Edited version of private ruling

Authorisation Number: 1011708275724

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Ruling

Subject: Residency of superannuation fund

Question 1

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

No.

Question 2

Will the Commissioner exercise his discretion under subsection 304-10(4) of the Income Tax Assessment Act 1997 in respect of the members of the Fund?

Advice/Answers

No.

This ruling applies for the following period

Year ending 30 June 2011

The scheme commenced on

1 May 2007

Relevant facts

o The Fund was established in Australia and has no active members.

o All trustee decisions in relation to the acquisition of relevant investments for the Fund were made in Australia.

o The Members arrived in Australia over five years ago.

o When the Members moved to Australia they continued to own the assets overseas.

o A member of the Fund worked as an employee in Australia.

o The Members became of the view that it was likely that they would retire in Australia and established the Fund with the purpose of building retirement savings in Australia.

o The Members each made non-concessional contributions to the Fund.

o Since the Fund's establishment the Members employers have also made concessional contributions to the Fund. In addition, benefits have been rolled into the Fund from other Australian superannuation funds.

o Subsequently, the Members left Australia and now consider that it is possible that they may not return to Australia and that they may not retire in Australia at the conclusion of their working lives.

o Neither the Members nor any other party has made contributions to the Fund since the Members left Australia.

o The Members have not entered into any employment contracts since leaving Australia.

o Upon departing Australia the Members of the Fund did not intend to return to Australia, other than to dispose of their Australian home and cars.

o The Members are contemplating winding up the Fund and paying out the resultant moneys to themselves as superannuation benefits to enable them to invest in retirement vehicles overseas or elsewhere that may be more appropriate to their changed circumstances.

o The investments held within the Fund included units in Australian managed funds, shares in Australian listed companies and cash at bank in Australian financial institutions.

Relevant legislative provisions

Income tax Assessment Act 1936 Section 26AFB

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).

Income Tax Assessment Act 1997 Section 304-10

Superannuation Industry (Supervision) Regulations 1994 Regulation 6.20A

Reasons for decision

Issue 1

Summary of decision

The Fund is not an Australian Superannuation Fund in the 2010-11 income year as the central management and control of the Fund is not ordinarily in Australia.

The Commissioner does not consider it is unreasonable that any amount withdrawn from the Fund be included in the Members' assessable income, based on the information provided.

Detailed reasoning

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.

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 Commissioner's 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 was 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:

o formulating the investment strategy for the fund;

o reviewing and updating or varying the funds investment strategy as well as monitoring and reviewing the performance of the funds investments;

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

o 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 this case, the Members have been overseas for a period of less than two years and it is noted that all trustee decisions in relation to the acquisition of relevant investments for the Fund have been made in Australia. However, the CM&C of the Fund is not 'ordinarily' in Australia within the meaning of paragraph 295-95(2)(b) of the ITAA 1997 as the Members absence from Australia is not temporary. Upon departing Australia, the Members of the Fund are non-residents of Australia for taxation purposes as they did not intend to return, other than to dispose of their Australian home and cars.

Therefore, the CM&C of the Fund is not temporarily outside of Australia and does not remain 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:

o a contributor to the fund at that time; or

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

o who is a foreign resident; and

o who is not a contributor at that time; and

o 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, the Fund does not have any active members. 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 not been satisfied, the Fund is not an Australian superannuation fund.

Taxation of amounts withdrawn from the Fund

Benefits received from a complying superannuation fund contrary to payment standards established by the Superannuation Industry (Supervision) Regulations 1994 are prima facie assessable in the hands of the member.

Subsection 304-10 of the ITAA 1997 provides that:

Include in your assessable income the amount of a superannuation benefit if:

any of the following applies:

you received the benefit from a complying superannuation fund or from a superannuation fund that was previously a complying superannuation fund;

the benefit is attributable to the assets of a complying superannuation fund or from a superannuation fund that was previously a complying superannuation fund; and

Subsection 304-10(4) of the ITAA 1997 further provides that

However, you do not have to include the amount in your assessable income to the extent that the Commissioner is satisfied that it is unreasonable that it be included having regard to:

for subsection (1) or (2) - the nature of the fund; and

any other matters that the Commissioner considers relevant.

In deciding whether or not to include an amount the Commissioner is required to have regard to both the nature of the fund, the circumstances of a particular case and any other matters the Commissioner considers relevant. Hence, each case should be considered on its own merits.

Paragraph 2.84 of the Explanatory Memorandum to the Tax Laws Amendment (Simplified Superannuation) Act 2007 notes that the Commissioner retains the discretion to provide that an amount may be excluded from a person's assessable income and treated as a superannuation benefit where the Commissioner is satisfied that it would be unreasonable not to do so.

In looking at section 304-10 of the ITAA 1997 it is also appropriate to consider the circumstances in which the discretion in former section 26AFB of the ITAA 1936 was intended to be applied.

Section 26AFB of the ITAA 1936 was inserted by the Tax Laws Amendment Act (No 4) 1987. The relevant Explanatory Memorandum provides some insight into the circumstances in which exercising the discretion may be appropriate. The Explanatory Memorandum suggests that appropriate treatment will, at least in some instances, depend on whether an appropriate sanction has already been applied. It states:

New section 26AFB will assume the discretion currently available under section 26AFA in order to ensure that taxpayers are treated appropriately such as where loss of tax exemption by a fund may be regarded as a sufficient penalty for a breach of the relevant standards.

The relevant Explanatory Memorandum also outlines circumstances in which it might be appropriate to exercise the discretion in former section 26AFA of the ITAA 1936 and states:

The Commissioner has indicated that this discretion would be exercised where there are no tax avoidance implications and where the excessive benefit arose fortuitously or in other circumstances beyond the effective control of the recipient or the employer.

As with any discretion, subsection 304-10(4) of the ITAA 1997 should be applied in a manner that promotes the underlying policy intent. First and foremost section 304-10 of the ITAA 1997, as with former section 26AFB of the ITAA 1936, is designed to prevent abuse of the concessional tax environment. This should inform the position of the Commissioner when considering whether to apply the discretion favourably or not.

As noted above, subsection 304-10(4) of the ITAA 1997 expressly states that the Commissioner must have regard to the nature of the fund where relevant. As a general statement it is fair to say that the Members, as trustees of the Fund, have complete control over the nature and timing of any benefit payments. This is a factor that would generally weigh against exercising the discretion favourably.

The Members have made significant contributions to the Fund, which has enjoyed concessional tax treatment in respect of any earnings derived from those contributions.

Based on the information provided, it is apparent that the Members have not satisfied any of the conditions of release listed in Schedule 1 to the Superannuation Industry (Supervision) Regulations 1994.

Section 304-10 of the ITAA 1997 applies if a member receives a superannuation benefit from a complying superannuation fund without satisfying a condition of release and is not contingent upon the composition of the benefit in terms of identifying a tax-free and/or taxable component. Having regard to the policy intent behind section 304-10 of the ITAA 1997, including a benefit in the assessable income of the member at marginal rates is entirely appropriate in instances where the benefit has been received contrary to payment standards. There is nothing to suggest that including the relevant benefits in the assessable income of the Members under subsection 304-10 of the ITAA 1997 would be unreasonable in the present circumstances and therefore it would not be appropriate to apply the discretion in subsection 304-10(4) ITAA 1997.

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