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Ruling

Subject: Residency status of self managed superannuation fund

Question 1

Is the Fund an Australian superannuation fund as defined in subsection 295-95(2) of the Income Tax Assessment Act 1997 in the relevant income year?

Answer

Yes.

Question 2

Will the Member be able to make a superannuation contribution to the Fund in the subsequent income year without affecting its status?

Answer

No.

This ruling applies for the following periods:

1 July 2012 to 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

The Member is the sole member of the Fund.

The Member is the director of a corporate trustee governing the Fund.

The Member is in receipt of a transition to retirement income stream from the Fund.

The Member is working as an offshore resident in an overseas country.

The Member currently resides in the overseas country with their spouse and child.

The Member spends a number of weeks in the overseas country and X week in Australia every month.

When in Australia, the Member lives in rented accommodation and currently does not own a house or car in Australia.

The Member has a bank account in Australia which is used to pay monthly expenses.

The Member no longer has any direct business interests in Australia.

The Member has stated that they will continue to make all decisions regarding the Fund whilst they are in Australia in consultation with their accountant and financial adviser and will conduct trustee fund meetings in Australia only.

No decisions relating to the Fund will be made while the Member is overseas.

The Fund was established in Australia prior to year 2000.

The Member is a non-resident for tax purposes for the subsequent income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 295-95.

Income Tax Assessment Act 1997 Subsection 295-95(2).

Income Tax Assessment Act 1997 Paragraph 295-95(2)(a).

Income Tax Assessment Act 1997 Paragraph 295-95(2)(b).

Income Tax Assessment Act 1997 Paragraph 295-95(2)(c).

Income Tax Assessment Act 1997 Subsection 295-95(3).

Income Tax Assessment Act 1997 Subsection 295-95(4).

Reasons for decision

Summary of decision

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.

At present and up to 30 June 2013, the Commissioner accepts the central management and control of the Fund is in Australia in accordance with subsection 295-95(4) so while the Fund has no active members, the Fund will be an Australian Superannuation Fund. However, if the non-resident member makes a contribution to the Fund or someone makes a contribution to the Fund on their behalf, the Fund will fail the definition creating taxation consequences for both the Fund and the Member. In addition, unless the Member's circumstances change from 1 July 2013, the Fund will not be an Australian resident superannuation fund from that date.

Q1 - Is the Fund an Australian superannuation fund as defined in subsection 295-95(2) of the Income Tax Assessment Act 1997 in the subsequent income year?

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 titled 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.

In relation to temporary absences, subsection 295-95(4) of the ITAA 1997 states:

To avoid doubt, 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.

In this case, the Member who is the sole member of the Fund currently resides in an overseas country with their spouse and child. From 1 July 20XX, the Member spends Y days in Australia and Z weeks in the overseas country. The member is a non-resident for taxation purposes and advises that all decisions relating to the Fund are made during these visits to Australia. In addition, all trustee meetings and meetings with accountants and financial advisors are also held in Australia. In view of this and subsection 295-95(4) of the ITAA 1997, it is considered the CM&C of the Fund is in Australia and subsection 295-95(2) is satisfied.

Test Three: The active member test

The third test that a fund is required to satisfy to be an Australian superannuation fund is the 'active member' test. Paragraph 69 of Taxation Ruling TR 2008/9 states:

69….. The 'active member' test is satisfied if, at the relevant time:

· the fund has no 'active member'; or

· at least 50% of the total market value of the fund's assets attributable to superannuation interests held by active members is attributable to superannuation interests held by active members who are Australian residents (subparagraph 295-95(2)(c)(i) of the ITAA 1997); or

· at least 50% of 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 (subparagraph 295-95(2)(c)(ii) of the ITAA 1997).

As your client is a non-resident for income tax purposes they cannot satisfy the second or third criterion set out above.

The definition of 'active member' is contained in subsection 295-95(3) of the ITAA 1997. A member is an active member of a superannuation fund at a particular time if the member is a contributor to the fund at that time (paragraph 295-95(3)(a) of the ITAA 1997) or is an individual on whose behalf contributions have been made (paragraph 295-95(3)(b) of the ITAA 1997). As no contributions have yet been made by or for the member, the Fund has no active member and will satisfy the first criterion set out above.

As all three tests have been satisfied, the Fund meets the definition of an Australian superannuation fund.

Q2 - Will the Member be able to make a superannuation contribution to the Fund in the 2012-13 income year without affecting its status?

As outlined above, the Fund meets the definition of an Australian superannuation fund while it has no 'active members'. Once the Member makes a contribution to the fund or someone makes a contribution for his benefit, the Fund will have an active member and fail the test set out in subsection 295-95(3) of the ITAA 1997. Taxation Ruling TR 2008/9 states:

199. A fund that ceases to be a complying superannuation fund in a particular year of income because it fails to satisfy the definition of Australian superannuation fund at a particular time faces a number of taxation consequences. In the income year that it becomes non-complying, it must include in its assessable income an amount equal to the total of the market values of the fund's assets (as calculated just before the start of the income year), less any crystallised undeducted contributions made between 30 June 1983 and 30 June 2007 and any non-concessional contributions made from 1 July 2007. This amount is taxed at the highest marginal tax rate.

200. Furthermore, the fund is not eligible for the tax concessions available to a complying superannuation fund. For example, for every income year that the fund remains non-complying, its income is taxed at the highest marginal tax rate.

In addition, the Member will not be able to claim a deduction for any contributions made and the benefits eventually payable from the Fund will be taxed at the highest marginal tax rate.

Conclusion:

At present and up to 30 June 2013, the Commissioner accepts the central management and control of the Fund is in Australia in accordance with subsection 295-95(4) so while the Fund has no active members, the Fund will be an Australian Superannuation Fund. However, if the non-resident member makes a contribution to the Fund or someone makes a contribution to the Fund for their benefit, the Fund will fail the definition creating taxation consequences for both the Fund and the Member. In addition, unless the Member's circumstances change from 1 July 2013, the Fund will not be an Australian resident superannuation fund from that date.