Edited version of private advice

Authorisation Number: 1012650744406

Ruling

Subject: Foreign pension fund and exemption from withholding tax

Question 1(a)

Is interest and dividend income paid by an Australian company to an overseas company, as trustee of the Bare Trust, excluded from liability to withholding tax for the purposes of paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes. The interest and dividend income paid by the Australian company, as trustee of the Bare Trust, is excluded from liability to withholding for the purposes of paragraph 128B(3)(jb) of the ITAA 1936.

Question 1(b)

Are the Pension Funds excluded from liability to withholding tax on the interest and dividend income derived from an Australian company under paragraph 128B(3)(jb) of the ITAA 1936?

Answer

Yes. The Pension Funds are excluded from liability to withholding tax on the interest and dividend income derived from an Australian company under paragraph 128B(3)(jb) of the ITAA 1936.

Question 2(a)

Is the interest and dividend income paid by the Australian company, as trustee of the Bare Trust, non assessable and non exempt income of that foreign company, for the purposes of section 128D of the ITAA 1936?

Answer

Yes. The interest and dividend income paid by Australian company to the foreign company, as trustee of the Bare Trust, is non assessable and non exempt income of that foreign company for the purposes of section 128D of the ITAA 1936.

Question 2(b)

Is the interest and dividend income paid by the foreign company, as trustee of the Bare Trust, non assessable and non exempt income of the Pension Funds, under section 128D of the ITAA 1936?

Answer

Yes. The interest and dividend income paid by the Australian company, as trustee of the Bare Trust, is non assessable and non exempt income of the Pension Funds under section 128D of the ITAA 1936.

Relevant facts and circumstances

The Pension Funds

1. There are a number of pension plans formed in country A:

collectively referred to hereafter as the 'Pension Funds'.

2. The sole purpose of each Pension Fund is to provide superannuation benefits to eligible recipients, who are not residents of Australia, upon retirement, disability or when other conditions are met.

3. The central management and control of each Pension Fund is carried on outside Australia by the trustees, none of whom is an Australian resident.

4. The Pension Funds are registered pension plans in Country A and are compliant with Country A tax and the relevant government benefits legislation.

5. The Pension Funds are exempt from income tax on their income in Country A.

6. The governing rules of the Pension Funds do not provide for a termination date.

7. The Pension Funds hold their investment through a stator pool (the Pool). The Pool enables the Pension Funds to pool their funds and collectively invest in certain assets. The Pool is not a separate legal entity.

8. Each Pension Fund holds its proportionate interest in the assets of the Pool directly and for its own benefit. Each Pension Fund is entitled to receive any returns in proportion to its contribution to the Pool.

9. The liability of each Pension Fund in the Pool is not limited, but each is liable for any losses incurred in respect of their investment made through the PIP Pool.

The Investment

10. A bare trust (Bare Trust) was established with the foreign company, a company incorporated in Country A, acting as trustee.

11. The Pool is absolutely entitled to the assets of the Bare Trust as against the trustee and is presently entitled to the income of the Bare Trust as it arises.

12. In accordance with the trust declaration, the foreign company has not undertaken any activities other than to acquire debt and equity interests issued by the Australian company, an Australian resident corporation formed under the Corporations Act 2001 (Cth).

13. An amount paid to, or set aside for, the Pension Funds in respect of the Investment has not been or cannot be deducted under the Income Tax Assessment Act 1997 (ITAA 1997) and a tax offset has not been allowed or is not allowable for such an amount.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 6(1).

Income Tax Assessment Act 1936 Subsection 128A(3)

Income Tax Assessment Act 1936 Subsection 128A(10)

Income Tax Assessment Act 1936 Paragraph 128AAA(1)(c)

Income Tax Assessment Act 1936 Section 128B

Income Tax Assessment Act 1936 Subsection 128B(1)

Income Tax Assessment Act 1936 Subsection 128B(2)

Income Tax Assessment Act 1936 Subsection 128B(3)

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

Income Tax Assessment Act 1936 Subsection 128B(4)

Income Tax Assessment Act 1936 Subsection 128B(5)

Income Tax Assessment Act 1936 Section 128D

Income Tax Assessment Act 1997 Section 118-520

Income Tax Assessment Act 1997 Subsection 118-520(2)

Income Tax Assessment Act 1997 Subsection 995-1(1)

Reasons for decision

Question 1(a):

Is the foreign company, as trustee of the Bare Trust, excluded from liability to withholding tax on the interest and dividend income derived by the foreign company from Australia on behalf of each of the Pension Funds for the purposes of paragraph 128B(3)(jb) of the ITAA 1936?

Is the income, "income" to which this section applies?

1. Subsection 128B(1) of the ITAA 1936 provides that the following type of income, is "income" to which this section applies:

a. income derived on or after 1 January 1968 by a non-resident; and

b. consists of a dividend paid by a company that is a resident.

2. Subsection 128B(2) of the ITAA 1936 also provides that the following type of income, is "income" to which this section applies:

a. income derived on or after 1 January 1968 by a non-resident; and

b. consists of interest that:

i. is paid to the non-resident by a person to whom this section applies and is not an outgoing wholly incurred by that person in carrying on a business in a country outside Australia at or through a permanent establishment of that person in that country.

3. In the present case, the relevant income is both interest and dividends, as defined in these subsections.

Is the income, specifically excluded from liability to withholding tax under section 128B(3)?

4. Paragraph 128B(3)(jb) applies to exclude certain income from liability to withholding tax namely:

a. income that is derived by a non-resident that is a superannuation fund for foreign residents; and

b. consists of interest or dividends paid by a company that is a resident; and

c. is exempt from income tax in the country in which the non-resident resides.

Is the income derived by a non-resident?

5. The definition of the term 'non-resident' in subsection 6(1) of the ITAA 1936 states that, unless contrary intention appears, a non-resident is a 'person who is not a resident of Australia'. The definition of 'person' in subsection 6(1) provides that the term 'person' includes a company.

6. Applying the definition of 'non-resident' as stated in subsection 6(1) of the ITAA 1936 to the phrase 'a non-resident that is a superannuation fund for foreign residents' in subparagraph 128B(3)(jb)(i) of the ITAA 1936 means that the subparagraph cannot be satisfied where the superannuation fund for foreign residents is a trust. This is because the trust is not a 'person' as defined.

7. However, subsection 128A(10) of the ITAA 1936 provides that, for the purposes of Division 11A of the ITAA 1936, the trustee of a provident, benefit, superannuation or retirement fund is a non-resident at a particular time if, and only if, the fund is a foreign superannuation fund at that time.

8. As stated in ATO Interpretative Decision ATO ID 2009/78, as a result of the operation of subsection 128A(10), the trustee of a provident, benefit, superannuation or retirement fund is a non-resident, and thus a 'person' for the purposes of section 128D.

9. The income from the Investment is initially received by the foreign company as the trustee of the Bare Trust before it is paid to the Pension Funds as beneficiaries of that trust.

10. Each of the Pension Funds, via the Pool, has an absolute indefeasible proportionate entitlement to the assets of the Bare Trust and is presently entitled to any income that arises.

11. Under subsection 128A(3) of the ITAA 1936, the Pension Funds who are presently entitled to the income of the Bare Trust will be deemed to have derived that income for the purposes of Division 11A of the ITAA 1936.

12. As further explained in ATO Interpretative Decision ATO ID 2008/61, interest and dividend income that is initially received by a manager/custodian before it is paid to another will be deemed, for the purposes of Division 11A, to have been derived by the (end) recipient where the parties are in a trust relationship.

13. In the present case, there is a trust relationship between the foreign company and the Pension Funds via the Pool. As such, although the foreign company initially receives the income, it is the Pension Funds that are deemed to have derived the income.

14. Therefore, income from the Investment is derived by the trustees of the Pension Fund, being non-residents.

Are the Pension Funds 'superannuation fund for foreign residents'?

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

16. A fund is a superannuation fund for foreign residents under section 118-520 of the ITAA 1997 if:

(a) at that time, it is:

(i) an indefinitely continuing fund; and

(ii) a provident, benefit, superannuation or retirement fund; and

(a) it was established in a foreign country; and

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

(c) at that time, its central management and control is carried on outside Australia by entities none of whom is an Australian resident.

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

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

(b) a tax offset has been allowed or is allowable for such an amount.

"Fund"

18. The first question to consider in determining whether each Pension fund forming part of the Pool is a "superannuation fund for foreign residents" within the meaning of section 118-520 of the ITAA 1997 is whether each Pension Fund is a "fund".

19. The term "fund" is not defined in either the ITAA 1997 or the ITAA 1936. Therefore, as explained in ATO Interpretative Decision ATO ID 2009/67, it should be given its ordinary meaning subject to the context in which it appears and having regard to any relevant case law authorities.

20. The Australian Oxford Dictionary defines the term "fund" as 1 a permanent stock of something ready to be drawn upon…2 a stock of money, especially one set apart for a purpose.

21. In Scott v. FCT (No 2) (1966) 40 ALJR 265, Windeyer J expressed the view (at 278) that "fund" in the context of "superannuation fund" ordinarily meant "money (or investments) set aside and invested, the surplus income therefrom being capitalised." Windeyer J's views in Scott were cited with approval by Hill J in Walstern Pty Ltd v. FCT (2003) 138 FCR 1 who stated (at 15) that "for present purposes, the point is the need for "money" or "other property" to constitute a fund."

22. In the present case, each of the Pension Funds are financed by employee and employer contributions. The contributions are then being invested by the trustee of the Pension Funds with any gains being credited to the accounts of the members of the Pension Funds. As such, each Pension Fund is a "fund".

"Indefinitely continuing fund"

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

24. The Australian Oxford Dictionary defines "indefinitely" as 1. for an unlimited time… 2. in an indefinite manner.

25. In the current circumstances, the governing rules of the Pension Funds do not provide for a termination date and they are expected to continue indefinitely.

26. Therefore, each of the Pension Funds are "indefinitely continuing" 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"

27. 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.

28. 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. FCT (No 2) (1966) 40 ALJR 265 at 278, per Windeyer J; Mahony v. FCT (1968) 41 ALJR 232 at 232, per Kitto J; Walstern Pty Ltd v. FCT (2003) 138 FCR 1 at 15, per Hill J and Cameron Brae Pty Ltd v. FCT (2007) 243 ALR 273 at 284, per Stone and Allsop JJ).

29. Each of the Pension Funds in the present circumstances provides superannuation benefits to their members upon retirement, disability or when the members meet other eligibility requirements.

30. Therefore, each of the Pension Funds is a "provident, benefit, superannuation or retirement fund" within the meaning of subparagraph (a)(ii) of the definition of "superannuation fund for foreign residents" in section 118-520 of the ITAA 1997.

Are the Pension Funds established in a foreign country?

31. Each of the Pension Funds were established in Country A.

Are the Pension Funds established, and maintained, only to provide benefits for individuals who are not Australian residents?

32. Each of the Pension Funds were established and maintained to provide benefits to residents of Country A.

Is the central management and control of each of the Pension Funds carried on outside Australia by entitles none of whom are Australian residents?

33. Each of the Pension Funds is managed by its trustee and Board, within Country A.

Have any amounts paid to the Pension Funds or set aside for the Pension Funds been or can be deducted under this Act or has a tax offset been allowed or is allowable for such amounts?

34. An amount paid to, or set aside for, the Pension Funds in respect of the investment has not been or cannot be deducted under the ITAA 1997 and a tax offset has not been allowed or is not allowable for such an amount.

35. Based on the reasons given above, the Pension Funds are excluded from liability to withholding tax on the interest and dividend income derived on their behalf by Px Co from FIAH.

36. Further, paragraph 128B(3)(jb) of the ITAA 1936 provides for exemption from liability to withholding tax on the income from the Investment paid to Px Co on behalf of the Pension Funds.

Question 1(b)

Are the Pension Funds excluded from liability to withholding tax on the interest and dividend income derived from the Australian company under paragraph 128B(3)(jb) of the ITAA 1936?

37. Based on the reasons given under question 1(a) above, the income from the Investment (being interest and dividends paid by the Australian company) is derived by the non-resident trustee of each Pension Fund, which qualifies as a superannuation fund for non-residents that is exempt from the foreign country's income tax.

38. Accordingly, each of the Pension Funds is excluded from liability to withholding tax on the interest and dividend income derived on their behalf by the Australian company.

Question 2(a)

Is the interest and dividend income derived from the Australian company by the foreign company, as trustee of the bare trust, non assessable and non exempt income of the foreign company, under section 128D of the ITAA 1936?

39. Income to which paragraph 128B(3)(jb) of the ITAA 1936 applies is not assessable and not exempt income under section 128D of the ITAA 1936.

40. For present purposes, section 128D of the ITAA 1936 provides that income upon which withholding tax would, but for certain provisions including paragraph 128B(3)(jb) of the ITAA 1936, be payable, is not assessable income and is not exempt income of a person.

41. The definition of 'person' in subsection 6(1) of the ITAA 1936 provides that, unless the contrary intention appears, the term 'person' includes a company. The definition of the term 'non-resident' in subsection 6(1) states that, unless contrary intention appears, a non-resident is a 'person who is not a resident of Australia'.

42. Subsection 128A(10) of the ITAA 1936 provides that, for the purposes of Division 11A of the ITAA 1936, the trustee of a provident, benefit, superannuation or retirement fund is a non-resident at a particular time if, and only if, the fund is a foreign superannuation fund at that time.

43. As stated above, given that subsection 128A(10) of the ITAA 1936 treats the trustee of a provident, benefit, superannuation or retirement fund to be the non-resident for the purposes of Division 11A of the ITAA 1936, the trustee is therefore, 'a person' for the purposes of section 128D of the ITAA 1936.

44. Subsections 128B(4) and 128B(5) of the ITAA 1936 provide that a person who derives income to which section 128B of the ITAA 1936 applies is liable to pay dividend and interest withholding tax on the dividends and interest it derives. Paragraph 128AAA(1)(c) of the ITAA 1936 provides that Division 11A of Part III of the ITAA 1936 applies to non-share dividends in the same way as it applies to dividends. Disregarding any application of paragraph 128B(3)(jb) of the ITAA 1936, the taxpayer would be liable to pay tax under subsections 128B(4) and 128B(5).

45. However, because the interest and dividends paid to the foreign company is income to which paragraph 128B(3)(jb) of the ITAA 1936 applies (as explained under question 1(a) above), that income is excluded from being income that is subject to withholding tax.

46. Therefore, the dividend and interest income received by the foreign company is not assessable and not exempt income of the foreign company under section 128D of the ITAA 1936.

Question 2(b)

Is the interest and dividend income derived from the Australian company by the foreign company, as trustee of the bare trust, non assessable and non exempt income of the Pension Funds, under section 128D of the ITAA 1936?

47. Income to which paragraph 128B(3)(jb) of the ITAA 1936 applies is not assessable and not exempt income under section 128D of the ITAA 1936.

48. As explained earlier, the interest and dividends paid to the foreign company is income to which paragraph 128B(3)(jb) of the ITAA 1936 applies.

49. The income from the Investment is initially received by the foreign company as the trustee of the Bare Trust before it is paid to the Pension Funds as beneficiaries of that trust.

50. Under subsection 128A(3) of the ITAA 1936, the Pension Funds who are presently entitled to the income of the Bare Trust will be deemed to have derived that income for the purposes of Division 11A of the ITAA 1936.

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