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Ruling

Subject: Withholding tax exemption under paragraph 128B(3)(jb) of the ITAA 1936

Question 1

Is Entity X's Board exempted from liability to withholding tax on its interest income derived in Australia under paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)

Answer

No.

This ruling applies for the following periods:

1 January 2012 to 31 December 2012

1 January 2013 to 31 December 2013

1 January 2014 to 31 December 2014

The scheme commences on:

1 January 2012

Relevant facts and circumstances

Entity X is a social security institution in a foreign country formed in accordance with the laws of that country, which provides retirement benefits for members.

Entity X is exempted from income tax in its country.

Entity X's Board was established pursuant to the relevant foreign legislation as the trustee of Entity X and for the purposes of managing Entity X.

All private and non-pensionable public sector employees who are employed under a contract of service and their employers must contribute to Entity X.

Every employee and employer is liable to pay monthly contributions to Entity X on the amount of wages for the month at a rate set out by the law.

Pursuant to the law and Entity X's regulations, each member has two accounts and contributions are credited into these accounts according to the following percentages:

Account I - 70% of monthly contribution

Account II - 30% of monthly contribution

Account I is established for retirement purposes only and cannot be withdrawn before the member reaches the prescribed age, becomes incapacitated, leaves the country or is deceased.

Account II is established as a savings account. Subject to previous approval, withdrawals are allowed on application for contributions toward purchasing or building a house, financing higher education or providing for medical expenses.

Members are guaranteed a minimum dividend on contributions per annum pursuant to the relevant law.

The return on investment is the result of various investments made by Entity X which are permitted pursuant to the relevant legislation.

At the time of the withdrawal, members will receive the total amount of contributions (from contributions paid by the members and their employers) and the dividend on the total amount of contributions.

The funds held in Entity X are not used for any purposes other than providing benefits to its members and paying reasonable expenses of administration.

The central management and control of Entity X is in a foreign country and is not conducted in Australia. Entity X has no place of business or management in Australia.

No amount paid to Entity X or set aside for Entity X has been or can be deducted under Australian tax law and a tax offset is not allowed or is allowable for such an amount.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 128B(3)(jb)

Income Tax Assessment Act 1997 Section 118-520

Income Tax Assessment Act 1997 Section 995-1

Reasons for Decision

Question 1

Is Entity X's Board exempted from liability to withholding tax on its interest income derived in Australia under paragraph 128B(3)(jb) of the ITAA 1936?

Detailed reasoning

Paragraph 128B(3)(jb) of the ITAA 1936 exempts interest and dividend (including non-share dividend) income derived by a non-resident that is a 'superannuation fund for foreign residents'.

Subsection 995-1(1) of the ITAA 1997 provides that 'superannuation fund for foreign residents' has the meaning given by section 118-520 of the Income Tax Assessment Act 1997 (ITAA 1997).

A fund is a 'superannuation fund for foreign residents' at a time under section 118-520 of the ITAA 1997 if:

at that time, it is:

· an indefinitely continuing fund; and

·  a provident, benefit, superannuation or retirement fund; and

· it was established in a foreign country; and

· it was established, and maintained at that time, only to provide benefits for individuals who are not Australian residents; and

· at that time, its central management and control is carried on outside Australia by entitles none of whom is an Australian resident.

Under subsection 118-520(2) of the ITAA 1997, a fund is not a 'superannuation fund for foreign residents' if:

· an amount paid to the fund or set aside for the fund has been or can be deducted under this Act; or

· a tax offset has been allowed or is allowable for such an amount.

Fund

The first question to consider in determining whether Entity X is a 'superannuation fund for foreign residents' within the meaning of section 118-520 of the ITAA 1997 is whether Entity X is a 'fund'.

The term 'fund' is not defined in either the ITAA 1997 or the ITAA 1936. Therefore, it should be given its ordinary meaning subject to the context in which it appears and having regard to any relevant case law authorities.

The Macquarie Dictionary , 2012, defines the term 'fund' as 1 a stock of money or pecuniary resources 2 an organisation which manages money invested for a particular purpose… 3 money in hand; pecuniary resources.

In Scott v. FC of T (No 2) (1966) 14 ATD 333; (1966) 10 AITR 290 (Scott), Windeyer J expressed the view that 'fund' in the context of 'superannuation fund' ordinarily meant 'money (or investments) set aside and invested, the surplus income there from being capitalised'. Windeyer J's views in Scott were cited with approval by Hill J in Walstern Pty Ltd v. Commissioner of Taxation (2003) 138 FCR 1; 2003 ATC 5076; (2003) 54 ATR 423 who stated that 'for present purposes, the point is the need for "money" or "other property" to constitute a fund'.

According to the relevant foreign legislation, employees are required to contribute a percentage of their monthly wages and employers are required to contribute a percentage of the employee's monthly wages towards the employees account with Entity X.

Members are guaranteed a minimum dividend on contributions per annum which continues to accumulate in the member's account and not paid out until member's account is eligible to be withdrawn. The return on investment is the result of various investments made by Entity X which are permitted pursuant to the relevant legislation.

At the time of the withdrawal, members will receive the total amount of contributions (from contributions paid by the members and their employers) and the dividend on the total amount of contributions.

Therefore it is concluded that Entity X is a 'fund'

Indefinitely continuing fund

The term 'indefinitely continuing fund' in subparagraph (a)(i) of the definition of 'superannuation fund for foreign residents' in section 118-520 of the ITAA 1997 is not defined.

The Macquarie Dictionary, 2012, defines 'indefinite' as 1 not definite; without fixed or specified limit; unlimited. 2 not clearly defined or determined; not precise.

There is no provision in the legislation which established Entity X that requires the fund to be terminated or wound up after a specified period. The fund is thus an 'indefinitely continuing fund' within the meaning of subparagraph (a)(i) of the definition of 'superannuation fund for foreign residents' in section 118-520 of the ITAA 1997.

Provident, benefit, superannuation or retirement fund

None of the four descriptors 'provident', 'benefit', 'superannuation' or 'retirement fund' in subparagraph (a)(ii) of the definition of 'superannuation fund for foreign residents' in section 118-520 of the ITAA 1997 are defined. The terms have, however, been the subject of judicial consideration.

The courts have held that for a fund to be a 'provident, benefit, superannuation or retirement fund', the fund's sole purpose must be to provide superannuation benefits, that is, benefits to a member upon the member reaching a prescribed age or upon their retirement, death or other cessation of employment ( Scott v. FC of T (No 2) (1966) 14 ATD 333; (1966) 10 AITR 290, per Windeyer J; Mahony v. FC of T (1967) 14 ATD 519, per Kitto J; Walstern Pty Ltd v. Commissioner of Taxation (2003) 138 FCR 1; 2003 ATC 5076; (2003) 54 ATR 423, per Hill J and Cameron Brae Pty Ltd v. Federal Commissioner of Taxation (2007) 161 FCR 468; 2007 ATC 4936; (2007) 67 ATR 178, per Stone and Allsop JJ).

Particularly, the High Court examined both the terms superannuation fund and fund in Scott v Commissioner of Taxation of the Commonwealth (No. 2) (1966) 10 AITR 290; (1966) 40 ALJR 265; (1966) 14 ATD 333 (Scott). In that case, Justice Windeyer stated:

… I have come to the conclusion that there is no essential single attribute of a superannuation fund established for the benefit of employees except that it must be a fund bona fide devoted as its sole purpose to providing for employees who are participants money benefits (or benefits having a monetary value) upon their reaching a prescribed age. In this connexion "fund", I take it, ordinarily means money (or investments) set aside and invested, the surplus income there from being capitalised. I do not put this forward as a definition, but rather as a general description

The issue of what constitutes a provident, benefit, superannuation or retirement fund was discussed by the Full Bench of the High Court in Mahony v Commissioner of Taxation (Cth) (1967) 41 ALJR 232; (1967) 14 ATD 519 (Mahony). In that case, Justice Kitto held that a fund had to exclusively be a 'provident, benefit or superannuation fund' and that 'connoted a purpose narrower than the purpose of conferring benefits in a completely general sense…'. This narrower purpose meant that the benefits had to be 'characterised by some specific future purpose' such as the example given by Justice Kitto of a funeral benefit.

Entity X's fund consists of two main accounts, Account I and Account II. 70% of the contributions (both from employers and employees) go to Account I and 30% of the contributions go to Account II.

Account I is established for retirement purposes only and amounts in the fund cannot be withdrawn before the member reaches the prescribed age, becomes incapacitated, leaves the country or is deceased.

Account II is established as a savings account. Subject to previous approval, withdrawals are allowed before reaching a prescribed age for contributions toward purchasing or building a house, financing higher education or providing for medical expenses.

Therefore, it is considered that the fund does not satisfy the requirements in paragraph 118-520(a)(ii) of the ITAA 1997 because Account II of the fund allows members to perform withdrawals before reaching a prescribed age and confers benefits in a completely general sense as for example financing higher education, purchasing a house and/or providing for medical expenses.

Accordingly, Entity X is not a 'superannuation fund for foreign residents' under section 118-520 of the ITAA 1997 and therefore, Entity X's Board is not exempted from liability to withholding tax on its interest income derived in Australia under paragraph 128B(3)(jb) of ITAA 1936 .

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