Edited version of private advice

Authorisation Number: 1051987152455

Date of advice: 30 May 2022

Ruling

Subject: Superannuation fund residency

Question

Will the Fund satisfy the definition of an Australian superannuation fund as per subsection 295-95(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following period:

1 July 2017 to 30 June 2023

Relevant facts and circumstances

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

The two members are directors of Fund's corporate trustee.

The members are Australian citizens.

Member 1 first accepted an offer of employment with Employer in the United States commencing in 2018. Member 2 has travelled and lived with Member 1 during the employment period.

Member 1 accepted an extended contract of employment from the Employer. This secondment is expected to last until December 2022, after which the Employer will give Member 1 an option to return to Australia.

Member 1 has received a private ruling from the ATO finding that he is an Australian resident for tax purposes up until the period ending December 2022.

ATO records show that Member 2 is currently an Australian resident for tax purposes.

The Fund was established in Australia and assets are located in Australia.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 295-95

Superannuation Industry (Supervision) Act 1993 section 42A

Other relevant documents

Taxation Ruling TR 2008/9 Income tax: meaning of 'Australian superannuation fund' in subsection 295-95(2) of the Income Tax Assessment Act 1997

Reasons for Decision

For a self-managed superannuation fund (SMSF) to receive the tax concessional rate of 15% under section 26 of the Income Tax Rates Act 1986, it must be a complying superannuation fund as per section 42A of the Superannuation Industry (Supervision) Act 1993 (SISA). To be a complying fund it must satisfy the residency test at all times during a year of income. To satisfy the residency test, a fund must meet the definition of an 'Australian superannuation fund' in accordance with subsection 295-95(2) of the ITAA 1997.

Section 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 active member, or at least 50% of the following is attributable to superannuation interests held by active members who are Australian residents:

                             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.

Each of these three tests must be met for an SMSF to be an Australian superannuation fund.

The Commissioner of Taxation has issued Taxation Ruling TR 2008/9 Income tax: meaning of 'Australian superannuation fund' in subsection 295-95(2) of the Income Tax Assessment Act 1997 (TR 2008/9) which sets out the Commissioner's view on the interpretation of the definition of 'Australian superannuation fund'.

First test: Fund established in Australia or any asset of the fund is situated in Australia

The first test that an Australian superannuation fund must satisfy is that the SMSF was either established in Australia, or any asset of the fund is situated in Australia at the relevant time.

An SMSF will be established when the trust deed governing the operation of the fund is signed and executed and money or other property is transferred to the trustee of the fund as an initial contribution, to be held on trust for the beneficiaries (members) of the fund. An SMSF will be established in Australia if the initial contribution is paid to and accepted by the trustee of the fund in Australia.

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. If it is determined that the fund was not established in Australia, then the alternative requirement in paragraph 295-95(2)(a), namely location of the assets of the fund, must be considered.

In this case, the Fund was established in Australia and assets are located in Australia. Therefore, the first test under paragraph 295-95(2)(a) of the ITAA 1997 is satisfied.

Second test: Central Management and Control

The second test, and one of the key requirements that an SMSF 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.

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 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 the fund is a question of fact to be determined by 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 a superannuation fund, the mere duty to exercise CM&C does not, of itself, constitute CM&C. The trustee is required to actually perform the high level duties and activities of the fund to be exercising the CM&C.

The trustee may seek external advice relating to the performance of their high-level duties and activities. Where they make the actual high level decision to act on this advice, it is considered that they are 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 where the 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 involves determining if, 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:

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 an 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 fund is ordinarily in Australia if it is temporarily exercised outside Australia for a period of not more than two years.

Where the trustee is 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 trustee of the 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 of a temporary nature.

Paragraph 33 of TR 2008/9 states that:

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. 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 a period of absence is considered to be relatively short involves considerations of questions of degree which must be decided by reference to the circumstances of each particular case.

In this case, the corporate trustee directors perform the high level and strategic decisions relating to the Fund and have the legal responsibility for exercising the CM&C. Where no other person will be appointed to independently exercise this role, it follows that the high level decisions relating to the Fund will be made by the directors when overseas.

It has been stated that the directors/members will be temporarily absent from Australia and intend to return in December 2022. However, the fact that persons exercising CM&C of a fund know that they will be returning to Australia at a definite point in time does not, of itself, mean that the CM&C is temporarily outside Australia. The relevant key factors that need to be considered when determining if the CM&C is ordinarily in Australia are that:

•                    the period of the absence is defined in advance and is related to the fulfilment of a specific purpose, being the member's employment contract overseas

•                    the members intend to return permanently to Australia at the end of member's assignment as per the date indicated

•                    the members have not established a permanent home outside Australia; and

•                    the members continue to maintain their home and other assets in Australia during the period they will be overseas.

The CM&C requirement in paragraph 295-95(2)(b) of the ITAA 1997 will generally be satisfied where the above factors are met.

The ATO has issued a private ruling that Member 1 is an Australian resident for tax purposes. This was primarily based on the fact that:

•                    he did not cease residing in Australia

•                    his permanent place of abode remains in Australia

•                    his domicile is Australia and remains unchanged

Taking the above into consideration and the fact that the directors/members intend to return to Australia in December 2022, when Member 1 is given the option by his Employer, it is reasonable to conclude that the CM&C requirements will be satisfied up until this time.

Third test: Active member test

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

The SMSF must have no active members or have active members who are Australian residents and who hold at least 50% of:

•                    the total market value of your fund's assets attributable to super interests, or

•                    the sum of the amounts that would be payable to active members if they decided to leave the fund.

However, as per subsection 295-95(3) of the ITAA 1997, a member is not an active member if contributions have been made to the SMSF on their behalf and:

•                    they are not a resident of Australia

•                    they have ceased to be a contributor, and

•                    the contributions made on their behalf, after they ceased to be an Australian resident, were made for the time they were an Australian resident.

If all members of an SMSF are non-residents of Australia and a member makes a contribution to the fund, then the test will be failed as there are no Australian resident active members holding a superannuation interest in the fund.

In this case, both members are Australian residents, subsequently any contributions made by them, or on their behalf, will result in active resident members holding 100% of the benefits in the Fund. Therefore, the 'active member' test will be satisfied.

Conclusion

Based on the information provided, the Fund will continue to be an Australian superannuation fund for the purposes of subsection 295-95(2) of the ITAA 1997 (and a complying superannuation fund for the purposes of section 42A of the SISA), for the period that the corporate trustee directors/members are absent from Australia.