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Compliance, Management

Parallels exist between SMSF, company residency

Tax rulings on company residency mirror central management principles.

The ATO will consider the central management and control of an SMSF to be occurring in Australia if all high-level decisions are made in Australia regardless of where the fund’s directors live, according to a lawyer.

DBA Lawyers senior associate David Oon addressed the issue in the law firm’s SMSF Online Update last week, in which he said an SMSF will meet its residency rules if it at all times meets the Australian superannuation fund definition according to section 295-95(2) of the Income Tax Assessment Act 1997.

There are three sub-tests a fund must meet to qualify as an Australian super fund: it was established in Australia or any asset of the fund was situated in Australia at that time; central management and control must ordinarily be in Australia; and the fund must either have no active member or at least 50 per cent of active member balances must be attributable to active members who are Australian tax residents.

Oon cited Taxation Ruling 2018/5 on central management control after the cases Bywater Investments Limited v Commission of Taxation and Hua Wang Bank Berhad v Commissioner of Taxation (2016) HCA 45, which related to company residency, but emphasised the principles in the cases apply to SMSFs as well.

The cases related to a group of four companies incorporated outside Australia as those who established the companies did not want to have Australian tax residency and wanted them to be controlled outside Australia. The companies appointed directors and had board meetings overseas.

“Obviously in the case of SMSF residency, we typically want the other thing. We want the SMSF to be centrally managed and controlled ordinarily in Australia, but for this tax case, the guy didn’t want to be liable to Australian tax,” Oon said.

The tax commissioner argued the companies were resident in Australia and liable to Australian tax.

“The central management and control test for companies in section 6 of the 1936 Income Tax Assessment Act, it defines resident as including a company not incorporating but carries on its business in Australia and has its central management and control in Australia. That central management and control was the key thing really for this case,” Oon said.

The High Court said central management and control was located in Australia as the high-level decision-maker of the company, Vanda Gould, resided in Sydney, while the directors overseas were mechanically recording and implementing decisions made by someone else in Australia.

“This is relevant for SMSFs because, I mean, in much the same way that the Bywater case had someone, Vanda Gould in Sydney, who wasn’t a director, didn’t in the documents and in the paperwork and on paper have control of these overseas companies, in reality he was controlling it implicitly or controlling it,” Oon said.

He said this sets a new standard for SMSF residency, as well as the phrasing for central management and control is identical when comparing the company resident test and the Australian superannuation fund test in section 295-95(2)  of the Income Tax Assessment Act 1997.

It can be gleaned from TR 2018/5 that central management and control is determined by high-level decisions as opposed to day-to-day conduct, and requires active formulation of investment strategies and constant reviews of investment decisions rather than mere rubber stamping.

“You need to make sure that not only do you put someone in who has the legal power and authority to control, they have to actually in reality control the company. They can’t just be a puppet or listening to a few people from overseas, for example,” Oon said.

“Formally appointed directors who play no actual role, they’re going to be ignored.”

In cases where an equal number of directors/trustees live in Australia and overseas and all participate in high-level decisions, central management and control is taken to be in Australia, according to the ATO.

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