Edited version of private ruling

Authorisation Number: 1011495360203

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Ruling

Subject: Residency status of the Fund

Question

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

Advice/Answer

Yes.

This ruling applies for the following period

For the year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts and circumstances

In the relevant income year, a self-managed superannuation fund (the Fund), was established.

The Trustees of the Fund are also the members of the Fund.

The members are between 60 and 65 years of age.

The Fund is in pension mode with all members receiving a pension and no contributions are being made to the Fund.

During a later income year, the members left Australia to travel overseas.

The members plan to be away for a number of years and expect to return to Australia at a future date.

Neither member will be engaged in any employment.

The members sold their main residence in Australia prior to departure and invested the money in the Fund.

In the relevant income year, the Trustees of the Fund appointed an Australian based, legal representative with power of attorney.

The legal representative will perform the duties and activities that constitute the central management and control of the Fund therefore exercising the high level decision making activities whilst the members are overseas.

When the members return to Australia from their overseas holiday they intend to purchase a another home and living essentials to live permanently back in Australia.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 295-95.

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 is an Australian superannuation fund as it satisfies all of the requirements of an Australian superannuation fund.

It is considered that the central management and control of the Fund has remained 'ordinarily in Australia'.

Detailed reasoning

What is an Australian superannuation fund?

From 1 July 2007 the term 'resident superannuation fund' is replaced by the term 'Australian superannuation fund'. Subsection 295-95(2) of the Income Tax Assessment Act 1997 (ITAA 1997) defines what is an Australian superannuation fund.

Subsection 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:

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

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

- at that time either the fund had no member covered by subsection (3) (an active member) or at least 50% of:

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

- 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.

A fund must satisfy three tests in order to be treated as an 'Australian superannuation fund' as defined in subsection 295-95(2) of the ITAA 1997.

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

The Commissioner of Taxation has issued Taxation Ruling TR 2008/9 entitled Income tax: meaning of 'Australian superannuation fund' in subsection 295-95(2) of the Income Tax Assessment Act 1997. The ruling sets out the Commissioner's interpretation of the definition of 'Australian superannuation fund'. In particular, it provides guidance on the meaning of central management and control (CM&C).

Test One - 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' 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 fact.

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.

The Fund was established in Australia in the 2003-04 income year. Therefore, the requirement in paragraph 295-95(2)(a) of the ITAA 1997 has been satisfied.

Test Two - 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 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 Tax Laws Amendment (Simplified Superannuation) Act 2007 (which inserted section 295-95 of the ITAA 1997) does not provide any guidance as to its meaning. Therefore, it must be given its ordinary or common law meaning.

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.

The CM&C of a superannuation fund involves the 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 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. If the trustee in fact performs the high level duties and activities of the fund, they will be exercising the CM&C of the fund in practice.

In discussing CM&C, TR 2008/9 states at paragraphs 24 and 26:

24. There may be situations where a person other than the trustee is exercising the CM&C of the fund, for example, the trustee may have delegated their duties and powers to that person. 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.

26. The trustee of the fund may seek external advice relating to the performance of their high level duties and activities. Provided that the trustee makes the actual high level decisions for the fund, the circumstance that the trustee acts on such advice does not affect the fact that the trustee is exercising the CM&C of the fund.

From the above, it can be seen that if a person performs the duties and activities that constitute the CM&C of the fund without any influence from the trustee, 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 high level duties and activities are in fact performed. Thus, if the trustees of the fund ordinarily reside overseas (notwithstanding that they may be Australian residents for income tax purposes) then, unless there is evidence to the contrary, the conclusion would be that the CM&C of the fund is overseas.

Whether the CM&C of a fund is ordinarily in Australia at a particular time is to be determined by the relevant facts and circumstances of each case. It involves determining whether, 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 (for whom the old 'two year temporary absence rule' was mainly directed), 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 ordinarily in Australia if it is exercised outside Australia 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) of the ITAA 1997 if the trustees can establish that their absence was of a temporary nature.

Paragraph 33 of TR 2008/9 states that:

The CM&C of a fund will be 'temporarily' outside of Australia if the person or persons who exercise the CM&C of the fund are outside Australia for a relatively short period of time. 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 a period of absence is considered to be relatively short involves considerations of questions of degree which must be decided by reference to the circumstances of each particular case.

Where a taxpayer has accepted a work appointment overseas for a two year period and that engagement is extended beyond that period, it would be reasonable to conclude that the absence is not temporary. The fact that regular short return trips to Australia are made would not necessarily alter the conclusion that the absence was not temporary.

In this case, the Trustees of the Fund appointed a legal representative of the Fund with power of attorney in the relevant income year. The legal representative is based in Australia, and will independently perform the duties and activities that constitute the CM&C of the Fund therefore exercising the high level decision making activities, whilst the members are overseas.

In the same income year, the trustees left Australia to travel overseas. The purpose of the trip is for an extended holiday during which they hope to travel around the world.

The members intend to return to Australia and purchase another home and living essentials to live permanently back in Australia.

The trustees expected date of return to Australia is at a future date, an absence in excess of two years.

In view of the above the Commissioner accepts that the CM&C of the Fund between the relevant quarter of the relevant income year and up to the relevant quarter of a future income year is ordinarily in Australia.

Therefore, the requirements in paragraph 295-95(2)(b) of the ITAA 1997 have been satisfied.

Test Three - the 'active member' test

The terms of paragraph 295-95(2)(c) of the ITAA 1997 contemplate two situations:

- the first situation is that the fund has no active members at a particular time. In this case, paragraph 295-95(2)(c) is satisfied at that time; and

- the second situation is where the superannuation fund does have an active member (as defined in subsection 295-95(3) of the ITAA 1997). In such a situation, the conditions in subparagraphs 295-95(2)(c)(i) and (ii) of the ITAA 1997 must be considered to determine whether the fund satisfies the active member test.

In this case, the Fund has no active members and no contributions are being made to the Fund. The Fund is in pension mode as the members have reached age 60 and are receiving a pension, therefore the requirements of paragraph 295-95(2)(c) of the ITAA 1997 have been satisfied.

Conclusion

For the Fund to be considered an Australian superannuation fund all the conditions for the purposes of subsection 295-95(2) of the ITAA 1997 need to be satisfied.

As all of the tests mentioned above have been satisfied it is considered that the Fund is, and will remain, an Australian superannuation fund for the purposes of subsection 295-95(2) of the ITAA 1997, for the 2009-10 income year until the 2012-13 income year.

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