Edited version of your written advice

Authorisation Number: 1051446352955

Date of advice: 6 November 2018

Ruling

Subject: Exemption from withholding tax for a 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 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 ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Fund

1. The Fund is a company pension fund affiliated with the Pension Federation and was established by notarial deed on a specified date.

2. The Fund has its registered office in a foreign country, at the offices of the private company with limited liability.

3. The Fund is an independent foundation that executes the pension scheme of the Employers.

4. The Fund implements the pension scheme in accordance with the relevant Pension Act, the Pension Regulations, the Articles of Association and associated regulations that apply to employers, employees, former employees and their survivors.

5. The Articles of Association state that one or more sets of Pension Regulations are adopted by the Board that contain provisions such as:

● The time of start and end of the participation

● The cases in which and the manner in which a right to pension arises

● The nature and the amount of the pension entitlements and the pension benefits, and

● The obligations of the employer and those who pursuant to the Pension Regulations have pension entitlements towards the pension fund.

6. The object of the Fund is to administer pension agreements and in the framework provided by the Pension Regulations and its Articles of Association, pay or cause payment of pension benefits or other benefits to participants, former participants, persons with entitlements and pension beneficiaries.

7. A Certificate of Residence from the Tax Authorities in the foreign country declares that:

● The Fund, during the 20XX year, is a resident of the foreign country within the meaning of a specific Article of the Convention for the avoidance of double taxation between the foreign country and Australia (the Commonwealth of Australia), and

● The Fund is subject to Income Tax, however the income is exempt from taxation in accordance with the relevant Income Tax Act of the foreign country.

8. A Statement from the Funds’ Settlements Manager and Head of Treasury states that:

● The Fund is an indefinitely continuing fund and a provident, benefit, superannuation or retirement fund

● The Fund was established in a country outside Australia and is maintained and applied for the sole purpose of providing superannuation benefits for persons other than persons who are, or would ordinarily be or become, residents of Australia or residents of a Territory

● The central management and control of the Fund is carried on outside of Australia by persons none of whom is a resident of Australia or a resident of a Territory, and

● The Fund does not receive income for which an amount has been set aside or to which an amount has been paid, by a taxpayer that is an amount that has been allowed or is allowable as a deduction, or in respect of which a rebate of tax has been allowed or is allowable, under any provisions of the Australian Income Tax Legislation.

Pension Fund Description

Plan Administration

9. The Fund has proper administrative and accounting procedures and adequate internal monitoring mechanisms and is authorised to pursue its object by creating a capital account from which the pension benefits are to be paid.

10. The administration of the Fund is the responsibility of the Board of Directors. The Directors are responsible for the implementation of the pension schemes, the pension administration, the asset management and all communication involved.

11. The Board consists of eight seats with four seats representing the employees and pension beneficiaries and four seats representing the employers.

12. All Board members are employed or were employed by the Employers and assessed by the foreign country’s bank on their knowledge and integrity prior to their appointment.

13. The Board receives advice from various Committees and Actuaries.

14. The Fund will continue to operate in accordance with the Rules for an indefinite period of time.

15. The Articles of Association specify the process that the Fund will follow in the event of dissolution or liquidation including:

● A decision of the Board, having received prior advice from the Accountability Committee

● The Fund can no longer achieve its objectives or no longer has obligations

● The entitlements and benefits are transferred to another certified pension administrator, taking into consideration the years of participation past at the time of liquidation

● Resources available will be used in accordance with the Regulations and the object of the Fund.

Plan Investments

16. The Fund strives to arrange a good pension for their participants by investing the assets of the fund as carefully as possible to pay all pensions in the long term.

17. The Fund invests in shares and corporate and government bonds in regions such as Europe, Asia and areas where emerging markets are identified.

18. The investment distribution includes:

● Shares

● High-yield values

● Fixed-income securities

19. The invested capital in recent years has fluctuated due to the premiums paid by participants and employers and the investment return.

20. The Fund holds Australian investments and receives interest and dividend income from these investments.

Plan Membership and Contributions

21. The Fund’s membership consists of:

● Employees;

● Pensioners and Pension Beneficiaries;

● Former employees.

22. All members of the Fund build up a Retirement Pension and will receive their pension from the first day of the month following their 68^th birthday (pension date).

23. The Retirement Pension is a supplement to the state pension that is received when a member reaches state pension age.

24. The Fund is a defined benefit agreement. Every year, a participant builds up pension on part of the salary that they have earned in that year. A participant does not build up pension on their entire salary as the fund takes in account of the state pension that will be received from the Government.

25. Monthly pension contributions are paid by both the participant and the employer. Employers withhold the participant’s contribution from their monthly salary at a specific rate and make employer contributions at a specific rate.

Benefits Provided

26. The amount of pension received by a participant depends on the level of salary earned, the number of years that the pension has built up and the details of the pension scheme.

27. The Retirement Pension will be paid out on a monthly basis from the participant’s pension date for as long as they live.

Partial or Early Retirement

28. From the age of 55 years until state pension age a participant can choose to retire part-time. A part-time pension is a combination of working part-time and bringing forward their Retirement Pension for the part they no longer work. This allows the participant to work less with the pension supplementing their income.

29. Participants have the option to receive their pension before their pension commencement date. Early retirement results in a participant’s monthly pension being lower, their pension build up ceasing at an earlier date and receiving their pension over a longer period. If a participant enters into early retirement their decision cannot be reversed.

30. Participants can adjust the amount of pension received for the first few years of retirement by choosing to take either a lower or higher Retirement Pension amount.

Partner’s and Orphan’s Pension

31. In addition to the Retirement Pension, a participant is also building up a partner’s pension. When a participant dies, their partner will receive a partner’s pension.

32. The partner’s pension is a percentage of the Retirement Pension that a participant would receive (if built up until retirement age). If a participant dies after retirement, their partner will also receive a percentage of the built up Retirement Pension.

33. If a participant retires or leaves employment, they can choose to swap some of their Retirement Pension for an extra partner’s pension. A participant can also swap the partner’s pension for a higher Retirement Pension.

34. An orphan’s pension is a percentage of the participant’s Retirement Pension. An orphan’s pension is available until the age of 18 years unless the child is attending school or studying where they will receive the orphan’s pension until they turn 27 years of age.

Occupational disability

35. If a participant becomes occupationally disabled (more than a certain percentage unfit for work), they may be entitled to a partial continuation of their pension build up without having to pay any contributions. The pension build up and the occupational disability pension is based on the extent of the occupational disability.

Pension Transfer

36. If a participant changes employment and becomes a member of another pension scheme, they may choose to transfer their built up pension by making application with the Fund. If a participant does not apply for a pension transfer, their pension will continue to be administered by the Fund and will be received upon reaching the applicable retirement age.

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;

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. Subsection 6(1) 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 is 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:

n The Fund is an indefinitely continuing fund

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

n The Fund was established in a foreign country

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

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

n No amount paid to the Fund or set aside for the Fund has been or can be deducted under the ITAA 1997, and

n 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 on 1 February 2018, www.macquariedictionary.com.au defines ‘indefinitely’ and ‘continuing’ as follows:

Indefinite:

adjective 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

The Articles of Association set out the process in the event of the Fund entering into dissolution or liquidation. There is no indication in the Articles of Association or elsewhere that there is any contemplation of the Fund ending at a defined point in time.

The Articles of Association provides that the Fund is dissolved or enters into liquidation by a decision of the Board, having received prior advice from the Accountability Committee or if the Fund is no longer able to achieve its objectives and/or no longer has obligations.

In the event of liquidation of the Fund, the entitlements and benefits are transferred to another certified pension administrator where the nature and the amount of the insurances will be determined on the basis of the Pension Regulations, with due observance of the years of participation past at the time of the liquidation.

Where resources available during the liquidation are more than sufficient to comply fully with the entitlements, those resources will be used in accordance with the Articles of Association, Pension Regulations and the object of the pension fund to administer pension agreements and pay or cause payment of pension benefits or other benefits to participants, former participants, persons with entitlements and pension beneficiaries.

Therefore, it is accepted that the Fund will continue to operate in accordance with the Rules for an indefinite period of time.

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 Fund implements the pension scheme in accordance with the relevant Pension Act, the Pension Regulations, the Articles of Association and associated regulations and is responsible for ensuring that everyone who is entitled to a pension actually receives a pension.

The object of the Fund is to administer pension agreements in the framework provided by the Pension Regulations and its Articles of Association and pay or cause payment of pension benefits or other benefits to participants, former participants, persons with entitlements and pension beneficiaries.

The payment of retirement benefits by the Fund is allowed upon members reaching the specified retirement ages and years of service. Further, the Commissioner accepts that the alternate circumstances of access in this case, being death and transfer upon termination of employment, align to the contemplated contingencies of 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 foreign country and is a resident of a foreign country. 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 is an independent foundation that executes the pension scheme of the Employers to pay or cause payment of pension benefits or other benefits to participants, former participants, persons with entitlements and pension beneficiaries.

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 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, paragraphs 10 and 11 of 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.

The Fund is an independent foundation with its registered office in a foreign country at the offices of the private company with limited liability.

The Fund is a resident of a foreign country within the meaning of a specific Article of the Convention for the avoidance of double taxation between the foreign country and Australia (the Commonwealth of Australia) and is subject to Income Tax, however the income is exempt from taxation in accordance with specific Article of the Income Tax Act (of the foreign country).

The administration of the Fund is the responsibility of the Board of Directors. The Directors are responsible for the implementation of the pension schemes, the pension administration, the asset management and all communication involved.

The Board consists of eight seats with four seats representing the employees and pension beneficiaries and four seats representing the employers. All Board members are employed or were employed by the Employers and assessed by the Bank (in the foreign country) on their knowledge and integrity prior to their appointment.

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

Therefore, the Fund 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 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 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.

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 the foreign country in accordance with a specific Article if the Income Tax Act (in the foreign country).

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 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 ITAA 1936.

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