Private ruling: Residency of a self-managed superannuation fund
Published: April 2015
Ruling period: 1 July 2014 to 30 June 2018
Date scheme commenced: 1 January 2015

Ruling: Q1: Will the superannuation fund continue to be an Australian superannuation fund as defined in subsection 295-95(2) of the Income Tax Assessment Act 1997 ? | A1: Yes.

Relevant facts and circumstances: Your client manages a self-managed superannuation fund (the Fund). Your client is the sole director of the corporate trustee and is also the sole member of the Fund. Your client has dual citizenship with Australia and a foreign country. At date of application your client was an Australian tax resident however has since commenced an employment contract in a foreign country where they will also be a tax resident. Your client has had previous employment with the foreign employer. The employment contract provides for an annual housing allowance for a three-year period after employment commencement and a relocation package. The relocation package provides for a one off lump sum, return airfare ticket to Australia, and five working days leave of absence, and the use of a tax consultant advisor during the first four years of employment. The contract does not specify an end date however you have stated that your client has every intention of returning to Australia after three years as they plan on retiring. Your client will maintain their home and other assets in Australia while residing overseas. For example, they will be maintaining their motor vehicle and furniture and will continue to hold insurance policies, bank accounts and utilities in their name. Whilst your client has no family in Australia they will maintain their social ties. Your client has no family connections in the foreign country however you have stated that the primary reason for your client moving there was to be closer to their terminally ill sibling. Your client is renting an apartment in the foreign country. You have advised that your client will not be making personal contributions into the Fund nor will a third party be making any contributions on their behalf.

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). | Income Tax Assessment Act 1997 Subsection 295-95(4). | Superannuation Industry (Supervision) Act 1993 Section 17(A). | Superannuation Industry (Supervision) Act 1993 Subsection 17(A)(1). | Superannuation Industry (Supervision) Act 1993 Paragraph 17(A)(3)(b). | Superannuation Industry (Supervision) Act 1993 Subparagraph 17(A)(3)(b)(ii).

Reasons for decision: Summary: Provided your client does not abandon their intention of only being outside Australia for a period of three years, the self-managed superannuation fund will continue to be an Australian Superannuation Fund for the period 1 January 2015 to 31 December 2017 as: • it was established in Australia; • the central management and control of the Fund will be ordinarily in Australia for this period; and • there will be no active members for this period. | Detailed Reasoning - Detailed reasoning: Subsection 295-95(2) of the Income Tax Assessment Act 1997 (ITAA 1997) defines what is an Australian superannuation fund. Subsection 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 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. | Detailed Reasoning - 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. A superannuation fund will be established when the trust deed governing the operation of the fund is signed and executed. The money or other property is transferred to the trustee or trustees of the fund, to be held on trust for the beneficiaries (members) of the fund, and is made by a person or persons situated 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 the present case, the Fund is established in Australia. Therefore the first requirement under paragraph 295-95(2)(a) of the ITAA 1997 has been satisfied. | Detailed Reasoning - Test Two: The CM&C 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 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. 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. In this case it is clear your client, being the sole director of the corporate trustee, will be exercising CM&C. | Detailed Reasoning - 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. 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. With regards to temporary absences, subsection 295-95(4) of the ITAA 1997 states the following: 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. However, as your client will be living overseas for a period of three years, this safe harbour rule does not apply. Instead the Fund will need to satisfy the 'ordinarily' requirement in paragraph 295-95(2)(b) of the ITAA 1997. According to paragraph 32 of Taxation Ruling TR 2008/09 Income tax: meaning of 'Australian superannuation fund' in subsection 295-95(2) of the Income Tax Assessment Act 1997 , where the CM&C will be performed outside Australia for a period greater than two years, the period of absence must be temporary. For the absence to be considered temporary, 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 giving consideration to the circumstances of each particular case. Whilst your client's employment contract with the foreign employer does not specify an end date, your client has stated that they have every intention of returning to Australia to retire after a three year period. The fact that your client will maintain their home and other assets including motor vehicle, insurance policies and bank accounts is consistent with this intention. Further, as your client is only renting in the foreign country, they will not be establishing a home outside Australia. Therefore, provided your client does not abandon this intention, the three year period of absence will be considered temporary. Accordingly, the CM&C of the Fund will remain ordinarily in Australia within the meaning of paragraph 295-95(2)(b) of the ITAA during the three year period your client will be outside Australia. | Detailed Reasoning - Test Three: The active member test: The active member test requires that, where a fund has at least one active member, then the accrued entitlements of Australian resident active members must be 50 per cent or more of the accrued entitlements of all active members of the fund. As defined in subsection 295-95(3) of the ITAA 1997, a member is an active member at a particular time if your client is: (a) a contributor to the fund at that time; or (b) an individual on whose behalf contributions have been made, other than an individual: (i) who is a foreign resident; and (ii) who is not a contributor at that time; and (iii) for whom 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. The term 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. As no contributions will be made to the Fund, neither by your client nor a third party on their behalf, there will be no active members of the Fund during the three year period your client will reside in overseas. Therefore, the requirement under paragraph 295-95(2)(c) of the ITAA 1997 has been satisfied. | Detailed Reasoning - Conclusion: Provided your client does not abandon their intention to only remain overseas for the predetermined period, the requirements under subsection 295-95(2) of the ITAA 1997 will be met and the Fund will continue to satisfy the definition of an Australian superannuation fund for the three year period your client is overseas.