Private ruling: SMSF residency
Date of advice: 16 October 2015
Published: October 2015
Ruling period: Year ending 30 June 20YY | Year ending 30 June 20ZZ
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is the Fund an Australian superannuation fund as defined in subsection 295-95(2) of the Income Tax Assessment Act 1997 ? Advice/Answers Yes

Relevant facts and circumstances: The Fund is a self managed superannuation fund. Both of the Fund's Members are also the Fund's Trustees. The Fund was established in Australia and the Fund's assets are situated in Australia. Member A advised that he/she ordinarily resides overseas. Member A has confirmed that he/she is an Australian resident for tax purposes. Member A, in his/her 20WW-XX Income Tax Return (ITR) nominates himself/herself as an Australian resident, and he/she intends to lodge his/her 20XX-20YY ITR. Member B continues to be an Australian resident. Member A as the sole contributor to the Fund has an accumulation balance within the Fund, and solely owns the Fund's assets. Member B has never made any contributions to the Fund. Member B plays a major role in the control and management of the Fund. Member A and Member B are in constant daily and weekly contact. Member B (and his/her staff providing assistance) has joined together with Member A in decision making and the actioning of events that have been necessary. Member B has guided and advised Member A on many issues pertaining to investments and the running of the Fund. Typically, decisions would be made by Member B and then forwarded to Member A for signature and return. It is established that both members have strong professional and social ties with each other. Member A has strongly indicated his/her intention to return to Australia.

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). Summary | Based on the information, the Fund is an Australian superannuation fund for income tax purposes, provided that all the conditions are satisfied. | 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. | The Commissioner of Taxation 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 views of the Commissioner and sets out the Commissioner's interpretation of the definition of Australian superannuation fund. | 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. | 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 fund's 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. | Paragraph 26 of TR 2008/9 states: | The trustee of a fund may seek external advice relating to the performance of their high level duties and activities. Provided that the trustee in fact makes the strategic and high level decisions for the fund, the circumstance that the trustee acts on or is influenced by 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. | 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. | Division of CM&C | In this case, it is clear that both Member A and Member B actively participate in the management and control of the Fund, and are involved in the high level and strategic decision making of the Fund. | According to paragraph 35 of the TR 2008/9: | Where there is an equal number of individual trustees or directors of a corporate trustee located in Australia and overseas and each of those trustees/directors substantially and actively participate in the exercise of the CM&C of the fund from those locations, it is accepted that the CM&C of the fund will ordinarily be in Australia within the meaning of paragraph 295-95(2)(b) of the ITAA 1997. This will be the case despite the fact that the CM&C of the fund is also ordinarily being exercised overseas. | Therefore, the central and management and control of the Fund is considered to be ordinarily in Australia. | Therefore, it is considered that the Fund will satisfy the CM&C test under paragraph 295-95(2)(b) of the ITAA 1997. | Test Three: The active member test | 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). | 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, Member B is not an active member as Member B has never contributed to the Fund. | Therefore the active member test will be satisfied if, during an income year, Member A either made no contributions to the Fund (in which case the Fund will have no active members) or was an Australian resident for the income year (in which case more than 50% of the Fund's assets will be attributable to active members who are Australian residents). | The active member test is thus satisfied for the 20WW-XX income year since Member A has indicated that they were an Australian resident for that income year. The active member test will also be satisfied for the 20XX-15 income year and the 20YY-ZZ income year if Member A either makes no contributions during those income years or was an Australian resident for those income years. | Conclusion | For a fund to be considered an Australian superannuation fund all the conditions under subsection 295-95(2) of the ITAA 1997 have to be satisfied. | As the requirements under paragraphs 295-95(2)(a) and 295-95(b) of the ITAA 1997 have been satisfied, the Fund will an Australian superannuation fund if the active member test is satisfied.