, it cannot be established in retrospect.

Power of attorney and the location of CM&C

All members are required to be trustees of an SMSF or a director of the fund's corporate trustee to meet the definition of an SMSF under section 17A of the SISA.

Under subparagraph 17A(3)(b)(ii) of the SISA a legal personal representative who holds an enduring power of attorney granted by a member may be a trustee of the SMSF, or a director of the corporate trustee of the SMSF, in place of the member without causing the fund to fail to satisfy the definition of an SMSF.

A person who holds an enduring power of attorney for a member qualifies as a legal personal representative.

The Commissioner of Taxation has issued a Self Managed Superannuation Fund Ruling 2010/2 titled - Self Managed Superannuation Funds: the scope and operation of subparagraph 17A(3)(b)(ii) of the Superannuation Industry (Supervision) Act 1993 (SMSFR 2010/2), which sets out the Commissioner's view on the operation of subparagraph 17A(3)(b)(ii) of the SISA.

In order to comply with subparagraph 17A(3)(b)(ii) of the SISA, the legal personal representative must be appointed as a trustee of the SMSF, or a director of the corporate trustee of the SMSF. The member must cease to be a trustee of the SMSF or a director of the corporate trustee except where the legal personal representative is appointed as an alternate director.

Where an overseas member wants to appoint an alternative person to be their legal personal representative (and director of corporate trustee) then they can grant a new enduring power of attorney to the person of choice and revoke the former. Enquiries should be made to the relevant state or territory on the requirements. They all have different laws about powers of attorney.

In order to be appointed as a director of the corporate trustee, the legal personal representative must:

•         consent in writing to the appointment as a director of the corporate trustee

•         sign a declaration stating that they understand their duties as a trustee no later than 21 days after their appointment as a director of the corporate trustee

•         lodge a change of details form with the ATO and ASIC reporting the change in corporate trustee directors.

Based on the statements provided, so long as the Members validly appoint a power of attorney, who exercises the CM&C of the Fund such that the CM&C is ordinarily in Australia, the Fund will satisfy the CM&C test.

There is nothing to stop a validly appointed power of attorney from sharing the Fund's financial records with the Members while they are outside of Australia, provided the members are not using this information to make the high level and strategic decisions of the Fund.

As the Fund assets are legally owned by the corporate trustee and the power of attorney will be acting on behalf of the Members in their capacity as directors of the Trustee, there is no need to change the legal title of the Fund assets.

Third test: Active member test

The third test that must be satisfied for an SMSF to be an Australian superannuation fund at a particular time is the 'active member' test.

The fund must have no active members or have active members who are Australian residents and who hold at least 50% of:

•         the total market value of your 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.

However, as per subsection 295-95(3) of the ITAA 1997, a member is not an active member if contributions have been made to the fund on their behalf and:

•         they are not a resident of Australia

•         they have ceased to be a contributor, and

•         the contributions made on their behalf, after they ceased to be an Australian resident, were made for the time they were an Australian resident.

If all members of an SMSF are non-residents of Australia and a member makes a contribution to the fund, then the test will be failed as there are no Australian resident active members holding a superannuation interest in the fund.

Based on the statements provided, the Members will not make contributions to the Fund while they are outside Australia, and no contributions will be made on their behalf. So long as that is the case, they will not be active members and the 'active member' test will be satisfied.

Conclusion

Based on the information provided, the Fund will continue to be an Australian superannuation fund for the purposes of section 295-95 of the ITAA 1997 (and a complying superannuation fund for the purposes of section 42A of the SISA), so long as the CM&C test and the active member test are satisfied at all times during the Members' absence from Australia.

[1] Section 26 of the Income Tax Rates Act 1986