Edited version of private advice

Authorisation Number: 1051545549218

Date of advice: 15 July 2019

Ruling

Subject: Residency of self-managed superannuation fund

Question

Is the Fund an Australian superannuation fund for the purposes of subsection 295-95(2) of the Income Tax Assessment Act 1997 (ITAA 1997) for the 2019-20 and 2020-21 income years?

Answer

Yes

This ruling applies for the following periods:

Income year ending 30 June 2020

Income year ending 30 June 2021

The scheme commences on:

1 July 2019

Relevant facts and circumstances

The Fund is an SMSF established in Australia.

The two members of the Fund are Member 1 and Member 2.

Both Members are in receipt of an account based pension from the Fund.

Both Members make the strategic and high level decisions for the Fund.

Member 1 intends to depart Australia in the 2019-20 income year.

Member 1 intends to be overseas for a period of less than two years and has no current plans to reside overseas permanently.

Member 2 will remain in Australia and continue their trustee obligations.

Member 1 also intends to provide Member 2 with an enduring power of attorney to act on their behalf and perform the strategic and high level decision making whilst overseas.

While overseas, Member 1 will maintain their Australian residence, Australian bank and share investment accounts.

The Members will not make any contributions to the Fund (nor have any contributions made on their behalf) for the period Member 1 will be overseas.

Relevant legislative provisions

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)

Reasons for decision

Summary

The Fund satisfies all the tests set out in subsection 295-95(2) and will remain an Australian superannuation fund in the specified income years.

It is considered that the central management and control of the fund will remain 'ordinarily in Australia'.

Detailed reasoning

In accordance with subsection 295-95(2) a superannuation fund is an Australian superannuation fund at a time 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, 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 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 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 (regardless of where the persons exercising the CM&C of the fund actually reside).

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.

Paragraph 32 of TR 2008/9 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.

CM&C - temporary absences

Where the trustees are temporarily absent from Australia for a period of up to two years, then subsection 295-95(4) 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.

Paragraph 33 and 34 of TR 2008/9 state that:

33. 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.

34. 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.

Based on the facts of this case, both Members perform the high level and strategic decisions relating to the Fund and hence both Members exercise the CM&C of the Fund. Accordingly, the CM&C of the Fund is 'ordinarily' in Australia.

The fact that Member 1 will be temporarily absent from Australia, does not impact (nor will it affect) the fact that the CM&C of the Fund is exercised in Australia and continues to remain in Australia. Further, the Commissioner accepts that Member 1's absence from Australia is temporary and that therefore the CM&C of the Fund remains ordinarily in Australia during the period of Member 1's absence from Australia.

This conclusion is supported by the following facts as detailed in your private ruling application:

·         the period of the absence is outlined in advance and is related to the fulfilment of a specific purpose;

·         Member 1 intends to be absent from Australia for a period of less than two years and has no plans to reside overseas permanently. [Note, further certainty is provided under subsection 295-95(4), that as the period of absence is not more than two years, the CM&C of the Fund is ordinarily in Australia even if the CM&C is temporarily outside Australia for that period].

·         the Members continue to maintain their home and other assets in Australia during the period Member 1 will be overseas.

The requirement in paragraph 295-95(2)(b) has therefore been satisfied.

Test Three: The 'active member' test

The active member test is satisfied if:

·         the fund either has no active members; or

·         it has active members who are Australian residents and who hold at least 50% of the total market value of the fund's assets attributable to superannuation interests; or the sum of the amounts that would be payable to active members if they decided to leave the fund.

For the purposes of condition three, a member is an 'active member' if they are a contributor to the fund or contributions to the fund have been made on their behalf.

In this case, as there are no 'active' members of the Fund for the purposes of paragraph 295-95(2)(c), the active member test will be satisfied.