Edited version of your private ruling

Authorisation Number: 1012475333125

Ruling

Subject: Residency status of superannuation fund

Question 1

Is the Fund an Australian superannuation fund in accordance with subsection 295-95(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following periods:

2013-17 income years

The scheme commences on:

1 July 2012

Relevant facts and circumstances

The Fund is a self managed superannuation fund, established in Australia.

The members of the Fund are Member 1 and Member 2.

The trustee of the Fund is a corporate trustee.

The two directors of the corporate trustee are the Fund's members.

Member 1 has taken up an employment contract overseas.

The length of the contract is for a maximum period of four years. However, the continuation of the contract up until the maximum period is subject to performance criteria.

The Members have relocated overseas. Member 1 left Australia in early 2013 to take up the contract. Member 2 left Australia several months later to join Member2.

Member 1 has a temporary visa which is valid for a period of three years. The visa obtained by Member 1 is tied to their employment and once the position is terminated, the visa is also terminated. The position (and current visa held) will never result in permanent employment in the overseas country.

Member 2 has a visa which does not allow employment in that foreign country.

The Members intend to return to Australia permanently following the expiration of the coaching contract.

The Members intend to visit Australia at least once each year during the period of the contract; however this may extend to multiple visits.

Member 2 intends to carry out some work with their current Australian employer while overseas. The majority of the work will be carried out remotely and face to face time with the employer will be organised on return visits to Australia. Member 2 therefore intends to visit Australia two to three times during the period of Member 1's contract.

The Members have rented out their home in Australia whilst overseas, so they can return to it on completion of the coaching contract. In addition, both directors have maintained their Australian bank accounts, furniture, personal effects and an investment property. Neither director intends to dispose of any of their Australian assets.

Both directors intend to continue exercising the management and control of the Fund whilst overseas and during any return trips to Australia.

Both directors will not remain domiciled in Australia for income tax purposes for the duration of the contract.

Neither member is a contributing member of the Public Sector Superannuation Scheme or an eligible member in respect of the Commonwealth Superannuation Scheme.

The members do not intend to make any contributions to the Fund (nor have any contributions made on their behalf) for the period they will be overseas.

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 Subsection 295-95(3)

Income Tax Assessment Act 1997 Subsection 295-95(4)

Reasons for decision

Summary

The Fund satisfies all the tests set out in subsection 295-95(2) of the ITAA 1997 and is therefore an Australian superannuation fund for income tax purposes.

It is considered that the central management and control of the fund will remain 'ordinarily in Australia'.

Detailed Reasoning

In accordance with subsection 295-95(2) of the ITAA 1997, a superannuation fund is an Australian superannuation fund at a time and for an 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.

Subject to the fund meeting all of the above three tests during the relevant period, the Fund will be an Australian superannuation fund.

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 conditions.

The Commissioner of Taxation (the Commissioner) 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 (TR 2008/9). The ruling represents 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 is established in Australia or any asset of the fund is situated in Australia

The first test that must be satisfied is that either the fund was established in Australia, or any asset of the fund is situated in Australia at the relevant time. This is a question of fact.

In this case, the Fund was established in Australia and therefore satisfies the requirement in paragraph 295-95(2)(a) of the ITAA 1997.

Test Two: The CM&C of the fund is '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 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.

Paragraph 20 of TR 2008/9 states that 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 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.

In discussing CM&C, TR 2008/9 states at paragraph 26:

The trustee of the fund may seek external advice relating to the performance of their high level duties and activities. Provided that the trustee makes the actual high level decisions for the fund, the circumstance that the trustee acts on 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 (regardless of where the persons exercising the CM&C of the fund actually reside).

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.

Paragraph 32 of TR 2008/9 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 ordinarily in Australia if it is temporarily exercised outside Australia 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) of the ITAA 1997 if the trustees can establish that their absence was of a temporary nature.

Paragraph 33 of TR 2008/9 states that:

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. 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 a period of absence is considered to be relatively short involves considerations of questions of degree which must be decided by reference to the circumstances of each particular case.

In this case, the members as directors of the corporate trustee perform the high level and strategic decisions relating to the fund and have the legal responsibility for exercising the CM&C of the fund. Further, as no other person has been appointed to independently exercise decisions for the fund, it follows that the high level decisions relating to the fund are required to be made jointly by the directors and that the CM&C is attached to the directors.

The Commissioner accepts that the directors' relocation overseas is temporary and that therefore the CM&C of the fund remains ordinarily in Australia during the period of the directors' absence from Australia.

This conclusion is supported by the following facts as detailed in your private ruling application:

· that the entire period of the absence is defined in advance and is related to the fulfilment of a specific purpose, being Member 1's fixed term employment contract;

· that the Members intend to return to Australia 'within a few days' of the expiration, or earlier termination, of Member 1's employment contract;

· that the Visa obtained by Member 1 is tied to their employment and once the position is terminated, the Visa is also terminated;

· that Member 2 is also the holder of a temporary Visa which does not allow employment in that foreign country; Member 2 intends to carry out some work for their current Australian employer while overseas and intends to visit Australia two to three times a year while based overseas; and

· that the Members continue to maintain their home and other assets in Australia during the period they will be in the USA.

The requirement in paragraph 295-95(2)(b) of the ITAA 1997 has therefore been satisfied.

Test Three: The 'active member' test

The third test that must be satisfied for a fund to be an Australian superannuation fund at a particular time is the 'active member test'.

In accordance with paragraph 295-95(2)(c) of the ITAA 1997, the active member test is satisfied if, at the relevant time:

· the fund has no 'active' member; or

· at least 50% of the total market value of the fund's assets attributable to superannuation interests held by active members is attributable to superannuation interests held by active members who are Australian residents; or

· at least 50% of 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.

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 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 Members have been deemed to be non-residents of Australia for income tax purposes from the time they left Australia, as they do not meet any of the tests of residency under subsection 6(1) of the Income Tax Assessment Act 1936.

The members do not intend to make any contributions (nor have any contributions made on their behalf) for the period they will be relocated overseas. That being the case, both members (as foreign residents) will be non-contributors of the Fund during their period overseas and accordingly not 'active' members. As there are no 'active' members of the Fund for the purposes of paragraph 295-95(2)(c), the active member test will be satisfied.

Conclusion

For the fund to be considered an Australian superannuation fund all the conditions for the purposes of subsection 295-95(2) of the ITAA 1997 need to be satisfied.

As all of the tests mentioned above have been satisfied it is considered that the Fund is, and will remain, an Australian superannuation fund for the purposes of subsection 295-95(2) of the ITAA 1997 in the specified income years.

Other relevant comments:

The Commissioner of Taxation may reconsider his position, should both directors of the corporate trustee have their stay overseas further extended in excess of the maximum period currently specified.

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).