Edited version of your written advice

Authorisation Number: 1051319293318

Date of advice: 14 December 2017

Ruling

Subject: Superannuation fund for foreign residents

Question 1

Is the foreign entity exempt from liability to withholding tax on interest, dividend and non-share dividend income under paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

Question 2

Is interest, dividend and non-share dividend income derived by the foreign entity not assessable and not exempt income of the foreign entity under section 128D of the ITAA 1936?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The foreign entity

1. The foreign entity is the pension fund of an employer in the foreign jurisdiction.

2. The foreign entity was established on XX by a deed drawn up in the foreign jurisdiction.

3. The certified translation of the establishment documents (the establishment documents) of the foreign entity forms part of the Scheme to which this Ruling relates.

4. The establishment documents indicate that the purpose of the foreign entity is to provide pensions.

5. The foreign entity is managed by a Management Board in accordance with the establishment documents.

6. The establishment documents set out the composition, obligations and powers of the Management Board.

7. The establishment documents set out that the foreign entity will have a representative body to which the Management Board will be accountable. The establishment documents sets out the tasks and powers of the representative body.

8. The establishment documents sets out that the internal supervision of the foreign entity, will be exercised by a committee. This committee will review the performance and management of the pension fund in accordance with the relevant articles.

9. The establishment documents provides for the dissolution of the foreign entity. corresponding as much as possible with the fund’s objective.

Regulations of the foreign entity (the Regulations)

The foreign entity operates in accordance with the Regulations. The Regulations in their entirety form part of the Scheme to which this Ruling relates.

10. The Regulations set out the pension entitlements that accrue to members of the foreign entity.

11. The Regulations also provide for early access to pension entitlement.

12. The Regulations set out conditions in respect of members joining or leaving the fund and seeking to bring or take their accrued pension benefits with them

Other

13. The foreign entity will receive interest income along with dividend and non-share dividend income from companies who are residents of Australia for tax purposes.

14. An amount paid to the foreign entity or set aside for the foreign entity has not been and cannot be deducted under the Income Tax Assessment Act 1997 (ITAA 1997).

15. A tax offset has not been allowed nor would be allowable for any amount paid to the foreign entity or set aside for the foreign entity.

16. The foreign entity is not a resident of Australia for tax purposes.

17. The foreign entity is exempt from taxation in its resident jurisdiction as a tax exempt Pension Fund.

18. Further, the foreign entity is not fiscally transparent for tax purposes in its resident jurisdiction.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1)

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

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

Reasons for decision

Question 1

Is the foreign entity exempt from liability to withholding tax on interest, dividend and non-share dividend income under paragraph 128B(3)(jb) of the ITAA 1936?

Detailed reasoning

Section 128B of the ITAA 1936 imposes liability to withholding tax on income derived by a non-resident that consists of dividend income (subsection 128B(1) of the ITAA 1936), interest income (subsection 128B(2) of the ITAA 1936) as well as other income prescribed in that section.

Subsection 128B(3) of the ITAA 1936 notes that section 128B of the ITAA 1936 will not apply to prescribed categories of income. Relevantly, paragraph 128B(3)(jb) of the ITAA 1936 states:

(jb) income that:

(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; or

Non-resident

The foreign entity is not a resident of Australia for tax purposes. Therefore, the foreign entity will satisfy this requirement.

Superannuation fund for foreign residents

Superannuation fund for foreign residents is a defined term in the ITAA 1936. Section 6 of the ITAA 1936 states:

superannuation fund for foreign residents has the meaning given by subsection 995-1(1) of the Income Tax Assessment Act 1997.

Subsection 995-1 of the ITAA 1997 sets out the following:

superannuation fund for foreign residents has the meaning given by section 118-520.

Section 118-520 of the ITAA 1997 states the following:

(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.

(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; or

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

Consequently, for the foreign entity to be considered a superannuation fund for foreign residents for the purposes of paragraph 128B(3)(jb) of the ITAA 1936, it must be established that:

● the foreign entity is an indefinitely continuing fund

● the foreign entity is a provident, benefit, superannuation or retirement fund

● the foreign entity was established in a foreign country

● the foreign entity was established and maintained only to provide benefits for individuals who are not Australian residents

● The central management and control of the foreign entity is carried on outside of Australia by entities none of whom are Australian residents

● No amounts paid to the foreign entity or set aside for the foreign entity has been or can be deducted under this Act, and

● No tax offsets have been allowed or would be allowable for an amount paid to the foreign entity or set aside for the foreign entity.

The foreign entity is an indefinitely continuing fund

The legislation provides no guidance on the meaning of ‘indefinitely continuing’. It is not a technical legal expression, and the ordinary meanings of indefinitely and continuing involve little ambiguity or controversy.

The Macquarie Dictionary, [Online], viewed 23 October 2017, www.macquariedictionary.com.au defines ‘indefinitely’ and ‘continuing’ as follows:

Indefinite:

1. not definite; without fixed or specified limit; unlimited: an indefinite number.

2. not clearly defined or determined; not precise.

- indefinitely, adverb

Continue: (verb (Continued, continuing))

1. to go forwards or onwards in any course or action; keep on.

2. to go on after suspension or interruption.

3. to last or endure.

4. to remain in a place; abide; stay.

5. to remain in a particular state or capacity

While the establishment documents provides for the dissolution of the foreign entity, the establishment documents provide no indication that there is any contemplation of the foreign entity ending at a defined point in time. Therefore, it is accepted the foreign entity will continue to operate in accordance with its regulations for an indefinite period of time.

The foreign entity is a provident, benefit, superannuation or retirement fund

This requirement considers the purpose and operation of the foreign entity.

In Scott v. FCT (No. 2) (1966) 40 ALJR 265; 14 ATD 333, Windeyer J stated (40 ALJR 265 at 278; 14 ATD 333 at 351):

There is no definition in the Act of a superannuation fund. The meaning of the term must therefore depend upon ordinary usage, the attributes of a thing thus denominated being those which things ordinarily so described have...the connotation of the phrase in the Act must be determined by one’s general knowledge of the extent of the denotation of the phrase in common parlance...I have come to the conclusion that there is no 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 Mahony v Commissioner of Taxation (1967) 41 ALJR 232; (1967) 14 ATD 519, Kitto J stated:

There was no definition in the Act of ‘a provident, benefit or superannuation fund’, and the meaning of the several expressions must therefore be arrived at in light of ordinary usage and with only one piece of assistance to be gathered from the immediate context. Since a fund, if its income was to be exempt under the provision, was separately required to be one established for the benefit of employees, each of the three descriptive words ‘provident’, ‘benefit’ and ‘superannuation’ must be taken to have connoted a purpose narrower than the purpose of conferring benefits, in a completely general sense, upon employees. Precise definition may be difficult, and in any case is unnecessary for present purposes. All that need be recognized 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 employment, 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 in a general sense, but characterized by some specific future purpose. A funeral benefit is a familiar example.

In Cameron Brae Pty Limited v FCT (2007) 161 FCR 468; [2007] FCAFC 135; 2007 ATC 4936, the Full Federal Court held that the relevant fund was a superannuation fund for the purposes of former section 82AAE of the ITAA 1936. Jessup J at [106] stated:

In answering the question whether the fund was a “superannuation fund” as the term is ordinarily understood, it is, in my view, critical that payments could not have been made out of the fund (other than by way of administration expenses, taxation, etc) save to members of the relevant discretionary class, and save in circumstances which fell within the ordinary understanding of superannuation. A proper characterisation of the fund should, in my view, depend upon the purposes for which the assets and moneys of the fund might have been used rather than upon the quality of the rights of individual members of the fund. If the fund could have been used only to achieve what might be described as a superannuation purpose, I would describe the fund as a “superannuation fund”. That a particular member of a discretionary class might not, ultimately, have received any payment, was not, in my view, disqualifying.

ATO Interpretative Decision ATO ID 2009/67 Income Tax: Superannuation fund for foreign residents (ATO ID 2009/67) refers to these authorities to provide guidance on the meaning of the phrase “provident, benefit, superannuation or retirement fund”:

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.

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. FC of T (No 2) (1966) 14 ATD 333; (1966) 10 AITR 290, per Windeyer J; Mahony v. FC of T (1967) 14 ATD 519, per Kitto J; Walstern Pty Ltd v. Commissioner of Taxation (2003) 138 FCR 1; 2003 ATC 5076; (2003) 54 ATR 423, per Hill J and Cameron Brae Pty Ltd v. Federal Commissioner of Taxation (2007) 161 FCR 468; 2007 ATC 4936; (2007) 67 ATR 178, per Stone and Allsop JJ).

Having regard to the terms of the deed of the Plan, it is considered that the Plan is a 'provident, benefit, superannuation or retirement fund' as that phrase has been interpreted by the relevant authorities. The sole purpose of the Plan is the provision of benefits to, or in respect of, participating employees who:

● cease their employment upon or after reaching retirement age (age 60)

● cease their employment after the satisfaction of certain service requirements

● cease their employment because of death or total and permanent disability, or

● reach age 70, whether or not they have ceased employment.

Therefore, the Plan satisfies subparagraph (a)(ii) of the definition of 'superannuation fund for foreign residents' in section 118-520 of the ITAA 1997.

The above establish that for a fund to qualify as a provident, benefit, superannuation or retirement fund, it must have the sole purpose of providing retirement benefits or benefits in other allowable contemplated contingencies (such as death, disability or serious illness). If a fund provides benefits in other circumstances, it will not satisfy the requirement to be a provident, benefit, superannuation or retirement fund.

The objective of the foreign entity as set out its establishment documents and Regulations.

With respect to the actual operation of the fund, regarding the circumstances in which a member can access the benefits accrued in the fund, the regulations set out the circumstances in which a member of the foreign entity can receive the funds as provided for in the Regulations are clearly consistent with those of a provident, benefit, superannuation or retirement fund.

The alternate circumstances of access, being early release, as identified in the Regulations and transfer of interest to another fund as discussed in the Regulations also clearly align to the contemplated contingencies of a provident, benefit, superannuation or retirement fund.

Therefore, as both the objective of the fund and the actual operation of the fund have the sole purpose of providing retirement benefits or benefits in alignment with other contemplated contingencies, the foreign entity is considered to be a provident, benefit, superannuation or retirement fund.

Therefore, the foreign entity will satisfy this requirement.

The foreign entity was established in a foreign country

The foreign entity was established in its resident jurisdiction. Therefore, the foreign entity will satisfy this requirement.

The foreign entity was established and maintained only to provide benefits for individuals who are not Australian residents

The foreign entity was established in its resident jurisdiction as the pension fund of the foreign employer in its resident jurisdiction. The fund operates to provide retirement benefits for its members in its resident jurisdiction.

It is considered that the possibility of a very small number of members being returned residents or becoming Australian residents after ceasing eligible employment is incidental and should not be taken to conclude that the foreign entity, in this case, has not been established and is not maintained only to provide benefits for non-residents, based on the rules and operation of the foreign entity.

Therefore, the foreign entity will satisfy this requirement.

The central management and control of the foreign entity is carried on outside of Australia by entities none of whom are Australian residents

Paragraphs 20 and 21 of Taxation Ruling TR 2008/9 Income tax: meaning of ‘Australian superannuation fund’ in subsection 295-95(2) of the Income Tax Assessment Act 1997 (TR 2008/9) states in respect of the central management and control of a superannuation fund:

20. The CM&C of a superannuation fund involves a focus on the who, when and where of the strategic and high level decision making processes and activities of the fund. In the context of the operations of a superannuation fund, the strategic and high level decision making processes includes:

● formulating the investment strategy for the fund;

● reviewing and updating or varying the fund's investment strategy as well as monitoring and reviewing the performance of the fund's investments;

● if the fund has reserves - the formulation of a strategy for their prudential management; and

● determining how the assets of the fund are to be used to fund member benefits.

21. The other principal areas of operation of a superannuation fund that form part of the day-to-day or operational side of the fund's activities will not constitute CM&C. These activities do not form part of the CM&C of the fund because they are not of a strategic or high level nature. Rather, these activities are of a more formalistic or administrative nature. Examples of such activities include the acceptance of contributions that are made on a regular basis, the actual investment of the fund's assets, the fulfilment of administrative duties and the preservation, payment and portability of benefits.

Furthermore, paragraph 6 of Draft Taxation Ruling TR 2017/D2 Income tax: Foreign Incorporated Companies: Central Management and Control test of residency (TR 2017/D2) states:

Central management and control is the control and direction of a company's operations. The key element is the making of high-level decisions that set the company's general policies, and determine the direction of its operations and the type of transactions it will enter.

The registered office of the foreign entity is in its resident jurisdiction and the decision making and management of the foreign entity is undertaken by the Management Board.

The objective of the foreign entity is to provide pensions to employees and former employees of the foreign resident entity.

Based on the above mentioned factors it is reasonable to conclude that the central management and control of the foreign entity occurs in the resident jurisdiction by entities that are not Australian residents.

Therefore, the foreign entity will satisfy this requirement.

No amounts paid to the foreign entity or set aside for the foreign entity has been or can be deducted under this Act and no tax offsets have been allowed or would be allowable for an amount paid to the foreign entity or set aside for the foreign entity.

An amount paid to the foreign entity or set aside for the foreign entity has not been and cannot be deducted under the ITAA 1997. A tax offset has not been allowed nor would be allowable for any amount paid to the foreign entity or set aside for the foreign entity.

Therefore, the foreign entity will satisfy this requirement.

Consists of interest or consist of dividends or non-share dividends paid by a company that is resident

Paragraph 128B(3)(jb) of the ITAA 1936 will only apply to interest, or to dividends and non-share dividends paid by Australian resident companies.

Subsection 128A(3) of the ITAA 1936 is also relevant. It states:

For the purposes of this Division, a beneficiary who is presently entitled to a dividend, to interest or to a royalty included in the income of a trust estate shall be deemed to have derived income consisting of that dividend, interest or royalty at the time when he or she became so entitled.

The operation of subsection 128A(3) of the ITAA 1936 will enable interest, dividend and non-share dividend income paid by an Australian resident company and derived by a trust estate to retain its character in the hands of a beneficiary of that trust estate. Further, the beneficiary will be deemed to have derived the relevant income for the purposes of paragraph 128B(3)(jb) of the ITAA 1936 at the point in time that the beneficiary becomes presently entitled to that income.

The foreign entity will receive interest income, along with dividend and non-share dividend income from companies who are residents of Australia for tax purposes.

Therefore, the foreign entity will satisfy this requirement.

Is exempt from income tax in the country in which the non-resident resides

The foreign entity is exempt from taxation in its resident jurisdiction as a tax exempt Pension Fund.

Therefore, the foreign entity will satisfy this requirement

Conclusion

As all the requirements of paragraph 128B(3)(jb) of the ITAA 1936 are satisfied, the foreign entity will be entitled to an exemption under paragraph 128B(3)(jb) of the ITAA 1936.

Question 2

Is interest, dividend and non-share dividend income derived by the foreign entity not assessable and not exempt income of the foreign entity under section 128D of the ITAA 1936?

Detailed reasoning

Section 128D of the ITAA 1936 states:

Income other than income to which section 128B applies by virtue of subsection (2A), (2C) or (9C) of that section upon which withholding tax is payable, or upon which withholding tax would, but for paragraph 128B(3)(ga), (jb) or (m), section 128F, section 128FA or section 128GB, be payable, is not assessable income and is not exempt income of a person.

Section 128D of the ITAA 1936 provides that, inter alia, where withholding tax would be payable but for the operation of paragraph 128B(3)(jb) of the ITAA 1936, the income is not assessable income and is not exempt income.

The interest, dividend and non-share dividend income derived by the foreign entity from its Australian investments will not be assessable income or exempt income under section 128D of the ITAA 1936 because the aforementioned income:

● would have been subject to withholding tax, and

● is not exempt from withholding tax under any provision other than paragraph 128B(3)(jb) of the ITAA 1936.

Conclusion

The interest, dividend and non-share dividend income derived by the foreign entity is not assessable and not exempt income of the foreign entity under Section 128D of the ITAA1936.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).