The draft ruling sets out the “Commissioner’s preliminary but considered view on how to apply the central management and control test of company residency”.

DBA Lawyers director Daniel Butler said while the High Court decision and draft ruling are not SMSF specific, they impact the application of the law in terms of ensuring that where an SMSF has members overseas, the SMSF remains a resident fund.

“To remain a resident fund, they need to comply with this central management and control,” Mr Butler told SMSF Adviser.

Mr Butler said the Bywater decision was about normal companies and normal investment-type companies, and it was claimed that these companies were non-resident, but because of the real and effective control here in Sydney they were subject to Australian tax.

In paragraph 10 of the draft ruling, he said the ATO looks at how exercising central management and control can involve things like setting the investment and operational policies.

“In an SMSF context, that’s usually the investment strategy and overseeing and controlling those appointed to conduct the day-to-day business of the company. That’s who’s looking after it. It’s not the day-to-day business activities but the overall investment strategy of that fund,” Mr Butler said.

The draft ruling also clarifies in paragraph 17 that a “person who has power or authority to control and direct a company, but does not use it, does not exercise central management and control”.

Mr Butler said both paragraph 17 and paragraph 18 are relevant to SMSFs.

Paragraph 18 of the draft ruling states, “In limited circumstances, a person may control and direct a company without ongoing active intervention in the company’s affairs provided they have appointed agents or managers whom they tacitly control to conduct the company’s day-to-day business provided:

• Have appointed agents or managers whom they tacitly control to conduct the company’s day-to-day business;
• Tacitly control and regularly exercise oversight of the affairs of the company, including monitoring the company's performance; and
• Do not need to actively intervene because the company’s affairs are running smoothly and in the manner they desire.”

Mr Butler said a lot of these issues could affect SMSFs by merely just have “window dressing” in terms of where the central control and management is.

“It’s really bringing home that the ATO’s view has shifted since the Bywater decision. The central control and management is heightened by having real and effective control by those who are over here that are the directors who should be exercising the real and effective control over that company, setting the top-level decisions, not being puppets on strings.”