Edited version of private advice

Authorisation Number: 1051798578303

Date of advice: 10 February 2021

Ruling

Subject: Residency status of a self-managed superannuation fund

Question

Is the Fund an Australian superannuation fund as defined in subsection 295-95(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following period:

February 2021 until December 2023

The scheme commences on:

4 February 2021

Relevant facts and circumstances

•         The Fund is a one-member fund.

•         The Fund has a corporate trustee.

•         The member of the Fund is the sole director of the corporate trustee company.

•         The Fund is an Australian superannuation fund as it satisfies the three conditions as subsection 295-95(2) of the Income Tax Assessment Act 1997.

•         The Fund was established in Australia.

•         The member will take up an appointment overseas

•         The appointment is as an Australian diplomat

•         The appointment is for a three-year period.

•         The exact date the appointment finishes is not yet known.

•         The member's employer is Australian

•         The member will occupy a furnished apartment provided by his employer.

•         The member will travel on a diplomatic passport and will enjoy diplomatic status while overseas.

•         The member will be classified as an A-based officer and is considered an Australian resident for tax purposes.

•         When the appointment finishes, they may travel privately for a few weeks before returning to Australia.

•         The member's agent outlined in further evidence provided that:

o   The member will be an active member of the Fund for the period he is overseas as he will be receiving superannuation contributions into the Fund,

o   At least 50% of the total market value of the Fund's assets are attributable to superannuation interests held by active members who are Australian residents, and

o   The superannuation interest held by the Fund is payable to the member on his retirement who is an Australian resident.

•         The following statements support the member's claim the overseas appointment is temporary:

§  The member will rent out their home in Australia while they are overseas

§  The furniture will be put into storage

§  The member may sell their motor vehicle, before leaving Australia

§  The member's Australian Bank accounts will remain open, private health cover will be maintained, and the newspaper subscriptions may be on-going

§  The member will maintain business relationships with all existing service providers in looking after his/her Australian assets

§  The member has significant family in Australia including children and grandchildren

§  All of these factors indicate an intention to be outside of Australia for a temporary period

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 295-95(2).

Income Tax Assessment Act 1997 Paragraph 295-95(2)(a).

Income Tax Assessment Act 1997 Paragraph 295-95(2)(b).

Income Tax Assessment Act 1997 Paragraph 295-95(2)(c).

Income Tax Assessment Act 1997 Subsection 295-95(3).

Income Tax Assessment Act 1997 Subsection 295-95(4).

Reasons for decision

Summary

The Fund satisfies all the tests set out in subsection 295-95(2) of the ITAA 1997 and is therefore an Australian superannuation fund for income tax purposes.

Based on provided information, it is considered that the central management and control of the Fund will remain 'ordinarily in Australia'.

Detailed reasoning

Subsection 295-95(2) of the ITAA 1997 defines what is an Australian superannuation fund. It states 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 member covered by subsection (3) (an active member) or at least 50% of:

(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;

is attributable to superannuation interests held by active members who are Australian residents.

Accordingly, there are three tests that a fund must satisfy in order to be treated as an Australian superannuation fund to meet definition in subsection 295-95(2) of the ITAA 1997.

If a fund fails to satisfy any one of these tests at a particular time, it will not be an Australian superannuation fund at that time, even if it satisfies the other two tests.

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).

The ruling 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 a superannuation fund must satisfy to be an Australian superannuation fund at that time is that the fund was either established in Australia, or any asset of the fund is situated in Australia at the relevant time. This is a question of facts.

A superannuation fund 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. A superannuation fund 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. Therefore, the first requirement under paragraph 295-95(2)(a) of the ITAA 1997 has been satisfied.

Second test: The CM&C of the fund ordinarily in Australia

The second test, and one of the key requirements that a superannuation fund 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.

The concept of CM&C is not defined in the ITAA 1997 or in the Income Tax Assessment Act 1936 (ITAA 1936). In addition, the Explanatory Memorandum to the Superannuation Legislation Amendment (Simplification) Act 2007 (which inserted section 295-95 of the ITAA 1997) does not provide any guidance to its meaning. Therefore, this concept must be given its ordinary or common law meaning. The policy intention of the amendment was to simplify the scope of the superannuation fund residency definition and give effect to a minor policy change in respect of the application of the CM&C test.

The concept of CM&C was developed by the courts as a common law rule for determining the residence of a company.

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 facts to be determined with reference to the circumstances of each case. While it is the trustee of the fund which 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.

As director of the corporate trustee of the Fund, he/she performs the high level and strategic decisions in relation to the Fund and it is considered that the member exercises 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 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.

CM&C - temporary absences

To provide certainty to trustees of superannuation funds, especially trustees of a self-managed superannuation fund (SMSF), subsection 295-95(4) of the ITAA 1997 was inserted into the definition of 'Australian superannuation fund'. This subsection explains that the CM&C of a superannuation fund is considered to be ordinarily in Australia even if that CM&C is temporarily outside Australia, where it is for a period of not more than two years.

Where the trustees are temporarily absent from Australia for a period of up to two years, then subsection 295-95(4) of the ITAA 1997 makes it clear that the CM&C is ordinarily in Australia. On the other hand, it is considered that where the trustees of the fund are absent from Australia for a period greater than two years, the fund will only satisfy the test in subsection 295-95(2) if the trustees can establish that their absence was of a temporary nature.

At paragraph 33 of TR 2008/9 it states:

The CM&C of a fund will be 'temporarily' outside Australia if the person or persons who exercise the CM&C of the fund are outside Australia for a relatively short period of time and during that time they exercise the CM&C of the fund overseas. The duration of the absence must either be defined in advance or related (both in intention and fact) to the fulfilment of a specific, passing purpose. Whether an absence is considered to be temporary involves considerations of questions of degree which must be decided by reference to the circumstances of each particular case.

In this case the member will be overseas the period of absence which had been defined in advance as being longer than two years, accepting an employment position as a foreign diplomat, which is specified as a three-year appointment. Accordingly, the entire period of absence is related to the fulfilment of a specific purpose.

The provided evidence and statements support that the member will not abandon their intention to return to Australia at the expiration of the appointment.

The member will continue to maintain their home, other assets and health insurances in Australia, indicating a durability of association with Australia.

Due to the above reasons whilst the CM&C of the Fund may be outside of Australia for a period greater than two years, the period of absence of the CM&C is temporary. The CM&C of the Fund remains ordinarily in Australia.

Accordingly, the Fund satisfies the CM&C test under paragraph 295-95(2)(b) of the ITAA 1997.

Third test: The active member test

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

In accordance with paragraph 295-95(2)(c) of the ITAA 1997 the 'active member' test is satisfied if, at the relevant time:

-   the fund has no 'active member'; or

-   at least 50% of the total market value of the fund's assets attributable to superannuation interests held by active members is attributable to superannuation interests held by active members who are Australian residents (subparagraph 295-95(2)(c)(i) of the ITAA 1997); or

-   at least 50% of the sum of the amounts that would be payable to or in respect of active members if they voluntarily ceased to be members is attributable to superannuation interests held by active members who are Australian residents (subparagraph 295-95(2)(c)(ii) of the ITAA 1997).

As defined in subsection 295-95(3) of the ITAA 1997, a member is an active member at a particular time if the member is:

(a)      a contributor to the fund at that time; or

(b)      an individual on whose behalf contributions have been made, other than an individual:

(i)        who is a foreign resident; and

(ii)       who is not a contributor at that time; and

(iii)      for whom contributions made to the fund on the individual's behalf after the individual became a foreign resident are only payments in respect of a time when the individual was an Australian resident.

The term 'contributor' in the definition of active member is not defined. Therefore, it is to be given its ordinary meaning subject to the context in which it appears. The concept of a 'contributor' within the context of the active member test is directed at establishing the status of a member as a contributor at a particular point in time, not on the specific act of contributing.

Information has been provided to state that the member will have superannuation contributions made on his behalf during his time overseas. Further, that more than 50% of the total market value of the Fund's assets attributable to superannuation interests are held by the member and he will maintain his residency in Australia.

Therefore, the requirement under paragraph 295-95(2)(c) of the ITAA 1997 has been satisfied.

As a result, the Fund will meet the definition of an Australian super fund under subsection 295-95(2) of the ITAA 1997.