Edited version of private ruling

Authorisation Number: 1011483332679

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Ruling

Subject: Residency of a self managed superannuation fund

Question

Will a self managed superannuation fund be considered an 'Australian superannuation fund' for income tax purposes if the fund's trustees are out of Australia for 2 years?

Answer

Yes

This ruling applies for the following period

1 July 2010 to 30 June 2012

The scheme commenced on

1 July 2010

Relevant facts

The fund was established in a recent year in Australia.

The fund's members are also the trustees.

One has accepted a contract to work overseas for 2 years and will be moving the family there for the same time.

The majority of the fund's assets (term deposits) will be remaining in Australia.

No contributions will be made to the fund by the members or for the benefit of the members in the 2 year period.

All the family (including both trustees/members) will be returning to Australia at the completion of the 2 year work contract.

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).

Reasons for decision

Summary

There are three tests that a superannuation fund must satisfy if it is to be an 'Australian superannuation fund'. This superannuation fund has satisfied all these tests so it will be an 'Australian superannuation fund' for the two year period.

Detailed reasoning

From 1 July 2007 the term 'resident superannuation fund' is replaced by the term '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:

· the fund was established in Australia, or any asset of the fund is situated in Australia at that time; and

· at that time, the central management and control of the fund is ordinarily in Australia; and

· at that time either the fund had no member covered by subsection (3) (an active member) or at least 50% of:

· the total market value of the fund's assets attributable to superannuation interests held by active members; or

· 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.

The Commissioner of Taxation has issued Taxation Ruling TR 2008/9 (TR 2008/9) entitled - Income tax: meaning of 'Australian superannuation fund' in subsection 295-95(2) of the Income Tax Assessment Act 1997 which represents the Commissioner's interpretation of the definition of 'Australian superannuation fund'.

In paragraph 11 of TR 2008/9 the Commissioner states that a fund must satisfy three tests at the same time if it is to be an 'Australian superannuation fund' as defined in subsection 295-95(2) of the ITAA 1997. If the fund satisfies all three tests at the same time in the income year then, for income tax purposes, the fund is an Australian superannuation fund for the entire income year in which that particular time occurs. If a fund fails to satisfy any one of the conditions at a particular time it is not an Australian superannuation fund at that time.

Test One - Fund established in Australia or any asset of the fund is situated in Australia

The first test is 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.

A superannuation fund will be established when the trust deed governing the operation of the fund is signed and executed.

The money or other property is transferred to the trustee or trustees of the fund, to be held on trust for the beneficiaries (members) of the fund, and is made by a person or persons situated in Australia.

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.

If it is determined that the fund was not established in Australia, then the alternative requirement in paragraph 295-95(2)(a) of the ITAA 1997, namely location of the assets of the fund, must be considered.

This fund was established in Australia in March 2010. This means the first requirement under paragraph 295-95(2)(a) of the ITAA 1997 has been satisfied.

Test Two - The central management and control (CM&C) of the fund is ordinarily in Australia

The second test 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. 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 this concept must be given its ordinary 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.

In paragraph 20 of TR 2008/9 the Commissioner explains 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 paragraph 26 of TR 2008/9 the Commissioner states:

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.

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.

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.

In paragraph 32 of TR 2008/9 the Commissioner 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 (paragraph 34 of TR 2008/9).

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 operates as a 'safe harbour' rule, and explains that a superannuation fund is considered ordinarily in Australia even if the CM&C is temporarily outside Australia, where it is 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.

An examination of the information provided shows the members of this fund are in a very similar situation to the scenario set out at paragraph 152 of TR 2008/9.

Example 3.1

A married couple are trustees of their self-managed superannuation fund that was established in 2001. In July 2007 the husband accepts a two year employment contract to work for an overseas government, intending to return to Australia after the contract is fulfilled. His wife joins him for the term of his contract. They make no contributions to the fund after leaving Australia.

In these circumstances it is accepted that the central management and control of the self-managed superannuation fund is ordinarily in Australia and the self-managed superannuation fund will be treated as an Australian superannuation fund. If the trustee's employment contract was continually extended so that the couple remained overseas for a period considerably in excess of two years, central management and control of the self-managed superannuation fund would not ordinarily be in Australia and the self-managed superannuation fund would not be treated as an Australian superannuation fund.

Consequently, it is considered that the CM&C of this fund remains ordinarily in Australia during the period of the trustee's employment overseas for 2 years. This means the second requirement as required by paragraph 295-95(2)(b) of the ITAA 1997 is satisfied.

Test Three - the 'active member' test

The third test a superannuation fund must satisfy to be an Australian superannuation fund at a particular time is the 'active member' test. The active member test is satisfied if, at the relevant time, the fund has no active member.

Alternatively, 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 contributor to the fund at that time; or

· an individual on whose behalf contributions have been made, other than an individual:

· who is a foreign resident; and

· who is not a contributor at that time; and

· 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.

It should be noted in paragraph 198 of TR 2008/9, the Commissioner states that he considers that a roll-over superannuation benefit is a contribution for the purposes of subsection 295-95(3) of the ITAA 1997.

Consequently, provided no superannuation contributions or inward rollovers are made to a fund in respect of the members while they are overseas, that fund will have no active members during that time.

It is noted you have advised that no contributions will be made to this fund by the members or for the benefit of the members in the 2 year period that both members are overseas. This means the requirements of both paragraph 295-95(2)(c) and subsection 295-95(3) of the ITAA 1997 are satisfied.

Conclusion

All of the tests in subsection 295-95(2) of the ITAA 1997 have been satisfied therefore this fund will be considered to be an Australian superannuation fund while the trustees are overseas.