Edited version of your private ruling

Authorisation Number: 1012168316967

This edited version of your ruling will be published in the public register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.

Ruling

Subject: Entity that is covered by the requirements under paragraph 12-402(3)(f)(iii) of Schedule 1 of the Tax Administration Act 1953

Question 1

Is W Co an entity that is covered by the requirements under paragraph 12-402(3)(f)(iii) of Schedule 1 of the Tax Administration Act 1953 (TAA 1953) (relevantly, is W Col a wholly owned subsidiary of an entity with a principal purpose of funding pensions for citizens or contributors of a foreign country)?

Answer

Yes.

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

D

Relevant facts and circumstances

W Co

1. W Co is a company incorporated in a foreign country.

2. W Co is wholly-owned by Entity X. Relevant legislation permits Entity X's Board to invest money belonging to Entity X in any form of investment.

3. The principal activity of W Co is investment in overseas properties from which it derives rental income.

4. All dividends declared by W Co are distributed to Entity X.

5. The directors of W Co are also employees of Entity X.

6. The central management and control of W Co is not conducted in Australia

Entity X

7. 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.

8. Entity X is exempted from income tax in its country.

9. 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.

10. 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.

11. The central management and control of Entity X is outside of Australia. Entity X has no place of business or management in Australia.

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

13. 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.

14. 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

15. 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.

16. Account II is established to assist members prepare for a comfortable retirement. Subject to previous approval, withdrawals are allowed for contributions toward purchasing or building a house, financing higher education or providing for medical expenses.

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

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

19. 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.

Entity X's management

20. 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.

21. 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.

22. The central management and control of Entity X is outside of Australia. Entity X has no place of business or management in Australia.

Relevant legislative provisions

Taxation Administration Act 1953 Subdivision 12-H

Taxation Administration Act 1953 Paragraph 12-402(3)(f)(i)

Taxation Administration Act 1953 Paragraph 12-402(3)(f)(iii)
Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

Question 1

Is W Co an entity that is covered by the requirements under paragraph 12-402(3)(f)(iii) of Schedule 1 of TAA 1953 (relevantly, is W Co a wholly owned subsidiary of an entity with a principal purpose of funding pensions for citizens or contributors of a foreign country)?

Detailed reasoning

23. Subdivision 12-H of Schedule 1 to the TAA 1953 deals with 'Pay As You Go' withholding obligations for distributions of managed investment trust income.

24. Section 12-402 of Schedule 1 of the ITAA 1953 establishes the widely held requirements for the entities including in the section. Subsection 12-402(3) of Schedule 1 of TAA 1953 lists the kinds of entity that are covered by the section.

25. Paragraph 12-402(3)(f) of Schedule 1 of TAA 1953 specifies the following:

an entity, the principal purpose of which is to fund pensions (including disability and similar benefits) for the citizens or other contributors of a foreign country, if:

(i) the entity is a fund established by an *exempt foreign government agency; or


(ii) the entity is established under a foreign law for an exempt foreign government agency; or


(iii) the entity is a *wholly-owned subsidiary of an entity mentioned in subparagraph (i) or (ii);

Entity X

26. 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.

27. Pursuant to the relevant foreign law and its 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

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

29. Account II allows members to perform withdrawals before reaching a prescribed age and confers benefits in a completely general sense like for example financing higher learning of family members, purchasing a house and/or providing for medical expenses.

30. Accordingly, given that 70% of the member's contributions are devoted to retirement purposes, it is established that the principal purpose of Entity X is to fund pensions.

31. The term 'exempt foreign government agency' is defined in section 995-1 as:

a) the government of a foreign country, or of part of a foreign country; or

b) an authority of the government of a foreign country, if the authority is of a similar nature to an authority that is an *exempt Australian government agency; or

c) an authority of the government of part of a foreign country, if the authority is of a similar nature to an authority that is an *exempt Australian government agency.

32. Since Entity X itself is not a 'government', it is necessary to consider whether it is an 'authority' of a foreign government.

33. In Commissioner of Taxation v Bank of Western Australia; State Bank of New South Wales (1995) 96 ATC 4009, the Full Federal Court considered the ordinary meaning of the term 'authority' in the context of the former Sales Tax (Exemptions and Classifications) Acts of 1935 and 1992. The Court nevertheless considered the broader definition of the term, concluding that the general characteristic of an 'authority' is a body 'which has the right or power to exercise authority or command' (96 ATC 4009 at 4025 and 4026).

34. Although stating that 'it is fair to say that no test of universal applicability has emerged', Justice Hill quoted the following passage from the judgement of Gibbs J in Committee of Direction of Fruit Marketing v Australian Postal Commission (1980) 144 CLR 577 at 580 as being 'the closest any judicial comment has come to attempting a definition of the word "authority"':

The expression 'authority of a State' refers to a body which exercises power derived from or delegated by the State, but the fact that a body is established under State law and possesses power conferred upon it by State law will not necessarily mean the body is an authority of a State. … In all cases, it is necessary to have regard to all the relevant circumstances in order to determine the character of the body in question.

35. Justice Hill (with whom Wilcox and Drummond JJ agreed) listed several propositions that can be derived from the decided cases that consider the ordinary meaning of the term 'authority', including the fact that 'a private body, corporate or unincorporated, established for profit will not be an authority' (96 ATC 4009 at 4026). However, another proposition listed by the Court was that '[a]t least where the question is whether a body is a "public authority" the body must exercise control power or command for the public advantage or execute a function in the public interest' (96 ATC 4009 at 4027).

36. Entity X is a social security institution formed and established in accordance with the laws of a foreign country. Entity X provides retirement benefits for members.

37. All private and non-pensionable public sector employees who are employed under a contract of service and their employers must contribute to Entity X in accordance with the relevant foreign legislation.

38. Entity X is an entity formed and established in accordance with the laws of a foreign country which executes a function in the public interest in the form of mandating contributions from employers and employees to provide for retirement and social security benefits. Therefore, it is considered that Entity X is an authority of the government of a foreign country and therefore represents an exempt foreign government agency within the meaning of subsection 995-1 of the ITAA 1997.

39. Accordingly, the Entity X is an entity that is covered by the requirements under paragraphs 12-402(3)(f)(i) and (ii) of Schedule 1 of TAA 1953.

W Co

40. W Co is a company incorporated in a foreign country.

41. Subparagraph 12-402(3)(f)(iii) of Schedule 1 of the TAA 1953 requires that the entity is a wholly-owned subsidiary of an entity mentioned in subparagraphs 12-402(3)(f)(i) or (ii).

42. Section 995-1 of the ITAA 1997 states that a wholly owned subsidiary of an entity has the meaning given by section 703-30 of the ITAA 1997.

43. Subsection 703-30(1) of the ITAA 1997 stipulates that a subsidiary entity is a wholly-owned subsidiary of another entity if all the membership interests in the subsidiary entity are beneficially owned by the holding entity.

44. Entity X is listed in its accounts as having an effective equity interest of 100% in W Co, thereby being the sole shareholder of W Co. All the dividends of W Co are distributed to Entity X and, consequently, it is accepted all the membership interests of W Co are beneficially owned by Entity X. W Co therefore satisfies the requirements as being a wholly owned subsidiary of Entity X.

45. 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.

46. All private and non-pensionable public sector employees who are employed under a contract of service and their employers must contribute to Entity X in accordance with the relevant foreign legislation. The members may be citizens or contributors of a foreign country.

47. Accordingly, Entity X is an entity which has as its principal purpose the provision of retirement benefits for members and those members can be citizens or other contributors of a foreign country.

48. W Co is an entity which is wholly owned by Entity X. Entity X is an entity covered by the requirements of paragraphs 12-402(3)(f)(i) and (ii) Schedule 1 of TAA 1953 as determined above. Therefore, W Co will be an entity covered by the requirements under paragraph 12-402(3)(f)(iii) Schedule 1 of TAA 1953.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).