Edited version of private ruling

Authorisation Number: 1011712324554

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Ruling

Subject: Residency - Self-managed superannuation fund

Question:

Will the superannuation fund be considered to be an Australian superannuation fund as defined in subsection 295-95(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

Yes.

This ruling applies for the following periods:

For the year ended 30 June 2011.

For the year ended 30 June 2012.

For the year ended 30 June 2013.

For the year ended 30 June 2014.

The scheme commences on:

1 July 2010

Relevant facts and circumstances

The Superannuation Fund (the Fund) is a single member self managed superannuation fund. It was established in the Y income year.

The member trustee, who is under 65 years of age, is a trustee and the sole member of the Fund.

The non-member trustee, who is under 65 years of age, is the spouse of the member trustee and is also a non-member trustee of the Fund.

The Fund was, at the date of application for the private ruling, a complying superannuation fund and is currently in accumulation mode.

No other person has been appointed, or is intended to be appointed, to act on behalf of each of the trustees in relation to the Fund.

The Fund does not have a corporate trustee and the strategic decisions relating to the Fund are and will be made by the member and non-member trustees.

All assets of the Fund are and will continue to be located in Australia. Fund assets are invested through the an asset management platform.

The non-member trustee has been employed by the employer for more than 30 years.

The member trustee, who was also employed by the employer, ceased employment with the employer during the X income year.

A letter dated during the X income year confirmed the non-member trustee's foreign appointment in a senior position with a branch of the employer in an overseas country.

The term of the appointment was from a specific date during the X income year until a specific date during the W income year; a fixed three year period after the granting of an entry clearance under the Intra-Company Transfer provisions by the immigration authorities of an overseas country.

Entry clearance is valid for a term of three years and one month and has also been granted for the accompanying partner, the member trustee.

Both the non-member trustee and the member trustee were, prior to the foreign appointment, Australian residents for taxation purposes.

The non-member trustee will be taxed in the overseas country on the income derived there, during the term of the overseas appointment.

In a letter from the employer dated during the X income year it was stated, amongst other matters, that the following conditions applied to the foreign appointment:

1. the employer was to meet normal travel costs for the appointee and spouse to and from the overseas country;

2. relocation costs for household and personal possessions to and from the overseas country were to be met by the employer, as well as any removal and storage costs for furniture and effects;

3. insurance for baggage and personal accident insurance, plus cover for compensation under an Act for the term of the appointment;

4. Remuneration

(i) Salary is to be paid in the overseas country's currency equivalent of the Australian salary;

(ii) An overseas living allowance;

(iii) A miscellaneous allowance to maintain the Australian household for a dependent child;

(iv) The overseas country income tax on the salary and then the overseas country's health insurance payable from the second year in the overseas country.

5. Furnished accommodation provided by the employer with rent of a specified percentage of the gross annual salary;

6. Leave entitlements are to continue to accrue as normal;

7. Medical expenses rebatable at the Australian equivalent by the employer;

8. Membership in the employer health scheme can be suspended. However, Medicare Levy Surcharge of one per cent is payable as an Australian resident for tax purposes.

9. The employer to pay for one return trip per year for the dependent child to travel to the overseas country and one return trip per year for the spouse to travel to Australia;

10. The cost of club memberships in Australia to be paid by the employer during the appointment.

Whilst the non-member trustee is on the foreign appointment both trustees will maintain the following assets in Australia:

(a) an Australian bank account;

(b) individual Australian bank accounts; and

(c) the family residence, which will not be rented out and will be used on return visits during the foreign appointment.

The account balances of the Fund and therefore for the single member, during the X income year are as follows:

The Fund/member anticipated account balances will increase from a roll-over within the period during the X income year, paid by the member trustee's corporate superannuation fund, because of the termination of employment.

No additional superannuation contributions will be made in the future while the member trustee is overseas.

The only contributions made to the Fund in the V income year were a roll-over from the employer's superannuation fund as an adjustment to the benefits payment previously made to the member trustee.

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 Subparagraph 295-95(2)(c)(i).

Income Tax Assessment Act 1997 Subparagraph 295-95(2)(c)(ii).

Income Tax Assessment Act 1997 Subsection 295-95(3).

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

Income Tax Assessment Act 1997 Subsection 995-1(1).

Reasons for decision

Summary

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 has remained 'ordinarily in Australia'.

Detailed reasoning

Australian superannuation fund

From 1 July 2007 the term 'resident superannuation fund' is replaced by the term 'Australian superannuation fund'. Subsection 295-95(2) of the 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. The ruling sets out the Commissioner's interpretation of the definition of 'Australian superannuation fund'. In particular, it provides guidance on the meaning of central management and control.

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

The facts of this case show that all the assets of the Fund are in Australia and the Fund was established in Australia in the Y income year. Therefore, the requirement in paragraph 295-95(2)(a) of the ITAA 1997 has been satisfied.

Test Two - The Central Management & Control (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 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 (Paragraph 295-95(2)(b) of the ITAA 1997).

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 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.

In discussing CM&C, TR 2008/9 states at paragraphs 24 and 26:

24. There may be situations where a person other than the trustee is exercising the CM&C of the fund, for example, the trustee may have delegated their duties and powers to that person. 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.

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.

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 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.

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.

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.

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 explains that the CM&C of a superannuation fund is ordinarily in Australia if it is exercised outside Australia 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.

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 of TR 2008/9 states that:

The CM&C of a fund will be 'temporarily' outside of Australia if the person or persons who exercise the CM&C of the fund are outside Australia for a relatively short period of time. 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 a period of absence is considered to be relatively short involves considerations of questions of degree which must be decided by reference to the circumstances of each particular case.

Where a taxpayer has accepted a work appointment overseas for a set, reasonably short period and that engagement is extended beyond that period, it would be reasonable to conclude that the absence is not temporary. The fact that regular short return trips to Australia are made would not necessarily alter the conclusion that the absence was not temporary.

In this case, the non-member trustee has been appointed to a position for a fixed three year period with no suggestion of any extension of that appointment. Therefore, the period of absence has been defined.

The trustees also maintain substantial assets and investments in Australia. They are maintaining their principal place of residence in Australia. The employer, in their letter, stated they would pay an allowance to maintain that household as a dependent child will be residing there while the trustees are in the overseas country.

The employer has undertaken to meet the relocation costs back to Australia when the appointment finishes. Both the non-member trustee and the member trustee intend to return to live permanently in Australia.

The trustees' expected date of return to Australia is during the W income year, an absence of three years.

In view of the above the Commissioner accepts that the absence is temporary and the CM&C of the Fund between a specific date during the X income year and until a specific date during the W income year can be considered to be 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 this 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 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.

At paragraph 17 of TR 2010/1 it is stated:

A roll-over superannuation benefit (other than a superannuation benefit that is paid from one superannuation interest of a member in a superannuation plan to another interest of that member in the same plan) and a transfer of a person's benefits from an overseas superannuation fund to an Australian superannuation provider, however made, is a contribution as it increases the capital of the fund in the same way as any other transfer of funds or assets and is made to obtain superannuation benefits for a particular individual.

Consequently, if a roll-over of a superannuation benefit occurs during an income year in respect of a member, that member would be a contributor and, hence, an active member at the time the roll-over took place.

In this case, during the X income year, a roll-over superannuation benefit will be paid to the Fund. Therefore, at the time the roll-over takes place, the member trustee will be an active member for the purposes of the active member test.

However, the member trustee will continue to be an Australian resident for tax purposes for the duration of the spouse's international assignment period as per section 6 of the ITAA 1997.

As the member trustee is the sole active member of the Fund, more than 50% of the total market value of the Fund's assets will be attributable to superannuation interests held by active members. In addition, more than 50% of the sum of amounts that would be payable to active members if they voluntarily ceased to be members, is attributable to superannuation interests held by the member trustee.

Therefore, the requirement under paragraph 295-95(2)(c) of the ITAA 1997 has been satisfied.

Conclusion

As all of the tests mentioned above have been satisfied it is considered that the Fund is, and will remain, an Australian superannuation fund for the purposes of subsection 295-95(2) of the ITAA 1997, for the X income year until the W income year.