Private ruling: Residency of a self-managed superannuation fund
Date of advice: 21 September 2018
Published: November 2018
Ruling period: On or after 1 July 2016
Date scheme commenced: On or after 30 June 2012

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 in the period covered by this ruling? | A1: No, refer to reasons for decision for more detail.

Relevant facts and circumstances: 1. The Fund is a self-managed superannuation fund (SMSF). 2. There are two members of the Fund. The two members are also the trustee of the Fund (the Trustees). 3. In late 2015, one of the Trustees (Trustee 1) accepted the international assignment offer from the employer. 4. The assignment was to overseas for a period of up to 24 months. 5. The assignment states that the period of assignment may be extended beyond the initial period by mutual agreement, but is not to exceed a period of 5 years in total. 6. The Trustees have been living overseas since early 2016. 7. The Trustees intended to return to Australia at the end of the initial period. 8. Prior the expiry of the original assignment, Trustee 1 was offered extension of the international assignment for further 12 months starting early 2018. Trustee 1 has accepted this offer. Both Trustees continue to reside overseas. 9. The Trustees have lodged their individual income tax returns for the 2016-17 income year where they declared themselves as being non-residents for income tax purposes. 10. In the application the Trustees stated that the Fund did not receive any contribution on their behalf for the period they were overseas. 11. The Fund’s annual return lodged for the 2016-17 income year shows employer contribution was paid for Trustee 1. 12. The employer contribution was made for the benefit of Trustee 1 for period 1 June 2017 to 30 June 2017.

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 Subsection 295-95(4)

Reasons for decision: Summary: 13. The Fund is not an Australian superannuation fund as defined in subsection 295-95(2) of the Income Tax Assessment Act 1997 (ITAA 1997) from the date the employer contribution was made for Trustee 1 in the 2016-17 income year. | Detailed Reasoning - Detailed reasoning: 14. 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. 15. 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. 16. If a fund fails to satisfy any one of the conditions at that particular time, it will not be an Australian superannuation fund at that time, even if it satisfies the other two conditions. 17. 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 (TR 2008/9). 18. 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: 19. The first test that must be satisfied is that the fund was either established in Australia, or any asset of the fund is situated in Australia at the relevant time. 20. 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. 21. 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 ‘ordinarily’ in Australia: 22. The second test 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. 23. 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, the concept of CM&C 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. 24. The concept of CM&C was developed by the courts as a common law rule for determining the residence of a company. 25. 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. 26. The CM&C of a superannuation fund involves the focus on the who, when and where is performing 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. 27. 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: 28. 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. 29. 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. 30. 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 2 years. However where the 2 year concession is not satisfied, the general principles concerning if CM&C is ordinarily in Australia will apply. 31. To qualify for temporary absence (CM&C still ordinarily in Australia) the ruling 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. 32. 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. Paragraph 168 of TR 2008/9 provides some factors relevant in considering whether the CM&C of a fund is temporality outside Australia. These are: ● the intended and actual length of stay in the overseas country of the person or persons who exercise the CM&C of the fund; ● any intention of the person or persons exercising the CM&C of the fund to return to Australia at some definite point in time or to travel to another country; ● whether the person or persons exercising the CM&C of the fund have established a home (in the sense of a dwelling place; a house or other shelter that is a fixed residence) outside Australia; ● whether any residence or place of abode exists in Australia or has been abandoned because of the overseas absence; and ● the durability of association that the person or persons exercising CM&C have with a particular place in Australia, for example maintaining bank accounts in Australia, place of education of children and so on. 33. The CM&C test has not been considered in this particular case as the Fund has failed to satisfy the definition of an Australian superannuation fund under subsection 295-95(2) of the ITAA 1997 by failing to meet the active member test discussed below. | Detailed Reasoning - Test Three: The active member test: 34. The third test that a fund is required to satisfy to be an Australian superannuation fund is the 'active member' test. Paragraph 69 of Taxation Ruling TR 2008/9 states: ….. 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). 35. Subsection 295-95 (3) of the ITAA 1997 gives definition of the ‘active member’. A member is an "active member" of a superannuation fund at a particular time if the member is a contributor to the fund at that time, or is an individual on whose behalf contributions have been made other than an individual: ● who is a foreign resident; and ● who is not a contributor at that time; and ● 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. 36. From the information held by the ATO and provided by the Trustees, the Trustees were foreign residents for income tax purposes in the 2016-17 income year and an employer contribution was made for Trustee 1 by an Australian entity in respect of a time when Trustee 1 no longer treated themselves as an Australian resident for income tax purposes. 37. As all members of the Fund were non-residents of Australia during the 2016-17 income year and Trustee 1 was an ‘active member’ from the time the employer contribution was made to the Fund, the requirement under paragraph 295-95(2)(c) of the ITAA 1997 had not been satisfied. Conclusion : 38. As all of the conditions under subsection 295-95(2) of the ITAA 1197 have not been satisfied, the Fund is not considered to be an Australian superannuation fund from the time Trustee 1 became an ‘active member’. The Fund’s non-resident status will remain unchanged as long as the facts of this private ruling remain the same.