Edited version of private ruling

Authorisation Number: 1011803908813

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Ruling

Subject: Central management and control of a self managed superannuation fund

Questions

Is the central management and control of the Fund considered to be ordinarily in Australia for the purposes of paragraph 295-95(2)(b) of the Income Tax Assessment Act 1997?

Advice/Answers

Yes.

This ruling applies for the following period

Year ending 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

The Fund is a self managed superannuation fund.

The members (the Members) of the Fund are also the trustees of the Fund.

The Members currently see an opportunity to undertake work overseas.

The Members are in the process of selling their home (the Property) in Australia as they have reservations on renting out the Property whilst away or leaving the Property vacant due to the care and upkeep required to adequately maintain and preserve the Property. In addition, recent bushfires have raised concerns on continuing to hold the Property which is located in a bush area.

The sale of the Property will also assist with providing funds for the Members' travel for work.

The Members state that their work overseas will be for a period of up to but not exceeding 5 years.

It is expected that the Members will regularly visit Australian with at least a one month visit annually. The purpose of these trips would be to spend time with family, attend to their personal financial affairs and maintain connections in Australia.

The Members have a financial advisor in Australia who currently assists them with their personal and self managed superannuation fund investments, pensions and other financial matters.

At present the Members meet with their financial advisor at least annually. At their meetings the pension accounts are reviewed, new pension payments for the following year are calculated and investment strategies are reviewed, confirmed or amended as required.

The Fund's assets include cash, shares in listed Australian companies and units in an Australian listed unit trust.

Investments held in the Fund are structured with long term income and underlying capital growth being the primary objectives to ensure the longevity and growth of the Members' pension accounts. As such the Members do not need to micro manage the investment portfolio or investment strategy and an annual review is suitable.

You provide that during their trips back to Australia the Members will attend to their trustee duties in undertaking the necessary investment portfolio and investment strategy reviews, pension reviews and calculations and all other self managed superannuation fund administration.

Each year when meeting with their financial advisor in Australia, a detailed review of the Fund's portfolio and investment strategy will be undertaken by the Members. Further, the Members have a standing authority and instructions with their financial advisor enabling them to act should a change in securities be required due to changes in the risk assessment of those assets or in a changing market. The financial advisor can buy and sell assets or securities on the basis of the instructions provided under that authority without consultation with the Members. These instructions are reviewed at least annually in a meeting between the Members and the financial advisor.

In the event that a circumstance outside the scope of authority arises and consultation or authority from the Members is required the Members have a relative who holds power of attorney who can act on behalf of the Members in that instance. This action would only be required in extreme or unusual circumstances.

The Members' family are Australian residents who currently reside in Australia and the Members have very strong connections within Australia.

It is the intention of the Members to return to Australia.

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).

Reasons for decision

Summary of decision

Whilst the central management and control (CM&C) of the Fund may be outside of Australia for a period greater than two years, the period of absence of the CM&C is temporary. The CM&C of the Fund remains ordinarily in Australia as, at all times, it has been the intention of the members of the Fund to return to Australia. Further, the entire period of absence is related to the fulfilment of a specific purpose and all decisions of the Fund will still be made within Australia.

Detailed reasoning

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.

There are three tests that a fund must satisfy 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 a 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 views of the Commissioner and sets out the Commissioner's interpretation of the definition of Australian superannuation fund.

In this case we will focus on the central management and control test.

Test Two: The 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 central management and control (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.

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.

In this case whilst the Members (the Members) of the Fund will be overseas it is for a specific purpose. The Members' duration overseas is defined in advance as being for a period of up to but not exceeding 5 years. The Members will regularly visit Australia with at least a one month visit annually.

In addition, investments held in the Fund are structured with long term income and underlying capital growth being the primary objectives to ensure the longevity and growth of the Members' pension accounts. As such the Members do not need to micro manage the investment portfolio or investment strategy and an annual review is suitable.

On their trips back to Australia the Members will attend to their trustee duties in undertaking the necessary investment portfolio and investment strategy reviews, pension reviews and calculations and all other self managed superannuation fund administration duties.

Each year when meeting with their financial advisor in Australia, a detailed review of the portfolio and fund investment strategy will be undertaken by the Members. The Members have a standing authority and instructions with their financial advisor enabling them to act should a change in securities be required due to changes in the risk assessment of those assets or in a changing market. The financial advisor can buy and sell assets or securities on the basis of the instructions provided under that authority without consultation with the Members. These instructions are reviewed at least annually in a meeting between the Members and the financial advisor.

In the event that a circumstance outside the scope of authority arises and consultation or authority from the Members is required the Members have a relative who holds power of attorney who can act on behalf of the Members in that instance. This action would only be required in extreme or unusual circumstances.

The Members' family are Australian residents who currently reside in Australia and the Members have very strong connections within Australia.

Although the Members are selling their home it is only due to their reservations on renting out the Property whilst away or leaving the Property vacant due to the care and upkeep required to adequately maintain and preserve the Property. In addition, recent bushfires have raised concerns on continuing to hold the Property which is located in a bush area.

Therefore, whilst the CM&C of the Fund may be outside of Australia for a period greater than two years, the period of absence of the CM&C is temporary. The CM&C of the Fund remains ordinarily in Australia as, at all times, it has been the intention of the Members to return to Australia. Further, the Members entire period of absence is related to the fulfilment of a specific purpose and all decisions of the Fund will be made within Australia.

Therefore, the Fund satisfies the CM&C test under paragraph 295-95(2)(b) of the ITAA 1997.