To be eligible for concessional tax treatment, a superannuation fund needs to meet the definition of ‘Australian superannuation fund’ (ASF), along with other conditions.
Under s.295-95(2) of the ITAA97 a super fund is considered to be an ASF if all three of the following conditions apply:
1. The fund was established in Australia, or at least one of the fund’s assets is located in Australia.
2. The central management and control of the fund is ‘ordinarily’ in Australia.
3. The ‘active member’ test is met.
The ATO provided detailed guidance on meeting these tests in TR 2008/9.
Fund established in Australia
An SMSF is established in Australia when the initial contribution to start the fund is paid to and accepted by the trustee or trustees in Australia. It is not necessary for the trust deed to be signed and executed in Australia.
If a super fund was not established in Australia, it will satisfy the test if at least one asset of the fund is situated in Australia at the relevant time.
The location of an asset is determined by reference to the type of asset and the common law rules established by the courts for assets of that kind. This is a ‘once-and-for-all’ requirement that, when satisfied, is relevant for all times.
Central management and control
The ATO says the central management and control (CMC) of a super fund involves a 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 super fund, the strategic and high level decision making processes include:
* formulating, reviewing and updating the fund’s investment strategy
* monitoring and reviewing investment performance
* formulating a strategy for managing reserves, and
* determining how the fund’s assets are to be used to pay member benefits.
In the majority of cases, the other principal areas of super fund operation, such as the acceptance of contributions and the investment of the fund assets, are not of a strategic or high level nature to constitute CMC. These activities form part of the fund’s day-to-day operations.
Establishing who is exercising the CMC of a super fund is a question of fact to be determined with reference to the circumstances of each case.
While it’s the trustee of the fund who has the legal responsibility or duty to exercise the CMC of a super fund, the mere duty to exercise CMC doesn’t, of itself, constitute CMC.
If the trustee performs the high level duties and activities of the fund, they will be exercising the CMC of the fund in practice. There may be situations where a person other than the trustee is exercising the CMC of the fund. However, the mere fact the trustee uses an investment manager doesn’t mean the manager is in any sense exercising the CMC of the fund.
In some situations, a fund’s CMC may be outside Australia for a period of time. In general, the fund will still meet the ‘ordinarily’ requirement if its CMC is temporarily outside Australia for up to two years. Also, the fund can still meet this requirement even if the CMC is temporarily outside Australia for more than two years.
If the CMC 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 CMC is two years or less. Whether the CMC of the fund is ordinarily in Australia is based on the fund’s circumstances at that time.
Active member test
The third test that must be met is the active member test.
A member is an active super fund member at a particular time if they are a contributor to the fund at that time, or are an individual on whose behalf contributions have been made. However, a member is not an active fund member at the relevant time if:
* they are a non-resident, and
* they are not a contributor at that time, and
* the only contributions made to the fund on their behalf since they became a non-resident were made in respect of a time when they were an Australian resident.
Rollovers are treated as contributions for the purpose of the active member test. The active member test is satisfied if, at the relevant time:
* the fund has no active members, 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.
For addressing the CMC test
If an SMSF member moves overseas, there are some strategies that could be used to address the CMC test and ensure the complying status of the fund is maintained.
1. Using an Enduring Power of Attorney
To comply with the CMC test, non-resident trustees could consider appointing an enduring power of attorney (EPOA) to a resident of Australia.
SMSFR 2010/2 clarifies that a person holding an EPOA for an SMSF member will qualify as their Legal Personal Representative (LPR). It also specifies a range of conditions that must be met in order to comply with subparagraph 17A(3)(b)(ii) of the SIS Act 1993. Some of the key conditions are:
• the LPR must be appointed as a trustee or as a director of the corporate trustee
• the member themselves must cease to be a trustee or director of the corporate trustee, and
• both of the above events must be in accordance with the trust deed of the SMSF, the SIS Act and any other relevant legislation.
2. Rolling over to a public offer fund
To avoid having the CMC outside Australia, the SMSF assets could be rolled over to a public offer super fund or, if only one member of the fund is going overseas, then that member’s assets could be rolled over. A potential drawback is the fund may realise CGT on the disposal of the assets. Also, not all assets can be transferred to a public offer fund (eg business real property).
3. Changing trusteeship to a SAF
Another option is to make the fund a small APRA fund (SAF). This involves appointing an approved trustee allowing the CMC to reside in Australia. This option doesn’t have the same drawbacks as option 2, as a disposal of assets should not be required. However, a SAF may contain additional costs such as ongoing fees based on funds under management and may place investment restrictions on asset acquisitions.
For addressing the active member test
If an SMSF member moves overseas and they wish to make future contributions, they could make them to a public offer fund and not risk breaching the active member test.
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