Edited version of your private ruling

Authorisation Number: 1012393940375

This edited version of your ruling will be published in the public register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.

Ruling

Subject: Australian superannuation fund

Question

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

Answer

No.

This ruling applies for the following period

Year ending 30 June 2008

Year ending 30 June 2009

Year ending 30 June 2010

Year ending 30 June 2011

Year ending 30 June 2012

The scheme commenced on

1 July 2006

Relevant facts

Member A and the spouse, Member B are passport holders of Country X. They are both under 50 years of age.

Member B commenced work for an overseas employer a number of years ago.

Member B moved to Australia and commenced employment with an Australian subsidiary of the overseas employer in 200X. Member A accompanied Member B to Australia where they lived in a rental property for several years.

They purchased investment properties during their time in Australia. Details of the investment purchases were provided.

They bought their family home in Australia in 200Y.

In 200Z, in accordance with advice received from their accountant, a regulated self managed superannuation fund (the Fund) was established in Australia.

Member A and Member B are both members and trustees of the Fund.

In the relevant income year, an overseas subsidiary (the Employer) of the original overseas employer offered Member B an employment contract in Country Y. The employment contract with the Employer was open ended.

The Members' expectation at the time was that they would be in Country Y for couple years and then they would return to Australia.

In the relevant income year, Member B departed Australia to take up employment with the Employer in Country Y. Member A departed Australia at the end of the relevant income year to be with Member B.

Members A and B advised their accountant that they were moving to Country Y. They state that at no time were they advised of what to do to maintain the complying status of the Fund.

Whilst overseas the Members maintained their investment properties and their family home in Australia was also rented out.

In 20XX, Member B was relocated to Country Z with the Employer. Member A accompanied Member B to Country Z. Whilst in Countries Y and Z Members A and B lived in rental accommodation.

· Both Members have returned to Australia for short periods since first leaving Australia a number of years ago. Details of these visits were supplied.

It is the Members' ultimate intention to return to Australia, but at this time they are unsure of when they will return permanently. Member B has been employed within the same company group since the late 1990s and is now an expatriate. It is not possible to specify a date when they will return to Australia as this will be dependant on the needs of the company by whom Member B is employed.

No contributions have been made to the Fund for either members whilst, they have been overseas. However, an amount was rolled-over from a superannuation fund into the Fund in the subsequent income year. This roll-over was related to contributions made for or by Member B in the relevant 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)

Reasons for decision

Summary of decision

For a superannuation fund to be considered an Australian superannuation fund at a particular time it must meet all the requirements of the income tax legislation. That is, it must satisfy:

· the 'established in Australia' condition;

· the 'central management and control' condition; and

· the 'active member; condition.

It has been determined that the Fund has not satisfied both the 'central management and control' condition and the 'active member' condition therefore the Fund is not an Australian superannuation fund for the purposes of the ITAA 1997, for the relevant income years.

Detailed reasoning

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 conditions 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 represents the views of the Commissioner and sets out the Commissioner's interpretation of the definition of Australian superannuation fund.

Condition One: Fund established in Australia or any asset of the fund is situated in Australia

The first condition that a superannuation fund must satisfy to be an Australian superannuation fund at the relevant 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.

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 condition at all relevant times.

In the present case, the Fund was established in Australia. Therefore, the requirement under paragraph 295-95(2)(a) of the ITAA 1997 has been satisfied.

Condition Two: The central management and control of the fund is ordinarily in Australia

The second condition, 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 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.

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.

As trustees and Members of the Fund, both Members perform the high level and strategic decisions in relation to the Fund. It is considered that Members exercise the CM&C of the Fund.

Member B left Australia in the relevant income year to take up employment in Country Y and subsequently moved to Country Z. Member A accompanied Member B to both Country Y and Z.

Both Members have returned to Australia several times during the past few years. However, as these trips have only been for very short periods, and often taken independently of one another, it is considered that the strategic decisions of the Fund are being made whilst the Members reside overseas. Thus, the high level duties and activities of the Fund are being performed outside of Australia.

There are only two Members of the Fund, Member B's account balance in the Fund constitutes the bulk of the Fund's assets whilst Member A's account balance is nominal.

In view of the above it is considered that the CM&C of the Fund rests with Member B, a trustee and Member of the Fund who, as determined earlier, is a non-resident for Australian income tax purposes.

As discussed earlier, the CM&C of a superannuation fund can be outside Australia if it can be established that the CM&C is ordinarily in Australia or the trustees who exercise it are temporarily outside Australia.

In this case, it is considered that the Fund's CM&C is not ordinarily in Australia or temporarily exercised outside of Australia, details were provided.

In view of this the Commissioner considers the CM&C of the Fund is not ordinarily in Australia. Therefore, the requirements in paragraph 295-95(2)(b) of the ITAA 1997 have not been satisfied.

Condition 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.

It should be noted that 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 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 facts show there is an active member of the Fund in the subsequent income year as a rollover was made to Fund for the benefit of Member B in that income year. Accordingly, the requirement under paragraph 295-95(2)(c) of the ITAA 1997 has not been satisfied in respect of the subsequent income year.

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.

In this case, as all the requirements under subsection 295-95(2) of the ITAA 1997 have not been satisfied, the Fund is not an Australian Superannuation Fund.

Discretion

There is no discretion under the ITAA 1997 or the Superannuation Industry (Supervision) Act 1993 (SISA) that will allow the Commissioner to treat a superannuation fund as a complying superannuation fund if the superannuation fund is not an Australian superannuation fund.

Further issues for you to consider

Compliance status of a superannuation fund

Subsection 10(1) of the 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 defines a complying superannuation fund as meaning a complying superannuation fund within the meaning of section 45 of the SISA.

Section 45 of the SISA interacts with subparagraph 42A(1)(a)(i) of the SISA which 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 [emphasis added].

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. If at any point in time it is not, then it is not a complying fund under the ITAA 1997 and the SISA.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).