Edited version of private advice

Authorisation Number: 1051546499206

Date of advice: 18 July 2019

Ruling

Subject: Residency of self managed superannuation fund

Question 1

Isthefund an Australian superannuation fund for the purposes of subsection 295-95(2) of the Income Tax Assessment Act 1997 (ITAA 1997) for the 20XX-XX and 20XX-XX income years?

Answer

Yes

Question 2

Will the fund continue to be a complying fund and will it satisfy the residency rules if Member 1 returns to Australia for a short period at some point in early 20XX and Member 2 does not return to Australia until the passing of Member 2's parent?

Answer

Decline to rule

Question 3

Will the fund continue to be a complying fund and will it satisfy the residency rules if Member 1 and Member 2 return to Australia for a short period in late 20XX and then Member 2 does not return again until the passing of Member 2's parent?

Answer

Decline to rule

This ruling applies for the following periods:

Income year ended 30 June 20XX

Income year ended 30 June 20XX

Income year ended 30 June 20XX

Income year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The fund is a self managed superannuation fund (SMSF) established in Australia.

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

Late in the 20XX-20XX income year, Member 2 left Australia to care for their sick parents.

Some time later Member 1 departed Australia to assist Member 1 care for their parents.

In early 20XX Member 1 returned to Australia for approximately XX months, departing Australia again mid-20XX.

Member 1 has indicated that they intend to return to Australia at some point in early 20XX.

Member 1 holds expertise in relation to the SMSFs investment strategy.

Both Members intend to return to Australia shortly after the passing of Member 2's parent.

Both Members were Australian residents in the 20XX-XX and 20XX-XX income years.

Relevant legislative provisions

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

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

Taxation Administration Act 1953 Subsection 359-5(1) of Schedule 1

Taxation Administration Act 1953 Subsection 359-35(1) of Schedule 1

Taxation Administration Act 1953 Subsection 359-35(2) of Schedule 1

Taxation Administration Act 1953 Subsection 359-35(3) of Schedule 1

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

Reasons for decision

Summary

The Fund satisfies all the tests set out in subsection 295-95(2) and is an Australian superannuation fund in the 20XX-XX and 20XX-XX income years.

The Commissioner of Taxation (the Commissioner) declines to rule in respect of questions 2 and 3 as the facts of the arrangement cannot be determined with reasonable certainty and depend on an assumption about a future event.

Detailed reasoning

Question 1

Australian superannuation fund

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

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. Whilst trustees may seek external advice, if the trustee in fact performs the high level and strategic decisions for the fund, they will be exercising the CM&C of the fund in practice.

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.

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.

CM&C - temporary absences

Under subsection 295-95(4) of the ITAA 1997 where the trustees are temporarily absent from Australia for a period of up to two years, 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 and 34 of TR 2008/9 state that:

33. 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.

34. 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.

Based on the facts of this case, the high level and strategic decisions relating to the Fund were exercised at the relevant time in Australia. Accordingly, the CM&C of the Fund is regarded as being 'ordinarily' in Australia.

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

The 'active member' test

The active member test is satisfied if:

·         the fund either has no active members; or

·         it has active members who are Australian residents and who hold at least 50% of the total market value of the fund's assets attributable to superannuation interests; or the sum of the amounts that would be payable to active members if they decided to leave the fund.

For the purposes of condition three, a member is an 'active member' if they are a contributor to the fund or contributions to the fund have been made on their behalf.

In this case, the 'active' member test has been satisfied during the relevant period as at least 50% of the total market value of the Fund's assets attributable to superannuation interests were held by active members who were Australian residents.

Question 2 and Question 3

In accordance with subsection 359-5(1) of Schedule 1 to the Taxation Administration Act 1953 (TAA), the Commissioner may, on application, make a written ruling (called a private ruling) on how the Commissioner considers a relevant provision applies, or would apply, to a particular taxpayer in relation to a specified scheme, arrangement or transaction.

Subsection 359-35(1) of Schedule 1 to the TAA requires the Commissioner to comply with an application for a private ruling and make the ruling. However, in the interests of allowing the Commissioner to focus efforts on increasing certainty for entities in the most genuine and worthy cases, the Commissioner may decline to rule in accordance with subsections 359-35(2) and (3) of Schedule 1 to the TAA.

Situations where the Commissioner may decline to rule are discussed in paragraphs 39 and 40 of Taxation Ruling TR 2006/11 Private Rulings and, relevantly, include situations where the Commissioner considers that the correctness of the private ruling would depend on assumptions about a future event or other matter.

Based on the above, we will not be able to make your private ruling in respect of the questions raised in your application as the facts of the arrangement are not known and cannot be determined with reasonable certainty. Further, we note that both trustees will be away indefinitely and their return is contingent on a future event, that is, the passing of Member 2's parent. Accordingly, the Commissioner considers the correctness of your private ruling depends on assumptions about a future event and is not prepared to rule on the circumstances outlined in your application.

A decision to decline to make a ruling is reviewable under the Administrative Decisions (Judicial Review) Act 1977. For further information about your review rights, please read the explanatory notes attached to this letter.

Certain other persons may be trustees

Subparagraph 17A(3)(b)(ii) of the Superannuation Industry (Supervision) Act 1993 (SISA) allows a person who holds an enduring power of attorney granted by a member, to be a trustee of a superannuation fund in place of the member, without causing the fund to cease to be an SMSF.

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), further explains how subparagraph 17A(3)(b)(ii) of the SISA applies to SMSFs.

In accordance with paragraph 6 of SMSFR 2010/2, 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 the requirements that must be met in the process of appointing a legal personal representative as a trustee in place of the member of a fund.

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.

Hence, members of a fund may be able to execute a valid enduring power of attorney in favour of another individual (and remove themselves as trustees), who will then qualify as a legal personal representative for the purposes of subparagraph 17A(3)(b)(ii) and ensure the fund continues to meet the definition of SMSF.

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