Edited version of your written advice

Authorisation Number: 1051394780936

Date of advice: 11 March 2019

Ruling

Subject: International issues - Foreign entities - Foreign superannuation funds Income tax - Assessable income - Interest income - Interest paid to non-resident

Question

Is Fund A 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 non-assessable and non-exempt income of Fund A under section 128D of the ITAA 1936?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20xx

The scheme commences on:

1 July 20xx

Relevant facts and circumstances

1. Fund A was established in Country A.

2. Fund A is not a resident of Australia for tax purposes.

3. Fund A manages the portfolio of funds of the funded contribution assets of the national pension system in its country of residence.

4. There is no contemplation of Fund A ending at a defined point in time and there is no expectation that the fund will be discontinued.

5. The earliest members can start to draw from their pension is age 61.

6. Fund A also provides survivor benefits where a member dies.

7. Fund A has a board of directors. The board of directors represents Fund A and is responsible for the organisation of each of the Funds and the management of each of the Funds’ assets. Members of the board of Fund A must be citizens of Country A and shall be appointed by the Government on the basis of their expertise in furthering asset management.

8. Fund A’s head office is located in Country A.

9. An amount paid to Fund A or set aside for Fund A 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 Fund A or set aside for Fund A.

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

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1)

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 Fund A 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

Fund A is not a resident of Australia for tax purposes. Therefore, Fund A 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 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 Fund A 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:

● Fund A is an indefinitely continuing fund

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

● Fund A was established in a foreign country

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

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

● No amount paid to Fund A or set aside for Fund A 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 Fund A or set aside for Fund A.

The Fund is an indefinitely continuing fund

Fund A manages the portfolio of funds of the funded contribution assets of the national pension system in its country of residence.

There is no contemplation of Fund A ending at a defined point in time and there is no expectation that the fund will be discontinued.

Therefore, it is accepted that Fund A is an indefinitely continuing fund.

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

ATO Interpretative Decision ATO ID 2009/67 Income Tax: Superannuation fund for foreign residents (ATO ID 2009/67) provides 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).

Fund A has the sole task of managing the funded assets of the Country A’s pension system.

The earliest members can start to draw from their pension is age 61.

Fund A also provides survivor benefits where a member dies.

The circumstances in which a member of Fund A can receive the funds are clearly consistent with those 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, Fund A is considered to be a provident, benefit, superannuation or retirement fund.

Therefore, Fund A will satisfy this requirement.

The Fund was established in a foreign country

Fund A was established in Country A. Therefore, Fund A will satisfy this requirement.

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

Fund A was established in Country A and operates to provide retirement benefits for its members in Country A.

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 Fund A, 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 Fund A.

Therefore, Fund A will satisfy 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, Taxation Ruling TR 2018/5 Income tax: Central Management and Control test of residency (TR 2018/5) states:

10. Central management and control refers to the control and direction of a company’s operations. It does not refer to a physical location in which the control and direction of a company is located, and may ultimately be exercised in more than one location.

11. The key element in the control and direction of a company’s operations 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.

Fund A has a board of directors. The board of directors represents Fund A and is responsible for the organisation of each of the Funds and the management of each of the Funds’ assets. Members of the board of Fund A must be citizens of Country A and shall be appointed by the Government on the basis of their expertise in furthering asset management. Fund A’s head office is located in Country A.

Based on the above, it is reasonable to conclude that the central management and control of Fund A occurs in Country A by entities that are not Australian residents.

Therefore, Fund A will satisfy 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 Fund A or set aside for Fund A 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 Fund A or set aside for Fund A.

Therefore, Fund A will satisfy this requirement.

As all of the above requirements are satisfied, the Fund A meets the requirements of being a superannuation fund for foreign residents as defined by section 118-520 of the ITAA 1997 for the purposes of subparagraph 128B(3)(jb)(i) of the ITAA 1936.

Consists of interest or dividend and/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.

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

Therefore, Fund A will satisfy this requirement.

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

As part of the state of Country A, Fund A is exempt from taxation in Country A. Therefore, Fund A will satisfy this requirement

Conclusion

As all the requirements of paragraph 128B(3)(jb) of the ITAA 1936 are satisfied, Fund A 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 Fund A non-assessable and non-exempt income of Fund A under section 128D of the ITAA 1936?

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

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