Private ruling: Residency status of a self-managed superannuation fund
Date of advice: 21 May 2021
Published: August 2021
Ruling period: Income year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will a Self-Managed Superannuation Fund (the Fund) satisfy the definition of an Australian superannuation fund pursuant to subsection 295-95(2) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes

Relevant facts and circumstances: The members of the Fund are Member 1, Member 2, Member 3 and Member 4. The Fund was established in Australia. Member 1 is retired and is currently receiving a superannuation income stream from the Fund. This member also has an accumulation account with the Fund which is not receiving any superannuation contributions. Member 2 has an accumulation account with the Fund. Their accumulation account is currently receiving contributions. Member 3 and Member 4 also have accumulation accounts with the Fund. Their accumulation accounts are currently receiving superannuation guarantee contributions as well as salary sacrificed contributions. Member 1 and Member 2 intend to temporarily reside overseas for a period of up to two years. They have clear intentions to return to Australia. During the period of their absence: • Member 3 and Member 4 will continue to reside in Australia for the duration of the other members' absence. • All members of the Fund would be actively and substantially participating in the central management and control of the Fund (through electronic means). • Member 2 would not be receiving any superannuation contributions while residing overseas. Member 1 and Member 2 intend on departing Australia part way through the 2021-22 income year. For the period before they depart all members of the Fund will be active members. For the period after Members 1 and 2 depart the only active members of the Fund will be Member 3 and Member 4. No superannuation contributions will be made by or on behalf of either Member 1 or Member 2.

Relevant legislative provisions: 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 will be an Australian superannuation fund for the 2021-22 income year as it will satisfy the three tests contained within subsection 295-95(2) of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Subsection 295-95(2) of the ITAA 1997 defines what is an Australian superannuation fund. It 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 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 views of the Commissioner and sets out the Commissioner's interpretation of the definition of Australian superannuation fund. | 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. 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. | Detailed Reasoning - Test Two: The Central Management and Control of the fund is ordinarily in Australia: The second test requires 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 are made. 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. | 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. 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. | Detailed Reasoning - CM&C - 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'. This subsection explains that the CM&C of a superannuation fund is considered to be ordinarily in Australia even if that CM&C is temporarily outside Australia, where it is 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) if the trustees can establish that their absence was of a temporary nature. Paragraph 33 of TR 2008/9 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. Whether an absence is considered to be temporary involves considerations of questions of degree which must be decided by reference to the circumstances of each particular case. In this case, Member 1 and Member 2 intend to move overseas for a period of two years and all members of the Fund would continue to be actively and substantially participating in the central management and control of the Fund. Therefore, the second test is satisfied. | 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 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. Relevantly, paragraph 71 of TR 2009/8 states that a member is an active member of a superannuation at a particular time if the member is a contributor to the fund at that time (paragraph 295-95(3) of the ITAA 1997) or is an individual on whose behalf contributions have been made (paragraph 295-93(b) of the ITAA 1997). | Detailed Reasoning - Application to your circumstances: In this case, Member 1 and Member 2 intend to be active members of the Fund prior their departure from Australia. They do not intend that any contributions will be made to the Fund by them or on their behalf after their departure and for the period that they'll reside overseas. Therefore, Member 1 and Member 2 will not be active members of the Fund once they depart Australia. Member 3 and Member 4 will continue to reside in Australia and will be the only 'active members' of the Fund while Member 1 and 2 are overseas. Therefore, at least 50% of the total market value of the Fund's assets attributable to superannuation interests held by active members, will be attributable to superannuation interests held by 'active members' who are Australian residents. Consequently, the Fund will satisfy all the requirements of subsection 295-95(2) of the ITAA 1997 for the 20XX-XX income year and therefore, it will be considered an Australian superannuation fund for that income year.