Private ruling: Residency status of a superannuation fund
Date of advice: 23 March 2017
Published: May 2017
Ruling period: Income year ending 30 June 2018
Date scheme commenced: During the income year ending 30 June 2017

Ruling: Q1: Will a superannuation fund (the Fund) be an Australian superannuation fund as defined in subsection 295-95(2) of the Income Tax Assessment Act 1997 (ITAA 1997) while the directors of the trustee of the Fund are absent from Australia? | A1: No.

Relevant facts and circumstances: The Fund was established in Australia. The trustee of the Fund (the Trustee) is a private company. The Fund has two members who are also directors of the Trustee. In the 2012-13 income year, a private ruling was issued for the 2013-17 income years which considered that the central management and control of the Fund will remain ‘ordinarily in Australia’ while one of the directors (Director 1) is engaged under a contract of employment in a foreign country. The contract was for a four year period from January 2013. Both directors relocated to the foreign country in early 2013. In early 2014, Director 1’s contract was terminated. However, they remained in the foreign country and had worked casually with a number of employers during the 2014-2015 income year. In 2014, both directors were granted a Visa which allows them to live and work freely in the foreign country without the requirement to apply for a new Visa should they change jobs. There is no requirement to leave the foreign country if they are unemployed. In late 2015, Director 1 was offered a contract (the Contract) with a new employer in the foreign country. The contract was for a three year period. The directors intend to return to Australia permanently following either Director 1’s retirement or the lack of employment opportunities in their area of expertise. The Contract is results driven and may be extended for a further period. If Director 1 is offered an extension to the Contract, it is likely to be for another year or maximum two years. Director 1 expects to return to Australia when they reach the retirement age. Both directors intend to visit Australia at least once each year to visit family and friends. Both directors have entered into a lease for an apartment in the foreign country and have purchased furniture and a car. They do not intend to acquire any further assets during their time in the foreign country. The directors have opened a bank account in the foreign country into which Director 1’s employer pays their wages and this account is used for day-to-day living expenses. Director 2 is currently unemployed in the foreign country. They are still employed in Australia and intend to continue their work with their employer when possible remotely, and intend to arrange for face-to-face time upon return visits to Australia. The directors have rented out their home in Australia whilst overseas. In addition, both directors have maintained their Australian bank accounts, furniture, personal effects and an investment property. Neither director intends to dispose of any of their Australian assets. Both directors intend to continue exercising the management and control of the Fund whilst overseas and during any return trips to Australia. Both directors will not remain domiciled in Australia for income tax purposes for the duration of the Contract. Neither member of the Fund is a contributing member of a Public Sector Superannuation Scheme or an eligible member in respect of the Commonwealth Superannuation Scheme. The members of the Fund do not intend to make any contributions to the Fund (nor have any contributions made on their behalf) for the period they will be in the foreign country.

Relevant legislative provisions: 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).

Reasons for decision: Summary: The Fund will not satisfy the central management and control test in subsection 295-95(2) of the ITAA 1997 in the 2017-18 income year. Accordingly, the Fund will not be an Australian superannuation fund as defined in subsection 295-95(2) of the ITAA 1997 in the 2017-18 income year. | Detailed Reasoning - Detailed reasoning: In accordance with subsection 295-95(2) of the ITAA 1997, 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 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. *To find definitions of asterisked terms, see the Dictionary, starting at section 995-1. Therefore, there are three tests that a fund must satisfy at the same time in order to be treated as an Australian superannuation fund as defined in subsection 295-95(2) of the ITAA 1997. If a fund fails to satisfy any one of the conditions at that time, it will not be an Australian superannuation fund at that time, even if it satisfies the other two conditions. If the fund has satisfied all three tests at the same time in an income year then, for income tax purposes, it is an Australian superannuation fund for the entire income year in which that time occurs. | Detailed Reasoning - Test One: fund established in Australia or any asset of the fund is situated in Australia: 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) sets out the Commissioner's interpretation of the definition of 'Australian superannuation fund' in subsection 295-95(2) of the ITAA 1997. At paragraph 14 of TR 2008/9, the Commissioner states: 14. 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. ... In the present case, the Fund was established in Australia. Therefore, the first test is satisfied. Test Two : central management and control (CM&C) of the fund 'ordinarily' in Australia In accordance with paragraph 20 of TR 2008/9, 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: ● 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; and ● determining how the assets of the fund are to be used to provide member benefits. 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 performed (regardless of where the persons exercising the CM&C of the fund reside). Thus, if the trustees of the fund 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. The CM&C of a fund is ‘ordinarily’ in Australia at a particular time if, in the ordinary course of events, the CM&C of the fund is regularly, usually or customarily exercised in Australia. | Detailed Reasoning - CM&C - temporary absences: Subsection 295-95(4) of the ITAA 1997 states: To avoid doubt, the central management and control of a *superannuation fund is ordinarily in Australia at a time even if that central management and control is temporarily outside Australia for a period of not more than 2 years. *To find definitions of asterisked terms, see the Dictionary, starting at section 995-1. Where the trustees are temporarily absent from Australia for a period of up to two years, subsection 295-95(4) of the ITAA 1997 makes it clear that the CM&C is ‘ordinarily’ in Australia. On the other hand, where the trustees of the fund are absent from Australia for a period of more than two years, the fund will satisfy the test in subsection 295-95(2) of the ITAA 1997 only if the trustees can establish that their absence was of a ‘temporary’ nature. When the CM&C of a fund is ‘temporarily’ outside of Australia is discussed at paragraph 33 of TR 2008/9 where the Commissioner states: 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 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. …. Based on the above, where a trustee has accepted overseas employment for a two year period, and that employment is extended beyond that period, it would be reasonable to conclude that their absence from Australia is not temporary. The fact that short return trips to Australia are made would not necessarily alter the conclusion that the absence was not temporary. At paragraph 152, TR 2008/9 states: Absences of more than 2 years will need to be taken into account in the context of determining if, as a matter of fact and degree, the CM&C of the fund is still ‘ordinarily’ located in Australia. Put another way, if the CM&C of the fund is outside Australia for a period greater than 2 years, the fund will satisfy paragraph 295-95(2)(b) of the ITAA 1997 if it satisfies the ‘ordinarily’ requirement. An example of such a situation was provided in the EM to the Tax Laws Amendment (Simplified Superannuation) Bill 2006: | Detailed Reasoning - Example 3.1: A married couple are trustees of their self-managed superannuation fund that was established in 2001. In July 2007 the husband accepts a two year employment contract to work for an overseas government, intending to return to Australia after the contract is fulfilled. His wife joins him for the term of his contract. They make no contributions to the fund after leaving Australia. In these circumstances it is accepted that the central management and control of the self-managed superannuation fund is ordinarily in Australia and the self-managed superannuation fund will be treated as an Australian superannuation fund. If the husband’s employment contract was continually extended so that the couple remained overseas for a period considerably in excess of two years, central management and control of the self-managed superannuation fund would not ordinarily be in Australia and the self-managed superannuation fund would not be treated as an Australian superannuation fund. In this case, directors of the Trustee plan to remain in the foreign country after Director 1’s employment contract ends in 2017 because Director 1 intends to pursue further employment opportunities in the foreign country. They intend to return to Australia eventually after Director 1 decides to retire from employment or if Director 1 is unable to obtain further employment in the foreign country. Based on the above, and the fact that the directors have remained in the foreign country for four years even though the contract for which they left Australia was terminated in early 2014, it is our view that the directors intend to remain in the foreign country indefinitely in pursuit of employment opportunities. As such, their absence from Australia cannot be said to be a temporary absence. This is supported by both directors being granted a Visa in 2014 which allows them to live and work freely in the foreign country without the requirement to apply for a new Visa should they change or terminate their employment. As the directors’ absence is not considered temporary, it cannot be said that the CM&C of the Fund will ordinarily be in Australia in the 2017-18 income year. Therefore the second test in subsection 295-95(2) of the ITAA 1997 has not been satisfied. Consequently, as all the tests in subsection 295-95(2) of the ITAA 1997 would not be met in the 2017-18 income year, the Fund would not be treated as an Australian superannuation fund in the 2017-18 income year.