30/07/2018

The ATO has provided further guidance in its TR 2018/5 as to when a company will be considered a resident for tax purposes, under the central management and control test of residency.

To be a complying superannuation fund that receives tax concessions, the fund must be an Australian superannuation fund at all times during the financial year, otherwise the fund may be deemed as being non-complying and its assets (less certain contributions) and its income is likely to be taxed at the highest marginal tax rate.

An SMSF will be an Australian superannuation fund if it satisfies all three conditions of the residency test.   These conditions are:

1.    The fund was established in Australia, or at least one of its assets is located in Australia;
2.    The central management and control of the fund is ordinarily in Australia; and
3.    The fund either has no active members or at least 50% of its active member balances must be attributable to active members who are Australian tax residents.

This ruling is of relevance particularly in cases where a member of an SMSF may be considering going overseas indefinitely. The member may appoint a resident individual as their legal personal representative (“LPR”’) under an enduring power of attorney to act as a director of the corporate trustee in the member’s place.

However, the ruling emphasises that the appointment of the representative director is not sufficient, in itself, for an SMSF to satisfy the central control and management element of the residency test. The ruling states that one must look at the type of decisions that the company directors are making. The exercise of central control and management by the directors of a company will be satisfied where it is evident that the directors of the company are exercising their own knowledge and intelligence in order to make high-level decisions for the company as opposed to implementing “rubber stamping” decisions made by others. 

In light of TR 2018/5 Australian superannuation funds may want to revisit implementing their tax residency protocols to ensure that they align with the ATO’s view of central control and management. As the ruling suggests evidence of minutes or other documents used to record where high-level decisions by the company are made may be imperative in ensuring that an SMSF maintains its central management and control test of residency.

For further information, please contact Townsends Business & Corporate Lawyers on (02) 8296 6222 or info@townsendslaw.com.au to see how we can assist.