Newsletter No. 3, March 2012

Australian Superannuation Funds

For income tax purposes a SMSF qualifies for concessional tax treatment (i.e. 15%) if it is a complying superannuation fund. In order for a SMSF to be a complying superannuation fund, it needs to be a resident regulated superannuation fund at all times during the income year. This means your SMSF needs to meet the definition of an “Australian superannuation fund” in the Taxation Legislation (subsection 295-95(2) of the Income Tax Assessment Act 1997).

In the Taxation Legislation, there are three (3) conditions that your SMSF must satisfy to meet the definition. Your SMSF must satisfy all three conditions.

1:  Your SMSF must be established or situated in Australia.

A SMSF is established inAustraliaif the initial contribution made to establish the SMSF was paid inAustralia.  If the initial contribution was not paid in Australia, then your SMSF will still satisfy this test if at least one asset of the SMSF is situated in Australia. 

2:  The central management and control of the SMSF must “ordinarily” be in Australia.

The person in your SMSF whom makes high level decisions such as formulating, reviewing, updating the investment strategy and determining how the assets of the SMSF are to be used to provide member benefits is said to have the central management and control of your SMSF. If this person is in Australia, then your SMSF satisfies this test.  However, if this person is not in Australia then your SMSF will still meet this test as long as this person is temporarily outside Australia for a period of not more than two (2) years.  If this person is outside of Australia for a period of greater than two years, then your SMSF will still satisfy this test if it can be proved that although this person is outside of Australia for more than two years, his or her period of absence is temporary. 

3:  The SMSF has no foreign “active members”.

An “active member” is a member whom contributes into your SMSF or on whose behalf contributions have been received. You will need to ensure that any contributions received in your SMSF are contributions made for your members during the period they are or were in Australia.  If contributions are received for or from a foreign active member, then you will need to ensure that at least 50% of the total assets in your SMSF belong to active resident members.

SMSFs satisfying the above three (3) conditions

It is easy for SMSFs to satisfy condition number (1) as most SMSFs assets are situated in Australia. It is also quite easy for SMSFs to satisfy condition (3) by ensuring that you do not make contributions into your SMSF for you while you are overseas.  It is often condition (2) that can be hard to satisfy.

Is the central management and control (CM&C) of your SMSF “ordinarily” in Australia?

Whether or not the CM&C of your SMSF is ordinarily in Australia is determined by examining whether, in the ordinary course of events, the CM&C of your SMSF is regularly, usually or customarily exercised in Australia.  It is the period of absence of the CM&C that must be temporary.  The CM&C of a SMSF will be “temporarily” outside Australia if the person or persons who exercise the CM&C of the SMSF are outside Australia for a relatively short period of time and during that time they exercise the CM&C of the SMSF overseas.  The duration of the absence must either be defined in advance or related to the fulfilment of a specific, passing purpose.  The test must be applied at the relevant time during the year.  The test is a “real time” test.  The test is not applied in retrospective or with the benefit of hindsight.

The tax office has issued Tax Ruling 2008/9 on the topic “Australian Superannuation Funds”.  For your reference I have included the link to the ruling here.

Refer to Example 7(a) of Tax Ruling 2008/9 – where trustees were overseas for more than two years but their CM&C is considered to be ordinarily in Australia:  A husband and wife are trustees of a SMSF.  The husband was seconded to his employer’s London office for a period of two years.  It was always the intention of the trustees and his employer that the duration of his secondment would actually be two years and that they would return to working in Australia at the expiration of that period.  However, due to unforeseen circumstances, the husband was required to remain in London for an extra twelve (12) months. The wife accompanied the husband for the duration of his secondment.  They rented out the family home in Australia and lived in a furnished house in London.  They continued to maintain bank accounts and private health insurance cover in Australia during the secondment.  They travelled back to Australia for a holiday during the Christmas period.  During the period of secondment, the CM&C was exercised at trustee meetings at the house in London.  In these circumstances, it is considered that the CM&C of the SMSF remains ordinarily in Australia during the period of the husband’s secondment as the trustees’ absence from Australia was temporary.  The factors that support this conclusion are:

–          trustees intended to return to Australia at the expiration of the husband’s two year period of secondment and never abandoned that intention,

–          the entire period of absence, including the additional twelve months, was related to the fulfilment of a specific purpose,

–          they did not establish a home outside Australia and

–          they continued to maintain their home and other assets in Australia which indicates a durability of association with Australia.

Example 7(b) of Tax Ruling 2008/9– Where the scenario is the same as above except this time the husband abandons his intention to return to Australia at the expiration of the two years and continues to work in the London office on an indefinite basis.  The trustees continue to exercise the CM&C in their London home during this extended period.  After three (3) months, the trustees return to Australia because of the illness of one of the trustee’s parents.  In this situation, the first two years of the trustees’ absences from Australia is for a defined (temporary) period during which the trustees maintained their intention to return to Australia.  However, from the time that the intention of the trustees changed (so that they decided to remain overseas indefinitely), at the end of the two year period, their absence ceased to be temporary.  Therefore, the CM&C is not ordinarily in Australia during the three months prior to the trustees return to Australia.

Example 8(b) of Tax Ruling 2008/9 – Where the trustees of a SMSF are outside of Australia for a period less than two years but the CM&C of the SMSF is not ordinarily in Australia. In this example, the trustees’ absence from Australia was indefinite and they divested themselves of the majority of their assets in Australia prior to going overseas.  However, due to the ill health of one of the trustee’s parents, they return to Australia after being away from Australia for eighteen (18) months.  In view of the fact that the trustees moved overseas with the intention of remaining indefinitely, their absence would still not be temporary even though it turned out to be of a relatively limited duration.  This is because the CM&C test is not applied in retrospect or with the benefit of hindsight.  Therefore, even though the trustees’ absence was less than two years, the CM&C of the SMSF is not ordinarily in Australia. This is because upon leaving Australia, the trustees could not establish that their absence was temporary.

Common Mistake

Because the superannuation legislation lists the two year period of absence, a lot of people misinterpret this by thinking that as long as they are overseas for a period of no more than two years, their SMSF would remain as a resident fund.

The scenarios in the Tax Ruling clearly explain that it is not just the time period of two years that is considered – it is also the intention of the trustee and the purpose of going overseas.

Monica Rule is the author of “The Self Managed Super Handbook”.  Her advice is general in nature and readers should seek their own professional advice before making any financial decisions.

Monica Rule