Part IX Taxation of superannuation entities - all members are non-resident

Does a self managed superannuation fund (SMSF) retain its complying status for taxation purposes if all members are posted overseas for 1 to 10 years?

No, the SMSF will not retain its complying status as it becomes a non-resident fund.

The SMSF seeks advice regarding its compliance status.

The SMSF has two members (husband and wife)

A company acts as a trustee for the fund.

Both members are directors of the trustee company.

Both members have become non-residents for taxation purposes during the financial year.

Subsection 27A(1) of the Income Tax Assessment Act 1936 (ITAA 1936) defines a 'complying superannuation fund' as having the same meaning as in Part IX of ITAA 1936.

Subsection 267(1) of ITAA 1936 defines a 'complying superannuation fund' as having the same meaning as in section 45 of the Superannuation Industry (Supervision) Act (SISA).

Section 45 of SISA interacts with subsection 42(A) of SISA. That provision states: 'An entity is a complying superannuation fund in relation to a year of income for the purposes of this Division if the entity was a resident regulated superannuation fund at all times during the year of income when the entity was in existence'.

Therefore, in order to be a complying superannuation fund, the fund must be a resident fund for the whole year.

Subsection 10(1) of SISA is a definitional section and provides the following definition for a 'resident regulated superannuation fund': '" resident regulated superannuation fund " means a regulated superannuation fund that is a resident superannuation fund within the meaning of subsection 6E(1) of the Income Tax Assessment Act 1936 .'

Subsection 6E(1) of ITAA 1936 determines the conditions of residency for a superannuation fund at a particular time.

The SMSF satisfies the conditions in paragraphs 6E(1)(a) and (b) of ITAA 1936 for residency but it fails to satisfy paragraphs 6E(1)(c) and (d) of ITAA 1936.

In the case of an SMSF, the central management and control of the fund is exercised by the trustee of the fund (an individual trustee or a company). Accordingly, whether the central management and control test has been satisfied depends on whether the trustee is in Australia at all times during the year of income. As both members of the fund have become non-residents of Australia for taxation purposes, the central management and control of the fund is not in Australia. Hence the fund fails to satisfy paragraph 6E(1)(c) of ITAA 1936.

Where the non-resident members are still contributing to the fund, then they are considered to be active members of the fund. As both members are non-resident active members, the accumulated entitlements of resident active members of the fund at the relevant time is nil. If we apply the formula in paragraph 6E(1)(d) of ITAA 1936: ((Total of accumulated entitlements of residentactive members at the relevant time / Total of accumulated entitlements of active members at the relevant time) * 100) = ((0 / $230 000) * 100) = 0%

Hence the fund fails to satisfy paragraph 6E(1)(d) of ITAA 1936.

If the non-resident members are not contributing then they are not considered to be active members. The Explanatory Memorandum to Act No. 181 of 1994 which enacted section 6E of ITAA 1936 states at clause 7.33 that a fund that does not have an active member at the relevant time will be a resident superannuation fund at a particular time if it satisfies paragraphs 6E(1)(a), (b) and (c) of ITAA 1936. That is, all of the following conditions are met: (a) the fund is a provident, benefit, superannuation or retirement fund at the relevant time; and (b) either the fund was established in Australia or any asset of the fund at the relevant time is situated in Australia; and (c) at the relevant time, the central management and control of the fund is in Australia.

Even under this situation, the SMSF will not be a resident superannuation fund as the central management and control of the SMSF is not in Australia having failed to satisfy paragraphs 6E(1)(c) and 6E(1)(d) of ITAA 1936.

Therefore, the SMSF will not be a complying superannuation fund for taxation purposes.

( Note : Effective from 1 October 2001, a superannuation fund is a resident fund at a particular time if: • either the fund was established in Australia or any asset of the fund is situated in Australia; or • the central management and control of the fund is in Australia, if • the individual/s acting as trustee/s, or • the directors of the trustee company are temporarily overseas, the period overseas does not exceed 2 years, and • in respect of a fund which has at least one active member, the total accumulated entitlements of the resident active members at the relevant time must be 50% or more of the total accumulated entitlements of all active members. Generally an active member is someone who has made contributions to the fund, or someone for whom contributions to the fund have been made in the year of income. History note: The above bullet point was replaced on 15 April 2004. The original text follows. • the fund has at least one active member and the total of accumulated entitlements of resident active members at the relevant time are 50% or more of the total accumulated entitlements of all active members. An active member is someone who has made contributions to the fund, or someone for whom contributions to the fund have been made in the year of income.

Note: A member is excluded from being an active member at the relevant time if at the time: • they are not a resident of Australia; • they are not a contributor; and • only contributions that have been made on their behalf since they ceased being a resident were made in respect of a time they were a resident.

New subsection 6E(1A) of ITAA 1936 refers.)