Edited version of your written advice

Authorisation Number: 1013024092890

Date of advice: 26 May 2016

Ruling

Subject: Definition and residency of a self managed superannuation fund.

Questions

1. Will the Fund be a self managed superannuation fund for the purposes of subsection 17A(1) of the Superannuation Industry (Supervision) Act 1993 (SISA) if its members move overseas for a period greater than two years?

2. Will the Fund be an Australian superannuation fund for the purposes of subsection 295-95(2) of the Income Tax Assessment Act 1997 (ITAA 1997) if its members move overseas for a period greater than two years?

Answers

1. Decline to rule - Self-managed Superannuation Fund specific advice provided.

2. Yes.

This ruling applies for the following periods:

Year ending 30 June 2016

Year ending 30 June 2017

Year ending 30 June 2018

Year ending 30 June 2019

Year ending 30 June 2020

The scheme commences on:

1 July 2015

Relevant facts and circumstances

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

The Fund was established in Australia more than 30 years ago.

There are two members of the Fund, Member 1 and their spouse, Member 2.

Both Member 1 and Member 2 (the Members) are the trustees of the Fund.

Both members wish to relocate overseas for a period greater than two years. Both Members will become residents of the foreign country and will no longer be Australian residents for income tax purposes.

Each of the Members of the Fund will execute a valid enduring power of attorney in favour of their child.

The Members of the Fund will relinquish their role as trustees of the Fund and appoint their child, as the sole trustee of the Fund.

Their child (the legal personal representative) will consent to the appointment as trustee of the Fund and sign a declaration stating that they understand their duties as a trustee no later than 21 days after their appointment as trustee of the Fund.

The Members will cease to be trustees of the Fund once the legal personal representative is appointed as trustee of the Fund.

The legal personal representative will reside in Australia.

The management, administration and control of the Fund will remain in Australia with some assistance by the Fund's accountant in relation to the accounting and auditing of the Fund.

The legal personal representative of the Fund will perform the high level duties and activities as trustee of the Fund independently and without influence from the Members.

The Members will not have any involvement in the management of the Fund in the period they are absent from Australia.

The Members of the Fund intend to stay overseas for a period of three to five years.

The Members do not intend to make any contributions to the Fund, (nor have any contributions been made on their behalf), for the period they will be overseas.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 295-95

Income Tax Assessment Act 1997 Section 295-95(2)

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

Income Tax Assessment Act 1997 Section 295-95(3)

Superannuation Industry (Supervision) Act 1993 Subsection 17A(1)

Superannuation Industry (Supervision) Act 1993 Subparagraph 17A(3)(b)(ii)

Taxation Administration Act 1953 Subsection 357-55 of Schedule 1

Taxation Administration Act 1953 Subsection 359-5 of Schedule 1

Explanatory Memorandum to the Tax laws Amendment (Simplified Superannuation) Act 2007

All references are to the ITAA 1997 unless otherwise indicated.

Reasons for decision

Summary

The appointment of the trustee via a valid enduring power of attorney ensures that the Fund will continue to satisfy the definition of an SMSF notwithstanding that the Members are no longer trustees of the Fund.

The Fund satisfies all the tests set out in subsection 295-95(2) and is therefore an Australian superannuation fund for income tax purposes for the relevant income years.

Detailed reasoning

Question 1

Definition of SMSFs - other persons may be trustees

The following advice is Self-managed Superannuation Fund specific advice (SMSFSA) about how the SISA and/or Superannuation Industry (Supervision) Regulations 1994 (SISR) provisions apply to the Fund in relation to the issue you have raised concerning whether the Fund will continue to meet the requirements of subsection 17A(1) of the SISA during the period the Members are overseas.

While similar to a private ruling, SMSFSA is not binding on the Commissioner. A trustee or other entity that relies on SMSFSA will remain responsible for their actions under the SISA and the SISR.

Under subsection 17A(1) of the SISA, one of the basic conditions for an SMSF (other than a single member fund) required to meet the definition of an SMSF is that the trustees of the fund are individuals and each individual trustee is a member of the fund.

With respect to the specific issue you have raised, subparagraph 17A(3)(b)(ii) of the SISA allows a person who holds an enduring power of attorney granted by a member, to be a trustee of a superannuation fund in place of the member, without causing the fund to fail to satisfy the definition of an SMSF.

SMSFR 2010/2 Self Managed Superannuation Funds: the scope and operation of subparagraph 17A(3)(b)(ii) of the Superannuation Industry (Supervision) Act 1993 (SMSFR 2010/2), further explains how subparagraph 17A(3)(b)(ii) of the SISA applies to SMSFs.

In accordance with paragraph 6 of SMSFR 2010/2, a person who holds an enduring power of attorney qualifies as a legal personal representative.

Paragraphs 8, 44 and 45 of SMSFR 2010/2 provide that the following requirements must be met in the process of appointing a legal personal representative as a trustee in place of the member of a fund:

• the appointment of the legal personal representative as trustee and the removal of the member must be in accordance with the trust deed, the SISA and any other relevant legislation;

• the legal personal representative consents in writing to the appointment as trustee of the fund and signs a declaration stating that they understand their duties as a trustee no later than 21 days after their appointment as trustee.

Paragraph 11 of SMSFR 2010/2 explains that the legal personal representative must also perform their duties as a trustee of the SMSF pursuant to their appointment to that position.

Further, paragraph 16 of SMSFR 2010/2 also provides that multiple members can execute an enduring power of attorney in respect of the same legal personal representative who can be appointed as a trustee, in place of each of those members.

In this case, as each of the Members of the Fund will execute a valid enduring power of attorney in favour of their child, he/she will be a legal personal representative for the purposes of subparagraph 17A(3)(b)(ii).

Furthermore, based on the facts of this case, as the appointment of the legal personal representative and the removal of existing trustees will be in accordance with the requirements discussed above, as outlined in SMSFR 2010/2, the Fund will continue to meet the definition of SMSF.

Question 2

Australian superannuation fund

In accordance with subsection 295-95(2), 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 the Fund meeting all of the above three tests during the relevant period, the Fund will be an Australian superannuation fund.

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 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: The fund is established in Australia or any asset of the fund is situated in Australia

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

In this case, the Fund was established in Australia and therefore satisfies the requirement in paragraph 295-95(2)(a).

Test Two: The CM&C of the fund is 'ordinarily' in Australia

The second test, that a superannuation fund must satisfy to be an 'Australian superannuation fund' at a particular time, is that the 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 Tax Laws Amendment (Simplified Superannuation) 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.

Paragraph 20 of TR 2008/9 states that 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 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.

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

The trustee of the 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.

Based on the facts of this case, once the legal personal representative is appointed as trustee of the Fund and the Members cease to be trustees of the Fund, the high level and strategic decisions in relation to the Fund will only be performed by the legal personal representative. Therefore it is considered that the legal personal representative as trustee of the Fund will exercise 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 (regardless of where the persons exercising the CM&C of the fund actually reside).

In this case, once the legal personal representative is appointed as trustee of the Fund (in place of the current trustees), the high level and strategic decisions relating to the Fund will be independently performed by the legal personal representative. As the legal personal representative resides and will continue to reside in Australia during the Members' absence, the CM&C remains in Australia.

The requirement in paragraph 295-95(2)(b) will therefore be satisfied.

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), 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.

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 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 a member is a contributor at a particular time, they will be an active member, irrespective of whether the member is an Australian resident or foreign resident. [Refer: paragraphs 185 and 189 of TR 2008/9].

In this case, the Fund has no 'active' members. There have been no contributions to the Fund in respect of either Member while they have been overseas. Further, the Members do not intend to make any contributions for the period they will not be residents of Australia.

As there are no 'active' members of the Fund for the purposes of paragraph 295-95(2)(c) of the ITAA 1997, the active member test will be satisfied.

However, it is noted that you would like to make contributions in the 20XX-YY income year. In this case, if contributions were to be made in the 20XX-YY income year, at a time when the Member was not an Australian resident, the Member would become an active member, which in turn could cause the Fund to fail the active member test.