Edited version of private ruling

Authorisation Number: 1011812366985

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Ruling

Subject: Australian superannuation fund

Questions:

1. Is the non-resident member of the superannuation fund an active member under subsection 295-95(2) of the Income Tax Assessment Act 1997?

2. Will the superannuation fund be an Australian superannuation fund for the 2009-10 income year?

Answers:

1. Yes

2. No

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commenced on:

1 July 2009

Relevant facts and circumstances

The Fund was established in the 2009-10 income year as a small APRA fund (SAF).

The Fund is a single member fund with a body corporate as the trustee of the Fund.

The Member is currently over over 50 years of age.

The Member spends the majority of each income year in a foreign country performing volunteer work.

The Member currently holds a particular visa which does not entitle the member to work in the foreign country.

The Member returns to Australia regularly.

Within a couple of months of the inception of the Fund, the Member rolled over funds from another superannuation fund to the Fund. The Member also made personal non-concessional contributions to the Fund.

The total value of the assets of the Fund is over one million dollars.

At the time of the establishment of the Fund, the Member believed that the member was and would remain an Australian resident for taxation purposes. In attending to relevant income tax returns the Member realised that the member was not an Australian resident for taxation purposes at the time the rollover and personal contributions were made during the 2009-10 income year.

The applicant stated that the Member has not been an Australian resident for taxation purposes for a number of years since the inception of the Fund.

It has recently come to the attention of the trustee of the Fund that the Fund is not a complying superannuation fund due to the Member's residency status for the taxation purposes.

No contributions have been made by the Member in the 2010-11 income 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 995-1(1).

Superannuation Industry (Supervision) Act 1993 Section 10

Superannuation Industry (Supervision) Act 1993 Section 45

Superannuation Industry (Supervision) Act 1993 subparagraph 42A(1)(a)(i)

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 not satisfied the active member test therefore the Fund is not an Australian superannuation fund for the purposes of subsection 295-95(2) of the ITAA 1997, for the 2009-10 income year.

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.

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'.

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

Test Two - The central management and control 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 this case, the Fund is a single member fund with a body corporate as the trustee of the Fund. The corporate trustee is based in Australia, will make the day to day decisions and has the legal responsibility for exercising the CM&C of the Fund.

In view of the above the Commissioner accepts that the CM&C of the Fund whilst the Member is overseas 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 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.

Basically, this means that:

· · if a member ceases to be a resident, and

· · they have not made contributions to the fund since that time, and

· · another party such as an employer has not made any contributions on the members behalf in respect of the time they were a non-resident, then

they would be regarded as a non-active member at the relevant time.

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.

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.

In this case, the Member spends the majority of each income year performing volunteer work in a foreign country since the establishment of the Fund. It is noted that the Member made regular return trips to Australia. However, the applicant advised that the Member of the Fund has not been an Australian resident for income tax purpose since the inception of the Fund.

It was further advised by the applicant the Member of the Fund has rolled over existing benefits from another superannuation fund to the Fund in the 2009-10 income year. It should be noted in paragraph 198 of TR 2008/9, the Commissioner states that he considers that a roll-over superannuation benefit is a contribution for the purposes of subsection 295-95(3) of the ITAA 1997. The Member also made personal non-concessional contributions to the Fund in the 2009-10 income year. Accordingly, the sole Member of the Fund is an active member as the member has made contributions to the Fund in the 2009-10 income year. Given that the only active member of the Fund was a non-resident, the percentage of resident active member contributions must be 0%.

In this instance, the total of the accrued entitlements of the non-resident active member would exceed 50% of the total accrued entitlement of all active members, the Fund would therefore fail the 50% active member test.

As all of the tests mentioned above have not been satisfied it is considered that the Fund is not an Australian superannuation fund for the purposes of subsection 295-95(2) of the ITAA 1997, for the 2009-10 income year.

Compliance status of a superannuation fund

Subsection 10(1) of Superannuation Industry (Supervision) Act 1993 (SISA) defines a resident regulated superannuation fund as follows:

resident regulated superannuation fund means a regulated superannuation fund that is an Australian superannuation fund within the meaning of the Income Tax Assessment Act 1997.

Subsection 995-1(1) of the ITAA 1997 defines an Australian superannuation fund as having the meaning given by section 295-95, that is basically, a fund that was established in Australia and its central management and majority of active members are located in Australia.

It should be noted that subsection 995-1(1) of the ITAA 1997 also defines a superannuation fund as having the meaning given by section 10 of the SISA, that is:

(a) a fund that:

(i) is an indefinitely continuing fund; and

(ii) is a provident, benefit, superannuation or retirement fund; or

(b) a public sector superannuation scheme.

Further more, subsection 995-1(1) of the ITAA 1997 means a complying superannuation fund within the meaning of section 45 of SISA.

Section 45 of the SISA interacts with subparagraph 42A(1)(a)(i) of the SISA. That provision states that an entity is a complying superannuation fund in relation to a year of income if:

the entity was a resident regulated superannuation fund at all times during the year of income when the entity was in existence.

Therefore, in order to be a complying superannuation fund under the ITAA 1997 and the SISA and to be taxed concessionally, the superannuation fund must be an Australian superannuation fund at all times during the year and if at any point in time it is not, then it is not a complying fund under the ITAA and SISA.

As previously determined, the Fund is not an Australian superannuation fund for the purposes of subsection 295-95(2) of the ITAA 1997, for the 2009-10 income year. Accordingly, the Fund is not a complying superannuation fund.

Discretion

There is no discretion under the ITAA 1997 and the SISA that will allow the Commissioner treat a superannuation fund as a complying superannuation fund when the superannuation fund is not an Australian superannuation fund.

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