Edited version of private ruling

Authorisation Number: 1011847971898

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Ruling

Subject: Residency status of superannuation fund

Question

Will the superannuation fund be an Australian superannuation fund for the 2009-10, 2010-11, 2011-12, and 2012-13 income years?

Answer

No.

This ruling applies for the following periods:

2009-10 income year

2010-11 income year

2011-12 income year

2012-13 income year

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You and your spouse are the only members and trustees of the Fund, a self-managed superannuation fund which was established in the 2008-09 income year.

The Fund does not have a corporate trustee and the strategic decisions relating to the Fund are made by yourself and your spouse.

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

You are employed with an Australian employer (the Employer) and have been offered a foreign assignment to work for an associated foreign employer in an overseas country.

In a letter from the Employer during the 2008-09 income year it was stated, amongst other matters, that on your expatriate assignment you would:

· be acting on behalf of your Home and Host Affiliates, that is, the Employer and the associated foreign employer respectively;

· remain on the payroll and benefit programs of the Employer; and

· be located in an overseas country.

In the letter it was also stated that your home location is in a city in Australia and that you would be accompanied by your spouse on the assignment.

In another letter during the 2008-09 income year the employer stated that you would:

· hold the position of XX;

· commence your assignment on or around a specific date towards the end of the 2008-09 income year; and

· be on assignment for an estimated period of 24 months.

In the letter, the Employer also stated that it reserves the right to withdraw, modify or reduce any of the features of the Expatriate Guidelines and staffing are also subject to change which may affect the length of your assignment or duties.

You state that whilst you are on assignment you and your spouse:

· will continue to pay Australian residence tax including the Medicare levy;

· will continue to hold your Australian private health insurance; and

· will continue to own property in Australia.

You also state that:

· your spouse will be returning to Australia for several months at a time to support your children and aging parents;

· you will be returning to Australia to spend at least four weeks leave each year;

· you and your spouse intend to retire back to Australia when you are aged 55 and to build a permanent residence for retirement purposes at your property; and

· during your overseas assignment you and your spouse will continue to be residents for Australian tax purposes.

According to Australian Taxation Office (ATO) records:

· both you and your spouse have made contributions to the fund, and contributions have been made on your and your spouse's behalf in the 2009-10 income year;

· you hold more than 50% or more of the accrued entitlements in the Fund in the 2009-10 income year; and

· both you and your spouse have lodged your income tax returns for the 2009-10 income year as non-residents.

In an e-mail to the ATO during the 2010-11 income year you stated:

The term of my assignment in [the overseas country] … [Employer Group] foreign assignments do not typically have a start & finish date as the assignment may involve major construction projects anywhere in the world, in my case the [overseas project]. Employees are assigned to a specific Project for as long as that Project may last or, for as long as the employee is required or until their Work Permit expires or until they elect to be repatriated home. …

…

Our expected date of return to Australia is 2012, the specific date we have not yet determined because a) my employer will obviously need to know and I am not prepared to share that information with them at this early stage for various reasons and b) we will require specialist tax advise [sic] before making that decision as it not only impacts the pension phase of our SMSF we also need to ensure it is the most tax effective time for the Trustees

…

In the same e-mail you also stated:

… we wish to apply for a new ruling for the fiscal year 2012 along with 2013 in case our elected retirement date moves beyond the 30^th June 2012.

[The spouse trustee] intends to return regularly to Australia effective the 1st of July 2011 as [the spouse trustee's] temporary work assignment has come to an end in [the overseas country]…

The employer has sent you an e-mail during the 2010-11 income year to advise that the actual commencement date of your overseas assignment was early in the 2009-10 income year.

Both you and your spouse are under 65 years of age.

Your spouse ceased employment during the 2008-09 income year.

Relevant legislative provisions

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).

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

Superannuation Industry (Supervision) Act 1993 Subsection 10(1).

Superannuation Industry (Supervision) Act 1993 Subparagraph 42A(1)(a)(i).

Superannuation Industry (Supervision) Act 1993 Section 45.

Reasons for decision

Summary

The superannuation fund will not be an Australian superannuation fund for the 2009-10, 2010-11, 2011-12, and 2012-13 income years.

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:

(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.

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 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. 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).

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' 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.

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), namely location of the assets of the fund, must be considered.

From the facts of the case, the Fund was established 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 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) Bill 2006 (which, as enacted, 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 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.

At paragraph 26 of TR 2008/9 it 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.

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 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. 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.

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. 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 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.

From the facts of the case, you and your spouse, as the Fund's trustees, each have the legal obligation for exercising the CM&C of the Fund and conducting its high level and strategic decisions. No other person has been appointed to independently exercise the CM&C of the Fund.

Further, from the facts provided, the high level and strategic decisions have been continued to be made by each of you on your overseas assignment.

As your overseas assignment will result in you both being temporarily absent from Australia for a period of at least two years it follows that, as trustees of the Fund, the Fund's CM&C will be also be outside of Australia during that period.

Though the CM&C will be outside of Australia, subsection 295-95(4) of the ITAA 1997 states:

...the central management and control of a superannuation fund is ordinarily in Australia at a time even if that central management and control is temporarily outside Australia for a period of not more than 2 years.

Subsection 295-95(4) of the ITAA 1997 therefore supports a superannuation fund being ordinarily in Australia even if the CM&C is temporarily outside Australia for a period of not more than two years.

From the facts of the case, your employer has advised in a letter during the 2008-09 income year that the estimated assignment duration is 24 months. The letter also stated that the approximate assignment start date is on or around a specific date towards the end of the 2008-09 income year. You have since received confirmation from your employer in an e-mail during the 2010-11 income year that your foreign assignment actually commenced on a specific date early in the 2009-10 income year.

In view of the above your Fund's CM&C will be considered as ordinarily in Australia for the two year period of your overseas assignment under section 295-95(4) of the ITAA 1997.

It is noted the Employer reserves the right to change any of the conditions associated with your overseas assignment including the length or duties of your assignment.

You propose to be absent from Australia for a period greater than two years to complete your overseas assignment.

In cases where the trustees of a fund are absent from Australia for a period greater than two years, a fund will only satisfy the test in subsection 295-95(2) of the ITAA 1997 if the trustees can establish that the CM&C was ordinarily in Australia and their absence was of a temporary nature.

It is accepted that your Fund's CM&C will be considered as ordinarily in Australia for the two year period of your overseas assignment from a specific date early in the 2009-10 income year to a specific date early in the 2011-12 income year. However as you propose to be absent from Australia for a period of greater than two years, you and your spouse as trustees of the Fund must establish that the CM&C was ordinarily in Australia and your absence will be of a temporary nature.

You have not provided written confirmation from your employer of your anticipated date of return to Australia and the date your overseas assignment will cease. Your employer has advised in a letter during the 2008-09 income year that the estimated assignment duration is 24 months. As your assignment commenced on a specific date early in the 2009-10 income year this would mean that your assignment would cease on a specific date early in the 2011-12 income year.

However, you advised the following in an e-mail during the 2010-11 income year:

Our expected date of return to Australia is 2012, the specific date we have not yet determined because a) my employer will obviously need to know and I am not prepared to share that information with them at this early stage for various reasons and b) we will require specialist tax advise [sic] before making that decision as it not only impacts the pension phase of our SMSF we also need to ensure it is the most tax effective time for the Trustees.

In the same e-mail you also stated:

… we wish to apply for a new ruling for the fiscal year 2012 along with 2013 in case our elected retirement date moves beyond the 30th June 2012.

As mentioned above it is accepted that your Fund's CM&C will be considered to be ordinarily in Australia for the 2 years from a specific date early in the 2009-10 income year to a specific date early in the 2011-12 income year.

However, the Commissioner does not accept that the CM&C of the Fund will be ordinarily be in Australia for the requirements of paragraph 295-95(2)(b) of the ITAA 1997 for the period from a specific date early in the 2011-12 income year.

You have not provided a definite date of return to Australia. Consequently, as the duration of the absence beyond a specific date early in the 2011-12 income year is not defined in advance, it is not possible to conclude that the absence past a specific date early in the 2011-12 income year is temporary.

As the absence past a specific date early in the 2011-12 income year is not considered temporary, you have not established that the CM&C will ordinarily be in Australia past this date. Therefore the second requirement under paragraph 295-95(2)(b) of the ITAA 1997 has not been satisfied.

Please note where an equal number of trustees in a fund are located in Australia and overseas, and the each of those trustees substantially and actively participate in the exercise of the CM&C of the fund from those locations, it is accepted that the CM&C of the fund will ordinarily be in Australia within the meaning of paragraph 295-95(2)(b) of the ITAA 1997 (paragraph 35 of TR 2008/9).

In the e-mail during the 2010-11 income year, you advised that the spouse trustee, intends to return regularly to Australia effective on a specific date early in the 2011-12 income year as that trustee's temporary work assignment has come to an end in the overseas country.

However, from the facts of the case, it has not been established that your spouse, as trustee, will substantially and actively participate in the exercise of the CM&C of the fund or be performing the high level duties and activities of the fund in Australia from a specific date early in the 2011-12 income year.

As it has not been established that your spouse, as trustee, will be exercising the CM&C of the fund, the Commissioner does not accept that the CM&C of the Fund will ordinarily be in Australia even if your spouse returns regularly to Australia from a specific date early in the 2011-12 income year.

Accordingly, the second test under subsection 295-95(2) of the ITAA 1997 has not been satisfied.

Test Three - 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.

According to ATO records, both you and your spouse have made contributions to the Fund. Also, employer contributions have been made on both you and your spouse's behalf in the 2009-10 income year.

Consequently, both you and your spouse are active members for the 2009-10 income year.

ATO records show that you hold more than 50% or more of the accrued entitlements in the Fund in the 2009-10 income year.

You have stated that during your overseas assignment you and your spouse will continue to be residents for Australian tax purposes. However, ATO records show that both you and your spouse have lodged your income tax returns for the 2009-10 income year as non-residents.

As you have both lodged your 2009-10 income tax returns as non-residents, it is accepted that you and your spouse are non-residents for the 2009-10 income year. Accordingly, as all active members of the fund are non-resident active members, more than 50% of the accrued entitlements of all active members of the fund are held by non-resident active members.

Accordingly, the third test under subsection 295-95(2) of the ITAA 1997 has not been satisfied in respect of the 2009-10 income year. Also, based on the information held by the ATO, it is likely the third test under subsection 295-95(2) will not be satisfied in respect of 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 two of the tests mentioned above have not been satisfied it is considered that the Fund is not an Australian superannuation fund for the purposes of subsection 295-95(2) of the ITAA 1997 in the 2009-10 income year.

In respect of the 2010-11, 2011-12 and 2012-13 income years it is clear that the CM&C test under paragraph 295-95(2)(b) of the ITAA 1997 would not be satisfied.

On the basis of the information provided it would appear likely that the active member test under paragraph 295-95(2)(c) of the ITAA 1997 would also not be satisfied in respect of the 2010-11 income year.

Consequently, it is considered that the Fund is also not an Australian superannuation fund for the purposes of subsection 295-95(2) of the ITAA 1997 in respect of the 2010-11, 2011-12 and 2012-13 income years.

Further issues for you to consider

Compliance status of a superannuation fund

Subsection 995-1(1) of the ITAA 1997 means a complying superannuation fund within the meaning of section 45 of the Superannuation Industry (Supervision) Act 1993 (SISA).

Section 45 of the SISA interacts with subparagraph 42A(1)(a)(i) of the SISA. That provision states that an entity is a complying superannuation fund in relation to a year of income if:

the entity was a resident regulated superannuation fund at all times during the year of income when the entity was in existence. (emphasis added)

Therefore, in order to be a complying superannuation fund, the fund must be a resident regulated superannuation fund for the whole year.

Subsection 10(1) of SISA defines a resident regulated superannuation fund as follows:

resident regulated superannuation fund means a regulated superannuation fund that is an Australian superannuation fund within the meaning of the Income Tax Assessment Act 1997.