Edited version of private ruling

Authorisation Number: 1011752494079

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Ruling

Subject: Residency status of a superannuation fund

Question

Is your Superannuation Fund (the Fund) an Australian superannuation fund in the 2010-11 income year?

Answer: No.

This ruling applies for the following periods

Year ending 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts and circumstances

You and your spouse (you) are the trustees and only members of a self managed superannuation fund (the Fund).

The Fund was established a number of years ago and its assets are located in Australia.

In the 2007-08 income year you signed an agreement (the Agreement) with an organisation (the organisation) to perform services overseas.

At the time of offering your services to the organisation you state that you had arranged with it a schedule that you to be within Australia for a period in excess of two months every two years.

In the Agreement, which set out your working relationship with the organisation, it was stated, amongst other matters, that your first period of service spanned the 2007-08 and 2008-09 income years.

In the 2007-08 income year you departed Australia.

In accordance with your schedule you returned to Australia in the 2008-09 income year.

The organisation stated that in the 2009-10 income year it agreed that you could depart overseas again in the 2009-10 income year for a second period of service, subject to a satisfactory medical clearance and a completion of other requirements.

You subsequently departed for overseas and you intend to return to Australia during the 2010-11 income year.

Several months after your return to Australia in the 2010-11 income you intend to go overseas for a final period of service, returning to Australia in the 2012-13 income year.

The organisation has indicated that further period of service, that is, any after the 2010-11 income year, are subject to discussion.

The organisation has advised that:

· a selection process is entered into by applicants with the organisation for each period of service and a committee makes a decision whether applicants are accepted subject to passing a medical check and other requirements;

· the screening process for a first period of service is usually be more rigorous and takes more time than that taken where an applicant applies for a subsequent period;

· when applicants return to Australia in accordance with their schedule they are not automatically guaranteed another period of service. This is due to the applicant's having to go through the selection process again, a process which also includes a review of the applicant's performance;

· due to there being no guarantee of going overseas, any subsequent period of service an applicant may undertake does not represent an ongoing agreement by the organisation to use the applicant's services. Each period is viewed as a separate undertaking;

· at the end of each period a formal screening is undertaken;

· the only written agreement that the organisation has with you is that relating to the first period of service. In relation to the your current period of service, which expires in the 2010-11 income year, the organisation has records of discussion which, amongst other matters, details the timing of your second period of service.

No contributions to your superannuation fund were made by you or your spouse to the Fund since the 2007-08 income year.

You do not foresee any contributions being made to the Fund in the future.

You hold no assets outside of Australia except for a vehicle and a bank account for the necessities of living in your place of deployment.

You have continued to maintain ties with Australia and you state that your intention has always been that your permanent home is in Australia.

You are each over 65 years of age.

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).

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

Reasons for decision

Summary

A superannuation fund is an Australian superannuation fund at a particular time if it meets all the requirements of the legislation. That is, it must satisfy:

· the established in Australia test;

· the central management and control test; and

· the active member test.

It has been determined that for the 2010-11 income year that the Fund does not satisfy the central management and control test. Accordingly, for the 2010-11 income year the Fund is not an Australian superannuation fund.

Detailed reasoning

From 1 July 2007 the term 'resident superannuation fund' has been 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:

(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 all 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 tests at a particular time, it will not be an Australian superannuation fund at that time, even if it satisfies the other two conditions.

Further, the Commissioner of Taxation 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 sets out the Commissioner's interpretation of the definition of 'Australian superannuation fund'. In particular, it provides guidance on the application of the central management and control (CM&C) and active member tests.

Test One: The 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.

In the present case, your superannuation fund (the Fund) was established in Australia. Further, as stated in the Facts, the Fund's assets are all located in Australia. Therefore the first requirement under paragraph 295-95(2)(a) of the ITAA 1997 has been satisfied.

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 where the fund's trustees make high level decisions is the place where the CM&C is being exercised.

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.

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 funds investment strategy as well as monitoring and reviewing the performance of the funds 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.

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.

At paragraph 32 of TR 2008/9 it 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 considered to be ordinarily in Australia even if that 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. 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) if the trustees can establish that their absence was of a temporary nature.

At paragraph 33 of TR 2008/9 it states:

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 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 considerations of questions of degree which must be decided by reference to the circumstances of each particular case. (emphasis added)

Where a taxpayer has accepted a work appointment overseas for a two year 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 particular case, the Fund has two members, you and your spouse (you). You are also the Fund's trustees and as such you have the legal responsibility and accountability for the management, operation and administration of the Fund as indicated in paragraph 26 of TR 2008/9. Also as trustees, it is reasonable that you make the high level or strategic decisions in relation to the Fund, for example, decisions in relation to the investment of the fund's assets. Therefore, as trustees of the Fund you would exercise the CM&C of the Fund.

It is noted that since the 2007-08 income year to the present, you have resided overseas and that you are currently on your second period of service (which started in the 2009-10 income year). Further, it is noted that you intend to apply for a third period overseas which, if you are successful, will be from the 2010-11 income year to the 2012-13 income year.

In view of your absences overseas the issue that requires attention is whether the CM&C of the Fund is temporarily outside Australia.

Though your schedule with the organisation shows you were to spend two or more months of each two year period of service in Australia, it should be noted that return trips to Australia between the rounds do not necessarily indicate whether an absence from Australia is temporary.

It is noted that all applicants, regardless of whether they apply for an initial or subsequent period, must still go through a process with the organisation. Thus, there is no guarantee that an applicant who completes one period of service will automatically be accepted for subsequent periods.

Notwithstanding there are no guarantees that you will be successful for a third period, it should be noted that determining whether CM&C is temporarily outside Australia takes into consideration, both intention and fact, as mentioned in paragraph 33 of TR 2008/9.

Thus, determining whether a person who exercises the CM& C of a fund is outside of Australia for a short period of time, it is necessary to consider not only what has transpired but also the person's intentions.

In your case, the facts show that you have completed one period of service and most of your second period. Further, the facts also show that your intentions in relation to service with the organisation is, and was, to do three periods of service overseas which span a period from the 2007-08 income year to the 2012-2013 income year.

Though you return to Australia for periods of several months at a time between round, it is considered that your plan was to be away from Australia for an extended period of time. As the facts show, your intentions have been going according to that plan, a plan which does not indicate a temporary absence from Australia but one for overseas service with the organisation for an overall period covering more than five years.

Whilst it is accepted that you intend to resume your permanent residency in Australia at the end of the third period of service, it should be noted that this does not change the fact you intended to be away from Australia for most of the time in the period from the 2007-08 income year to the 2012-2013 income year.

In view of the above, your absence from Australia is not considered to be temporary and the CM&C of the Fund is accordingly viewed as being exercised outside of Australian. Therefore the requirements under paragraph 295-95(2)(b) of the ITAA 1997 have not been satisfied.

It should also be noted that subsection 295-95(4) of the ITAA 1997, which allows trustees a temporary absence from Australia for a period of up to two years does not apply in your case. As mentioned above, your absences from Australia are part of an overall plan where you intend to cover three periods of service which would, regardless of returns to Australia, exceed two years in total.

In conclusion, neither paragraph 295-95(2)(b) or subsection 295-95(4) of the ITAA 1997 have been satisfied as the CM&C was not ordinarily in Australia for the 2010-11 income year, the year for which this private ruling was sought.

Test Three - the 'active member' test

As mentioned earlier, paragraph 295-95(2)(c) of the ITAA 1997 requires that at the relevant time:

(i) no member is covered by subsection 295-95(3), that is, an active member; or

(ii) 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 can only be an active member at a particular time if either:

· the member makes a contribution to the fund; or

· contributions to the fund have been made on that member's behalf.

Contributions, in relation to a fund, include amounts paid to the fund that are taken to be rolled over.

In this case, the facts show that the requirement under paragraph 295-95(2)(c) of the ITAA 1997 will be satisfied. There are no active members of the fund as no contributions have been or will be made to the Fund in the 2010-11 income year.

Conclusion

For the Fund to be considered an Australian superannuation fund all the conditions for the purposes of subsection 295-95(2) of the ITAA 1997 need to be satisfied.

As it has been determined that the CM&C of the Fund is not ordinarily in Australia, the requirements under paragraph 295-95(2)(b) of the ITAA 1997 have not been satisfied.

Therefore, as the CM&C of the Fund is not ordinarily in Australia, the Fund would not be treated as an Australian superannuation fund for the 2010-11 income year.