Edited version of your written advice

Authorisation Number: 1051493619567

Date of advice: 14 March 2019

Ruling

Subject: Exemption from withholding tax for superannuation fund for foreign residents

Question 1

Is the Fund excluded from liability to withholding tax on its interest, dividend and non-share dividend income under paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes, but only in relation to those investments made through Separate Account Investments.

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, but only in relation to those investments made through Separate Account Investments.

This ruling applies for the following periods:

1 July 20xx to 30 June 20xx

The scheme commences 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.

The Fund

1. The Fund is a pension fund and is registered in a foreign country.

2. The Fund is exempt from taxation in the country it is a resident.

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

4. The Fund was set up in accordance with the Fund’s Ordinance to provide retirement benefits for all eligible members.

5. The objective of the Fund is to collect money for the members, deferred members, pension beneficiaries and other persons entitled to claim funds. The money serves to insure the pension in accordance with the Ordinance of the Fund.

6. The Fund since its inception is governed by any state or federal laws where it is a resident.

7. The Fund has two main boards to oversee the day to day management of the Fund and develop its annual administration budget.

8. The Boards are responsible for the general management of the Fund and for determining the Fund’s investments, objectives, strategies and policies.

9. The two boards who meet at least once a month. No meetings are held in Australia.

10. The Board members, all of whom are not Australian residents, are ultimately responsible for the activities of the Fund including the implementation of the pension scheme.

11. A Certificate of Residence from the foreign country’s Tax Authority declares that:

a. The Fund is a resident of the foreign country within the meaning of the relevant Article of the Convention for the avoidance of double taxation between the foreign country and Australia; and

b. The Fund is exempt to income tax as a pension fund.

12. The Fund provides a defined benefit pursuant to the laws of its country of residence.

13. All Fund plans are contributory plans where both the member and the employer contribute.

14. Members receive a lifetime benefit payable every month for the rest of their lives once they retire, these retirement benefits do not run out.

15. The Fund offers disability retirement benefits for eligible active members.

16. The Fund has two types of disability retirement: Service connected disability and non-service connected disability.

17. Where a member terminates their service and withdraws their retirement contributions, amounts will be withheld in line with the Fund’s Taxation jurisdiction laws unless certain eligibility criteria are met.

18. Death benefits are determined based on members’ service credits accrued, category of death (service or non-service connected) and the relationship of recipient to member.

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

20. The Fund invests into Australia through an investment manager.

21. The investment manager is granted authority by the Fund to invest in one or more collective investment funds and Separate Account Investments.

22. The investment manager manages the Fund’s Separate Account Investments where the Fund retains all aspects of beneficial ownership rights of underlying investments and the investments are not co-mingled with any other investors. Under the Separate Account Investments the Fund, not the investment manager, is responsible for the following:

a. Voting proxies related to any securities held in the Separate Account Investments; and

b. Participating in securities litigation claims, such as class actions, relating to the securities held in the Separate Account Investments.

23. The investment manager performs the custodial steps necessary to assist the Fund in exercising its appraisal rights.

24. The Fund will receive interest income directly from Australian investments, along with dividend and non-share dividend income from companies who are residents of Australia for tax purposes via its investment in Separate Account Investments with their investment manager.

25. The Fund also invests in collective funds managed by the investment manager. For the avoidance of doubt, the Fund’s investments made via collective funds are not covered by this Ruling

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

Question 1

Is the Fund 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.

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

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

(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

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 this Act, and

● No tax offsets have been allowed or would be allowable for an amount paid to the Fund or set aside for the Fund.

Is 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'.

As such, the Fund meets the definition outlined above as it is an amount of investments that are set aside to provide retirement allowances and other benefits members of the 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))

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

There is no indication that there is any contemplation of the Fund ending at a defined point in time and there is no expectation that the Fund will be discontinued. Therefore, it is accepted that the Fund is an indefinitely continuing fund.

Is the entity/plan 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.

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).

The Fund collects money from members and on behalf of the member from their employers. The Fund collects money for members, deferred members and other titleholders, which money serves to insure that old age pensions are paid to participants and former participants and any other beneficiaries in accordance with the Fund’s Ordinance. The Fund also allows for any federal or state allowances to be combined into the member’s plans.

The payment of the retirement benefit depends on the specified retirement ages in the Fund’s plans. The Commissioner accepts that the alternate circumstances of access in this case, being disability and death, align to the contingencies of providing a benefit, superannuation or retirement fund. Therefore the Fund will satisfy the requirement.

Was the entity/plan established in a foreign country?

The Fund was established and is a resident of a foreign country. Therefore, the Fund will satisfy this requirement.

Was the entity/plan established and is maintained only to provide benefits for individuals who are not Australian residents?

The Fund was established in a foreign country to provide retirement allowances and other benefits to eligible members.

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 it can be said that the Fund satisfies the meaning as outlined above.

The entity/plans’ 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.

The Fund was founded and is registered in the foreign country. The Fund is managed and administered by two Boards. The Board members, all of whom are not Australian residents are responsible for all fund activities including the implantation of the pension scheme. Board meetings are conducted at least once a month and are held outside of Australia.

Therefore the Fund will meet 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.

As all of the above requirements are satisfied, the Fund meets the requirements of being a superannuation fund for foreign residents as defined by section 118-520 of the ITAA 1997.

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 via the Separate Account Investments managed by the investment manager.

The Fund will receive interest income from Australia investments, along with dividend and non-share dividend income from companies who are residents of Australia for tax purposes via its investment in Separate Account Investments with the investment manager.

Therefore, the Fund will satisfy this requirement in relation to those investments via Separate Account Investments.

Conclusion

As all the requirements of paragraph 128B(3)(jb) of the ITAA 1936 are satisfied in relation to the investments via Separate Account Investments, the Fund will be entitled to an exemption under paragraph 128B(3)(jb) of the ITAA 1936 in relation to the interest and dividend income that it receives from those investments.

It is noted that the Fund also invests via collective, co-mingled investments. The Fund is not entitled to an exemption for any income received through the co-mingled investments.

Question 2

Is interest and/or dividend income derived by the Fund not assessable and not exempt income of the Fund 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 in relation to the Fund’s investments via Separate Account Investments. 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.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).