Edited version of your written advice

Authorisation Number: 1051488256321

Ruling

Subject: Foreign Superannuation Fund

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

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 2019

The scheme commences on:

1 July 2018

Relevant facts and circumstances

1. The Fund is:

● a public pension fund, established nearly a century ago.

● a retire plan for employees in a particular state in Country A.

● a qualified plan under Country A’s taxation laws.

2. The principal place of business of the fund is in Country A.

3. The Fund offers three retirement plan options to its members: a Defined Benefit Plan, a Defined Contribution Plan and a Combined Plan.

4. The source of income of the Fund is contributions from employers and members, as well as investment income on its assets.

5. The Fund is exempt from federal income taxes under Country A’s taxation laws.

6. The Fund is subject to annual financial audits, in good standing under the relevant state laws, and has the power to transact any business within the scope of its objectives.

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 Subsection 995-1

Superannuation Industry (Supervision) Act 1993 (SIS Act) Section 10

Reasons for decision

Question 1

Summary

The Fund qualifies as a 'superannuation fund for foreign residents' as defined in subsection 118-520(1) of the Income Tax Assessment Act 1997 (ITAA 1997).,and therefore, is excluded from liability to withholding tax on its interest and/or dividend income under paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936).

Detailed reasoning

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.

Subsection 995-1(1) of the ITAA 1997 provides that 'superannuation fund for foreign residents' has the meaning given by section 118-520 of the ITAA 1997.

The term 'superannuation fund for foreign residents' is defined in section 118-520 of the 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

(e) it was established in a foreign country; and

(f) it was established, and is maintained at that time, only to provide benefits for individuals who are not Australian residents; and

(g) 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

The Fund a ‘fund’ and is it an indefinite continuing fund

The term 'fund' is not defined in either the ITAA 1997 or 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 Australian Oxford Dictionary, 2004, Oxford University Press, Melbourne defines the term 'fund' as 1 a permanent stock of something ready to be drawn upon... 2 a stock of money, especially one set apart for a purpose.

In Scott v. FC of T (No 2) (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 therefrom being capitalised'. Windeyer J's views in Scott were cited with approval by Hill J in Walstern Pty Ltd v. Commissioner of Taxation (2003) 138 FCR 1; 2003 ATC 5076; (2003) 54 ATR 423 who stated that 'for present purposes, the point is the need for "money" or "other property" to constitute a fund'.

In the present case, the member and employer contributions of the Fund, as well as income from investments provide funds for pension benefits and health care to its members as permitted under a particular state law. The contributions are then being invested by the Fund with any gains being credited to the accounts of the members of the Fund. Therefore, the Fund is a ‘fund’.

In the present case it is established on the facts that the Fund is an indefinite continuing fund.

The Fund a provident, benefit, superannuation or retirement fund

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 stated 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 case), 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. The benefit must be characterised by some future purpose. 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.

Having regard to the relevant rules, plans and policies of the Fund, it is established that the sole purpose of the Fund is the provision of pension benefits and health care to, or in respect of, participating members. It is considered that the Fund is a 'provident, benefit, superannuation or retirement fund' as that phrase has been interpreted by the relevant authorities. Further, the Plan satisfies subparagraph (a)(ii) of the definition of 'superannuation fund for foreign residents' in section 118-520 of the ITAA 1997.

The Fund was established in a foreign country

This requirement is satisfied in circumstances where the Fund was established in Country A which is not Australia.

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

The Fund is a state-wide pension plan in Country A that offers a range of benefits and services to active and inactive members and retirees that were employed in the particular state in Country A. It is therefore considered that this requirement is satisfied.

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

The governance of the Fund is vested in the Retirement Board, which consists of 11 non-Australian resident members. It is considered that this requirement is satisfied.

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

This requirement was discussed in the Minutes to the National Tax Liaison Group Meeting of 5 September 2006 where the following statements were made by the ATO:

The exemptions are available where the connection to Australia is only that of investment. It is implicit in that answer that it is not our view that deductible interest affects the availability of the exemption.

We agree with the position in the question that the intent behind the definition was directed at contributions and have adopted a view that supports that intention.

The Fund has neither an Australian Tax File Number nor an Australian Business Number. It is a non-resident for tax purposes and its only connection to Australia is of investment, this requirement therefore is satisfied.

Question 2

Summary

Interest and/or dividend income derived from Australia by the trustee of the Fund is not assessable and not exempt income of the entity 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.

Dividend and interest income derived by the Fund would be subject to withholding tax under subsections 128B(1) and 128B(2) of the ITAA 1936 respectively, but for the operation of the withholding tax exemption under paragraph 128B(3)(jb) of the ITAA 1936. As paragraph 128B(3)(jb) of the ITAA 1936 is specifically referred to in section 128D of the ITAA 1936 any interest or dividend income derived by the Fund will be considered not assessable not exempt income under section 128D of the ITAA 1936.

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