Private ruling: Residency status of self-managed superannuation fund
Date of advice: 12 July 2018
Published: September 2018
Ruling period: Year ending 30 June 20xx
Date scheme commenced: 1 July 20xx

Ruling: Q1: Will the Fund 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: The Fund is a self-managed superannuation fund (SMSF). The Fund was established in Australia. The members of the Fund are also the trustees of the Fund. The Fund’s assets include cash at bank and shares in listed and unlisted Australian companies. In the 20xx-xx income year both members of the Fund left Australia and became non-residents of Australia for tax purposes. The members have a definite return date to Australia. The members as sole members and trustees are managing the fund from overseas. The members as sole members and trustees manage properties and review the performance of Fund’s investments and wish to continue managing the Fund.

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)

Reasons for decision: Summary: The Fund satisfies all of the tests in subsection 295-95(2) of the Income Tax Assessment Act 1997 (ITAA 1997) and is therefore is an Australian superannuation fund for income tax purposes for the relevant income year. It is considered that the central management and control of the Fund will remain ‘ordinarily in Australia’. | Detailed Reasoning - Australian superannuation fund: 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, 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 the 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. The members as sole members and trustees are still managing the fund from overseas. They manage properties reviewing the performance of Fund’s investments. It is recognised that the sole trustees and members will perform the high level and strategic decisions independently. Therefore it is considered that the members will exercise the CM&C of the Fund. therefore the sole trustees and members will 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 where the duties and activities are in fact performed. In this case, as the members ordinarily reside in Australia and are residents of Australia, it follows that the CM&C remains in Australia The requirement in paragraph 295-95(2)(b) of the ITAA 1997 will therefore be 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, 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. If a member is a contributor at a particular time, they will be an active member, irrespective of whether the member is an Australian resident or foreign resident. [Refer: paragraphs 185 and 189 of TR 2008/9]. In this case, employer monthly contributions were made for one member in the 20xx-20xx year. However the contributions ceased before the sole trustees and members departed for their overseas destination. Therefore, as both members are now foreign residents and are no longer contributors to the Fund, and thus are not ‘active’ members, paragraph 295 95(2)(c) of the ITAA 1997 has been satisfied.