Edited version of your written advice

Authorisation Number: 1051309155485

Date of advice: 21 November 2017

Ruling

Subject: Foreign Super Fund - Exemption from Income tax/Withholding tax.

Question 1

Is C Group Trust 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 C Group Trust non-assessable and non-exempt income under section 128D of the ITAA 1936?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

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 2009

Relevant facts and circumstances

The application includes the following documentations:

● Letter from the Country A tax authorities stating that the Group Trust is a group trust arrangement, each participant is a resident of Country A.

● A copy of the Group Trust amended and restated agreement and declaration of the trust, by and between the officer of the City A (the officer) and the trustee of the Group Trust (Trust Deed).

● The Trust Deed provides details of the establishment of the Group Trust, the benefits provided by the Group Trust, and the rules governing the Group Trust.

● A statement from the trustee of the Group Trust stating that:

● the participating funds are indefinitely continuing funds and provident, benefit, superannuation or retirement funds,

● the participating funds were established in a foreign country,

● the participating funds were established, and are maintained, only to provide benefits for individuals who are not Australian residents,

● the central management and control of the participating funds are carried on outside Australia by entities none of whom is an Australian resident,

● an amount paid to the participating funds or set aside for the participating funds 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.

● Various Annual Financial Reports.

The Agreement provides the purpose and policies of the Group Trust. It provides that the Group Trust is intended to constitute a qualified trust. Assets comprising the Group Trust shall be managed for the exclusive purpose of providing benefits to participants and their beneficiaries entitled to benefits under the Participating Plans and defraying the reasonable expenses of administering the Participating Plans.

The title to each asset of each Fund shall be owned exclusively by the Trustee in its fiduciary capacity.

An article of the Trust Deed states that the Group Trust consists of one or more separate investment funds (collectively, the “Funds”, and individually, a “Fund”) and each Fund shall be maintained as a separate and distinct subtrust separate and apart from any other Fund created; each Fund shall be independent of each other Fund and shall be separately managed, administered, valued, reinvested, distributed, accounted for and otherwise dealt with.

The Trust Deed provides the information of Units of Participation. The beneficial interest of each Participating Plan in each Fund of the Group Trust shall be represented by units of participation (Units), each of which shall be of equal value to every other within such Fund, and the total number if which may be, from time to time, diminished or increased as hereinafter provided (section 4.1).

All income, profits, losses, and expenses and liabilities of the Fund shall be allocated equally to all Units, and no Units shall have priority or preference over any other Unit of the Fund. The beneficial interest of each Participating Plan shall be expressed by the number of Units and fractions of a Unit allocated to it (section 4.1).

The initial value of each Unit shall be established by the Trustee. Thereafter the Trustee shall determine the value of each Unit within a Fund by dividing the net value of the assets of the Fund by the number of Units allocated to Participating Plans as of such Valuation Date. For purposes of such valuation, the net value of the assets of a Fund shall equal the aggregate value of the assets of such Fund less the aggregate value of liabilities (including accrued expenses) of such Fund. The Unit value for each Fund shall be determined as of each Valuation Date before taking into account additions to and withdrawals from each Fund as of such Valuation Date (section 4.2).

The net value of the assets of each Fund and of each Participant Account shall be determined, and securities shall be valued by the Trustee as of each Valuation Date (section 4.3).

The Trust Deed provides information in relation to Deposits and Withdrawals. It provides that Deposits to and withdrawals from the Group Trust shall be permitted by the Trustee only as of a Valuation Date, and only upon the authorized direction of the Officer.

Moreover, it provides that deposits into a Fund may be made only after prior notice from the Officer to the Trustee and shall consist only of cash or such other property as an investment Manager shall, in its sole discretion, deem to be a suitable and permissible investment for the applicable Fund on such Valuation Date (section 5.2).

Furthermore, Withdrawals from a Fund under this Group Trust may be made upon at least ten (10) Business Days’ advance written notice by the applicable Investment Manager or Officer to the Trustee or such lesser period to which the Trustee may agree. Upon the withdrawal of Units from a Fund under the Group Trust, the Trustee shall distribute to the Participating Plan making such withdrawal an amount equal to the number of Units withdrawn multiplied by the value of each such Unit as of the Valuation Date. The Trustee shall, at the authorized direction of the Officer, distribute such amount in cash or in property on in a combination of both (section 5.3).

Relevant legislative provisions

Income Tax Assessment Act 1936 Paragraph 128A(3)

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

Question 1

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 City A Group Trust a ‘fund’? and is it an indefinitely continuing fund?

On consideration of the relevant facts, circumstances and the constituent documents of the City A Group Trust, there is no question that the Group Trust is a ‘fund’ that is indefinitely continuing.

Is City A Group Trust 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 v FCT (No. 2) (1966) 40 ALJR 265;14 ATD 333;10 AITR 290 (Scott), the High Court examined the terms ‘superannuation fund’ and ‘fund’. Justice Windeyer enunciated at ALJR 278; ATD 351; AITR 312 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; 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.

Application to the facts

The Group Trust operates like a unit trust. This is made apparent in the Trust Deed which states that the beneficial interest of each Participating Plan in each Fund of the Group Trust shall be represented by units of participation (Units), each of which shall be of equal value to every other within such Fund, and the total number if which may be, from time to time, diminished or increased as hereinafter provided.

All income, profits, losses, and expenses and liabilities of the Fund shall be allocated equally to all Units, and no Units shall have priority or preference over any other Unit of the Fund. The beneficial interest of each Participating Plan shall be expressed by the number of Units and fractions of a Unit allocated to it.

The operation of the Group Trust in this way leads to a conclusion that it is not a superannuation fund for foreign residents. It does not operate to provide retirement benefits to its members. It operates as a group trust to make investments and provide benefits to the funds that invest it its units. Therefore, the Group Trust is not a superannuation fund for foreign residents for the purposes of paragraph 128B(3)(jb) of the ITAA 1936.

Do the City’s primary pension funds in the City A Group Trust derive the income?

Since the Group Trust fails to meet the definition of being a superannuation fund for foreign residents, the only way an exemption can be granted is if it can be shown that it is the primary pension funds that actually derive the income, not the Group Trust.

A non-resident beneficiary is liable for withholding tax when the beneficiary derives a dividend or interest included in the income of an Australian trust estate (Taxation Ruling IT 2680 Income Tax: withholding tax liability of non-resident beneficiaries of Australian trusts). Subsection 128A(3) of the ITAA 1936 provides that a beneficiary who is presently entitled to income of a trust estate, which includes interest or dividends, shall be deemed to have derived the income consisting of the interest or dividends at the time they became presently entitled to the income, of the trust estate that includes that interest or dividends.

IT 2680 and ATO Interpretative Decision ATO ID 2008/61 Income Tax: Withholding Tax Exemption: interest and dividends paid by an Australian resident and received by a Dutch Stitching as unitholder in an Irish Common Contractual Fund make it clear that it is the terms of the trust deed that determines present entitlement in these cases.

Therefore, under subsection 128A(3) of the ITAA 1936, a unit holder in the City A Group Trust will only be deemed to have derived the interest and dividend income when the unit holder is presently entitled, under the terms of the Trust Deed, to the income from the City A Group Trust that includes that interest or dividend income.

While present entitlement is not defined in the legislation, numerous court cases have developed the requirements needed to show present entitlement (Harmer v Federal Commissioner of Taxation (1991) 22 ATR 726 at 729,730, Taylor v Federal Commissioner of Taxation (1970) 110 CLR 444 at 452). A beneficiary of a trust becomes presently entitled to income from the trust if all of the following requirements are met:

● the relevant income is legally available for distribution;

● the beneficiary has an absolutely vested beneficial interest in possession in the whole of the relevant income; and

● the beneficiary would succeed in an action to recover the income from the trustees ignoring for this point the existence of any legal disability from giving a valid discharge to the trustees

For the purposes of determining whether the fund derives the income subject to withholding tax, the liability to withholding comes into existence at the time the payment is made to a non-resident.

At the time payments are made from the Australian entities, it does not appear that any primary pension funds would be presently entitled to any income of the Group Trust that includes that interest and dividend income.

The initial value of each Unit shall be established by the Trustee. Thereafter the Trustee shall determine the value of each Unit within a Fund by dividing the net value of the assets of the Fund by the number of Units allocated to Participating Plans as of such Valuation Date. For purposes of such valuation, the net value of the assets of a Fund shall equal the aggregate value of the assets of such Fund less the aggregate value of liabilities (including accrued expenses) of such Fund. The Unit value for each Fund shall be determined as of each Valuation Date before taking into account additions to and withdrawals from each Fund as of such Valuation Date.

The net value of the assets of each Fund and of each Participant Account shall be determined, and securities shall be valued by the Trustee as of each Valuation Date.

In addition, Withdrawals from a Fund under this Group Trust may be made upon at least ten (10) Business Days’ advance written notice by the applicable Investment Manager or Officer to the Trustee or such lesser period to which the Trustee may agree. Upon the withdrawal of Units from a Fund under the Group Trust, the Trustee shall distribute to the Participating Plan making such withdrawal an amount equal to the number of Units withdrawn multiplied by the value of each such Unit as of the Valuation Date. The Trustee shall, at the authorized direction of the Officer, distribute such amount in cash or in property on in a combination of both.

The Group Trust derives the income and gains from the investment then undertakes a process by which the net is allocated to the different funds within the Trust. Those funds are then valued to determine the value of the units held by the primary pension funds. Based on the details around the operation of the Group Trust, set out in the Trust Deed, at no point does present entitlement to the income derived from the Australian investments arise to the primary pension funds.

This can be contrasted with the funds involved in ATO ID 2008/61 where it was found that any interest or dividend income accrued to the unit holder as it arose. The Trust Deed in this case does not work to allow the primary pension funds to accrue the income as it arises.

Accordingly, the Group Trust will not be entitled to an exemption under paragraph 128B(3)(jb) of the ITAA 1936.

Question 2

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.

As the Group Trust will not be entitled to an exemption under paragraph 128B(3)(jb) of the ITAA 1936, the interest or dividend income derived by the Group Trust will not be considered non-assessable and non-exempt income under section 128D of the ITAA 1936.

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