Edited version of private ruling

Authorisation Number: 1011719580285

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Ruling

Subject: Australian superannuation fund - residency status

Question

Will the members be 'active members' for the purposes of subsection 295-95(3) of the Income Tax Assessment Act 1997 (ITAA 1997) if a superannuation benefit is rolled over into the superannuation fund while the members are non-residents?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

The Fund is a self managed superannuation fund (The Fund).

The Fund was established in Australia several years ago.

The member (Member 1) and his spouse (Member 2) are members of The Fund.

Member 1 and Member 2 are currently both non-residents for Australian tax purposes and are both non-contributors to The Fund.

Another individual has been delegated the 'trusteeship' of The Fund.

Member 1 is also a member of another Australian superannuation fund (Fund B).

The contributions that were made to Fund B were all made previously during the period when Member 1 was a resident for Australian tax purposes.

Member 1 proposes to roll over the entire amount held in Fund B 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 below three tests:

1. the established in Australia test;

2. the central management and control test; and

3. the active member test.

At the time the superannuation benefit is rolled over into the fund, all of the above three tests are satisfied. The members of the fund will not be 'active members' as the roll-over benefit constitutes a contribution made on behalf of the relevant non-resident member in respect of a period of time when the non-resident member was an Australian resident.

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 all 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 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 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.

In the present case The Fund was established in Australia. Therefore, in the absence of evidence to the contrary, it is accepted that the first test 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 CM&C of a superannuation fund.

The concept of CM&C is not defined in the ITAA 1997 or in the Income Tax Assessment Act 1936 (ITAA 1936). Tax Laws Amendment (Simplified Superannuation) Bill 2006 inserted section 295-95 into the ITAA 1997.

Paragraphs 3.91 and 3.93 of the Explanatory Memorandum to this Bill (including Example 3.1) explain that the definition of 'Australian superannuation fund' in the ITAA 1997 has replaced the then existing definition of 'resident superannuation fund' in section 6E of the ITAA 1936. 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 main change being there is no longer a specific temporary absence rule for trustees of a superannuation fund as an alternative condition to the requirement that the CM&C of the fund be in Australia.

The definition of 'Australian superannuation fund' in paragraph 295-95(2)(b) does not use the alternative test (the two-year temporary absence rule). Instead, it deals with temporary absences of trustees by requiring that the CM&C of the fund be 'ordinarily in Australia'. Satisfying the two-year temporary absence rule would normally satisfy this 'ordinarily in Australia' requirement. That is, the temporary absence of the trustee(s) from Australia does not exceed two years.

Example 3.1

A married couple are trustees of their self-managed superannuation fund that was established in 2001. In July 2007 the husband accepts a two year employment contract to work for an overseas government, intending to return to Australia after the contract is fulfilled. His wife joins him for the term of his contract. They make no contributions to the fund after leaving Australia.

In these circumstances it is accepted that the central management and control of the self-managed superannuation fund is ordinarily in Australia and the self-managed fund will be treated as an Australian superannuation fund. If the husband's employment contract was continually extended so that the couple remained overseas for a period considerably in excess of two years, central management and control of the self-managed superannuation fund would not be treated as an Australian superannuation fund.

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 who 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.

Location of the CM&C of the fund

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 reside). 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 and not ordinarily in Australia.

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 paragraphs 30 to 32 of TR 2008/9, it states:

The effect of subsection 295-95(4) is to provide one set of circumstances in which the CM&C of a fund will be taken to be 'ordinarily' in Australia at a time for the purposes of paragraph 295-95(2)(b) of the ITAA 1997 (that is, it operates as a 'safe harbour' rule).

Subsection 295-95(4) of the ITAA 1997 does not otherwise restrict the meaning of 'ordinarily' so that the CM&C of the fund can only be outside Australia for a period of 2 years or less. If the CM&C of the fund is outside Australia for a period greater than 2 years, the fund will satisfy the CM&C test if it satisfies the 'ordinarily' requirement in paragraph 295 -95(2)(b) of the ITAA 1997.

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.

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 that person independently and without any influence from the trustee performs those duties and activities that constitute the CM&C of the fund, then that person is exercising the CM&C of the fund.

At paragraphs 123 to 125 of TR 2008/9, it states:

Delegation of trustee's duties and powers

Where permitted by the trust deed of the fund or in circumstances prescribed in the trustee legislation of the relevant State or Territory, and consistent with the provisions of the Superannuation Industry (Provision) Act 1993 (SIS Act), the individual trustee or trustees of a superannuation fund may delegate all or any of their duties and powers. For example, in all jurisdictions, the trustee legislation permits a trustee to delegate the execution of the trust where he or she is absent from the jurisdiction or about to depart from it.

Where the trustee of a fund delegates their duties to another person, the delegate will be exercising the CM&C of fund if they independently and without influence from the trustee, perform those duties and activities that constitute the CM&C of the superannuation fund.

However, if the trustee continues to participate in the strategic and high level decision making and activities of the fund then it cannot be said that the delegate is exercising the CM&C of the fund. The trustee may continue to participate in such activities by reviewing or considering the decisions and actions of the delegate before deciding whether any further action is required. ...

In the present case, it has been stated:

o The two members of The Fund are non-residents of Australia for taxation purposes; and

o The Fund remains an 'Australian resident fund due to previous delegation of the trusteeship of the fund' to the individual entity.

Therefore in considering this ruling application, and in the absence of evidence to the contrary, the Commissioner has made the assumption that the CM&C of The Fund is 'ordinarily' in Australia and it is accepted that the second test under paragraph 295-95(2)(b) of the ITAA 1997 has also been satisfied.

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.

The term contributor in the definition of active member in subsection 295-95(3) 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.

The active member test is explained in TR 2008/9 at paragraphs 177 to 194. The relevant paragraphs from TR 2008/9 are extracted below:

177.The third test that a fund is required to satisfy to be an Australian superannuation fund is the 'active member' test in paragraph 295-95(2)(c) of the ITAA 1997. The 'active member' test is satisfied if, at the relevant time, either the fund has no member covered by subsection 295-95(3) of the ITAA 1997 (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.

178. The terms of paragraph 295-95(2)(c) of the ITAA 1997 therefore 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 and further discussed in paragraphs 183 to 195 of this Ruling). 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.

Australian resident

181. 'Australian resident' in paragraph 295-95(2)(c) of the ITAA 1997 means a person who is a resident of Australia for the purposes of the ITAA 1936 …

182. A 'foreign resident' is a person who is not a resident of Australia for the purposes of the ITAA 1936.

Contributor to the fund at that time

184.The term 'contributor' in subsection 295-95(3) of the ITAA 1997 is not defined. Therefore, it takes its meaning from the context in which it appears.

185. In the case of a superannuation fund, a 'contributor' is an individual who makes a contribution for the purpose of providing for future retirement or superannuation benefits (see paragraphs 196 to 198 of this Ruling for a discussion on the meaning of 'contribution'). It appears from the context of the provisions that the focus of the test is on the status of the member as a contributor at a particular point in time, and not actually on the specific act of contributing. Further, the amount of the contribution that is made by the member is irrelevant for the purposes of determining whether the member is a contributor.

189. If the member is a contributor to the fund at a particular time, they will be an active member within the meaning of subsection 295-95(3) of the ITAA 1997, irrespective of whether the member is an Australian resident or foreign resident.

An individual on whose behalf contributions have been made

190. Subject to the exception relating to foreign residents (which is discussed in paragraphs 191 to 194 of this Ruling), an individual on whose behalf contributions have been made will be an active member (paragraph 295-95(3)(b) of the ITAA 1997).

191. If the member is a foreign resident and a contribution is made on their behalf after they became a foreign resident, they will only be an active member at the relevant time if the contribution is made in respect of the time when the individual was a foreign resident. If the contribution to the fund is in respect of a period of time when the individual was an Australian resident, they will not be an active member at the relevant time (subparagraph 295-95(3)(b)(iii) of the ITAA 1997).

192. The phrase 'in respect of' in subparagraph 295-95(3)(b)(iii) of the ITAA 1997 conveys or contemplates some nexus or connection between one thing and another. The meaning of the expression, and hence the nature of the connection that is to be established between the two things, depends on the context in which the words are found.106 The context in this situation includes having regard to the purpose or object underpinning the predecessor provision to paragraph 295-95(3)(b) of the ITAA 1997.107

193. Subsection 295-95(3)(b) of the ITAA 1997 substantially reflects the terms of former subsection 6E(4B) of the ITAA 1936. Subsection 6E(4B) of the ITAA 1936 was enacted by the Taxation Laws Amendment Act (No. 6) 200. In the EM to the Tax Laws Amendment Bill (No.6) 2001, it was stated:

4.6 The amendment provisions will ... enable a non-resident member to receive superannuation contributions in respect of a period in which they were a resident member without them subsequently becoming a non-resident active member.

Example 4.2

Mark, John and Harry are members of the MJH Superannuation Fund and are all Australian residents. Harry's employer makes a superannuation contribution for Harry in July. Harry ceases to be a resident of Australia in August. From that time on Harry is not a contributor to the fund and does not have any contributions made to the fund on his behalf. He is therefore not an active member at any stage during that time. In October a further contribution is made for Harry by the employer in relation to work carried out by him in July. As Harry is not a resident and both the July and October contributions relate to a period when Harry was a resident, he does not become a non-resident active member because of the contributions.

194. Having regard to the policy rationale underpinning former subsection 6E(4B) of the ITAA 1936, the requisite connection in subparagraph 295-95(3)(b)(iii) of the ITAA 1997 must be established between the contribution and a period of time during which the member was an Australian resident. It is considered that a contribution will be made 'in respect of' a time when an individual was an Australian resident within the meaning of subparagraph 295-95(3)(b)(iii) of the ITAA 1997 if the entitlement to that payment arises at that time. In the example from the EM outlined above, Harry's entitlement to the further contribution that is made on his behalf in October arises at the time he carried out the work in July. At that time, Harry was a resident of Australia.

Therefore, taking into consideration all of the above, a view can be formed that if a non-resident member of a superannuation fund receives superannuation contributions in respect of a period in a year in which they were a resident this alone will not make them a non-resident active member for that entire year.

Paragraphs 197 and 198 of TR 2008/9 lists a number of provisions within Part 3-30 of the ITAA 1997 which contain a reference to a contribution and states that when the provisions listed in paragraph 197 are analysed, it is clear that the term 'contribution' has a very broad meaning.

When interpreted in the context of those provisions in Part 3-30 of the ITAA 1997, 'contributions' in subsection 295-95(3) would include such amounts as a roll-over superannuation benefit - in relation to superannuation funds.(This is a superannuation lump sum benefit paid from one complying fund to another complying fund at the direction of the member).

In the present case, it is stated both Member 1 and Member 2 are currently non-residents and non-contributors of The Fund. It is also stated that Member 1 is a member of another Australian superannuation fund (Fund B) and that the contributions that were made to Fund B were all made previously during the time when Member 1 was a resident for Australian taxation purposes.

In consideration of the guidance as provided by paragraphs 194 to 198 (Meaning of 'contribution') of TR 2008/9, a roll-over superannuation benefit - in relation to superannuation funds, includes a superannuation lump sum benefit paid from one complying fund to another complying fund at the direction of the member.

If Member 1 were to direct the roll-over of his superannuation benefit held in Fund B to The Fund, it will be a contribution made to The Fund on his behalf at that time. However, it will not cause him to become an active member at that time as the roll-over superannuation benefit is a contribution made in relation to a period when he was an Australian resident. That is, he will not become an active member for the purposes of subsection 295-95(3)of the ITAA 1997 at the time the roll-over is made.

Consequently, on the basis of the facts as presented, it is considered that both non-resident members of The Fund will not be 'active members' for the purposes of subsection 295-95(3) of the ITAA 1997 if the roll-over of the superannuation benefit as proposed were to be effected.

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