Edited version of your written advice

Authorisation Number: 1051385075608

Date of advice: 14 June 2018

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

Answer

Yes.

Question 3

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

The scheme commences on:

Year ending 30 June 20XX

Relevant facts and circumstances

1. The Fund and Pension Scheme were created in Country A by virtue of legislation (the Act). The Fund is governed by the Act.

2. The purpose of the Pension Scheme under the Act is to provide pension benefits for old-age, disability, death, or in limited circumstances lump-sum refunds.

3. The Act provided rules around eligibility to pension benefits provided under the Pension Scheme.

4. The Act provides the rules around membership to the Fund.

The Fund

5. The Fund was established by the Act to finance the pension benefits provided under the Act.

6. Under the Act, a Minister of Country A is responsible for administering and investing the Fund. This responsibility has been outsourced to a government entity established under the Act (the Administrator).

Investment A

7. The Fund acquired an X% interest in Investment A.

8. The purpose of the Fund’s acquisition of Investment A is to derive consistent, long-term periodic income from the underlying consortium vehicles.

Investment A structure

9. The Fund expects to receive income in the form of trust distributions from the underlying structure, as well as interest income from Investment A.

10. The Aus Trust owns X% of the units in Investment A.

11. The Aus Trust is an Australian resident unit trust. The units in the Aus Trust are held as follows:

● Y% by Bare Trust, and

● Z% by Offshore Co.

12. The Fund is the sole beneficiary of Bare Trust. The Bare Trust is a bare trust, established and tax resident in Country B.

13. Offshore Co, being a company incorporated in Country B, is a whole owned entity of the Fund.

The Bare Trust

14. The Deed for the Bare Trust states the trustee shall hold all the right, title and interest in and to the units in Bare Trust and all distributions, interest, bonuses and all other rights and benefits from time to time received or arising in respect of the units in Aus Trust on trust solely for the Fund absolutely.

15. The Deed provides that the trustee of Bare Trust shall:

● not sell, transfer, or encumber with the right, title, and interest in Bare Trust unless approved by Fund

● promptly and fully account to Fund for all distributions, interest, bonuses, and benefits that arise from the units held in the Bare Trust

● exercise voting rights and other privileges as directed by Fund

● at the request and cost of Fund execute proxies that allow Fund to designate a representative to attend or vote at any meeting of Aus Trust

● in respect to the units held in Aus Trust; transfer, pay, and deal with units and all distributions, interest, bonuses and other benefits that are received from time to time as directed by Fund, and

● hold all other cash, investments, and other trust property from time to time for the Fund absolutely.

Other

16. The investment income of the Fund is not subject to corporate tax in Country A.

17. The Fund will receive interest, dividend and non-share dividend income from income tax residents of Australia.

18. 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).

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

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

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?

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;

The Fund is a non-resident

The Fund is not a resident of Australia for tax purposes. Therefore, the Fund satisfies 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;

(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 amount paid to the Fund or set aside for the Fund has been or can be deducted under the ITAA 1997, 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, [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))

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

1. to go on after suspension or interruption.

2. to last or endure.

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

4. to remain in a particular state or capacity

The rules for the Fund, being the Act, provide no indication that there is any contemplation of the Fund ending at a defined point in time. Therefore, it is accepted that the Fund will continue to operate in accordance with the Act for an indefinite period of time.

Therefore, the Fund satisfies this requirement.

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).

The purpose of the Fund is to provide retirement benefits to members of the Fund.

These members can become eligible for benefits under the following circumstances of voluntary retirement, disability retirement, early retirement, death and withdrawal from Pension Scheme.

The payment of retirement benefits is allowed upon members reaching the specified retirement ages. Further, the Commissioner accepts that the alternate circumstances of access in this case align to the contemplated contingencies of a provident, benefit, superannuation or retirement fund.

Therefore, the Fund satisfies this requirement.

The Fund was established in a foreign country

The Fund was established in Country A which is not Australia.

Therefore, the Fund satisfies this requirement.

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

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 satisfies this requirement.

The Fund’s central management and control is carried on outside Australia by entities none of whom is an Australian resident

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 (CM&C) 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 the 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 Fund is managed and controlled by the Administrator, being an entity controlled by the government of Country A. Consequently, it is reasonable to conclude the central management and control of the Fund occurs in Country A by entities that are not Australian residents.

Therefore, the Fund satisfies this requirement.

No amount paid to the Fund or set aside for the Fund has been or can be deducted under the ITAA 1997 and no tax offset has been allowed or is allowable for such an amount

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 satisfies this requirement.

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

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 satisfies 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 the taxation laws of Country A.

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

Answer

Yes.

Detailed reasoning

In accordance with the answer to question 1, Australian sourced interest, dividend, and non-share dividend income of the Fund are exempt from liability to withholding tax under paragraph 128B(3)(jb) of the ITAA 1936.

Aus Trust derives interest income from Investment A. This income will then eventually be distributed to Bare Trust and Offshore Co. In order for the 128B(3)(jb) exemption to apply to the Bare Trust’s share of the interest income:

● the Bare Trust must be presently entitled to the interest income of the Aus Trust, and

● the Fund must be presently entitled to the interest income at the time it is derived by the Bare Trust.

Bare Trust

The operation of paragraph 128B(3)(jb) of the ITAA 1936 is extended by subsection 128A(3) of the ITAA 1936 which 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.

Subsection 128A(3) of the ITAA 1936 enables interest income (as well as dividend and non-share dividend income paid by an Australian resident company) derived by a trust estate to retain its character in the hands of a beneficiary of that trust estate. The beneficiary of the trust estate will be deemed to have derived the relevant type of 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.

Paragraph 16 to 17 of Taxation Ruling IT 2680 Income tax: withholding tax liability of non-resident beneficiaries of Australian trusts (IT 2680) confirms the operation of subsection 128A(3) in this regard.

Paragraph 24 of IT 2680 states the following in relation to present entitlement:

24. The requirement of present entitlement to a share of the income of the trust estate refers to a present vested right to demand and receive payment of the whole or part of what has been received by the trustee as income and, retaining that character in the trustee's hands, is legally available to be distributed to those entitled to it as beneficiaries under the trusts. (See the Full Court of the Federal Court of Australia decision in FC of T v. Totledge Pty Ltd (1982) 40 ALR 385 at 394; 82 ATC 4168 at 4175; (1982) 12 ATR 830 at 838.)

Aus Trust derives interest income from Investment A. Pursuant to 128A(3) of the ITAA 1936, when Bare Trust becomes presently entitled to its share of the income from the Aus Trust, the interest income derived by Aust Trust shall retain its character as interest income in the hands of the Bare Trust. Consequently, interest income initially derived by the Aus Trust from Investment A is deemed to be derived by its beneficiary, the Bare Trust.

Derived by the Fund

Paragraph 128B(3)(jb) of the ITAA 1936 requires that for the exemption to liability to withholding tax on interest, dividend, or non-share dividend income to apply, the income must be derived by a non-resident superannuation fund for foreign residents.

ATO Interpretative Decision ATOID 2008/61 - Withholding Tax Exemption: interest and dividends paid by an Australian resident and received by a Dutch Stichting as unitholder in an Irish Common Contractual Fund (ATO ID 2008/61) determined that income received through an interposed CCF was entitled to the exemption under paragraph 128B(3)(jb). It states the following with respect to the relationship between the interposed CCF and the Stichting:

Is the relationship between the CCF and the Stichting a trust for the purposes of subsection 128A(3) of the ITAA 1936?

The term 'trust estate' is not defined in the ITAA 1936 or Income Tax Assessment Act 1997 (ITAA 1997). Whether the interest and dividend income forms part of a trust estate, therefore, depends on whether a trust exists in accordance with guidance provided by the Courts. Justice French in Harmer & Ors v. FC of T 89 ATC 5180; (1989) 20 ATR 1461 stated that a trust 'is notably a definition of a relationship by reference to obligations'. His Honour went on to state that the four essential elements of a trust are:

1. the trustee who holds a legal or equitable interest in the trust property

2. the trust property which must be property capable of being held on trust and which includes a chose in action

3. one or more beneficiaries other than the trustee, and

4. a personal obligation on the trustee to deal with the trust property for the benefit of the beneficiaries, which obligation is also annexed to the property.

Is the relationship between the Bare Trust and the Fund a trust relationship for the purposes of subsection 128A(3) of the ITAA 1936?

All four elements of a trust are present in the relationship between the trustee and beneficial owner of the Bare Trust (being the Fund). Therefore, the relationship between the trustee and beneficiary constitutes a trust relationship. Accordingly, the income received by the trustee and administrator of the Bare Trust is income of a trust estate for the purposes of subsection 128A(3) of the ITAA 1936.

Is the Fund presently entitled to interest income at the time it is derived by the Bare Trust?

The liability to withholding tax arises at the time of payment from Australia to a non-resident. It is at this time that the Fund must be presently entitled to the income deemed to be derived by the Bare Trust in order for the exemption under s128B(3)(jb) to be available.

Paragraph 24 of IT 2680 states that present entitlement is a present vested right to demand and receive payment of the whole or part of what has been received by the trustee as income and, retaining that character in the trustee's hands, is legally available to be distributed to those entitled to it as beneficiaries under the trusts.

With respect to present entitlement, ATO ID 2008/61 states:

Under the terms of the deed, income of the CCF accrues to the unitholder as it arises. Accordingly, the Stichting would have a present legal right to demand and receive payment of the income and therefore, would be presently entitled to the interest and dividend income received by the CCF.

The Bare Trust operates as a bare trust. Similar to the passage above, under the terms of the Bare Trust, income accrues to the Fund as it arises. Additionally, the trustee of the Bare Trust must pay, transfer, and deal with any distributions, interest, bonuses and other benefits as directed by the Fund which is the sole beneficiary of the Bare Trust. Accordingly, the Fund would have a present legal right to demand and receive payment of the income of the Bare Trust and therefore, would be presently entitled to the interest income derived by the Bare Trust as the Bare Trust derives it.

Consequently, subsection 128A(3) of the ITAA 1936 would therefore apply so that the Fund is deemed to have derived the interest income at the time the income is derived by Bare Trust. This effectively means that for the purposes of the interest withholding tax exemption in subsection 128B(3)(jb), the Fund, a non-resident superannuation fund for foreign residents has derived interest income from an Australian resident payer.

Conclusion

Due to the operation of subsection 128A(3) of the ITAA 1936, the Fund will be deemed to have derived the interest income from Investment A provided by the Aus Trust to the extent that such interest income is deemed to be derived by the Bare Trust. As such, the Fund will be entitled to an exemption from withholding tax under paragraph 128B(3)(jb) of the ITAA 1936 for this interest income.

Question 3

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 provides:

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 in Australia by the Fund is not assessable and not exempt income of the Fund under section 128D of the ITAA1936.

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