26/04/2017

The High Court's decision on when a taxpayer meets a necessary residency test has implications for members of SMSFs who travel overseas.

Frank and Mary want to go overseas for a while to work in England. They’re told that they need to ensure that their SMSF does not become a non-resident fund simply because of their trip.  That would be a big problem because to be compliant and therefore eligible for tax concessions an SMSF needs to be resident in Australia.

In a decision late last year called Bywater Investments Limited & Ors v. Commissioner of Taxation; Hua Wang Bank Berhad v. Commissioner of Taxation [2016] (Bywater) the High Court made findings about when a company’s central management and control is located in Australia.  The decision affects SMSFs because one of the tests of the residence of a super fund is its ‘central management and control’.

The tax commissioner (who also administers the law on superannuation) has now released a draft tax ruling TR 2017/D2 which sets out the view of the commissioner following the High Court’s decision.  The following is a summary of the commissioner’s draft ruling.

Three matters are relevant in determining whether a SMSF’s central management and control is in Australia:
 
(a)    what does central management and control mean?
(b)    who exercises central management and control?
(c)    where is central management and control exercised?

What does central management and control mean?

Central management and control is the control and direction of a fund's operations. The key element is the making of high-level decisions that set the fund's general policies, and determine its direction.  It is different from the day-to-day conduct and management of its activities and operations. The conduct of the company's day-to-day activities and operations is not an act of central management and control.

Who exercises central management and control of a company?

Identifying who exercises central management and control is a question of fact. It is not determined by identifying who has the legal power or authority to control and direct the fund. The crucial question is who controls and directs the fund's operations in reality.

The trustees of the fund or the directors of the trustee company are clearly entitled to exercise central management and control but there are no presumptions so it will be necessary to prove that in fact this is what happened in any particular case or time.

Having the legal power to do so is not the same thing as having done so.  If the trustees have the authority then they must prove they exercised that authority.  On the other hand if the trustees give that power to an attorney via a power of attorney (the fund deed must empower them to do so) it must be proven that the attorney exercised that power and did not simply follow the directions of the trustees who would then be the real exercisers of central management and control.

Where is central management and control of a company exercised?

A SMSF will be controlled and directed where those making its decisions do so as a matter of fact and substance. It is not where decisions are merely recorded and formalised, or where the fund's deed or governing rules require it be controlled and directed, if in reality it occurs elsewhere.  Nor is it where the trustees’ attorney works or records the decisions unless that attorney is the person actually making the decisions alone.

Central management and control of a fund is not necessarily exercised where the trading or investment activities of the fund are carried on.

Matters that the courts will likely consider when identifying where those who control and direct the fund’s operations do so include:

•    where the trustees meet
•    where those trustees live
•    the nature of the fund’s activities and whether those activities dictate where control and management decisions are made in practice
•    minutes or other documents recording where high-level decisions are made
•    if a trustees’ attorney is said to be making the decisions then all of the above in relation to the attorney
•    the presence (or absence) of evidence that the attorney did not simply act at the direction of the trustees.

None of these factors alone necessarily identify or determine where central management and control of a company is exercised. The relevance and weight to be given to each will depend on the facts and circumstances of the case.

There are other issues to be considered when deciding whether an overseas trip by the fund’s members makes the fund non-compliant.  Advice from specialists such as ourselves should be obtained.  

Nevertheless it is appropriate to say that if Frank and Mary returned to Australia twice a year for the purpose of holding meetings and making the high level decisions that constitute central management and control and did not make those decisions at any other time or place then it is more likely than not that the fund’s central management and control is in Australia.

For help with issues of the residency of a SMSF and the likely effect of a trip overseas by the members (including help understanding the often misunderstood “2-year rule”) don’t hesitate to contact us here at Townsends Business & Corporate Lawyers on (02) 8296 6222.