Edited version of your written advice

Authorisation Number: 1013020939572

Date of advice: 19 May 2016

Ruling

Subject: Exemption from withholding tax

Question 1

Is Entity A exempt from withholding tax on dividends paid by Australian resident companies from the investments held through Fund A under subparagraph 4d) of Article 10 of the Convention between Australia and the X Confederation for the Avoidance of Double Taxation with respect to Taxes and Income, with Protocol [2014] ATS 33 (X 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 X.

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 X tax purposes.

5. Entity A is exempt from tax in X.

6. Entity A does not carry on a business through a permanent establishment situated in Australia and does not perform independent personal services from a fixed base in Australia.

Fund A and Australian investments

7. Entity A holds investment interests through Fund A.

8. Fund A holds shares in Australian resident companies which pay dividends in relation to those shares.

9. Entity A holds directly no more than 10 per cent of the voting power in the Australian resident companies paying dividends from the investments held through Fund A.

10. Fund A is not subject to X 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.

Assumptions

1. The Australian resident companies that pay dividends from the investments held through Fund A are not dual residents of both Australia and X, pursuant to paragraph 1 of Article 4 of the X Convention.

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 X 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 X 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 X 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 X 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 X Confederation for the Avoidance of Double Taxation with respect to Taxes and Income, with Protocol [2014] ATS 33 Article 10

Convention between Australia and the X 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 X 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

Reasons for decision

Question 1

Is Entity A exempt from withholding tax on dividends paid by Australian resident companies from the investments held through Fund A under subparagraph 4d) of Article 10 of the X Convention?

Summary

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

Dividends paid by Australian resident companies from the investments held through Fund A by Entity A meet the requirements of subparagraph 4d) of Article 10 of the X Convention and as such are exempt from withholding tax under the X Convention.

Detailed reasoning

X Convention - application to Entity A

In order for the X Convention to apply, Article 1 of the X 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 X Convention to apply.

Person

Subparagraph 1c) of Article 3 of the X 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 X 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 X. Therefore, Entity A satisfies the definition of a 'company' pursuant to subparagraph 1d) of Article 3 of the X Convention.

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

Resident of a Contracting State

Paragraph 1 of Article 4 of the X 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 X Convention states that, in relation to paragraph 1 of Article 4 of the X 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 X. 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 X 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 X. As a result, due to it being not liable to pay tax in X, prima facie, Entity A does not satisfy paragraph 1 of Article 4 of the X 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 X. As such, pursuant to sub-subparagraph 3a)(i) of the Protocol to the X Convention, Entity A is a resident of a Contracting State.

Conclusion

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

X Convention - application to taxes

Paragraphs 1 and 2 of Article 2 of the X 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 X, 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 X 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 X 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 X Convention.

Is Entity A exempt from withholding tax on dividends paid by Australian resident companies from the investments held through Fund A under subparagraph 4d) of Article 10 of the X Convention?

Dividend income

Article 10 of the X Convention is the relevant provision in relation to dividend income.

For subparagraph 4d) of Article 10 of the X Convention to apply to Entity A, in respect of an exemption from withholding tax on dividends, it must satisfy the following:

• there are dividends that are paid by companies that are residents of Australia

• Entity A is the beneficial owner of the dividends

• Entity A holds directly no more than 10 per cent of the voting power in the companies paying the dividends, and

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

1. There are dividends that are paid by companies that are residents of Australia

Fund A hold shares in Australian resident companies which pay dividends in relation to those shares.

Therefore, there are dividends that are paid by companies that are residents of Australia from the investments held by Entity A through Fund A, in accordance with subparagraph 4d) of Article 10 of the X Convention.

2. The beneficial owner of the dividends

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

Paragraph 2 of Article 3 of the X 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 dividends derived from an Australian source shall be guided by the context of its use in the X 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 X Convention:

1.41. Unless the context requires otherwise, a term not specifically defined in the X 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 X 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 X 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 income of Fund A as it arises to Fund A. As such, Entity A is considered to derive the dividends through Fund A.

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

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

Fund A is not subject to X 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 dividends as a company for the purposes of X tax, it follows that Entity A is the beneficial owner of the dividends 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 X tax and Australian tax, it follows that Entity A is the beneficial owner of dividends for the purposes of the X Convention.

3. Entity A holds directly no more than 10 per cent of the voting power in the companies paying the dividends

Entity A holds directly no more than 10 per cent of the voting power in the Australian resident companies paying dividends from the investments held through Fund A.

Based upon the above, this condition is satisfied.

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

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

5. Other provisions of Article 10 of the X Convention

Paragraphs 7 and 9 of Article 10 of the X Convention affect the exemption to withholding tax on dividends under subparagraph 4d) of Article 10 of the X Convention. These provisions do not apply to Entity A, pursuant to the following:

• Entity A does not carry on a business through a permanent establishment situated in Australia and does not perform independent personal services from a fixed base in Australia.

• The Australian resident companies that pay dividends from the investments held through Fund A are not dual residents of both Australia and X, pursuant to paragraph 1 of Article 4 of the X Convention. Entity A, also, as determined above, is a resident of X.

Conclusion

Entity A is a X pension scheme whose investment income is exempt from X tax. In addition, Entity A is the beneficial owner of dividends paid by companies that are Australian residents. Furthermore, Entity A holds directly no more than 10 per cent of the voting power in the Australian resident companies paying dividends.

Therefore, subparagraph 4d) of Article 10 of the X Convention will operate to exempt Entity A from withholding tax on dividends paid by Australian resident companies from the investments held through Fund A.

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