Edited version of private advice

Authorisation Number: 1052213316457

Date of advice: 5 February 2024

Ruling

Subject: Residency of self-managed superfund

Question 1

Is the Fund an Australian Fund for the purposes of subsection 295-95(2) of the Income Tax Assessment Act 1997?

Answer

Yes.

This ruling applies for the following period:

1 July 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

The XXXXXXXX superfund (The Fund) is a self-managed superfund (SMSF)

The fund was established in Australia on DD MM YYYY.

The Fund has X members. The members of the fund are also the trustees of the fund.

The members of the Fund are Australian residents for the income year ending 30 June 20YY.

The Fund's assets include cash and term deposits at bank, shares in listed Australian companies and listed trusts and other assets.

In XXXXX 20XX, one of the Members, left Australia with the intention of returning in the foreseeable future.

The member is currently residing overseas and visits Australia regularly, with the intention of returning within the next 5-6 years.

The two remaining members, reside in Australia.

Member, XXXXX XXXXX, holds 100% of the total value of the SMSF's assets.

The Member was the only active member of the Fund, with the last contribution being a non-concessional amount of $XX,XXX in the 20XX-XX financial year, since then the Member has commenced an income stream from the Fund.

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)

Does IVA apply to this private ruling?

Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement.

If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidance rule for income tax'.

Reasons for decision

Question

Isthe Fund an Australian Fund for the purposes of subsection 295-95(2) of the Income Tax Assessment Act 1997?

Answer

Yes.

Summary

The fund will satisfy all of the tests in subsection 295-95(2) of the Income Taxation Assessment Act 1997 (ITAA 1997) and will therefore be an Australian superannuation fund for income tax purposes for the income year ending 30 June 20YY.

Detailed reasoning

Australian Superannuation Fund

1.            For income tax purposes, a superannuation fund qualifies for concessional tax treatment if it is a 'complying superannuation fund' within the meaning of the Superannuation Industry (Supervision) Act 1993 (SISA).

2.            A superannuation fund is an 'Australian superannuation fund' at a time, or for an income year in which that time occurs under Subsection of the ITAA 1997 provides that;

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 funds assets attributable to *superannuation interests held by active members; and

ii.             The sum of the amounts would be payable to or in respect of the active member

3.            To be a 'resident regulated superannuation fund' and therefore, a complying superannuation fund within the meaning of the SISA, the fund must satisfy the definition of 'Australian superannuation fund' at all times in the year of income. This means that the fund must satisfy all three tests in the definition of 'Australian superannuation fund' concurrently at all times.

4.            In contrast, for income tax purposes, provided that a fund satisfies the definition of 'Australian superannuation fund' in subsection 295-95(2) of the ITAA 1997 at any time during an income year, it will be an Australian superannuation fund for the income year in which that time occurs.

5.            Where a fund is an Australian superannuation fund in relation to an income year, the fund must include in its assessable income the ordinary and statutory income the fund derived from all sources, whether in or outside Australia, during that income year. If the fund is a complying superannuation fund in relation to the year of income, this income will be taxed concessionally, that is at 15%. If the fund is non-complying, the fund's taxable income will be taxed at the highest marginal tax rate.

6.            Subject to the Fund meeting all of the above three tests during the relevant period, the Fund will be an Australian superannuation fund.

7.            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.

8.            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

9.            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.

10.            In this case, the Fund was established in Australia and therefore satisfies the requirement in paragraph 295-95(2)(a) of the ITAA 1997.

Test Two:

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

11.            Thesecond 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.

12.            Theconcept 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.

13.            Theconcept of CM&C was developed by the courts as a common law rule for determining the residence of a company.

14.            Todetermine 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.

15.            Paragraph20 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:

a.             Formulatingthe investment strategy for the fund;

b.             Reviewingand updating or varying the fund's investment strategy as well as monitoring and reviewing the performance of the fund's investments;

c.             If the fund has reserves - the formulation of a strategy for their prudential management; and

d.             Determininghow the assets of the fund are to be used to fund member benefits.

16.            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.

Location of the CM&C

17.            Thelocation 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 duties and activities are in fact performed. Therefore, if the Trustees of the Find 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.

18.            Ifthe 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.

19.            Paragraph32 of TR 2008/9 states:

a.            Whilethe 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.

20.            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

21.            Wherethe trustees are 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.

22.            Asthe members absence from Australia will be for a period of more than two years, i.e from December 2018 to when they intend to return to Australia at the completion of the three years contract, subsection 295-95(4) of the ITAA 1997 does not apply.

23.            Onthe 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) of the ITAA 1997 if the trustees can establish that their absence was of a temporary nature.

24.            Paragraph33 of TR 2008/9 states that:

a.             TheCM&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.

25.            Inthis case, the facts indicate the high level and strategic decisions relating to the Fund and the legal responsibility for exercising the CM&C of the Fund are done by one member of the fund who resides in Australia with consultation of the other two members, one whom resides in Australia and one of whom resides overseas.

26.            Inthis case, the requirement in paragraph 295-95(2)(b) of the ITAA 1997 will therefore be satisfied for the year ended 30 June 2024

Test Three:

The 'active member' test

27.            Thethird test that must be satisfied for a fund to be an Australian superannuation fund is the 'active member test'.

28.            Inaccordance with paragraph 295-95(2)(c) of the ITAA 1997, the active member test is satisfied if, at the relevant time:

a.            The fund has no'active' member; or

b.            Anindividual on whose behalf contributions have been made, other than an individual:

i.                who is a foreign resident; and

ii.                whois not a contributor at that time; and

iii.                forwhom 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.

29.            Theterm '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. In order to determine whether a member is a contributor at any particular point in time, regard must be had to all of the relevant circumstances. Particular regard should be given to the member's intention established by reference to objective evidence (paragraph 73 of TR 2008/9).

30.            Personalcontributions were made to the fund for one of the members, for year ending 30 June 20XX. The Member has then entered in retirement phase and received an income stream for years ending 30 June 20XX, 20XX and 20XX

31.            Thepersonal contributions made by one Member in income year ending 30 June 20XX, and then payments made to that Member as part of their retirement phase. As there has been no further contributions since 30 June 20XX, there is currently no active members.

32.            Inthis case, based on the assumption that the members of the Fund do not intend to make contributions to the Fund for the income year ending 30 June 20YY, the Fund will have no active members whilst one member is overseas.

Thefund is considered to be an Australian superannuation fund under subsection 295-95(2) ITAA 97 for the year ended 30 June 20YY and will remain unchanged as long of the facts of this private ruling remain the same.