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Ruling

Subject: Residency of a self managed superannuation fund

Question 1:

Is one of the members (Member A) of a superannuation (the Fund), a resident of Australia for tax purposes for the 2010-11 income year?

Answer:

No.

Question 2:

Is the Fund an Australian superannuation fund?

Answer:

No.

This ruling applies for the following periods

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Member A

Member A is an Australian citizen of Australian origin who is less than 60 years of age.

Neither Member A or Member A's ex-spouse hold positions with the Commonwealth Government of Australia.

In the 2000-01 income year Member A, who holds a resident visa for an overseas country (the overseas country) departed Australia to take up employment in that country.

None of Member A's family, which comprises of adult children and a spouse, accompanied Member A to the overseas country.

In the overseas country, Member A:

(i) has established friends;

(ii) lives in rental accommodation; and

(iii) has a bank account.

Whilst in the overseas country Member A has maintained contact with family and friends and continues to own in Australia:

(i) a bank account;

(ii) a house which is currently occupied from which no rental income is received; and

(iii) a small quantity of personal items stored at the house.

Member A has provided details in relation to return trips made to Australia since the 200-01 income year.

On the return visits to Australia Member A stays with family.

Member A is not employed by an Australian employer but by a foreign company.

In the 2011-12 income year Member A's employment contract in the overseas country expired.

Member A does not intend to return to Australia to live permanently but to return to visit family and friends.

ATO records show that Member has been a non-resident for Australian income tax purposes for almost every year since 2001-02 income year.

The Superannuation Fund (the Fund)

The Fund is a self managed superannuation fund which was established in Australia during the 2000-01 income year.

The Fund has a corporate trustee of which Member A and Member B are its directors.

Member B, an adult child of Member A, lives in Australia. Member B, a signatory for the Fund, is not involved in the Fund's day to day operations nor is he/she involved in making any major strategic decisions in relation to the Fund.

Decisions made in relation to the Fund are made by Member A.

The Fund has a bank account in Australia to which Member A has access and control.

ATO records show that the bulk of the assets held in the Fund since its establishment belong to Member A's Fund account balance.

Details in relation to Member A and Member B's current account balances in the Fund have been provided.

In relation to contributions to the Fund, ATO records show that:

(i) almost of all of the contributions made to the Fund were made by Member A; and

(ii) the last contributions made to the Fund were in the 2008-09 income year and they were made by Member A.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 6(1)

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

Member A was not an Australian resident for income tax purposes in the 2010-11 income year.

Further, for a superannuation fund to be an Australian superannuation fund at a particular time it must meet all the requirements of the income tax legislation. One of the requirements is the central management and control test.

It has been determined that the Fund has not satisfied the central management and control test. Accordingly, the Fund is not an Australian superannuation fund for the purposes of subsection 295-95(2) of the ITAA 1997, for the 2010-11 income year.

Detailed reasoning

Residency status

The terms resident and resident of Australia, in regard to an individual, are defined in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936). The definition contains four tests which will help us ascertain whether Member A was a resident of Australia for income tax purposes for the year ended 30 June 2011. These tests are:

(i)   the residence according to ordinary concepts test;

(ii)  the domicile/permanent place of abode test;

(iii)  the 183 days/usual place of abode test; and

(iv)  the Commonwealth superannuation test.

The main test for deciding Member A's residency status is whether Member A resides in Australia according to the ordinary meaning of the word resides.  However, if Member A does not reside in Australia according to ordinary concepts, Member A may still be a resident of Australia for tax purposes if Member A satisfies the conditions of one of the other three tests.

The residence according to ordinary concepts test

The ordinary meaning of the word 'reside', according to the Macquarie Dictionary, 2001, rev. 3^rd edition, is 'to dwell permanently or for a considerable time; having one's abode for a time', and according to the Compact Edition of the Oxford English Dictionary (1987), is 'to dwell permanently, or for a considerable time, to have one's settled or usual abode, to live in or at a particular place'.

Results of the residence according to ordinary concepts test

As Member A has been living and working in the overseas country since leaving Australia in the 2000-01 income year and does not intend to return to live in Australia permanently, Member A was not a resident of Australia for tax purposes under this test.

We therefore need to examine the remaining tests to determine Member A's residency status.

The domicile/permanent place of abode test

Domicile

If a person has their domicile in Australia they will be considered an Australian resident unless the Commissioner is satisfied they have a permanent place of abode outside Australia.

There are essentially three types of domicile that an individual can have:

· the domicile of origin;

· the domicile of choice; and

· the domicile of dependency.

Basically, your domicile of origin is where you were born, or the country of your father's permanent home.

In order to show that you have chosen a new domicile of choice in a country outside Australia, you must be able prove an intention to make your home indefinitely in another country.

In relation to domicile of dependency, such a domicile will normally only exist in relation to minors or individuals who are of unsound mind.

Taxation Ruling IT 2650 Income tax: residency - permanent place of abode outside Australia provides guidelines for determining whether individuals who leave Australia temporarily to live overseas, cease to be Australian residents for income tax purposes.

The ruling explains that in determining a person's domicile it is necessary to consider their intention as to the country in which they are to make their home indefinitely. Thus, a person with an Australian domicile but living outside Australia will retain that domicile if he or she intends to return to Australia on a specified planned date, for example, at the end of an employment contract.

On the other hand, if that person has in mind only a vague possibility of returning to Australia at some future point in time that has not been determined, such a state of mind is consistent with the intention required by law to acquire a domicile of choice in the foreign country.

Results of the domicile/permanent place of abode test

As Member A was born in Australia and the member's parents' home is in Australia, Member A's domicile of origin is Australia.

Member A has indicated an intention not to return to Australia to live permanently and stated an intention to stay in the overseas country indefinitely.

In accordance with the guidelines provided above, Member A's intention to reside in the overseas country indicates Member A has chosen a new domicile of choice.

As we have determined Member A has chosen a new domicile of choice, we do not need to consider the permanent place of abode test.

Member A was not a resident of Australia under this test.

The 183 day/usual place of abode test

183 days

Under the 183-day test you will be an Australian resident if you are present in Australia for more than183 days during a financial year unless the Commissioner is satisfied that your usual place of abode is outside Australia and you do not intend to take up residence in Australia.

Since leaving Australia in the 2000-01 income year Member A has returned on occasion for the purpose of visiting family and friends. None of these occasions have been for more than 183 days. Further, Member A does not intend to return to live in Australia permanently.

Results of the 183 day/usual place of abode test

Member A was not a resident of Australia under this test.

The superannuation test

An individual is still considered to be a resident if that person is eligible to contribute to the Commonwealth Superannuation Scheme (CSS) or Public Service Superannuation Scheme (PSS), or that person is the spouse or child under 16 of such a person.

Results of the superannuation test

Member A's is over 16 years of age and not a member of the CSS or the PSS or a spouse of such a person. Therefore, Member A is not a resident under this test.

Conclusion

Member A was not a resident of Australia for taxation purposes for the year ended 30 June 2011.

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:

· 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 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.

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.

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 Superannuation Fund (the Fund) was established in Australia. Therefore, the 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 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 ITAA 1936. In addition, the Explanatory Memorandum to the Superannuation Legislation Amendment (Simplification) 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.

Where a superannuation fund has a corporate trustee, the legal responsibility or duty to exercise its CM&C rests with the director/s of the corporate trustee. In this case Members A and B are the directors of the Fund's corporate trustee.

Though one of the Fund's directors, Member B, is a resident of Australia, it is noted that this person's role is to merely perform an administrative function, that is, to act as a signatory. Further, as stated in the facts, Member B is not involved in the day to day operations of the Fund nor is Member B involved in making any major decisions in relation to the Fund.

In relation to the Fund's other director, Member A, the facts show that the major decisions in relation to the Fund are made by this person, a situation which also appears to be supported by:

(i) the bulk of the contributions made to the Fund since its establishment were made by Member A; and

(ii) Member A's account balance in the Fund constitutes the bulk of the Fund's assets whilst Member B's account balance is nominal.

In view of the above it is considered that the CM&C of the Fund rests with Member A, a director and member of the Fund who, as discussed earlier, is a non-resident for Australian income tax purposes.

As discussed earlier, the CM&C of a superannuation fund can be outside Australia if it can be established that the CM&C is ordinarily held in Australia or the trustees who exercise it are temporarily outside Australia.

In this case, it is considered that the Fund's CM&C is not ordinarily held in Australia or temporarily exercised outside of Australia as:

(i) Member A, the director with whom the CM&C rests, has not been an Australian resident as far back as the 2001-02 income year; and

(ii) Member A has expressed an intention not to return to Australia to live permanently.

In view of the above the Commissioner considers the CM&C of the Fund is not ordinarily in Australia. Therefore, the requirements in paragraph 295-95(2)(b) of the ITAA 1997 have 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 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.

Basically, this means that:

· if a member ceases to be a resident, and

· they have not made contributions to the fund since that time, and

· another party such as an employer has not made any contributions on the members behalf in respect of the time they were a non-resident, then

· they would be regarded as a non-active member at the relevant time.

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

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.

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 this case, the facts show there are no active members of the Fund as no contributions were made to the Fund in the 2010-11 income year. Accordingly, the requirement under paragraph 295-95(2)(c) of the ITAA 1997 will be satisfied.

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.