Edited version of your written advice

Authorisation Number: 1051322444312

Date of advice: 20 December 2017

Ruling

Subject: Superannuation fund for foreign residents

Question 1

Is the Fund 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 Fund not assessable and not exempt income of the Fund under section 128D of the ITAA 1936?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Articles of Association

1. The Articles of Association, in their entirety, form part of the scheme to which this ruling relates.

2. The Fund has its registered office in a country that is not Australia.

3. The Articles of Association state the objectives of the Fund, which includes to implement the pension scheme adopted by the Employer.

4. The Fund is managed by a Board in accordance with the Articles of Association which sets out the membership, powers and meetings of the Board.

5. The Fund has set up an Accountability Committee in accordance with the Articles of Association which sets out the membership requirements of the Accountability Committee.

6. The Board appoints a Visitation Committee to conduct Internal Supervision. The Visitation Committee reports to the Board. The Articles of Association sets out the membership requirements.

7. The Articles of Association outline the eligible participants of the Fund.

8. The Board may also, in consultation with the Employer, open the Fund to persons in the employ of a Befriended Employer. A Befriended Employer is defined in the Articles of Association.

9. The Articles of Association outline the circumstances in which participation in the Fund will end.

10. The Rules and Regulations contain more detailed provisions governing the pensions and other benefits covered by the Fund.

11. The Articles of Association state that the Board may dissolve the Fund, and outlines the process for the dissolution and liquidation of the fund.

Rules and Regulations

12. The Fund is governed by the Articles of Association, which reference the Rules and Regulations (the Rules).

13. The Rules, in their entirety, form part of the Scheme to which this ruling relates.

14. The Rules set out the commencement of membership with the Fund.

15. Membership of the Fund ends on termination of the employment contract with the Employer, but in any case at the moment of reaching the statutory retirement age, however there are some exceptions. The Articles of Association also provide conditions for which membership is deemed to continue after termination of the employment contract.

16. The pension entitlements of the Fund are detailed further in the Articles of Association and the Rules.

17. If the membership ends other than as a result of death, disability for work or retirement, the former member is entitled to some of the pension entitlements whilst other entitlements may lapse, which is detailed further in the Rules.

18. The Rules state that with reference to early or late retirement, the (former) member can have the old-age pension commence earlier or later than on the retirement date. The Rules further detail that early retirement cannot commence earlier than the 55^th birthday of the (former) member and that employment with the Employer has ended.

19. The Rules provide that at the option of the member, the old-age pension can commence partially (on an earlier date). The member chooses a part-time pension percentage, and the aggregate of this and the part-time percentage for which the member remains employed with the Employer may not exceed the percentage for which the member was in the employment of the Employer. The part-time retirement cannot commence earlier than the 55^th birthday of the member.

20. The Rules provide for the value transfer on entering or leaving employment with the Employer. An employee is able to transfer the value of their non-contributory pension entitlements from their previous employment to the Fund. In addition, upon leaving employment with the Employer, the amount of non-contributory pension entitlements can be transferred directly to the pension administrator of the new pension scheme.

21. The member’s accrued pension entitlements in the Fund are indexed annually by a percentage not exceeding the general pay increase; however this is decided by the Board.

22. Participants in the Fund contribute to the costs of the pension scheme. The contribution is payable monthly by way of deduction by the Employer from the member’s salary or from the benefit replacing the salary. The Rules outline what the contribution is equal to and calculated on.

23. The Fund allows for the commutation of small pensions in the circumstances of leaving employment, after retirement date, and small surviving dependant’s pension if on an annual basis it is less than the commutation limit as outlined in the Rules.

Other

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

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

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

27. The Fund is not a resident of Australia for tax purposes.

28. The Fund is exempt from taxation in accordance with statute in its country of residence as a tax exempt Pension Fund.

29. The Fund is not fiscally transparent for tax purposes in its country of residence.

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

Answer

Yes.

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

The Fund is a non-resident

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

The Fund is a 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(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 Fund 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 Fund is an indefinitely continuing fund

● The Fund is a provident, benefit, superannuation or retirement fund

● The Fund was established in a foreign country

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

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

● No amounts paid to the Fund or set aside for the Fund 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 Fund or set aside for the Fund.

The Fund 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, 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 Articles of Association provide for the process of dissolution and liquidation of the Fund, the Rules and the Articles of Association provide no indication that there is an intention for the Fund to end at a defined point in time. Therefore, it is accepted the Fund will continue to operate for an indefinite period.

The Fund is a provident, benefit, superannuation or retirement fund

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 Fund as set out in the Articles of Association is to implement the Fund’s pension scheme adopted by the Employer. The Fund provides its members with pension entitlements in accordance with the Rules.

With respect to the operation of the Fund, the Rules set out the circumstances in which a member can access the benefits accrued in the Fund, being pension entitlements.

The circumstances in which a member of the Fund can receive the entitlements as provided for in the Rules are consistent with those of a provident, benefit, superannuation or retirement fund.

The alternate circumstances of access, being early or part-time retirement, as identified by the Rules, and value transfer from or to another fund as outlined in the Rules also align to the contemplated contingencies of a provident, benefit, superannuation or retirement fund.

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 Fund is considered to be a provident, benefit, superannuation or retirement fund.

Therefore, the Fund will satisfy this requirement.

The Fund was established in a foreign country

The Fund was established in a country that is not Australia. Therefore, the Fund will satisfy this requirement.

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

The Fund was established in a country that is not Australia as a pension fund for the Employer. The Fund operates to implement its pension scheme for its members in the country where it is a resident.

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 Fund, 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 Fund.

Therefore, the Fund will satisfy this requirement.

The central management and control of the Fund 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 Fund is in a country that is not Australia. The decision making and management of the Fund is undertaken by the Board.

The objective of the Fund is to implement the pension scheme adopted by the Employer.

Based on the above mentioned factors it is reasonable to conclude that the central management and control of the Fund occurs in the country that is not Australia by entities that are not Australian residents.

Therefore, the Fund will satisfy this requirement.

No amounts paid to the Fund or set aside for the Fund 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 Fund or set aside for the Fund

An amount paid to the Fund or set aside for the Fund 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 Fund or set aside for the Fund.

Therefore, the Fund 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 the 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 Fund will receive interest income, along with dividend and non-share dividend income from companies who are residents of Australia for tax purposes.

Therefore, the Fund will satisfy this requirement.

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

The Fund is exempt from taxation in accordance with laws in its country of residence as a tax exempt Pension Fund.

Therefore, the Fund will satisfy this requirement

Conclusion

As all the requirements of paragraph 128B(3)(jb) of the ITAA 1936 are satisfied, the Fund 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 Fund not assessable and not exempt income of the Fund under section 128D of the ITAA 1936?

Answer

Yes.

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 Fund 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 Fund is not assessable and not exempt income of the Fund under Section 128D of the ITAA 1936.

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).