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Ruling

Subject: Australian superannuation fund -residency status

Questions:

1. Will the superannuation fund be an Australian superannuation fund in the 2011-12 income year?

2. Will the superannuation fund be an Australian superannuation fund in the 2012-13 income year?

3. Will the superannuation fund be an Australian superannuation fund in the 2013-14 income year?

4. Will the superannuation fund be an Australian superannuation fund in the 2014-15 income year?

Answer:

1. Yes

2. Yes

3. Yes

4. The Commissioner declines to rule.

This ruling applies for the following periods:

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

The scheme commences on:

1 July 2011

Relevant facts and circumstances

The superannuation fund (The Fund) is a self managed superannuation fund (SMSF).

You and your spouse are the Fund trustees and members of the Fund.

You are taking up employment in an overseas country for three years from January 2012 to December 2014.

Your spouse will also be moving to the overseas country with you.

Your three children will live in the family home (in Australia) maintained by you and your spouse.

You will periodically be returning to Australia and live in the family home which will be once a year as your children are residing in Australia.

You are aware of the rules regarding non-residents and that an overseas assignment of more than two years may pose a residency problem for the Fund - unless the assignment is broken by a return to Australia for a month or more.

You wish to apply for a ruling or exemption to the residency requirement for trustees of an SMSF as you will only be temporarily working in the overseas country for three years and will be returning frequently to Australia.

You and your spouse will not be making contributions to the Fund whilst you are living in the overseas country.

You will be making contributions to a pension scheme in the overseas country and then transferring these funds to the Fund when you resume living and working in Australia.

You will not be rolling over any benefits from other funds into the Fund during the period you are overseas.

You have provided the full name of your employer in the overseas country and a copy of your employment contract.

The day to day decisions on running the Fund will be conducted from Australia and the overseas country.

The Fund trustees receive investment strategy advice from an Australian investment entity involving long term strategy and day to day actions in relation to the Fund.

The Australian investment entity also oversee management of the compliance and tax issues for the Fund.

As the Fund trustees, you will be located in the overseas country but will transact based on the advice received from the Australian investment entity using internet trading.

This is exactly the same as the Fund has operated since the Fund was set up except you will be making the transactions in the overseas country rather than in Australia.

The Fund trustees meet face to face with the Australian investment entity to discuss investment strategy on a quarterly basis and these meetings will be conducted by phone while you are in the overseas country.

You will endeavour to have at least one face to face meeting per year on one of your return visits to Australia.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 292-95.

Income Tax Assessment Act 1997 Subsection 292-95(2).

Income Tax Assessment Act 1997 Subsection 292-95(3).

Income Tax Assessment Act 1997 Subsection 292-95(4).

Taxation Administration Act 1953 ..Schedule 1 Subsection 357-110(1)

Reasons for decision

Summary

A superannuation fund is an Australian superannuation fund at a particular time if it meets all the requirements of subsection 295(2) of the Income Tax Assessment Act 1997 (ITAA 1997). That is, it must satisfy the below three tests:

1. the established in Australia test;

2. the central management and control test; and

3. the active member test.

Subject to the Fund meeting all of the above three tests during the 2011-12, 2012-13 and 2013-14 income years, the Fund will be an Australian superannuation fund during these income years.

The Commissioner declines to rule on the 2014-15 income year.

Detailed reasoning

Subsection 295-95(2) of the ITAA 1997 defines what is an Australian superannuation fund and is as follows:

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).

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 tests.

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 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 (CM&C) and active member.

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.

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.

In the present case the Fund was established in Australia. Therefore, in the absence of evidence to the contrary, it is accepted that the first test 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 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 CM&C of a superannuation fund.

The concept of CM&C is not defined in the ITAA 1997 or in the Income Tax Assessment Act 1936 (ITAA 1936). Tax Laws Amendment (Simplified Superannuation) Bill 2006 inserted section 295-95 into the ITAA 1997.

Paragraphs 3.91 and 3.93 of the Explanatory Memorandum to this Bill (including Example 3.1) explain that the definition of 'Australian superannuation fund' in the ITAA 1997 has replaced the then existing definition of 'resident superannuation fund' in section 6E of the ITAA 1936. 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 main change being there is no longer a specific temporary absence rule for trustees of a superannuation fund as an alternative condition to the requirement that the CM&C of the fund be in Australia.

The definition of 'Australian superannuation fund' in paragraph 295-95(2)(b) does not use the alternative test (the two-year temporary absence rule). Instead, it deals with temporary absences of trustees by requiring that the CM&C of the fund be 'ordinarily in Australia'. Satisfying the two-year temporary absence rule would normally satisfy this 'ordinarily in Australia' requirement. That is, the temporary absence of the trustee(s) from Australia does not exceed two years.

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

fund will be treated as an Australian superannuation fund. If the husband'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 be treated as an Australian superannuation fund.

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 who 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.

Location of the CM&C of the fund

Paragraph 27 of TR 2008/9 clarifies 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 (regardless of where the persons exercising the CM&C reside).

When is the CM&C of the fund 'ordinarily' in Australia?

Paragraph 28 of TR 2008/9 states that 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.

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 and not 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 paragraphs 30 to 32 of TR 2008/9, it states:

The effect of subsection 295-95(4) is to provide one set of circumstances in which the CM&C of a fund will be taken to be 'ordinarily' in Australia at a time for the purposes of paragraph 295-95(2)(b) of the ITAA 1997 (that is, it operates as a 'safe harbour' rule).

Subsection 295-95(4) of the ITAA 1997 does not otherwise restrict the meaning of 'ordinarily' so that the CM&C of the fund can only be outside Australia for a period of 2 years or less. If the CM&C of the fund is outside Australia for a period greater than 2 years, the fund will satisfy the CM&C test if it satisfies the 'ordinarily' requirement in paragraph 295 -95(2)(b) of the ITAA 1997.

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.

You stated that you are taking up employment in the overseas country for three years from January 2012 to December 2014 and your spouse will also be moving with you.

Your three children will live in the family home (in Australia) maintained by you and your spouse.

You will periodically be returning to Australia and live in the family home which will be once a year as your children are residing in Australia.

Therefore on the basis of the facts you have provided, it is considered that the CM&C of the Fund remains ordinarily in Australia during the period of your employment in the overseas country in the 2011-12, 2012-13 and 2013-14 income years subject to the Fund meeting the second test under paragraph 295-95(2)(b) of the ITAA 1997 at all times during these income years.

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 Australian 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 in subsection 295-95(3) 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 active member test is explained in TR 2008/9 at paragraphs 177 to 194. The relevant paragraphs from TR 2008/9 are extracted below:

177.The third test that a fund is required to satisfy to be an Australian superannuation fund is the 'active member' test in paragraph 295-95(2)(c) of the ITAA 1997. The 'active member' test is satisfied if, at the relevant time, either the fund has no member covered by subsection 295-95(3) of the ITAA 1997 (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.

178. The terms of paragraph 295-95(2)(c) of the ITAA 1997 therefore contemplate two situations:

o the first situation is that the fund has no active members at a particular time. In this case, paragraph 295-95(2)(c) is satisfied at that time; and

o the second situation is where the superannuation fund does have an active member (as defined in subsection 295-95(3) of the ITAA 1997 and further discussed in paragraphs 183 to 195 of this Ruling). In such a situation, the conditions in subparagraphs 295-95(2)(c)(i) and (ii) of the ITAA 1997 must be considered to determine whether the fund satisfies the active member test…

Australian resident

181. 'Australian resident' in paragraph 295-95(2)(c) of the ITAA 1997 means a person who is a resident of Australia for the purposes of the ITAA 1936 …

182. A 'foreign resident' is a person who is not a resident of Australia for the purposes of the ITAA 1936…

Contributor to the fund at that time

184.The term 'contributor' in subsection 295-95(3) of the ITAA 1997 is not defined. Therefore, it takes its meaning from the context in which it appears.

185. In the case of a superannuation fund, a 'contributor' is an individual who makes a contribution for the purpose of providing for future retirement or superannuation benefits (see paragraphs 196 to 198 of this Ruling for a discussion on the meaning of 'contribution'). It appears from the context of the provisions that the focus of the test is on the status of the member as a contributor at a particular point in time, and not actually on the specific act of contributing. Further, the amount of the contribution that is made by the member is irrelevant for the purposes of determining whether the member is a contributor.

189. If the member is a contributor to the fund at a particular time, they will be an active member within the meaning of subsection 295-95(3) of the ITAA 1997, irrespective of whether the member is an Australian resident or foreign resident.

In the present case, it is stated both members (your spouse and yourself) will not be making contributions to the Fund whilst you are living in the overseas country. Therefore you and your spouse will be non-contributors of the Fund during the period of your employment in the overseas country in the 2011-12, 2012-13 and 2013-14 income years.

Therefore on the basis of the facts as presented, it is considered that both-members of the Fund will not be 'active members' for the purposes of subsection 295-95(3) and consequently the Fund will meet the third test of paragraph 295-95(2)(c) of the ITAA 1997 and considered an Australian superannuation fund.

Ruling on the 2014-15 income year:

You stated your employment in overseas country is for three years from January 2012 to December 2014 which spans over a period of four income years, (2011-12, 2012-13. 2013-14 and the 2014-15 income years).

It is noted from the employment contract that the provisions under Clause X 'Job Title & Location" and Clause Y 'Reassignment' state that:

§ your normal place of work will be in the overseas country but the Company may require you to work at other locations or offices on a temporary or permanent basis as the Company shall from time to time direct.

§ The Company may offer to re-assign you at any time to an equivalent role either within the Company or on secondment to any related entity.

Although you have stated your overseas appointment will end in December 2014, the letter of September 2011 from your employer was to confirm to you their offer of ongoing employment on a permanent full time basis and made no mention of the appointment ending in December 2014 (during the 2014-15 income year).

Therefore it is considered there may be an option to extend the period of your overseas employment to beyond December 2014. Accordingly, a conclusion cannot be drawn that the appointment will end in December 2014.

Subsection 357-110(1) of Schedule 1 of the Taxation Administration Act 1953 (TAA) states that:

If the Commissioner considers that the correctness of a private ruling or

an oral ruling would depend on which assumptions were made about a future event

or other matter, the Commissioner may:

(a) decline to make the ruling; or

(b) make such of the assumptions as the Commissioner considers to be most appropriate.

In this case, in order to make a ruling on whether the Fund will be an Australian superannuation fund for the 20134-15, the Commissioner is not willing to make assumptions on these matters for this future income year, and accordingly declines to make a ruling for the 2014-15 income year in this instance, in accordance with subsection 357-110(1) of Schedule 1 to the TAA.