Edited version of your private ruling

Authorisation Number: 1012550197632

Ruling

Subject: Residency status of superannuation fund

Questions

1. If the central management and control (CM&C) of the self-managed superannuation fund (SMSF) remains in Australia can the SMSF pay an account based pension to the sole member who is permanently leaving the country?

2. If the CM&C remains in Australia and the sole member leaves Australia indefinitely, can the SMSF continue to operate and invest in Australia?

3. Does the payment of a pension to a non-resident member mean that the member is an active member of the SMSF?

4. If the non-resident member is over age 60 are they entitled to receive the pension as tax-free income?

Answers

1. Yes

2. Yes

3. Yes

4. Yes

This ruling applies for the following period

Year endings 30 June 2014, 30 June 2015 and 30 June 2016

The scheme commenced on

1 July 2013

Relevant facts and circumstances

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

The Fund Member is the sole member of the Fund and is over 60 years of age.

The trustees of the SMSF are two individual trustees, one of whom is the Fund Member.

The Fund was, at the date of applicant for private ruling, a complying superannuation fund.

The Fund Member intends to sell all their property in Australia, close their bank account and shortly leave Australia to reside permanently in an overseas country.

The Fund Member together with the non-member trustee will cease to be the trustees of the Fund.

A new company will be established with the Fund Member initially being the sole director. The company will be appointed as the trustee of the Fund.

While the Fund Member is overseas, two individuals will hold an enduring power of attorney (EPOA) to act as directors of the Trustee Company. The holders of the enduring power are the tax agent and accountant of the Fund.

No remuneration will be received by the holders of the EPOA from the Fund or from any person (including the Trustee Company) for any duties or services performed as the directors of the corporate trustee of the Fund.

The Fund Member will not be participating in any strategic and high level decision making and activities of the Fund by reviewing or considering the actions of the holders of the EPOA.

The holders of the EPOA will be exercising the central management and control of the Fund independently and without influence from the Fund Member.

ATO records show that the Fund Member is in receipt of a transition to retirement pension which commenced sometime in the 2009-10 income year.

The Fund Member intends to continue to draw the transition to retirement pension from the Fund whilst residing 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 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).

Income Tax Assessment Act 1997 Subsection 307-70(2)

Income Tax Assessment Act 1997 Section 307-5

Income Tax Assessment Act 1997 Subsection 301-10

Income Tax Assessment Act 1997 Subsection 6-5.

Reasons for decision

Summary

Provided the Fund Member will not make any contributions to the Fund while the Fund Member is overseas then the Fund will not have an active member. If this is the case, the Fund is an Australian superannuation fund as it satisfies all of the requirements of an Australian superannuation fund.

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

The relevant legislation does not restrict the payment of an account based pension from an Australia superannuation fund regardless of where the member is situated.

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 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 titled '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.

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.

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. The Fund assets are situated, and will remain, in Australia whilst the member is overseas. Therefore, the requirement under 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 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:

Ÿ formulating the investment strategy for the fund;

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

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

Ÿ determining how the assets of the fund are to be used to fund member benefits.

Establishing who is exercising the CM&C of a superannuation 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 paragraphs 123,124 and 125:

Delegation of trustee's duties and powers

123. Where permitted by the trust deed of the fund or in the circumstances prescribed in the trustee legislation of the relevant State or Territory, and consistent with the provisions of the SISA, the individual trustee or trustees of a superannuation fund may delegate all or any of their duties and powers.68 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. In accordance with the Corporations Act 2001, the directors of a corporate trustee may also delegate their duties and powers.

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

125. 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. The decision in BW Noble Ltd v. Mitchell [(1926) 11 TC 372] (BW Noble) illustrates this principle. [citation reference added]

From the above, it can be seen that if a person performs the duties and activities that constitute the CM&C of the fund without any influence from the trustee, that person is exercising the M&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.

In this case, the Fund Member will be leaving Australia in the relevant income year. The Fund Member intends to stay permanently in the overseas country. It would be reasonable to conclude from this that the Fund Member will be a non-resident of Australia for income tax purposes.

After the Fund Member has left Australia, the registered tax agents and accountants of the Fund Member and the Fund in Australia will be appointed as the holders of an EPOA for the Fund Member.

The applicant has stated that the Fund Member will not be participating in any strategic and high level decision making and activities of the Fund by reviewing or considering the actions of the holders of the EPOA. The holders of the EPOA will independently perform the duties and activities that constitute the CM&C of the Fund therefore exercising the high level decision making activities, whilst the Fund Member is overseas.

In view of the above the Commissioner considers it reasonable to accept that the CM&C of the Fund whilst the Fund 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

Paragraph 295-95(2)(c) of the ITAA 1997 contemplates two situations:

1. Where the superannuation fund has no active members at a particular time. In such a case, paragraph 295-95(2)(c) is satisfied at that time; and

2. Where the fund has one or more active members (as defined in subsection 295-95(3)). In such a situation, the conditions in subparagraphs 295-95(2)(c)(i) and (ii) must be considered to determine whether the fund satisfies the active member test.

The active member test requires that, where a fund has at least one active member, then the accrued entitlements of 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' 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 Commissioner has issued Taxation Ruling TR 2010/1 titled 'Income tax: superannuation contributions', which explains the Commissioner's views as to the ordinary meaning of the word 'contribution' in so far as 'contribution' is used in relation to a superannuation fund, approved deposit fund or retirement savings account in the ITAA 1997.

In this case, the Fund is a single member fund. Provided the Fund Member will not make any contributions to the Fund while the Fund Member is overseas then the Fund will not have an active member. Therefore, the requirements of paragraph 295-95(2)(c) of the ITAA 1997 will be 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.

Provided the Fund Member will not make any contributions to the Fund while the Fund Member is overseas then the Fund will not have an active member.

In this case, as all the tests mentioned above have been satisfied, it is considered that the Fund is, and will remain, an Australian superannuation for the purposes of subsection 295-95(2) of the ITAA 1997, for the 2013-14, 2014-15 and 2015-16 income years.

Superannuation benefits

The payment of superannuation benefits from a complying superannuation fund are governed by legislation contained in the Superannuation Industry (Supervision) Act 1993 (SISA) and the Superannuation Industry (Supervision) Regulations 1994 (SISR).

Subsection 307-70(1) of the ITAA 1997 states:

A superannuation income stream benefit is a superannuation benefit specified in the regulations that is paid from a superannuation income stream.

Further subsection 307-70(2) of the ITAA 1997 states:

A superannuation income stream has the meaning given by the regulations.

Subregulation 1.06(1) of the SISR defines a benefit as a pension if:

(a) it is provided under rules of a superannuation fund that:

(i) meet the standards of subregulation (9A); and

(ii) do not permit the capital supporting the pension to be added to by way of contribution or rollover after the pension has commenced; and

(b) in the case of rules to which paragraph (9A)(a) applies - the rules also meet the standards of regulation 1.07D

For a superannuation income stream that is an account based pension the relevant requirements in subregulation 1.06(9A) of the SISR are as follows:

Rules for the provision of a benefit (the pension) meet the standards of this subregulation if the rules ensure that payment of the pension is made at least annually, and also ensure that:

(a) for a pension in relation to which there is an account balance attributable to the beneficiary - the total of payments in any year (including under a payment split but excluding amounts rolled over) is at least the amount calculated under clause 1 of Schedule 7; and

…

(c) the pension is transferable to another person only on the death of the beneficiary (primary or reversionary, as the case may be); and

(d) the capital value of the pension and the income from it cannot be used as a security for a borrowing.

It can be seen from the above, whether a superannuation fund is able to pay an income stream to their members depends of the governing rules of the relevant trust deed. If the rules of the fund permit it, and the pension recipient has satisfied a condition of release (for example, retirement), the trustee of the fund will be able to pay an income stream to the member.

The resident status of a member of a superannuation fund is not defined under the superannuation provisions, the SISA and the SISR. Accordingly, the residency status of a member who permanently, or for an extended period of time, resides overseas has no bearing on the determination of the payment of the superannuation pension provided a condition of release is satisfied. However, the taxation liability of the superannuation pension payment may be different depending on the residency status of the member of the fund and their age for income tax purposes.

Subsection 6-5 of the ITAA 1997 provides that if a person is an Australian resident, the person's assessable income includes income derived from all sources, whether in or out of Australia, during the income year. However, if a person is not an Australian resident, the person's assessable income includes only income derived from Australian sources. This includes Australia government pensions, and other Australian pension income.

Superannuation income stream and superannuation contributions

As previously mentioned, 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.

TR 2010/1 at paragraph 4 states:

In the superannuation context, a contribution is anything of value that increases the capital of a superannuation fund provided by a person whose purpose is to benefit one or more particular members of the fund or all of the members in general.

Taxation Ruling TR 2013/5 titled 'Income tax: when a superannuation income stream commences and ceases', states at paragraph 9:

When a superannuation income stream commences

9. A superannuation income stream can never commence before all the capital which is to support that income stream has been added by way of contribution or rollover to the relevant superannuation interest from which the superannuation income stream is to be paid.

In this case, the Fund Member is in receipt of transition to retirement pension. The retirement pension is an income stream paid out of an amount allocated to the account of a member of a superannuation fund. The pension payment represents a reduction in the Fund Member's superannuation benefit entitlement in the Fund, hence it is not a contribution.

Provided the Fund Member will not make any contributions whilst overseas, then the Fund Member will not be a contributor of the Fund for the purposes of the active member test.

Superannuation pension paid to a non-resident member over the age of 60

Section 307-5 of the ITAA 1997 sets out payments which are superannuation benefits. Generally, a payment which is made to a person from a superannuation fund because they are a fund member is a superannuation benefit by virtue of subsection 307-5(1).

Section 301-10 of the ITAA 1997 states:

If you are 60 years or over when you receive a superannuation benefit, the benefit is not assessable income and is not exempt income.

In this case as the Fund Member is over 60 years of age, the tax-free component and the taxable component - element taxed of the Fund Member's superannuation benefit are not assessable income and not exempt income. The fact that the Fund Member will be a non-resident does not change this.

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