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Ruling

Subject: Residency of a self managed superannuation fund

Issue 1

Question

Will the members of a Superannuation Fund (the Fund) continue to be residents of Australia while on their overseas trip?

Answer:

Yes.

Issue 2

Question

Will the Fund continue to be an Australian superannuation fund as defined in subsection 295-95(2) of the Income Tax Assessment Act 1997 while the members, who are also trustees of the Fund, are on their overseas trip?

Answer:

No.

This ruling applies for the following periods:

Year ending 30 June 2014

Year ending 30 June 2015

Year ending 30 June 2016

Year ending 30 June 2017

The scheme commences on:

1 July 2013

Relevant facts and circumstances

A and B were born overseas and arrived in Australia over 10 years ago.

A is an Australian citizen and B is a foreign citizen.

A and B (herein referred to collectively as the 'partners') operate through business in Australia through a company.

The business makes employer contributions on behalf of the partners and the contributions are made to their superannuation Fund (the Fund).

The Fund, a self managed superannuation fund, of which the partners are trustees and members, was established in Australia in the 2007-08 income year.

The partners' current balances in the Fund have been provided.

In the 2013-14 income year the partners are contemplating a lengthy overseas trip together. This will be similar to one they undertook in past years which was for a shorter period of time.

At the end of the trip the partners intend to return to Australia permanently.

While travelling overseas the partners will:

(a) be travelling on tourist visas;

(b) not take up residence or employment in any location;

(b) pay for their living and travelling expenses from personal savings and business income.

(c) manage their business from overseas by:

(i) using the internet;

(ii) setting up accounts with a variety of financial institutions prior to departure, so new products could be opened remotely;

(iii) redirecting mail to a mail processing provider who will scan all mail and make it securely available on the internet; and

(iv) have an authorised representative in Australia to assist with administrative duties.

In relation to the Fund, the partners will continue to make strategic decisions and see to the Fund's day to day operations in the same ways they will operate their business from overseas.

During the period that the partners are overseas they have no dates planned to come back to Australia for any period of time but they may return for various occasions.

Before returning to Australia, the partner's last destination will be at the residence of one of A's relatives. The partners do not intend to stay there for a long period of time.

The partners do not:

(a) possess any overseas assets;

(b) have any social or sporting connections overseas;

(c) own a permanent residence in Australia as they reside in rental accommodation; and

(d) have family in Australia.

In relation to Australian assets, the partners have multiple investments and bank accounts as individuals and through their business.

As the partners have lived in Australia for over 10 years they have a large network of friends and colleagues in Australia.

Neither partner is an employee of the Commonwealth Government of Australia.

Each of the partners is less than 50 years of age.

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)

Income Tax Assessment Act 1936 subsection 6(1)

Superannuation Industry (Supervision) Act 1993 Section 10

Superannuation Industry (Supervision) Act 1993 Section 45

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

Reasons for decision

Summary

The members of the Fund will continue to be Australian residents for income tax purposes during the 2013-14 to 2016-17 income years.

For the Fund to be an Australian superannuation fund at a particular time it must meet all the requirements of the income tax legislation. That is, it must satisfy:

· the established in Australia test;

· the central management and control test; and

· the active member test.

The Fund does not satisfy the central management and control test. Accordingly, for the 2013-14 to 2016-17 income years the Fund will not be an Australian superannuation fund.

Detailed reasoning

Issue 1

Subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) defines an Australian resident as a person who is a resident of Australia for the purpose of the Income Tax Assessment Act 1936 (ITAA 1936).

The terms resident and resident of Australia, in regard to an individual, are defined in subsection 6(1) of the ITAA 1936. The definition provides four tests to ascertain whether a taxpayer is a resident of Australia for income tax purposes. These tests are:

· The resides test

· The domicile test

· The 183 day test

· The superannuation test

The primary test for deciding the residency status of an individual is whether the individual resides in Australia according to the ordinary meaning of the word resides. However, where an individual does not reside in Australia according to ordinary concepts, they may still be considered to be an Australian resident for tax purposes if they satisfy the conditions of one of the three other tests.

The resides test

The ordinary meaning of the word reside, according to the dictionary meaning, 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.

As the partners will be residing overseas for the period in question, their behaviour will not be consistent with that of persons who live in Australia. Thus the partners will not be residents of Australia for taxation purposes under the resides test.

The domicile test

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

In order to show that a new domicile of choice in a country outside Australia has been adopted, the person must be able prove an intention to make his or her home indefinitely in that country.

In this case the country of origin for each of the partners is located overseas. The partners arrived in Australia over 10 years ago and they run a business in Australia. The partners intentions are to live permanently in Australia and they do not plan to settle overseas. Thus the partners have chosen Australia to be their domicile.

Permanent place of abode

The expression 'place of abode' refers to a person's residence, where they live with their family and sleep at night. In essence, a person's place of abode is that person's dwelling place or the physical surroundings in which a person lives.

A permanent place of abode does not have to be 'everlasting' or 'forever'. It does not mean an abode in which a person intends to live for the rest of his or her life. An intention to return to Australia in the foreseeable future to live does not prevent the taxpayer in the meantime setting up a permanent place of abode elsewhere.

Income tax ruling IT 2650 gives guidance as to whether a person has set up a permanent place of abode overseas. Paragraph 28 of the ruling states:

The fact that an individual has established his or her home (in the sense of a dwelling place; a house or other shelter that is the fixed residence of a person, family or household) in an overseas country would tend to show that the place of abode in the overseas country is permanent. Acquisition of a home in the overseas country would be a very relevant though not conclusive factor. On the other hand, individuals or a family group who "make do" in temporary accommodation with limited resources and facilities such as in barracks, singles' quarters, aboard ships, oil rigs, or mining towns, will be less likely to be considered to have established a permanent place of abode overseas.

For the period in question the partners will be travelling overseas and staying in temporary accommodation. Thus the partners will not have a permanent place of abode overseas. In addition, during their travel overseas, their associations with Australia will be more significant as:

· the reason for going overseas is to travel.

· the partners have a business in Australia which they jointly run and will continue to run from overseas.

· the partners went on a similar trip in an earlier income year and were able to run their business from overseas.

· the partners will not take up residence or employment in any location. They plan to return to Australia permanently following their trip.

· the partners do not own any assets overseas.

· the partners' assets in Australia include multiple investments and bank accounts as well as assets owned through their business.

· the partners have a large network of friends and colleagues in Australia.

· the partners do not have any social or sporting connections overseas.

· the partners, though they have no planned dates of visiting Australia whilst overseas, may return for various occasions.

Based on these facts, the partners will not establish a permanent place of abode outside Australia for the period if their trip. Therefore they will be Australian residents under the domicile test.

As the partners will be residents of Australia under the domicile test, it is not necessary to consider the other two residency tests.

Residency status from 1 July 2013 until 30 June 2017

The partners will be Australian residents for tax purposes for the period they are away under the domicile test of residency outlined in subsection 6(1) of the ITAA 1936.

Issue 2

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 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 Income Tax Assessment Act 1936 (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.

In this particular case, the Fund's members (the partners) are also the Fund's trustees. As the Fund's trustees, the partners 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, the facts show that the partners 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 they exercise the CM&C of the Fund.

It is noted that the partners intend to undertake an overseas trip, which, unlike an earlier trip, will exceed three years. In view of the partners absence overseas, notwithstanding they are considered to be Australian residents for income purposes in those years, the issue that requires attention is whether the CM&C of the Fund is temporarily outside Australia.

In this case it is noted that the partners intend to permanently return to Australia at the end of their trip. However, as mentioned in paragraph 33 of TR 2008/9, determining whether CM&C is temporarily outside Australia takes into consideration, both intention and fact.

The facts show that the partners will continue to operate the CM&C of the Fund from overseas by using the same methods they intend to use to operate their business whilst overseas. Therefore, for the period of the partners' trip, the CM&C of the Fund will not be in Australia.

The partners have stated that the purpose for going overseas is for travel. However, it is considered that the period of time that the partners will be away is more than a 'relatively short period of time' for the Fund's CM&C to be temporarily outside of Australia.

Though TR 2008/9 does not state what constitutes a 'relatively short period of time', it could be construed that subsection 295-95(4) of the ITAA 1997 indicates it as being a period of up to two years as that subsection allows trustees a temporary absence from Australia for a period of up to two years.

Further, it is noted that the partners have no definite date of return to Australia other than a month ion a particular income year. In view of this, it is considered the period of the partners absence, and hence CM&C of the Fund being outside of Australia, is fluid. Accordingly, the duration of the absence does not indicate it to be defined in advance or related to the 'fulfilment of a specific, passing purpose' which would be expected to have set commencement and end dates.

In view of the all of above, the partners 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 this case. As mentioned above, the partners absence from Australia is intended to span a period excess of three years.

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

Therefore, the Fund does not satisfy the CM&C test under paragraph 295-95(2)(b) of the ITAA 1997. As this requirement has not been satisfied it considered unnecessary to determine whether the active member test is satisfied.

Conclusion

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

As one of the requirements under subsection 295-95(2) of the ITAA 1997 has not been satisfied, the Fund is not an Australian superannuation fund for the years during which the trustees intend to be overseas.

Further issues for you to consider

Compliance status of a superannuation fund

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

Subsection 995-1(1) of the ITAA 1997 defines an Australian superannuation fund as having the meaning given by section 295-95, that is basically, a fund that was established in Australia and its central management and majority of active members are located in Australia.

It should be noted that subsection 995-1(1) of the ITAA 1997 also defines a superannuation fund as has the meaning given by section 10 of the SISA, that is:

(a) a fund that:

(i) is an indefinitely continuing fund; and

(ii) is a provident, benefit, superannuation or retirement fund; or

(b) a public sector superannuation scheme.

Further more, subsection 995-1(1) of the ITAA 1997 means a complying superannuation fund within the meaning of section 45 of 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.

Therefore, in order to be a complying superannuation fund under the ITAA 1997 and the SISA and to be taxed concessionally, the superannuation fund must be an Australian superannuation fund at all times during the year and if at any point in time it is not, then it is not a complying fund under the ITAA and SISA.

As previously determined, on the facts provided, the Fund will not be an Australian superannuation fund for the purposes of subsection 295-95(2) of the ITAA 1997, for the income years to which this ruling relates. Accordingly, the Fund will not be a complying superannuation fund.

Employer contributions - superannuation guarantee

Under the superannuation guarantee law an employer must pay superannuation contributions (the contributions) for their eligible employees, at a minimum rate of 9% of their ordinary time earnings. However, between 1 July 2013 and 1 July 2019 the minimum rate will gradually increase from 9% to 12%.

The contributions made by an employer, for which the employer can generally claim a tax deduction, must be paid into a complying super fund or retirement savings account (RSA). Accordingly, an employer would be precluded from claiming a tax deduction for contributions made to a non-complying superannuation fund.

Further, it should be noted where an employer makes a contribution to a non-complying superannuation fund in relation to an employee, such a contribution does not discharge the employer's obligation to pay the superannuation guarantee for the employee.

Generally, an employer has to pay the superannuation guarantee for an employee if they're between 18 and 69 years old (inclusive) and the employer pays them $450 or more (before tax) in salary or wages in a month. It doesn't matter whether the employee is full time, part time or casual. Employees who are under 18 years old must meet these conditions and work at least 30 hours per week to be entitled to the super guarantee.

The superannuation guarantee also applies to:

· eligible employees who receive a super pension or annuity while still working. This includes employees who qualify through the transition to retirement measure. Transition to retirement allows people to access their super benefits once they reach their preservation age, without having to retire or leave their job

· directors of a business. Generally, this means that directors who receive salary, wages or director's fees are entitled to super contributions from their employer. Employer family members working in the business may also be eligible employees.

It should also be noted that an Australian employer's superannuation guarantee obligations in relation to employees who temporarily work overseas (for that employer) are not negated whilst they are outside Australia.

In view of the above the partners may still be able to have employer contributions made on their behalf whilst they are overseas. However, if employer contributions are made to the Fund for the periods on which the private ruling was sought, those contributions will:

(i) not represent superannuation guarantee contributions; or

(ii) be contributions for which the employer can claim a tax deduction.

As stated in the ruling, the Fund will not be an Australian superannuation fund for the periods that the partners are absent from Australian. Accordingly, the Fund would be viewed as a non-complying superannuation fund under the SISA. Hence, any contributions made to the Fund in those periods represent contributions made to a non-complying superannuation fund.