Private ruling: Residency status of a self managed superannuation fund
Date of advice: 21 March 2016
Published: May 2016
Ruling period: Year ended 30 June 20YY
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is the Self Managed Superannuation Fund (the Fund) an Australian superannuation fund as defined in subsection 295-95(2) of the Income Tax Assessment Act 1997 for the 20XX-YY income year? | A1: Yes.

Relevant facts and circumstances: The Fund was established in Australia on several years ago. All assets of the Fund are in Australia. The Members of the Fund are Member 1 and Member 2. The Directors of the Corporate Trustee are Member 1 and Member 2. The Members of the Fund are over 55 years of age and retired. The Members of the Fund departed Australia for an overseas country during the 20WW-XX income year. You advised that at the time of leaving Australia during the 20WW-XX income year, it was the intention of the Members to stay for one to two years to look after their aged parents, and then return to their home in Australia. As such no specific date was planned but no later than the 20XX-YY income year. You advised that the Directors situation have now changed and although they do not intend to reside indefinitely outside Australia they have made a decision to stay in the overseas country over the next several years look after their aged parents. The Members own a home in Australia and it is not rented out. The Members household effects are currently in the home they own. Current assets held by the Members in Australia include: • A home that they purchased; • Household effects; • Bank accounts; • Investments. The Members' residence in the overseas country was: • During the 20VV-WW income year they lived with a relative. • During the 20VV-WW income year they leased a place for 12 months. • During the 20XX-YY income year they purchased a house and are residing in the house. Current Assets held by the Members in the overseas country now include: • House that they purchased; • Two motor vehicles; • Investment fund and bank accounts; • Household effects. Both Directors were responsible for making the strategic and high level decisions of the Fund during the 20XX-YY income year. The Fund operated in the 20XX-YY income year in the same way as previous years. The Fund's assets were invested in long term bank deposits rolled over from previous years and renewed by internet banking means. The decision by both directors to renew the term deposit during the 20XX-YY income year was made whist the Directors were residing in the overseas country. Both Members of the Fund became Australian residents several years ago. Both Members of the Fund became overseas residents a few years ago. The Fund has no active Members. There were no member contributions into the Fund in the 20XX-YY income year.

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 Subsection 295-95(3) | Income Tax Assessment Act 1997 Subsection 295-95(4)

Reasons for decision: Summary: The Fund is an Australian superannuation fund as defined in subsection 295-95(2) of the Income Tax Assessment Act 1997 for the 20XX-YY 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 an 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. Subject to the Fund meeting all of the above three tests during the relevant period, the Fund will be an Australian superannuation fund. 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. 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. | Detailed Reasoning - Test One: The fund is established in Australia or any asset of the fund is situated in Australia: 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. In this case, the Fund was established in Australia and therefore satisfies the requirement in paragraph 295-95(2)(a) of the ITAA 1997. | Detailed Reasoning - Test Two: The CM&C of the fund is '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 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. 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. Paragraph 20 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: • 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 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 discussing CM&C, TR 2008/9 states at paragraph 26: The trustee of a fund may seek external advice relating to the performance of their high level duties and activities. Provided that the trustee makes the actual high level decisions for the fund, the circumstance that the trustee acts on such advice does not affect the fact that the trustee is 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. In this case the directors of the Fund's corporate trustee are Member 1 and Member 2. As both Members perform the high level and strategic decisions in relation to the Fund and it is considered that they exercise the CM&C of the Fund. | 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 (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, 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. 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. | Detailed Reasoning - CM&C - temporary absences: To provide certainty to trustees of superannuation funds, especially 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 superannuation fund is ordinarily in Australia if it is temporarily exercised outside Australia for a period of not more than two years. 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) of the ITAA 1997 if the trustees 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, both Members are the Directors of the corporate trustee. 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 both Members. Further, as no other person has been appointed to independently exercise decisions for the Fund, it follows that the high level decisions relating to the Fund are required to be made jointly by the Directors and the CM&C is attached to those Directors. It is also considered that in this case the CM&C of the Fund being overseas commenced on during the 20WW-XX income year, that is, when both Members took up residence in the overseas country which in effect resulted in both the Directors who jointly exercised the Fund's CM&C not being located in Australia. Notwithstanding the above, the Commissioner accepts that the Directors' relocation to the overseas country was temporary during the 20XX-YY income year and that therefore the CM&C of the Fund remains ordinarily in Australia during the period of the Directors' absence from Australia during the 20XX-YY income year. This conclusion is supported by the following facts: • the Members absence from Australia was defined in advance and is related to the fulfilment of a specific purpose, that being, to look after the Members aged parents overseas • at the time they left Australia during the 20WW-XX income year, it was their intention to return to Australia no later than during the 20XX-YY income year; and • the Members continued to maintain assets including bank accounts and investments in Australia during the period they were in the overseas country. The requirement in paragraph 295-95(2)(b) of the ITAA 1997 has therefore been satisfied. | Detailed Reasoning - Test Three: The 'active member' test: The third test that must be satisfied for a fund to be an Australian superannuation fund at a particular time is the 'active member test'. In accordance with paragraph 295-95(2)(c) of the ITAA 1997, as previously stated, 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; 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. As defined in subsection 295-95(3) of the ITAA 1997, a member is an active member at a particular time if the member 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. In this case, the Fund has no 'active' Members. There have been no contributions to the Fund in respect of either Member while they have been overseas. As there are no 'active' Members of the Fund for the purposes of paragraph 295-95(2)(c) of the ITAA 1997, the active member test will be satisfied. As all of the relevant conditions in subsection 295-95(2) of the ITAA 1997 have been satisfied it is accepted that the Fund is an Australian superannuation fund for the 20XX-YY income year.