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Edited version of your written advice
Authorisation Number: 1051264871182
Date of advice: 7 August 2017
Ruling
Subject: Foreign Super Fund - Exemption from Income tax/Withholding tax
Question 1
Is the Foreign Pension Fund (the Fund) excluded from liability to withholding tax on its interest and/or dividend income derived from Australia under paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)?
Answer
No
Question 2
Is interest and/or dividend income derived from Australia by the Fund not assessable and not exempt income under section 128D of the ITAA 1936?
Answer
No
This ruling applies for the following periods:
Year ended 30 June 2014
Year ended 30 June 2015
Year ended 30 June 2016
Year ended 30 June 2017
Year ending 30 June 2018
Year ending 30 June 2019
Year ending 30 June 2020
Year ending 30 June 2021
The scheme commences on:
1 July 2013
Relevant facts and circumstances
The applicant has applied for a private ruling for a superannuation fund for foreign residents.
The superannuation fund concerned is the Fund.
The Fund was established in Country X.
The application includes the following documentation:
● Letter from Country X tax authorities stating that the Fund is exempt from income tax in Country X and is also a resident of Country X for taxation purpose.
● A copy of the relevant version of the Act.
● The Act provides details of the establishment of the fund, the benefits provided by the fund, and the rules governing the fund.
● A statement from the fund confirming that:
● the fund is an indefinitely continuing fund and a provident, benefit, superannuation or retirement fund,
● the fund was established in a foreign country,
● the fund was established, and is maintained, only to provide benefits for individuals who are not Australian residents,
● the central management and control of the fund is carried on outside Australia by entities none of whom are an Australian resident,
● an amount paid to the fund or set aside for the fund 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.
A copy of the relevant version of the Fund and Subsidiaries Auditor’s Report and Financial Statements for year ended 31 December 2014.
A copy of the relevant version of the Fund and Subsidiaries Auditor’s Report and Financial Statements for year ended 31 December 2015.
The Act states that the member is entitled to apply for a loan from the fund not exceeding the saving, additional fund and the benefits thereof as recorded in the account of individual money of such member for spending in accordance with the objectives, rule and procedures as determined by the Committee.
The Act states that the member is entitled to receive the Gratuity and Pension, Savings, Additional fund, Initial fund, Compensation and the benefits thereof in accordance with the rule as prescribed by the Act upon the membership of such member is come to an end.
The Fund’s website provides that the fund has set up its member welfare objectives and products/services which include providing Housing Loan; Education Loan; Leasing Loan; Shop and Save; Insurance.
For the year ended 31 December 2014, the Fund had a total of xxxx in loans to members.
Relevant legislative provisions
Income Tax Assessment Act 1936 Paragraph 128B(3)(jb)
Income Tax Assessment Act 1936 Section 128D
Income Tax Assessment Act 1997 Section 118-520
Reasons for decision
Section 128D of the ITAA 1936 provides that interest and dividend income that is excluded from withholding tax pursuant to paragraph 128B(3)(jb) of the ITAA 1936 is not assessable income.
For the financial years ended 30 June 2008 and onwards, paragraph 128B(3)(jb) of the ITAA 1936 excludes interest and dividend income from withholding tax where that income:
i. is derived by a non-resident that is a superannuation fund for foreign residents; and
ii. consists of interest, or consists of dividends or non-share dividends paid by a company that is a resident; and
iii. is exempt from income tax in the country in which the non-resident resides.
The term 'superannuation fund for foreign residents' is defined in section 118-520 of the ITAA 1997 as follows:
118-520(1) A fund is a superannuation fund for foreign residents at a time if:
(a) at that time, it is:
(i) an indefinitely continuing fund; and
(ii) a provident, benefit, superannuation or retirement fund; and
(b) it was established in a foreign country; and
(c) it was established, and is maintained at that time, only to provide benefits for individuals who are not Australian residents; and
(d) at that time, its central management and control is carried on outside Australia by entities none of whom is an Australian resident.
118-520(2) However, 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;
(b) a tax offset has been allowed or is allowable for such an amount
Is the Fund a 'fund’? and is it an indefinite continuing fund?
In order to consider the application of Section 118-520 of the ITAA 1997 we must first determine if the Fund is a 'fund’ and is it an indefinite continuing fund?
On consideration of the plan details there is no question that the Fund is a 'fund’ that is indefinite and continuing.
Is the Fund a provident, benefit, superannuation or retirement fund for the purposes of 118-520 of the ITAA 1997?
The phrase 'a provident, benefit, superannuation or retirement fund’ under paragraph 118-520(1)(a)(ii) is not defined in either the ITAA 1997 or the ITAA 1936. However, the phrase has been subject to judicial consideration.
In Scott, the High Court examined the terms 'superannuation fund’ and 'fund’. Justice Windeyer enunciated at ATD 351; AITR 312; ALJR 278 that:
… 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.
In a later case, Mahoney v. Commissioner of Taxation (Cth) (1967) 41 ALJR 232; (1967); 14 ATD 519; 10 AITR 463 (Mahoney), the High Court took a similar view as in Scott, Justice Kitto expressed the view at ALJR 232; (1967); ATD 520; AITR 464 that:
…all that need be recognised is that just as 'provident’ and 'superannuation’ both referred to the provision of a particular kind of benefit – in the one case a provision against contemplated contingencies, and in the other case a provision, to arise on an employee’s retirement or death or other cessation of employee, of a subvention for him or his estate or persons towards whom he may have stood in some kind of relation commonly giving rise to a legal or moral responsibility – so 'benefit’ must have meant a benefit, not a general sense, but characterised by some specific future purpose.
The court found that the expression 'provident, benefit or superannuation fund’ takes its meaning from past usage and the meaning of the several expressions must be arrived at in light of their ordinary usage.
As such the term 'benefit’ requires a purpose narrower than conferring benefits in a completely general sense where the benefit must be characterised by some future purpose e.g. a funeral benefit. On the same note, a provident fund must not refer to the provision of funds in a general sense, but must relate to a provision against contemplated contingencies.
Both of the abovementioned cases emphasise that the benefits must be provided for a specific purpose and require that there is a connection between the benefit received and the provision by the fund for retirement or death of a member or against 'contemplated contingencies’, such as a sickness or accident.
In this case, the Act suggests that the Fund has not been established for the sole purpose of meeting one of the specified purposes.
The Act states that the member is entitled to apply for a loan from the fund not exceeding the saving, additional fund and the benefits thereof as recorded in the account of individual money of such member for spending in accordance with the objectives, rule and procedures as determined by the Committee.
The Act states that the member is entitled to receive the Gratuity and Pension, Savings, Additional fund, Initial fund, Compensation and the benefits thereof in accordance with the rule as prescribed by the Act upon the membership of such member is come to an end.
It is considered that the Fund will not meet the requirements to be considered a provident, benefit, superannuation or retirement fund.
The Fund’s website provides that the fund has set up its member welfare objectives and products/services which include providing Housing Loan; Education Loan; Leasing Loan; Shop and Save; Insurance.
The lending of money is not in line with the sole purpose of a fund of this nature and does not align with the supply of benefits on reaching a specified condition such as reaching retirement age or due to an unforeseen circumstance such as disablement.
Furthermore, the ability for members to access their full benefit on cessation of employment without any restrictions is outside of the sole purpose of a fund meeting the definition.
Accordingly, the Fund is not a superannuation fund for foreign resident and the interest and/or dividend income of the fund is not excluded from withholding tax and will not be non-assessable non-exempt income.
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