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High court judgement a lesson for ‘puppet’ SMSFs

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Miranda Brownlee
23 February 2017 — 1 minute read

A high court decision regarding central management and control is forcing SMSF practitioners and trustees to revaluate whether their fund meets the residency rules, according to an industry lawyer.

DBA Lawyers director Daniel Butler says the case of Bywater Investments Limited versus Commissioner of Taxation dealt with the central management and control of certain foreign incorporated companies, but also has implications for SMSFs.

Mr Butler told SMSF Adviser the High Court found that all the decisions of the foreign companies involved in the case were made by an accountant in Sydney, with the offshore directors “merely approving and rubber-stamping his instructions”.


The High Court found that these companies were, therefore, carrying on business in Australia and were Australian tax residents because their central management and control was in Australia.

In the aftermath of this case, Mr Butler said SMSF clients relying on central management and control need to ensure they have the proper systems and processes in place so that it will bear scrutiny. “It can’t just be a puppet affair,” he said.

Mr Butler said in the context of SMSFs, if an SMSF is purportedly controlled in Australia, the appointed directors here cannot just be orchestrating what they are told by the members of the SMSF living abroad.

“They need to have an enduring power of attorney and they need to have Australian directors who undertake real functions. The real functions they need to undertake is in accordance with TR 2008/9 which include formulating and updating the investment strategy, determining the assets of the fund that are to be used to be paying members benefits and so on,” he said.

“[The directors] really need to call the shots. They should be the ones representing the fund, they should be the ones signing off on the tax return, they should be the ones signing off on the investment strategy and they should not be dictated to by the [super members overseas].”

Mr Butler also warned SMSFs that with so much done via email, the ATO may look at that as an evidence trail of where the real control and management is.

If an SMSF fails the central management and control test, their fund will effectively be treated as non-complying and hit with a 47 per cent tax rate on most of the assets in the fund.

Miranda Brownlee

Miranda Brownlee

Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.

Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.

You can email Miranda on: [email protected]momentummedia.com.au
High court judgement a lesson for ‘puppet’ SMSFs
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