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Authorisation Number: 1011518860373

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Ruling

Subject: Residency status of superannuation fund

Question

Is the Fund an Australian superannuation fund as defined in subsection 295-95(2) of the Income Tax Assessment Act 1997 in the 2010-11 income year?

Advice/Answers

Yes

This ruling applies for the following period

Year ending 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

The Fund is a self managed superannuation fund.

The Fund has three members, Member A, Member B and Member C.

The members of the Fund are the trustees of the Fund.

The Fund was established in Australia and the assets of the Fund are situated in Australia.

Member B and Member C reside in Australia and are Australian residents. Member A is moving overseas and returning to Australia on occasions throughout the year.

All decisions regarding the management of the Fund will be made when Member A is in Australia.

Member A is receiving an account based pension. All assets attributable to Member A are held in a pension account and they have no funds in accumulation phase within the Fund.

Member A has not made any contributions to the Fund for a number of years and has no intention of doing so in the future.

The majority of assets in the Fund support Member A's pension balance, the two remaining members have small superannuation interests and make small contributions to the Fund each year.

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 of decision

The Fund is an Australian Superannuation Fund in the 2010-11 income year as:

- it was established in Australia;

- the central management and control of the Fund is ordinarily in Australia; and

- 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.

Detailed reasoning

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.

There are three tests that a fund must satisfy 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 a 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 (TR 2008/9).

The ruling represents the views of the Commissioner and sets out the Commissioners interpretation of the definition of Australian superannuation fund.

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 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 fact.

A superannuation fund will be established when the trust deed governing the operation of the fund is signed and executed. The money or other property is transferred to the trustee or trustees of the fund, to be held on trust for the beneficiaries (members) of the fund, and is made by a person or persons situated 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 the present case, the Fund is established in Australia. Therefore the first requirement under 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 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 as to its meaning. Therefore it 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.

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 funds investment strategy as well as monitoring and reviewing the performance of the funds 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.

Paragraph 26 of TR 2008/9 states:

The trustee of a fund may seek external advice relating to the performance of their high level duties and activities. Provided that the trustee in fact makes the strategic and high level decisions for the fund, the circumstance that the trustee acts on or is influenced by such advice does not affect the fact that the trustee is 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 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.

As trustees of the Fund, your clients perform the high level and strategic decisions in relation to the Fund and it is considered that your clients exercise the CM&C of the Fund.

Although Member A is moving overseas they will be returning to Australia on occasions throughout the year. All decisions regarding the management of the Fund will be made when Member A is in Australia. Therefore, the CM&C of the Fund remains in Australia within the meaning of paragraph 295-95(2)(b) of the ITAA 1997.

Test Three: The active member test

The active member test requires that, where a fund has at least one active member, then the accrued entitlements of Australian resident active members must be 50 per cent or more of the accrued entitlements of all active members of the fund.

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 contributor to the fund at that time; or

- an individual on whose behalf contributions have been made, other than an individual:

- who is a foreign resident; and

- who is not a contributor at that time; and

- 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.

In this case, Member B and Member C will continue to reside in Australia and remain as Australian residents. The remaining member, Member A, will be moving overseas.

Member B and Member C are active members as they make contributions to the Fund each year.

Member A is not an active member as he will be a foreign resident who is not a contributor in the 2010-11 income year and no contributions will be made to the Fund on his behalf.

As Member B and Member C are the only active members of the Fund and they are also Australian residents then more than 50% of the total market value of the Funds assets are attributable to superannuation interests held by active members and more than 50% of the sum of amounts that would be payable to active members if they voluntarily ceased to be members, is attributable to superannuation interests held active members who are Australian residents.

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

Conclusion

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

As all requirements under subsection 295-95(2) of the ITAA 1997 have been satisfied, the Fund is an Australian superannuation fund.

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