Private ruling: Australian superannuation fund - Residency status
Ruling period: 2010-11 income year
Date scheme commenced: 1 July 2010

Ruling: Q1: Will the central management and control of the Fund be ordinarily in Australia for the purposes of the definition of 'Australian superannuation fund' in subsection 295-95(2) of the Income Tax Assessment Act 1997 in the event of the member's death? | A1: No.

Relevant facts and circumstances: The superannuation fund (the Fund), a self-managed superannuation fund, was established on during the 2001-02 income year. The sole member of the Fund (the Member) is an Australian resident. The Trustee of the Fund is a company. The Member is the sole director of the trustee company. The Member intends to appoint the Member's sibling, who is a non-resident of Australia and lives in an overseas country, as a second director of the trustee company. The purpose of the Member appointing the Member's sibling as the second director of the trustee company, is to allow a director of the trustee company to wind up the Fund in the event of the Member's death. The Member's benefits will made to the Member's siblings who are non-dependant beneficiaries and non-residents.

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).

Reasons for decision: Summary: The central management and control (CM&C) of the Fund is considered to be 'ordinarily in Australia' as the Member, who is an Australian resident, will be exercising the CM&C. In the event of the Member's death, the CM&C test will not be satisfied if the second director of the corporate trustee is a non-resident of Australia as the CM&C will no longer be ordinarily in Australia. Therefore, the Fund will not be an Australian superannuation fund in the event of the Member's death. However, if the second director of the trustee company is an Australian resident, the CM&C test will be satisfied if the decisions being made are ordinarily in Australia. | Detailed Reasoning - Detailed reasoning: What is an Australian superannuation fund ? From 1 July 2007 the term 'resident superannuation fund' is replaced by the term 'Australian superannuation fund'. 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. A fund must satisfy three tests 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 '. 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). | 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' 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. A superannuation fund will be established when the trust deed governing the operation of the fund is signed and executed. The money or other property is transferred to the trustee or trustees of the fund, to be held on trust for the beneficiaries (members) of the fund, and is made by a person or persons situated in Australia. 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. If it is determined that the fund was not established in Australia, then the alternative requirement in paragraph 295-95(2)(a), namely the location of the assets of the fund, must be considered. As stated in the facts, the Fund was established in Australia during the 2001-02 income year. Therefore, the requirement in paragraph 295-95(2)(a) of the ITAA 1997 has been satisfied. | Detailed Reasoning - 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 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) Bill 2006 (which, as enacted, 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 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 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 paragraphs 123 to 125 states: 123. Where permitted by the trust deed of the fund or in the circumstances prescribed in the trustee legislation of the relevant State or Territory, and consistent with the provisions of the SISA, the individual trustee or trustees of a superannuation fund may delegate all or any of their duties and powers. For example, in all jurisdictions, the trustee legislation permits a trustee to delegate the execution of the trust where he or she is absent from the jurisdiction or about to depart from it. In accordance with Corporations Act 2001 , the directors of a corporate trustee may also delegate their duties and powers. 124. Where the trustee of a fund delegates their duties to another person, the delegate will be exercising the CM&C of the fund if they independently and without influence from the trustee, perform those duties and activities that constitute CM&C of the superannuation fund. 125. However, if the trustee continues to participate in the strategic and high level decision making and activities of the fund then it cannot be said that the delegate is exercising the CM&C of the fund. The trustee may continue to participate in such activities by reviewing or considering the decisions and actions of the delegate before deciding whether any further action is required. The decision in BW Noble Ltd v. Mitchell 1 (BW Noble) illustrates this principle. From the above, it can be seen that 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. | 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. 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: Subsection 295-95(4) of the ITAA 1997 states: To avoid doubt, the central management and control of a *superannuation fund is ordinarily in Australia at a time even if that central management and control is temporarily outside Australia for a period of not more than 2 years. The purpose of subsection 295-95(4) of the ITAA 1997 is discussed at paragraph 150 of TR 2008/9 which states: The meaning of subsection 295-95(4) is to be determined having regard to the context in which it appears and its underlying purpose or object. Subsection 295-95(4) was inserted into the ITAA 1997 by the Superannuation Legislation Amendment (Simplification) Act 2007 . Its purpose is to operate as a 'safe harbour' provision for funds (mainly SMSFs) whose trustees are temporarily outside Australia for 2 years or less and who exercise the CM&C of the fund outside Australia during that period. As outlined in the Explanatory Memorandum (EM) to the Superannuation Legislation Amendment (Simplification) Bill 2007 at paragraph 3.8: To provide certainty to trustees of superannuation funds, especially trustees of self-managed superannuation funds (for whom the old 'two-year temporary absence rule' was mainly directed), a provision is inserted into the definition of 'Australian superannuation fund', which explains that a superannuation fund is considered ordinarily in Australia even if the central management and control is temporarily outside Australia, where it is for a period of less than two years. This makes it clear that where the trustees are temporarily absent from Australia for a period of up to two years, for example, because of work commitments or an extended overseas holiday, then the CM&C would ordinarily be in Australia. Paragraph 152 of TR 2008/9 discusses the possibility that absences greater than two years may satisfy paragraph 295-95(2)(b) of the ITAA 1997 provided it can be established that the CM&C of the fund meets the 'ordinarily' requirement. However, at paragraphs 153 and 154 of TR 2008/9, the following comments are made: 153. While the CM&C of the fund can be outside Australia for a period greater than 2 years such that subsection 295-95(4) of the ITAA 1997 does not apply, it is clear from the context in which the term 'ordinarily' appears that the period of absence of the CM&C from Australia must be 'temporary'. This view is also supported by the purpose or object underlying paragraph 295-95(2)(b) of the ITAA 1997 as disclosed in the EM to the Tax Laws Amendment (Simplified Superannuation) Bill 2006. In explaining the changes to the operation of the CM&C test from the way it previously operated, the EM states: 2 The definition of Australian superannuation fund does not use this alternative test [the two-year temporary absence rule]. It deals with temporary absences of trustees by requiring that the central management and control of the fund ordinarily be in Australia. Satisfying the current two-year temporary absence rule described above…would normally satisfy the ordinarily requirement. (emphasis added) 154. From this, it follows that if the CM&C of a fund is only being exercised overseas and the absence from Australia is not temporary, then the CM&C will also not be ordinarily in Australia at a time within the meaning of paragraph 295-95(2)(b) of the ITAA 1997 even if the period of absence is 2 years or less. In the present case, the trustee of the Fund intends to appoint the trustee's sibling (who is an overseas resident), as the second director of the trustee company of the Fund. The Member, who is an Australia resident and director of the trustee company based in Australia, makes the day to day decisions and has the legal responsibility for exercising the CM&C of the Fund. Whilst the Member is an Australian resident, and exercising the CM&C of the Fund ordinarily in Australia, the CM&C test will be satisfied. However, in the event of the Member's death, the strategic and high level decision making and activities, including the winding up of the Fund, will pass to the Member's sibling (as the remaining director of the corporate trustee) and the CM&C of the Fund will, at this point, be ordinarily outside of Australia. Therefore, the requirements in paragraph 295-95(2)(b) of the ITAA 1997 will not be satisfied. | Detailed Reasoning - Conclusion: For the Fund to be considered an Australian superannuation fund all the conditions for the purposes of subsection 295-95(2) of the ITAA 1997 need to be satisfied. If the member's non-resident sibling is appointed as the second director of the corporate trustee of the Fund then, in the event of the member's death, the CM&C will ordinarily be outside of Australia. Therefore, requirement under paragraph 295-95(2)(b) of the ITAA 1997 will not be satisfied. Accordingly, the Fund will no longer be an Australian superannuation fund. The consequence of this will be that the Fund will become a non-complying superannuation fund for the relevant income year. You cannot rely on the rulings in the Register of private binding rulings in your tax affairs. You can only rely on a private ruling that we have given to you (or to someone acting on your behalf). 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