Private ruling: Residency status of superannuation fund
Published: February 2014
Ruling period: For the year ending 30 June 2018
Date scheme commenced: 1 March 2014

Ruling: Q1: Will the Fund be a resident superannuation fund while half of the members, who are also directors of the corporate trustee, are temporarily overseas on an extended holiday? | A1: Yes.

Relevant facts and circumstances: The Fund is a self managed superannuation fund with more than two members. The members are directors of the corporate trustee of the Fund. Half of the members will have ceased working prior to travelling extensively overseas and will temporarily leave Australia in mid 2014. The travel duration will be more than two years and may take up to a proposed specified number of years however, the members intend to return to Australia. Their absence is for a specific purpose to visit family and friends for an extended retirement holiday which has a definite planned end at which time the members will return to Australia. The members intend to fund their holiday with their savings and may be required to use part of their pensions once they turn a specified age. The members have retired and will not be working in any country. Whilst travelling overseas, the members will remain as residents of Australia for income tax purposes. During their temporary absence the members have no intention to become a resident of another country or establish a permanent home outside of Australia. While travelling overseas the members will be living in rental accommodation. The members have been issued long term tourist visas with various timeframes to travel in and out of each overseas country. The members will have leased their home in Australia while travelling overseas. The benefits in the Fund will be split into pension mode for the members travelling overseas and accumulation mode for the other members. The applicant has advised that the members' intention is for an extended holiday travelling overseas and not a permanent residency change. At least one director of the Fund will permanently reside in Australia during this period. Contributions will be made for the 2013-14 income year prior to the members leaving Australia. No contributions will be made to the Fund for one member as their employer will make contributions on their behalf to an industry fund. No contributions will be made to the Fund for the member who is currently overseas on a working holiday, and returns to Australia within a specified number of years. Investment decisions and overall fund management has been undertaken by the members with the approval of the other members. During the last few months all investments and avenues for investment have been arranged such that all transactions can be undertaken electronically. All research avenues are already electronic so active management of the Fund will continue while the members are travelling. All members can communicate electronically and an internet phone number has been established to maintain communication between the members. The current accountants will continue to audit the Fund and tax returns will be submitted annually during this period. Records have been digitised to allow for remote management and an Australian address has been arranged for documents. The tax office will be advised of a mobile number that will be set up where the members can be contacted anywhere in the world whilst overseas.

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 Subsection 295-95(4) Summary | The fund is an Australian superannuation fund as the central management and control is considered to be ordinarily in Australia whilst the members are temporarily on a holiday overseas. | Detailed reasoning | Subsection 295-95(2) of the Income Tax Assessment Act 1997 (ITAA 1997) defines what is an Australian superannuation fund and 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 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. | There are three tests that a fund must satisfy 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 a particular time, it will not be an Australian superannuation fund at that time, even if it satisfies the other two conditions. | The Commissioner of Taxation has issued Taxation Ruling TR 2008/9 titled ' Income tax: meaning of Australian superannuation fund in subsection 295-95(2) of the Income Tax Assessment Act 1997' . The ruling represents the views of the Commissioner and sets out 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). | Test One: Fund established in Australia or any asset of the fund is situated in Australia | The first test that a superannuation fund must satisfy to be an Australian superannuation fund at that time is that the fund was either established in Australia, or any asset of the fund is situated in Australia at the relevant time. This is a question of fact. | 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 requirement under paragraph 295-95(2)(a) of the ITAA 1997 has been satisfied. | Test Two: Central management and control of the fund 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 Superannuation Legislation Amendment (Simplification) 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. | 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 funds investment strategy as well as monitoring and reviewing the performance of the funds 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. | Paragraph 26 of TR 2008/9 states: | 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. | A superannuation fund can have individuals as trustees or a body corporate as trustee of the fund. It is the trustee of the fund that has the legal responsibility and accountability for the management, operation and administration of the fund. It is the trustee which is required to make the high level or strategic decisions in relation to the fund, for example, decisions in relation to the investment of the fund's assets. Therefore, it is the trustee of the fund which generally exercises the CM&C of the fund. | Where a fund has a corporate trustee, the Corporations Act 2001 requires that the company has at least one Australian resident director. 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 central management and control | 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. 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. | 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. 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. | 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. | Central management and control - temporary absences | To provide certainty to trustees of superannuation funds, especially trustees of a self-managed superannuation fund (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'. | Where the 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. 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. | Paragraphs 28 to 34 of Taxation Ruling TR 2008/9 discusses CM&C - temporary absences as follows: | 28. 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. 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. | 29. 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. | 30. The effect of subsection 295-95(4) is to provide one set of circumstances in which the CM&C of a fund will be taken to be 'ordinarily' in Australia at a time for the purposes of paragraph 295-95(2)(b) of the ITAA 1997 (that is, it operates as a 'safe harbour' rule). | 31. Subsection 295-95(4) of the ITAA 1997 does not otherwise restrict the meaning of 'ordinarily' so that the CM&C of the fund can only be outside Australia for a period of 2 years or less. If the CM&C of the fund is outside Australia for a period greater than 2 years, the fund will satisfy the CM&C test if it satisfies the 'ordinarily' requirement in paragraph 295-95(2)(b) of the ITAA 1997. | 32. 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. | 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. | TR 2008/9 advises that CM&C may be temporarily exercised outside Australia and still be held as being 'ordinarily' in Australia at a particular time. The ruling comments that there must be some element of continuity or permanence. There is a statutory exemption in subsection 295-95(4) of the ITAA 1997 where the absence is for a period of not more than two years. The two year concession is not satisfied in this case so the general principles concerning when CM&C is ordinarily in Australia apply. | To qualify as a temporary absence (CM&C still ordinarily in Australia) TR 2008/9 states that: | · the persons who exercise the CM&C should only be outside Australia for a relatively short period of time , and | · the duration of the absence must be defined in advance to the fulfilment of a specific, passing purpose . | TR 2008/9 further advises that 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. In this particular situation all of the facts support the contention of a temporary absence apart from one which is the length of time involved. As each case must be determined by weighing up all of the circumstances it is not possible to set a strict upper limit for the amount of time that can be spent outside Australia but a period of the proposed specified number of years would generally be outside the scope of a temporary absence for the purposes of the CM&C test. However, in this particular case there are a number of factors that support a finding that despite the proposed specified number of years period the time spent overseas is a temporary absence within the terms of TR 2008/9. The factors include: | · The absence is for a specific, passing purpose (albeit a lengthy one). The absence is for an extended retirement holiday which has a definite planned end at which time the trustees will return to Australia. | · The purpose of the trip is to travel around overseas and not a permanent residency change. | · The holiday will be funded mainly by the members' savings and they may require to use part of their pensions once they turn a specified age. | · The trustees have retired and will not be working in any country. | · During this absence there is no intention to become a resident of another country or establish a home outside Australia. The trustees intend to travel extensively to many countries and will be living in rental accommodation. | · Throughout the proposed specified years period the trustees will be residents of Australia for tax purposes. | · The trustees have kept their home in Australia which will be rented out during their trip. | · The members have been issued long term tourist visas with various timeframes to travel in and out of each overseas country. | · At least one director of the Fund will permanently reside in Australia during the period the members are overseas. | · All investments and avenues for investment have been arranged such that all transactions can be undertaken electronically. All research avenues are already electronic so active management of the Fund will continue while the members are travelling. All members can communicate electronically and an internet phone number has been established to maintain communication between the members. | · The current accountants will continue to audit the Fund and tax returns will be submitted annually during this period. Records have been digitised to allow for remote management and an Australian address has been arranged for documents. | Example 7(a) of TR 2008/9 has a number of similarities to this case and is produced below: | Example 7(a) - trustees of the fund are outside Australia for a period greater than 2 years yet the CM&C of the fund is still 'ordinarily' in Australia | 54. Joseph and his wife Marian are the trustees and members of their SMSF 'The J&M Superannuation Fund'. The J&M Superannuation Fund was established in Australia in August 2006. Joseph and Marian exercise the CM&C of the fund at meetings of the trustees at their home in Sydney. | 55. Joseph, who is a chartered accountant, was seconded to his employer's London office on 1 July 2008 for a period of 2 years. It was always the intention of both Joseph and his employer that the duration of his secondment would actually be 2 years and that Joseph would return to working in Australia at the expiration of that period. However, due to unforseen business pressures, Joseph was required to remain in London for an extra 12 months. | 56. His wife accompanied Joseph for the duration of his secondment. They rented out the family home in Australia via their real estate agent and lived in a furnished house in London which was provided by Joseph's employer. Both Joseph and Marian continued to maintain bank accounts and private health insurance cover in Australia during the period of Joseph's secondment. They travelled back to Australia for a holiday during the Christmas 2009 period. | 57. During the period of Joseph's secondment, the CM&C of the J&M Superannuation Fund was exercised at trustee meetings at the house in London. | 58. In these circumstances, it is considered that the CM&C of the fund remains ordinarily in Australia during the period of Joseph's secondment as the trustees' absence from Australia was temporary. The factors that support this conclusion include the facts that | · Joseph and Marian intended to return to Australia at the expiration of Joseph's 2 year period of secondment and never abandoned that intention, | · the entire period of the absence, including the additional 12 months, was related to the fulfilment of a specific purpose, | · they did not establish a home outside Australia and | · they continued to maintain their home and other assets in Australia which indicates a durability of association with Australia. | 59. Accordingly, the CM&C of the J&M Superannuation Fund remained ordinarily in Australia within the meaning of paragraph 295-95(2)(b) of the ITAA 1997 during the period that the trustees were in London. | The factors listed in paragraph 58 that of TR 2008/9 are used to support the conclusion that the CM&C of the fund remains ordinarily in Australia are all present in this particular case. It is only the length of time outside Australia (3 years as opposed to up to a proposed specified number of years) that is different. | Accordingly, the CM&C of the Fund remained ordinarily in Australia within the meaning of paragraph 295-95(2)(b) of the ITAA 1997 during the temporary absence from Australia of the members. | Test Three: The active member test | The third test that a fund is required to satisfy to be an Australian superannuation fund is the 'active member' test. Paragraph 69 of TR 2008/9 states: | 69. 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 (subparagraph 295-95(2)(c)(i) of the ITAA 1997); 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 (subparagraph 295-95(2)(c)(ii) of the ITAA 1997). | The applicant has advised that the members (although both still residents of Australia for income tax purposes) will not be making contributions to the Fund whilst the members are travelling overseas. Furthermore, the benefits in the Fund will be split into pension mode for the members travelling and accumulation mode for the other members. | Therefore the Fund satisfies the active member test. | Conclusion: | For a fund to be considered an Australian superannuation Fund all the conditions for the purposes of subsection 295-95(2) of the ITAA 1997 need to be satisfied. | As all requirements under subsection 295-95(2) of the ITAA 1997 have been satisfied, the Fund is an Australian superannuation fund.