Edited version of your written advice

Authorisation Number: 1013007185601

Date of advice: 5 May 2016

Ruling

Subject: Exemption from withholding tax

Question 1

Is Entity A exempt from withholding tax on interest income arising from the Australian investments held through Fund A under subparagraph 3d) of Article 11 of the Convention between Australia and the relevant Confederation for the Avoidance of Double Taxation with respect to Taxes and Income, with Protocol [2014] ATS 33 (relevant Convention)?

Answer

Yes.

This ruling applies for the following periods

Year ended 30 June 2015

Year ended 30 June 2016

Year ended 30 June 2017

Year ended 30 June 2018

Year ended 30 June 2019

Year ended 30 June 2020

Year ended 30 June 2021

Year ended 30 June 2022

Year ended 30 June 2023

Year ended 30 June 2024

Year ended 30 June 2025

The scheme commenced on

1 July 2014

Relevant facts and circumstances

Entity A

1. Entity A is a pension fund established in a foreign country.

2. Entity A was established pursuant to Statute A.

3. Entity A operates principally to provide pension related benefits.

4. Entity A is treated as a company for the relevant tax purposes.

5. Entity A is exempt from tax in the foreign country.

Fund A and Australian investments

6. Entity A holds investment interests through Fund A.

7. Interest income arises from the Australian investments held under Fund A.

8. All interest income arising from the Australian investments is paid by Australian residents for the purposes of Australian tax, and all such income is not connected to a permanent establishment or a fixed base situated outside of Australia.

9. The entities associated with Fund A, including Entity A, are not related to any payer of interest income in regards to Australian investments held under Fund A.

10. Fund A is not subject to foreign income tax and is fiscally transparent.

11. The income of Fund A is considered to be the income of Entity A as the sole investor in Fund A.

12. Entity A does not participate directly or indirectly in the management, control or capital, and does not have an existing or contingent right to participate in the financial, operating or policy decisions, of the issuer of the debt or equity, in which Fund A invests.

13. Entity B is the manager of Fund A and holds legal title to the assets of Fund A.

14. Entity C is the custodian of Fund A and acts to safeguard the assets of Fund A.

15. The assets of Fund A are not held by Entity B or Entity C for their own benefit, but they act for the interests of Entity A, which is the only unitholder of Fund A.

16. Entity A is beneficially entitled to the income of Fund A and can at any time require payment of its interest in Fund A.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 128B

International Tax Agreements Act 1953 subsection 3AAA(1)

International Tax Agreements Act 1953 subsection 5(1)

Convention between Australia and the relevant Confederation for the Avoidance of Double Taxation with respect to Taxes and Income, with Protocol [2014] ATS 33 Article 1

Convention between Australia and the relevant Confederation for the Avoidance of Double Taxation with respect to Taxes and Income, with Protocol [2014] ATS 33 Article 2

Convention between Australia and the relevant Confederation for the Avoidance of Double Taxation with respect to Taxes and Income, with Protocol [2014] ATS 33 Article 3

Convention between Australia and the relevant Confederation for the Avoidance of Double Taxation with respect to Taxes and Income, with Protocol [2014] ATS 33 Article 4

Convention between Australia and the relevant Confederation for the Avoidance of Double Taxation with respect to Taxes and Income, with Protocol [2014] ATS 33 Article 11

Convention between Australia and the relevant Confederation for the Avoidance of Double Taxation with respect to Taxes and Income, with Protocol [2014] ATS 33 subparagraph 2b) of the Protocol

Convention between Australia and the relevant Confederation for the Avoidance of Double Taxation with respect to Taxes and Income, with Protocol [2014] ATS 33 sub-subparagraph 3a)(i) of the Protocol

Convention between Australia and the relevant Confederation for the Avoidance of Double Taxation with respect to Taxes and Income, with Protocol [2014] ATS 33 paragraph 9 of the Protocol

Reasons for decision

Question 1

Is Entity A exempt from withholding tax on interest income arising from the Australian investments held through Fund A under subparagraph 3d) of Article 11 of the relevant Convention?

Summary

Entity A is considered to be a person who is a resident of a Contracting State, and is therefore subject to the relevant Convention.

Interest income arising from the Australian investments held through Fund A by Entity A meets the requirements of subparagraph 3d) of Article 11 of the relevant Convention and as such is exempt from withholding tax under the relevant Convention.

Detailed reasoning

Foreign Country Convention - application to Entity A

In order for the relevant Convention to apply, Article 1 of the relevant Convention provides that:

This Convention shall apply to persons who are residents of one or both of the Contracting States.

Entity A must therefore be considered both a 'person' and a 'resident of a Contracting State' for the relevant Convention to apply.

Person

Subparagraph 1c) of Article 3 of the Relevant Convention defines a 'person' to include:

… an individual, a company, a trust and any other body of persons.

Subparagraph 1d) of Article 3 of the Relevant Convention defines a 'company' to mean:

… any body corporate or any entity which is treated as a company or body corporate for tax purposes.

Entity A is treated as a company for tax purposes in The foreign country. Therefore, Entity A satisfies the definition of a 'company' pursuant to subparagraph 1d) of Article 3 of the Relevant Convention.

As Entity A is considered a company under the Relevant Convention, it also satisfies the definition of a 'person' in accordance with subparagraph 1c) of Article 3 of the Relevant Convention.

Resident of a Contracting State

Paragraph 1 of Article 4 of the Relevant Convention provides the following:

For the purposes of this Convention, the term "resident of a Contracting State" means any person who, under the laws of that State, is liable to tax as a resident of that State, and also includes the Government of that State and any political subdivision or local authority thereof. This term, however, does not include any person who is liable to tax in that State in respect only of income from sources in that State.

In addition, sub-subparagraph 3a)(i) of the Protocol to the Relevant Convention states that, in relation to paragraph 1 of Article 4 of the Relevant Convention, it is understood that the term 'resident of a Contracting State' includes, in particular, a person that is a pension scheme established in that State.

Entity A was established as a pension fund in The foreign country. In addition, Entity A was established pursuant to Statute A, which is specifically listed in the definition of 'pension scheme' in subparagraph 2b) of the Protocol to the Relevant Convention and paragraph 1.36 of the EM to the ITAAB 2014. Entity A operates principally to provide pension related benefits.

For completeness, Entity A is exempt from tax in The foreign country. As a result, due to it being not liable to pay tax in The foreign country, prima facie, Entity A does not satisfy paragraph 1 of Article 4 of the Relevant Convention to be defined as a 'resident of a Contracting State'.

However, as determined above, Entity A is deemed to be a person and a pension scheme established in The foreign country. As such, pursuant to sub-subparagraph 3a)(i) of the Protocol to the Relevant Convention, Entity A is a resident of a Contracting State.

Conclusion

Entity A meets the requirements of Article 1 of the Relevant Convention and is therefore subject to its application.

Relevant Convention - application to taxes

Paragraphs 1 and 2 of Article 2 of the Relevant Convention, in respect to taxes covered, provides the following:

1. This Convention shall apply to taxes on income imposed on behalf of a Contracting State and, in the case of The foreign country, on behalf of its political subdivisions or local authorities, irrespective of the manner in which they are levied.

2. There shall be regarded as taxes on income all taxes imposed on total income or on elements of income, including taxes on gains from the alienation of movable or immovable property, taxes on the total amounts of wages or salaries paid by enterprises, as well as taxes on capital appreciation.

In addition, subparagraph 3a) of Article 2 of the Relevant Convention provides the following:

The existing taxes to which this Convention shall apply are in particular:

a) in Australia:

the income tax, the fringe benefits tax and resource rent taxes imposed under the federal law of Australia;

(hereinafter referred to as "Australian tax");

Based upon the above, the Relevant Convention applies to all taxes imposed on income and in particular applies to Australian income tax.

Section 128B of the Income Tax Assessment Act 1936 imposes liability to withholding tax on dividend, interest and royalty income derived by non-residents. As such, withholding tax payable in respect to interest paid by Australian resident companies to non-residents is considered to be an Australian income tax and is covered by the Relevant Convention.

Is entity A exempt from withholding tax on interest income arising from the Australian investments held through fund A under subparagraph 3d) of Article 11 of the Relevant Convention?

Interest income

Article 11 of the Relevant Convention is the relevant provision in relation to interest income.

For subparagraph 3d) of Article 11 of the Relevant Convention to apply to Entity A, in respect of an exemption from withholding tax on interest income, it must satisfy the following:

• there is interest that arises in Australia

• Entity A is the beneficial owner of the interest

• Entity A is a resident of The foreign country, and

• Entity A is a pension scheme and its investment income is exempt from Relevant tax.

1. Interest that arises in Australia

Interest income arises from the Australian investments held by Entity A through Fund A.

Additionally, all interest income arising from the Australian investments is paid by Australian residents for the purposes of Australian tax, and all such income is not connected to a permanent establishment or a fixed base situated outside Australia. Accordingly, pursuant to paragraph 7 of Article 11 of the Relevant Convention, interest income arises in Australia.

Therefore, interest arises in Australia from the Australian investments held by Entity A through Fund A, in accordance with subparagraph 3d) of Article 11 of the Relevant Convention.

2. The beneficial owner of the interest

The term 'beneficial owner' is not defined under the Relevant Convention.

Paragraph 2 of Article 3 of the Relevant Convention provides the following:

As regards the application of the Convention at any time by a Contracting State, any term not defined therein shall, unless the context otherwise requires, have the meaning that it has at that time under the law of that State for the purposes of the taxes to which the Convention applies, any meaning under the applicable tax laws of that State prevailing over a meaning given to the term under other laws of that State.

As such, the definition of the term 'beneficial owner' in relation to interest income derived from an Australian source shall be guided by the context of its use in the Relevant Convention or, without such context, by the laws of Australia for the purposes of taxation.

Additionally, paragraphs 1.41, 1.42 and 1.43 of the EM to the ITAAB 2014 provide the following, in respect of paragraph 2 of Article 3 of the Relevant Convention:

1.41. Unless the context requires otherwise, a term not specifically defined in the Relevant Convention will have the same meaning that it has under the law of the country applying the Convention at the time of its application. In that case, the meaning of the term under the taxation law of that country will have precedence over the meaning it may have under other domestic laws.

1.42. The same term may have a differing meaning and a varied scope within different Acts relating to specific taxation measures. For example, GST definitions are sometimes broader than income tax definitions. The definition more specific to the type of tax should be applied in such cases. For example, where the matter subject to interpretation is an income tax matter, but definitions exist in either the ITAA 1936 or the ITAA 1997 and the A New Tax System (Goods and Services Tax) Act 1999, the income tax definition would be the relevant definition to be applied.

1.43. If a term is not defined in the Convention, but has an internationally understood meaning in tax treaties and a meaning under the domestic law, the context would normally require that the international meaning be applied. 

ATO Interpretive Decision ATO ID 2011/13 Income Tax Interest withholding tax: interest arising in Australia paid to a New Zealand Limited Partnership - 'beneficially owned' (ATO ID 2011/13) provides guidance in relation to the use of relevant context for interpreting Australian tax treaties and is therefore instructive in considering the application of paragraph 2 of Article 3 of the Relevant Convention. It further provides guidance in relation to the definition of 'beneficial owner'.

ATO ID 2011/13 states the following:

Relevant context for the purposes of interpreting an Australian tax treaty includes the Commentaries on the OECD Model Tax Convention on Income and on Capital (the OECD Commentary). Paragraph 104 of Taxation Ruling TR 2001 / 13 states that the OECD Commentary provides important guidance on interpretation and application of the OECD Model Tax Convention and will often need to be considered as a matter of practice, in interpreting tax treaties, at least where the wording is ambiguous.

Paragraph 9 of the 2010 OECD Commentary on Article 11 of the Model Tax Convention states:

 … The term 'beneficial owner' is not used in a narrow technical sense, rather, it should be understood in its context and in light of the object and purposes of the Convention, including avoiding double taxation and the prevention of fiscal evasion and avoidance.

Therefore, the term 'beneficial owner' should be used in a purposive sense in light of the operation of the Relevant Convention.

In terms of Australian tax, ATO Interpretive Decision ATO ID 2008/61 Income Tax: Withholding Tax Exemption: interest and dividends paid by an Australian resident and received by a Dutch Stichting as unitholder in an Irish Common Contractual Fund (ATO ID 2008/61) is relevant. ATO ID 2008/61 provides that, in respect of the particular arrangement in that decision, the relationship between the manager, custodian and the unitholder constitutes a trust relationship.

ATO ID 2008/61 refers to French J in Harmer & Ors v. FC of T 89 ATC 5180; (1989) 20 ATR 1461 who stated that a trust 'is notably a definition of a relationship by reference to obligations'.

Further, ATO ID 2008/61 provides the following:

His Honour went on to state that the four essential elements of a trust are:

1. the trustee who holds a legal or equitable interest in the trust property

2. the trust property which must be property capable of being held on trust and which includes a chose in action

3. one or more beneficiaries other than the trustee, and

4. a personal obligation on the trustee to deal with the trust property for the benefit of the beneficiaries, which obligation is also annexed to the property.

ATO ID 2008/61 states the following:

All four elements of a trust are present in the relationship between the manager, custodian and the unitholder of the CCF. The manager of the CCF, and in some cases the custodian, holds legal title to the assets of the CCF. The assets are not held by the manager and the custodian for their own benefit, but rather the deed obliges the manager and custodian to deal with the assets of the CCF on behalf of and in the best interests of the unitholder in the CCF. Accordingly, both the manager and the custodian are acting in a trustee capacity with respect to the assets of the CCF, being the trust property which initially arose from the unitholder's contributions to the CCF. A unitholder is beneficially entitled to a proportion of the underlying assets of the CCF in accordance with their unit holding and receives income from the investment of the CCF assets by the manager and/or custodian as it arises.

ATO ID 2008/61 concludes that where a trust relationship exists and the income accrues to the unitholder as it arises, the unitholder has a present legal entitlement to the income received by the fund.

Accordingly, the unitholder is considered to have derived the income at the time when it became presently entitled to the income.

In applying these principles to Entity A and Fund A:

• Entity B, as manager of Fund A, holds legal title to the assets.

• Entity C, as custodian of Fund A, acts to safeguard the assets of Fund A.

• The assets of Fund A are not held by Entity B or Entity C for their own benefit, but they act for the interests of Entity A, which is the only unitholder of Fund A.

• Entity A is beneficially entitled to the income of Fund A and can at any time require payment of its interest in Fund A.

Based upon the above rights and obligations, a trust relationship exists between Entity A, Entity B and Entity C. Due to Entity A's sole beneficial interest in the assets of Fund A where it can require payment of its interest at any time, Entity A accrues income from the investments as it arises.

Accordingly, Entity A is presently entitled to the assets and income of Fund A as it arises to Fund A. As such, Entity A is considered to derive the interest income through Fund A.

The Relevant tax treatment of Entity A and the income arising through Fund A is also instructive.

Entity A is treated as a company for Relevant tax purposes.

Fund A is not subject to Relevant income tax and is fiscally transparent. The income of Fund A is considered to be the income of Entity A as the sole investor in Fund A.

Accordingly, as Entity A is considered to derive the interest income as a company for the purposes of Relevant tax, it follows that Entity A is the beneficial owner of the interest income arising through Fund A.

Consequently, due to the purposive meaning to be given to 'beneficial owner' made apparent by the OECD Model Tax Convention, as cited by ATO ID 2011/13, and the determination that Entity A is viewed to derive the income under both Relevant tax and Australian tax, it follows that Entity A is the beneficial owner of the interest income for the purposes of the Relevant Convention.

3. Resident of The foreign country

As determined above, Entity A is a resident of the foreign country as it satisfies the definition of a 'resident of a Contracting State' and was established in the foreign country.

4. Pension scheme and investment income is exempt from Relevant tax

As determined above, Entity A is a pension scheme, pursuant to the Relevant Convention, and is exempt from tax in the foreign country.

5. Other provisions of Article 11 of the Relevant Convention

Subparagraph 4b) and paragraph 8 of Article 11 of the Relevant Convention affect the exemption to withholding tax on interest income under subparagraph 3d) of the Article 11 of the Relevant Convention.

Subparagraph 4b) of Article 11 of the Relevant Convention is further explained by paragraph 9 of the Protocol to the Relevant Convention, which provides the following:

It is understood that subparagraph b) of paragraph 4 is intended to ensure that the exemptions prescribed in subparagraphs a), c) and d) of paragraph 3 apply only where the beneficial owner of the interest holds a portfolio-like interest in the issuer of the debt-claim and will not apply where the beneficial owner is associated with, or in a position to control or influence the key decision-making of, the issuer of the debt-claim.

Subparagraph 4b) and paragraph 8 of Article 11 of the Relevant Convention do not apply to Entity A, pursuant to the following:

• Entity A does not participate directly or indirectly in the management, control or capital, and does not have an existing or contingent right to participate in the financial, operating or policy decisions, of the issuer of the debt or equity, in which Fund A invests.

• The entities associated with Fund A, including Entity A, are not related to any payer of interest income in regards to Australian investments held under Fund A.

Conclusion

Entity A is a Relevant pension scheme whose investment income is exempt from Relevant tax. Additionally, Entity A is the beneficial owner of the interest income arising in Australia. Therefore, subparagraph 3d) of Article 11 of the Relevant Convention will operate to exempt Entity A from withholding tax on interest income arising from the Australian investments held through Fund A.

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