Edited version of your written advice

Authorisation Number: 1012994283559

Date of advice: 6 April 2016

Ruling

Subject: Self-managed superannuation fund - residency

Questions

1. Is the Fund an Australian superannuation fund in accordance with subsection 295-95(2) of the Income Tax Assessment Act 1997 (the ITAA 1997)?

2. Can the Fund accept contributions by or for its members while they are overseas?

Advice/Answers

1. Yes

2. Yes

This ruling applies for the following period

Year ended 30 June 20ZZ

The scheme commenced on

1 July 20YY

Relevant facts and circumstances

The Fund is a self-managed superannuation fund established in Australia. Part of the Fund's assets are situated in Australia.

The members of the Fund (the Members) are the individual trustees of the Fund.

The Members are overseas citizens living in Australia as permanent residents since 20WW. For health and family reasons, have spent time overseas beginning in 20XX and will return to Australia before mid-20ZZ.

The Members are the equal shareholders and directors of a private company registered in Australia (the Company). The Company does not have any other employees. Its clients are mostly Australian clients.

The Members own a house in Australia, which they will retain and rent out while they are overseas.

The Members will remain Australian residents for taxation purposes while they are overseas.

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 Subsection 295-95(3)

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

Tax Laws Amendment (Simplified Superannuation) Act 2007 Explanatory Memorandum

Reasons for decision

Summary

The Fund will remain an Australian superannuation fund if it continues to satisfy all the tests set out in the legislation. As long as its members do not cease to be residents of Australia, it can still accept contributions by or for its members.

Detailed reasoning

Subsection 295-95(2) of the ITAA 1997 defines what an 'Australian superannuation fund' is. The subsection states that:

A superannuation fund is an Australian superannuation fund at a time and for an 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.

Subject to its meeting all of the above three tests during the relevant period, the Fund is treated as an 'Australian superannuation fund'. If the 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 conditions.

The Commissioner 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 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: Fund established in Australia or any Fund asset situated in Australia

The first test that must be satisfied is that either the superannuation fund concerned was established in Australia, or any of its asset are situated in Australia at the relevant time. This is a question of fact.

As the Fund was established in Australia, and as part of its assets are situated in Australia, it therefore satisfies the requirement in paragraph 295-95(2)(a) of the ITAA 1997.

Test Two: Fund's CM&C 'ordinarily' in Australia'

The second test, being one of the key requirements that a superannuation fund must satisfy in order to be an 'Australian superannuation fund' at a particular time, is that its CM&C is 'ordinarily' in Australia. Generally, the location at which important decisions are made by the trustee of the fund is the location of the fund's CM&C.

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 on enactment inserts 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 superannuation fund at a point in time, it is necessary to consider what constitutes the CM&C of the fund and who it is that exercises the CM&C of the fund.

Paragraph 20 of TR 2008/9 states that:

The CM&C of a superannuation fund involves a 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 a superannuation 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 the 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 carries out high level activities of the fund, they will be exercising the CM&C of the fund in practice.

In discussing CM&C, TR 2008/9 states at paragraph 26 that:

The trustee of a 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 of a superannuation fund is exercising the CM&C of the fund. For example, if a person other than the trustee of a superannuation fund performs high level duties or carries out high level activities for the fund independently and without any influence from the trustee, the person is exercising the CM&C of the fund.

Location of the CM&C

The location of the CM&C of a superannuation fund is determined by where in fact:

• strategic and high level decisions of the fund are made;

• high level duties are performed; and

• high level activities are in fact carried out,

regardless of where the persons exercising the CM&C of the fund actually reside.

Whether the CM&C of a superannuation 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.

Paragraph 32 of TR 2008/9 states that:

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.

According to paragraph 34 of TR 2008/9:

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.

To provide certainty to trustees of superannuation funds, especially trustees of self-managed superannuation funds 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 ordinarily in Australia if it is temporarily exercised outside Australia for a period of not more than two years.

Where the trustees are temporarily absent from Australia for a period of not more than 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 trustee of a superannuation fund is 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 trustee can establish that their absence was still of a temporary nature.

Paragraph 33 of TR 2008/9 states that:

The CM&C of a fund will be 'temporarily' outside 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 consideration of questions of degree which must be decided by reference to the circumstances of each particular case.

The individual trustees of the Fund have legal responsibility for exercising the CM&C of the Fund. There is no indication that they will appoint any other person to make strategic and high level decisions for the Fund during their absence from Australia. If they continue to make such decisions themselves, they will be exercising the CM&C of the Fund, regardless of where they are.

The duration of the Members' temporary absence from Australia has been defined in advance. Provided it is related, both in intention and fact, to health and family reasons as submitted in the private ruling application, the Commissioner can accept, under paragraph 295-95(2)(b) of the ITAA 1997, that their intended stay overseas is temporary and that therefore the CM&C of the Fund remains 'ordinarily' in Australia during the period of their temporary absence from Australia.

Test Three: The 'active member' test

The third test that must be satisfied for a fund to be an Australian superannuation fund at a particular time is the 'active member test'.

In accordance with paragraph 295-95(2)(c) of the ITAA 1997, 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; 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.

Broadly speaking, a member of a superannuation fund becomes an 'active member' of the fund under subsection 295-95(3) of the ITAA 1997 as and when they, or someone on their behalf, make(s) contributions to the fund.

As it has been ruled that the Members will remain Australian residents for taxation purposes while they are overseas, and as the Fund has no other members, the total market value of the Fund's assets is, therefore, attributable to the superannuation interests they hold. It follows that paragraph 295-95(2)(c) of the ITAA 1997 will be satisfied regardless of whether contributions will be made to the Fund by or on behalf of the Members while they are overseas.

Conclusion

Provided that all the information given to the Commissioner remains the same throughout the period for which this private ruling applies, the Commissioner accepts that the Fund meets all the conditions under subsection 295-95(2) of the ITAA 1997 and will, therefore, remain an Australian superannuation fund in the specified income years.

Acceptance of contributions by Fund

As noted before, broadly speaking a member of a superannuation fund becomes an 'active member' of the fund under subsection 295-95(3) of the ITAA 1997 as and when they, or someone on their behalf, make(s) contributions to the fund.

A superannuation fund will satisfy paragraph 295-95(2)(c) of the ITAA 1997 if 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.

The Members become 'active members' as and when they, or someone on their behalf, make(s) contributions to the Fund. As the Commissioner has ruled that they do not cease to be Australian residents while overseas, the total market value of the Fund's assets attributable to their superannuation interests are thus 'attributable to superannuation interests held by active members who are Australian residents'. It follows that the Fund will not fail the test under paragraph 295-95(2)(c) of the ITAA 1997 by accepting contributions by or on behalf of the Members.