Edited version of your written advice

Authorisation Number: 1051323207593

Date of advice: 21 December 2017

Ruling

Subject: Foreign superannuation fund and exemption from withholding/income tax

Question 1

Is 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

Yes.

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

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

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on

1 July 20XX

Relevant facts and circumstances:

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

1. This Fund was established by the relevant Acts.

2. The main plan in the Fund is a defined benefit plan where the pension provided is based on a formula that provides pension, disability, death and termination benefits to eligible members. This formula is based on years of service and average salary.

3. Employees of the Government, Boards and Commissions automatically become a member on the first day of full-time permanent employment.

4. The member and their employer share the cost of the plan.

5. The Fund’s net assets available for benefits are primarily comprised of investments derived from contributions from employees and prefunding employers together with investment income. These assets are intended to finance the Fund’s portion of the Plan’s actuarially determined obligation for pension benefits accruing to employees for service.

6. The benefits in the main plan are considered to be “locked-in” and can only be accessed upon retirement age and used toward retirement income.

7. There are only limited circumstances in which benefits may be withdrawn from the pension plan including an allowance for small pensions.

8. The relevant Act provides that persons who have a qualifying disability as defined in section X of the Act can have early access to their allowance if they have at least 10 years of service.

9. Neither of the relevant Acts provide that loans can be made to members.

10. The Board also administers another plan. Members of this plan can either have a “locked-in” account which operates like the main plan provided by the Fund. They can also have a “non locked-in” account where participants in the other plan may withdraw all or part of their money, limited to one transaction per month. Withdrawal options are based on whether or not funds are locked-in.

11. A member can participate in the other plan only if they:

● Become a member of the Fund and within one year elect to transfer funds (locked-in or non-locked in) from their prior employer’s pension plan; or

● Has ceased to be an employee in the fund, is entitled to transfer money out of the Fund, and applies to transfers those funds to the other plan; or

● Is the former spouse of common-law partner of a member and is entitled to a portion of the member’s pension as a result of a separation of relationship prior to 31 May 2010.

12. The board administers and maintains this other plan on a separate account on a trust basis.

13. The board of the fund operates as investment manager for other funds, which are separate and are not included in their financial reports.

14. The Fund is exempt from income tax in Country X.

15. A statement from the trustee of the Fund was provided stating 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 is an Australian resident,

● an amount paid to the Fund or set aside for the Fund has not been or cannot be deducted under the ITAA 1997 and

● a tax offset has not been allowed or is not allowable for such an amount.

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

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 Income Tax Assessment Act 1997 (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 indefinitely continuing fund?

The first question to consider in determining whether the Fund is a ‘superannuation fund for foreign residents’ within the meaning of section 118-520 of the ITAA 1997 is whether the Fund is a ‘fund’.

The term ‘fund’ is not defined in either the ITAA 1997 of the ITAA 1936. Therefore, it should be given its ordinary meaning subject to the context in which it appears and having regard to any relevant case law authorities.

The Macquarie Dictionary, [Online], viewed 5 December 2017, www.macquariedictionary.com.au (Macquarie Dictionary) defines the term ‘fund’ as:

16. a stock of money or pecuniary resources. 2. A store or stock of something, not often of something immaterial. 3. An organisation which manages money invested for a particular purpose, such as superannuation.

In Scott v. FC of T (No 2) (1966) 40 ALJR 265; (1966) 14 ATD 333; (1966) 10 AITR 290 (Scott), Windeyer J expressed the view that 'fund' in the context of 'superannuation fund' ordinarily meant 'money (or investments) set aside and invested, the surplus income there from being capitalised'.

Under the fund details, participation in the Fund is automatic for full-time employees and automatic upon meeting certain conditions for part-time, seasonal or in temporary employment. At the time of withdrawal, members will receive the total amount of contributions (from contributions paid by the member and their employer) and any investment income in the form of a retirement pension. Therefore, it is concluded that the Fund is a ‘fund’.

There is also no requirement that the Fund be terminated or wound up after a specified period. Therefore the Fund is a fund that is considered to be indefinitely continuing for the purposes of subparagraph 118-520(1)(a)(i) of the ITAA 1997.

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.

Main Plan

In the case of the main plan of Fund, contributions are made by either the employer or the employee. The employee can access the pension from this plan at the retirement age.

The Fund has been established as a retirement savings account. It is considered to be a “locked-in” account where benefits cannot be taken as a lump sum cash payment. They have to be used to provide retirement income.

The various Acts only allow withdrawal in limited circumstances including for very small pension balances and total disability.

The various Acts also do not provide that loans can be made to members.

Other Plan

In very specific circumstances, access to another plan is provided. These include:

● When a person becomes a member of the fund and within one year elect to transfer funds (locked-in or non-locked in) from their prior employer’s pension plan; or

● Has ceased to be an employee in the fund, is entitled to transfer money out of the fund, and applies to transfers those funds to this other plan; or

● Is the former spouse of common-law partner of a member and is entitled to a portion of the member’s pension as a result of a separation of relationship prior to a certain date.

Eligible members to this other plan are able to either have their funds in a “locked-in” or “non locked-in” accounts. Non-locked in accounts can be refunded to members upon request without penalty, limited to one transaction per month. The ability to withdraw the funds at any time and possibly many years before the age of retirement means that the specific purposes of the withdrawals are too remote to the broad statement of intention of assisting members prepare for retirement or enhancing post-retirement lifestyle.

However the Board that administers the plan operates these plans separately to the Fund.

The other plan is therefore considered to be separate to the Fund. They are not pooled in a common fund with the contributions contained in the Fund. The legislation that established the Fund dictates that it be set up on this separate basis. Therefore even though the “non locked-in” accounts would not be considered to be used for the required retirement purpose, they will not be considered to be part of the fund for the purposes of determining whether the Fund is excluded from withholding under 128B(3)(jb) of the ITAA 1936.

Other Plans

The other plans that the board administers are only as an investment manager role are considered separate from the main plans provided in the Fund. Therefore those plans are not considered to be part of the Fund

Conclusion

Therefore, the requirement in paragraph 128B(3)(jb) of the ITAA 1936 that the interest and dividend income is derived by a ‘superannuation fund for foreign residents’ is satisfied. Accordingly the Fund does qualify for the withholding tax exemption contained in paragraph 128B(3)(jb) of the ITAA 1936.

Question 2

Since the answer to Question 1 was yes, accordingly the answer to 2 is also yes and the interest and/or dividend income derived in Australia by the Fund is non-assessable non-exempt income.

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