The ATO has stated it is possible for an SMSF to be considered a legitimate fund under taxation law even where a member is inactive and overseas, basing its view predominantly on whether it can pass the central management and control (CM&C) test.
In a private ruling released last week, the regulator said an SMSF was Australian superannuation fund for the purposes of subsection 295-95(2) of the Income Tax Assessment Act (ITAA) 1997 despite the only active member being overseas for many years.
The case concerned a three-member fund where the members were also trustees and Australian residents for tax purposes, with one member overseas for at least the next five years.
That member holds 100 per cent of the total value of the SMSF’s assets and is drawing an income stream from the fund.
In deciding whether the SMSF was an Australian fund under tax law and thus qualified for concessional tax treatment, the ATO noted it had to satisfy all three tests in subsection 295-95(2) of the ITAA.
It acknowledged the SMSF passed the first test relating to whether the fund was established in Australia and focused on the CM&C and active member tests.
In regards to this test, it considered the location of those making the key decisions for the fund, recognising while CM&C can be held outside Australia, this was only for a temporary period of up to two years, which did not apply in this case.
“If the trustees of the fund ordinarily reside overseas, then unless there is evidence to the contrary, the conclusion would be that the CM&C of the fund is overseas,” the ruling stated.
However, the regulator noted this had been addressed with the overseas trustee assigning control to a fund member within Australia who did not derive any benefit from the fund.
“In this case, the facts indicate the high-level and strategic decisions relating to the fund and the legal responsibility for exercising the CM&C of the fund are done by one member of the fund who resides in Australia with consultation of the other two members, one of whom resides in Australia and one of whom resides overseas,” it said.
It added the fund also passed the active member test despite the overseas member becoming inactive since making their last personal contribution by entering the retirement phase and receiving an income stream for three consecutive financial years.
This meant there was no active member in the fund, which is a stand-alone criteria needed to pass the test.
“Based on the assumption that the members of the fund do not intend to make contributions to the fund, it will have no active members while one member is overseas,” the ATO stated.
“The fund is considered to be an Australian superannuation fund under subsection 295-95(2) of the ITAA and will remain unchanged as long of the facts of this private ruling remain the same.”
