Edited version of your written advice

Authorisation Number: 1012782586101

Ruling

Subject: Residency status of self-managed superannuation fund

Question 1

Is the self-managed superannuation fund an Australian superannuation fund as defined in subsection 295-95(2) of the Income Tax Assessment Act 1997 (ITAA 1997) in the 2015-16 to 2017-18 income years?

Answer

Yes

Question 2

Will the Members be able to make a superannuation contribution to the Fund in the 2015-16 to 2017-18 income years without affecting its status?

Answer

No.

This ruling applies for the following periods:

2015-16 to 2017-18 income years

The scheme commences on:

1 July 2015

Relevant facts and circumstances

Member 1 and Member 2 are both trustees of the Fund.

Member 1 has been offered a posting in the FOREIGN COUNTRY with no extension. The terms of his/her employment contract will remain the same as his/her current contract of employment.

Member 1 would not consider an extension if offered as the intention is for one of the children to return to Australia for school.

Member 1 and Member 2 will move to the FOREIGN COUNTRY in the 2015-16 income year.

Member 1 owns the family home and an investment property in Australia.

They will not be renting out the family home while they are in the FOREIGN COUNTRY.

Their mail will continue to go to the Australian address but temporarily forwarded to the FOREIGN COUNTRY.

They will retain their Australian bank accounts.

Member 2 will continue to receive investment income and has investments in addition to super in Australia.

Member 1 will continue to receive investment income while they own the investment property.

Their children will go to the FOREIGN COUNTRY with the parents and return with the parents at the end of the posting.

They will rent a house in the FOREIGN COUNTRY for the duration of their stay and the employer will pay an allowance for their FOREIGN COUNTRY accommodation.

The family will return to Australia for periodic visits during the time away.

Member 1 and member 2 will continue to manage the Fund in their capacity as trustees while they are in the FOREIGN COUNTRY.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 295-95(2)

Income Tax Assessment Act 1997 paragraph 295-95(2)(a)

Income Tax Assessment Act 1997 subsection 295-95(3)

Income Tax Assessment Act 1997 paragraph 295-95(3)(a)

Income Tax Assessment Act 1997 paragraph 295-95(3)(b)

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

Reasons for decision

Summary

For a fund to be considered an Australian Superannuation Fund, all the conditions in subsection 295-95(2) of the ITAA 1997 must be satisfied.

From 1 July 2015 to 30 June 2015 to 30 June 2018, the Commissioner accepts that the central management and control of the Fund is in Australia in accordance with subsection 295-95(4) of the ITAA 1997 so while the Fund has no active members, the Fund will be an Australian Superannuation Fund.

If the non-resident members (Member 1 and Member 2) makes a contribution to the Fund or someone makes a contribution to the Fund for either of their benefit during that time, the Fund will fail the definition creating taxation consequences for both the Fund and the members.

Unless the circumstances change for Members 1 and 2 from 2 July 2018, the Fund will not be an Australian resident superannuation fund from that date.

Question 1

Detailed reasoning

Subsection 295-95(2) of the Income Tax Assessment Act 1997 (ITAA 1997) defines the meaning of 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.

There are three tests that a fund must satisfy 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 (TR 2008/9).

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. Therefore, the requirement 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 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 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 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.

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.

In relation to temporary absences, subsection 295-95(4) of the ITAA 1997 states:

To avoid doubt, the central management and control of a superannuation fund is ordinarily in Australia at a time even if that central management and control is temporarily outside Australia for a period of not more than 2 years.

Paragraph 31 to 34 of TR 2008/9 states:

If the CM&C of the fund is outside of 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 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.

The CM&C of a fund will be 'temporarily' outside 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 consideration of questions of degree which must be decided by reference to the circumstances of each particular case.

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.

In the case, Member 1 and Member 2 will be away in the FOREIGN COUNTRY for a period of time, due to a posting by Member 1's employer. The facts of the case support the assertion that the absence is temporary as they do not intend to take an extension even if offered and their Australian assets will remain in Australia.

The members may be non-residents for taxation purposes during that time and have advised that decisions in relation to the Fund will continue to be managed by the members while they are in the FOREIGN COUNTRY. In view of this and TR 2008/9, it is considered that the CM&C is 'ordinarily' in Australia and test two is satisfied.

Test Three: The active member test

The third test that a fund is required to satisfy to be an Australian superannuation fund is the 'active member' test. Paragraph 69 of Taxation Ruling TR 2008/9 states:

69….. 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 (subparagraph 295-95(2)(c)(i) of the ITAA 1997); 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 (subparagraph 295-95(2)(c)(ii) of the ITAA 1997).

As Member 1 and Member 2 may be non-residents for income tax purposes they cannot satisfy the second or third criterion set out above.

The definition of 'active member' is contained in subsection 295-95(3) of the ITAA 1997. A member is an active member of a superannuation fund at a particular time if the member is a contributor to the fund at that time (paragraph 295-95(3)(a) of the ITAA 1997) or is an individual on whose behalf contributions have been made (paragraph 295-95(3)(b) of the ITAA 1997).

As long as no contributions are made by or for the members during the period they are away, the Fund has no active members and will satisfy the first criterion set out above.

If all three tests have been satisfied, the Fund meets the definition of an Australian superannuation fund.

Question 2

Detailed reasoning

As outlined above, the last test of the Fund meeting the definition of an Australian superannuation fund will only be satisfied in this case while the fund has no 'active members'.

Once either member makes a contribution to the Fund or someone makes a contribution on either of their benefit, the Fund will have an active member and fail the test set out in subsection 295-95(3) of the ITAA 1997.

Paragraph 199 and 200 of TR 2008/9 states:

A fund that ceases to be a complying superannuation fund in a particular year of income because it fails to satisfy the definition of Australian superannuation fund at a particular time faces a number of taxation consequences. In the income year that it becomes non-complying, it must include in it assessable income am amount equal to the total of the market values of the fund's assets (as calculated just before the start of the income year), less any crystallised undeducted contributions made between 30 June 1983 and 30 June 2007 and any non-concessional contributions made from 1 July 2017. The amount is taxed at the highest marginal tax rate.

Furthermore, the fund is not eligible for the tax concessions available to a complying superannuation fund. For example, for every income year the fund remains non-complying, its income tax is taxed at the highest marginal tax rate.

In addition, the members would not be able to claim a deduction for any contributions made and the benefits eventually payable from the Fund will be taxed at the highest marginal tax rate.

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