The concept of ‘Australian superannuation fund’ was introduced on July 1, 2007, replacing the residency requirements for superannuation funds prior to that date.
Being an ‘Australian superannuation fund’ is one aspect of the requirements of a ‘complying superannuation fund’ which, although relevant for all funds, is most likely to be an issue for self-managed superannuation funds (SMSFs). The implications of not meeting the requirements are the imposition of significant taxation penalties in the year of becoming a non-complying fund, and on an ongoing basis.
Although the broad concepts of the old residency tests largely remain, there are some subtle changes in the wording and structure of the new provision.
These and other interpretational issues are the basis of a number of recent communications from the Australian Taxation Office (ATO), in particular Taxation Ruling TR 2008/9 (Final Ruling), which was released on December 10, 2008. It includes a number of developments of the ATO views originally released in Draft Taxation Ruling TR 2008/D5 (Draft Ruling).
The three tests
A contentious aspect of the Final Ruling is the ATO’s interpretation of the requirements to be an Australian superannuation fund. Subsection 295-95(2) of the Income Tax Assessment Act 1997 (ITAA97) provides a “superannuation fund is an ‘Australian superannuation fund’ at a time, and for the income year in which that time occurs, if” all of the three tests are satisfied at the same time. The three tests are:
- the establishment/any asset situated in Australia test;
- the central management and control test; and
- the active member test.
Note that the old residency rules involved a fourth test — the fund must be ‘a provident, benefit, superannuation or retirement fund at the relevant time’. This is still relevant in meeting the separate definition of ‘superannuation fund’.
The ATO’s view is that, for the purposes of the income taxation legislation, satisfying all three tests at any point during the relevant income year will suffice. The implications of meeting the requirements for income taxation purposes include that the fund is taxable on worldwide income and consistent generally with the taxation of other Australian resident entities.
A different view has been adopted in respect of the requirements for a ‘complying superannuation fund’ in the Superannuation Industry (Supervision) Act 1993 (SIS). This SIS Act definition requires that a fund be a ‘resident regulated superannuation fund’ at all times during the year of income. To satisfy this latter term, a fund must be an Australian superannuation fund, as discussed above and defined in section 295-95(2) of ITAA97.
Because of the connection to ‘complying superannuation fund’ and that definition’s ‘at all times’ requirement, the ATO considers that a fund must meet all three ‘Australian superannuation fund’ tests at all times during the income year. This view appears contrary to a literal reading of the words in subsection 295-95(2) and is difficult to reconcile.
However, as the ATO is the relevant regulator for SMSFs, we assume the law will be administered according to their view until it is successfully challenged (if at all) or the wording of the legislation is amended.
To maintain SIS Act complying status, SMSFs will be required to meet all three tests at all times during an income year, and the fact that the tests only need to be met at any point during the year for taxation purposes is incidental and largely irrelevant.
The central management and control test
Central management and control (CM&C) of a superannuation fund is treated as being ordinarily in Australia, even if it is temporarily outside Australia.
Whether CM&C is temporarily or permanently absent is largely related to the intention of the members, which is evidenced by the facts of the situation. Temporary absence may become permanent absence (and vice versa) at any time due to a change in the members’ intentions.
Subsection 295-95(4) of the ITAA97 clarifies that a temporary absence of up to two years will be not cause the fund’s central management and control to be outside Australia.
The ATO has the view that a temporary absence exceeding two years is possible, so long as the absence actually remains temporary. That is, the duration of the absence is either defined in advance or related to the fulfilment of a specific passing purpose. The Final Ruling provides examples of absences of two and a half years and three years being treated as a temporary absence.
However, each case should be assessed on its own individual circumstances to determine if absence is temporary; not all absences in excess of two years will be treated as temporary.
The active member test
The ATO has provided further guidance on when a member is a ‘contributor’ to a fund. This concept is important in meeting the active member test.
The Final Ruling indicates a member ceases to be a contributor from the time they formed their intention to cease making contributions. Both the Draft Ruling and Final Ruling indicate that ceasing a monthly direct debit from a personal bank account to the fund may be evidence of an intention to cease making contributions.
In the Final Ruling the ATO suggested that evidencing the intention to cease being a contributor in the minutes of a trustee meeting may also be effective. This may be an important procedural process for members of SMSFs heading overseas.
Conclusion
The implications of SMSF members heading overseas should be carefully considered as the penalties for failing to meet the three tests may be severe.
Although quite lengthy, the Final Ruling provides numerous practical examples that are very helpful in providing guidance on specific issues.
We strongly recommend that advisers who have SMSF clients either already overseas or about to head off read and carefully consider the Final Ruling.
David Barrett is division director, MAStech, Macquarie Adviser
Services.
