Edited version of private ruling

Authorisation Number: 1011592608535

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Ruling

Subject: Resident superannuation fund

Question:

Will the self managed superannuation fund be an Australian superannuation fund as defined in subsection 295-95(2) of the Income Tax Assessment Act 1997?

Answer:

Yes. Provided the self managed superannuation fund satisfies the central management and control test.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You are a trustee and member of a self managed superannuation fund (The Fund). The other trustee and member of the Fund is your spouse.

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

You hold majority of the total assets of the Fund.

You were born in an overseas country and you are still a citizen of the overseas country (the destination country).

You lived in the destination country for more than 10 years prior to relocating to Australia a couple of years ago.

You will depart Australia within the next few months and you intend to live in the destination country for at least two to three years.

You own an apartment in the destination country which you will eventually move into.

You intend to spend 9 months of the year in the destination country. However, you will make regular short return trips to Australia to visit your spouse and children.

You will establish a business in the destination country.

You also own an apartment in Australia which will be occupied by your spouse.

You will pay taxes in the destination country on your business income.

Your family will not accompany you to the destination country as, due to marital difficulties, you may be separating from your spouse and your children are independent adults.

You have no social connections to Australia.

You have considerable family ties, friends and business associates in the destination country.

Your assets in Australia include the Fund and savings.

No contributions will be made by you or on your behalf to the Fund while you are overseas.

Your spouse will continue to make contributions to the Fund.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 292-95.

Income Tax Assessment Act 1997 Subsection 292-95(2).

Income Tax Assessment Act 1997 Subsection 292-95(3).

Income Tax Assessment Act 1997 Subsection 292-95(4).

Reasons for decision

Summary

A superannuation fund is an Australian superannuation fund at a particular time if it meets all the requirements of the legislation. That is, it must satisfy:

the established in Australia test;

the central management and control test; and

the active member test.

It has been determined that the Fund has satisfied both the established in Australia and the active member tests. Provided the Fund also satisfies the central management and control test, then the Fund will be an Australian superannuation fund.

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:

(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.

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) and active member.

Test One: The 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 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 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.

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.

At paragraph 32 of TR 2008/9 it 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) (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 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 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 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 your particular case, the Fund had two members, you and your spouse. You will be a non-resident of Australia for taxation purposes when you depart Australia within the next few months. You intend to live in the destination country for at least two to three years to embark on a new business opportunity. It would be reasonable to conclude from this that the absence may not be temporary. The fact that regular, short return trips to Australia are to be made would not necessarily alter this conclusion. This conclusion is further reinforced by the fact that due to marital difficulties you may be separating from your spouse and that your children are independent adults.

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) 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.

Contributions, in relation to a fund, include amounts paid to the fund that are taken to be rolled over.

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, your spouse will continue to reside in Australia and remain as an Australian resident and you will be moving overseas.

Your spouse will make contributions to the Fund. Accordingly, your spouse is the active member as she will continuously make contributions to the Fund.

You will not be an active member as you will be a foreign resident and will cease to be a contributor in the next few years and no contributions will be made to the Fund on your behalf.

As your spouse is the only active member of the Fund and she is also an Australian resident then more than 50% of the total market value of the Fund's assets is attributable to superannuation interest held by active member and more than 50% of the sum of amounts that would be payable to active member if she voluntarily ceased to be a member, is attributable to superannuation interest held by active member who is an Australian resident.

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

Further issues for you to consider

To avoid a complying fund becoming a non-complying fund where the trustees are overseas for longer than 2 years there are a number of options available to the trustees of a SMSF which include:

· a trustee, or trustees of a fund returns to Australia within 2 years of the trustees temporarily departing Australia;

· appointing a legal personal representative. This is a person who holds an enduring power of attorney to act on their behalf as a trustee for the period that they will be overseas. It is recommended that anyone considering this seek legal advice. (The laws around powers of attorney are administered by the states and territories of Australia), and

· ensuring that, during their absence, the accumulated entitlements of the fund's resident active members will be more than 50% of the total accumulated entitlements of all active members; or

· resigning as the non-resident trustee or the SMSF can be wound-up and the member's benefits rolled-over to another Australian complying superannuation fund.

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