Edited version of your written advice

Authorisation Number: 1051331743953

Date of advice: 2 February 2018

Ruling

Subject: Superannuation

Question

Will the superannuation fund (the Fund) be an Australian superannuation fund for the purposes of subsection 295-95(2) of the Income Tax Assessment Act 1997 (ITAA 1997) if its members move overseas for a period greater than two years?

Answer

Yes.

Relevant facts and circumstances

The Fund is a self-managed superannuation fund (SMSF).

The Fund was established in Australia on 1 January 200X.

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

Both Member 1 and Member 2 (the Members) are the trustees of the Fund.

The trust deed allows for the appointment of a legal personal representative for either member.

In the 2014-15 income year, an enduring power of attorney was signed in favour of an alternate director (legal personal representative).

The legal personal representative will act as trustee of the Fund from 1 July 2015 to the 30 June 2025 or earlier if evoked by Member 1.

The legal personal representative will reside in Australia.

Member 1 and Member 2 both travelled intermittently throughout the 2014-15, 2015-16 and 2017-18 income year.

Member 1 and Member 2 have the intention of continuing their travel plans for the 2018-19 income year onwards.

The legal personal representative of the Fund will perform the high level duties and activities as trustee of the Fund independently and without influence from the Members.

The Members do not intend to make any contributions to the Fund, (nor have any contributions been 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 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)

Superannuation Industry (Supervision) Act 1993 Subparagraph 17A(3)(b)(ii)

Explanatory Memorandum to the Tax laws Amendment (Simplified Superannuation) Act 2007

All references are to the ITAA 1997 unless otherwise indicated.

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 for the relevant income year.

Detailed reasoning

Australian superannuation fund

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 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).

Test Two: The CM&C of the fund is ‘ordinarily’ in Australia

The second test, 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.

Based on the facts of this case, the legal personal representative, will perform the high level and strategic decisions independently and without influence from the Members of the Fund. Therefore it is considered that the legal personal representative as trustee of the Fund will exercise 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.

In this case, as the legal personal representative has been appointed as trustee of the Fund (in place of the current trustees), the high level and strategic decisions relating to the Fund will be independently performed by the legal personal representative. As the legal personal representative resides and will continue to reside in Australia during the Members’ absence, the CM&C remains in Australia.

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

A superannuation fund does not fail to satisfy the definition of a SMSF where a legal personal representative is a trustee of the fund, in place of a member of the fund and has an enduring power of attorney in place of the member of the fund [paragraph 17A(3)(b) of the Superannuation Industry (Supervision) Act 1993].

It is important to note that the requirement in paragraph 295-95(2)(b) will be satisfied, as explained above, provided certain requirements have also been met in the process of appointing a legal personal representative as a trustee in place of the Members of the Fund.

Paragraph 6 of SMSFR 2010/2 Self Managed Superannuation Funds: the scope and operation of subparagraph 17A(3)(b)(ii) of the Superannuation Industry (Supervision) Act 1993 (SMSFR 2010/2), provides that a person who holds an enduring power of attorney qualifies as a legal personal representative.

Paragraphs 8, 44 and 45 of SMSFR 2010/2 provide that the following requirements must be met in the process of appointing a legal personal representative as a trustee in place of the member of a fund:

● the appointment of the legal personal representative as trustee and the removal of the members as trustees must be in accordance with the trust deed, the Superannuation Industry (Supervision) Act 1993 (SISA) and any other relevant legislation;

● the legal personal representative consents in writing to the appointment as trustee of the fund and signs a declaration stating that they understand their duties as a trustee no later than 21 days after their appointment as trustee.

Paragraph 11 of SMSFR 2010/2 explains that the legal personal representative must also perform their duties as a trustee of the SMSF pursuant to their appointment to that position.

Further, paragraph 16 of SMSFR 2010/2 also provides that multiple members can execute an enduring power of attorney in respect of the same legal personal representative who can be appointed as a trustee, in place of each of those members.

In this case, provided each of the Members of the Fund have executed a valid enduring power of attorney in favour of Adam Pascoe, he will be a legal personal representative for the purposes of subparagraph 17A(3)(b)(ii) of the SISA.

Furthermore, provided the appointment of the legal personal representative and the removal of existing trustees was in accordance with the requirements discussed above, as outlined in SMSFR 2010/2, the Fund will continue to meet the definition of SMSF.

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), 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. If a member is a contributor at a particular time, they will be an active member, irrespective of whether the member is an Australian resident or foreign resident. [Refer: paragraphs 185 and 189 of TR 2008/9].

There have been no contributions to the Fund in respect of either Member while they have been out of Australia. Further, the Members do not intend to make any contributions for the period they will be out of Australia. The Fund therefore, will have no ‘active’ members.

As there are no ‘active’ members of the Fund for the purposes of paragraph 295-95(2)(c) of the ITAA 1997, the active member test will be satisfied.

It is noted that contributions were made in the 2015-16 income year on behalf of Member 1, at a time when Member 1 was an Australian resident. As the contributions relate to a period when Member 1 was an Australian resident, Member 1 does not become an active member because of those contributions.

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).