Edited version of your written advice

Authorisation Number: 1051501733232

Date of advice: 2 April 2019

Ruling

Subject: International issues - foreign entities - foreign superannuation funds

Question 1

Is Australian interest and dividend income derived by the Fund excluded from withholding tax under section 128B of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

Relevant facts and circumstances

Creation and Legislative Governance

1. The Fund is a private provident fund established in and governed by the laws of Foreign Country, including the Provident Fund Laws and the Severance Pay Laws of Foreign Country.

2. Under the Provident Funds Law, the Fund is to be conducted in accordance with by-laws (the By-Laws) approved by Foreign Country.

Management of Fund

3. The managing company of the Fund (the Managing Company) manages the Fund and a number of other funds through a Board of Directors.

4. The Managing Company is the trustee for the assets of the Fund.

5. The Managing Company is governed by the Managing Company Articles of Association (Articles of Association).

6. In addition to the Board of Directors, there are two Committees with delegated powers from the Board of Directors, that supervise and inspect the operations of the Fund and all other funds managed by the Managing Company:

a. The Investment Committee – responsible for looking after the Managing Company’s investment policies, setting rules and procedures for managing the Fund and other funds managed by the Managing Company and guiding officers in applying the investment policy determined; and

a. The Audit Committee – responsible for guiding the Managing Company’s internal auditor in setting principles, priorities and work plan.

7. Investment decisions will be made by the Board of Directors of the Managing Company and Investment Committee.

8. No Directors on the Board of Directors, Investment Committee or Audit Committee are Australian residents. The management and control of the Fund and all other funds under management, are carried out Foreign Country.

Eligibility

9. A person would not be approved to join as a member or beneficiary of the Fund if their employer was a resident of a jurisdiction outside of Foreign Country.

10. There are no members or beneficiaries of the Fund that are currently residents of Australia.

Primary Purpose – The Provision of Retirement Benefits

11. The Fund’s primary purpose is the provision of retirement benefits to its members. It provides retirement benefits in the following circumstances:

a. When an employee member reaches retiring age, he/she can convert his interest in the fund wholly into an annuity, or, in some circumstances, into a lesser annuity plus a lump sum payment;

b. An employee member can withdraw a certain amount on attaining the age of 60. This withdrawal is limited to contributions before 2008;

c. A freelance member can withdraw his/her entire interest in the Fund on attaining the age of 60.

Death benefits

12. The Fund has a secondary purpose of providing death benefits. When a member dies before receiving his/her entire retirement benefit, his/her interest in the Fund must be paid to his/her beneficiaries.

Payments on termination of employment

13. The Fund has a secondary purpose of providing benefits on termination of employment to employee members. Where an employee’s employment terminates, in circumstances in which he/she is entitled to severance pay under the Severance Pay Laws, the employee member can withdraw the entire Severance Pay Component of his/her account. Alternatively, the employee can choose to leave the money in the Fund until retirement.

14. This has come about because, under the Severance Pay Laws, an employer is liable (in most circumstances) to pay severance pay to an employee on termination of his/her employment. However, the employer’s obligation to pay the severance pay does not arise if it instead pays appropriate amounts to a provident fund, as a result of which the provident fund becomes liable to pay an amount equal to the severance pay on termination of employment. This arrangement provides the employer with a means of fulfilling its obligation under the Severance Pay Laws and it converts what would have been a termination payment from the employer to the employee into a payment from the provident fund to the employee.

Loans to members

15. The Fund has a secondary purpose of providing loans to members on arm’s length conditions. The Fund can lend back to any member a part of the member’s interest in the Fund. The total of all such loans cannot exceed 10% of the value of fund assets. The loans can be for up to 7 years. The maximum amount that can be lent to a member is 80% of withdrawable funds and 30% of other funds (excluding in each case the Severance Pay Component). The loans are at an arm’s length rate of interest.

Early releases

16. Members can request the early release of certain amounts in the following circumstances:

a. An employee member who has been unemployed for 6 months can withdraw a certain amount. This withdrawal is limited to contributions before 2005 plus fund earnings on these;

b. Where an employee member has changed to new employment, and the new employer has not commenced making payments on the employee’s behalf to an annuity paying provident fund within 13 months of the commencement of that new employment, the employee member can withdraw a certain amount. This withdrawal is limited to contributions before 2005 plus fund earnings on these;

c. All members can at any time withdraw amounts to pay medical expenses of the member or a relative, where it has been determined that the member or relative has a sufficient degree of disability. These withdrawals are subject to an income test;

d. A freelance member can withdraw a certain amount after 15 years of membership of the Fund. This withdrawal is limited to contributions before 2006, and no contributions can have been made before 2001. Consequently, the scale of this benefit, in relation to the Fund as a whole, is minor.

Payments to employers

17. When an employee’s employment ceases in circumstances in which he/she is not entitled to severance pay under the Severance Pay Laws, an amount, equal to the amount of Severance Pay Component the employer contributed, is paid to the employer out of the Severance Pay Component of the employee’s account.

Residence and Continuity

18. Neither the Fund nor the Managing Company are residents of Australia for tax purposes and neither have a permanent establishment in Australia.

19. The By-Laws allow for the merger of the Fund with another fund.

20. There is no express termination date in the By-Laws.

Australian Investments of the Fund

21. The Fund derives dividend and interest income from Australia paid by a company that is a resident.

Taxation of the Fund

22. The Fund is exempt from income tax in Foreign Country.

23. No amounts paid to the Fund or set aside for it have been deducted or can be deducted under the Income Tax Assessment Act 1997 (ITAA 1997). Further, no tax offsets are allowable for such amounts.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 128B

Income Tax Assessment Act 1936 paragraph 128B(3)(jb)

Income Tax Assessment Act 1936 section 128D

Income Tax Assessment Act 1997 section 995-1

Income Tax Assessment Act 1997 section 118-520

Reasons for decision

Legislative references in the Reasons for Decision are to provisions of the ITAA 1936, or to provisions of the ITAA 1997 unless otherwise indicated.

Question 1

Is Australian interest and dividend income derived by the Fund excluded from withholding tax under section 128B?

Summary

The Australian interest and dividend income derived by the Fund is excluded from withholding tax under section 128B as the Fund is a ‘superannuation fund for foreign residents’ covered by paragraph 128B(3)(jb).

Detailed reasoning

For the financial years ended 30 June 2008 and onwards, paragraph 128B(3)(jb) 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;

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.

Is the Fund a non-resident?

For the purposes of section 128B, the trustee of a provident, benefit, superannuation or retirement fund is a non-resident at a particular time if, and only if, the fund is a foreign superannuation fund at that time (subsection 128A(10)). Foreign superannuation fund means a fund that is not an Australian superannuation fund: (see section 6(1) and subsection 995-1(1)).

An ‘Australian superannuation fund’ is defined in subsection 295-95(2) as follows:

295-95(2)

A *superannuation fund is an Australian superannuation fund at a time, and for the income year in which that time occurs, if:

(a) the fund was established in Australia, or any asset of the fund is situated in Australia at that time; and

(b) at that time, the central management and control of the fund is ordinarily in Australia; and

(c) at that time either the fund had no member covered by subsection (3) (an active member ) or at least 50% of:

(i) the total *market value of the fund ' s assets attributable to *superannuation interests held by active members; or

(ii) the sum of the amounts that would be payable to or in respect of active members if they voluntarily ceased to be members;

is attributable to superannuation interests held by active members who are Australian residents.

The Managing Company is the trustee of the Fund. The Managing Company is a non-resident because, as noted further below, the Fund was established in a country other than Australia and the central management and control of the Fund is carried on outside Australia by individuals. Accordingly, this requirement is satisfied.

Is the Fund a superannuation fund for foreign residents?

The term ‘superannuation fund for foreign residents’ is defined in section 118-520 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

Is the entity/plan 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.’

The Managing Company’s entitlement to merge the Fund into another provident fund does not by itself preclude the Fund from being an ‘indefinitely continuing fund.’ Moreover, as the Fund has no termination date, 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 sub-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, 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.

The Fund is a superannuation fund in the ordinary sense of the term (and therefore is a provident, benefit, superannuation or retirement fund).

Firstly, the principal purpose of the Fund is the provision of retirement benefits.

Secondly, the following secondary purposes of the Fund are consistent with a fund being a superannuation fund in the ordinary sense of the term: the provision of death benefits; the making of payments (by an employer sponsored fund to employee members) on termination of employment; and the making of loans to members on arm’s length terms.

Thirdly, the various early releases described in the facts above do not prevent the Fund from being a superannuation fund in the ordinary sense of the term. Each of the various types of early releases described above is consistent with the Fund being a superannuation fund in the ordinary sense of the term, and/or so minor in scale as to not prevent the Fund from being a superannuation fund in the ordinary sense of the term.

Accordingly, the Fund is a ‘provident, benefit, superannuation or retirement fund.’

Was the entity/plan established in a foreign country?

The Fund is a private provident fund governed by and established pursuant to the law of Foreign Country, and so this requirement is satisfied.

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

A person would not be approved to join as a member or beneficiary of the Fund if their employer was a resident of a jurisdiction outside of Foreign Country. There are no members or beneficiaries of the Fund that are currently residents of Australia. Accordingly, this requirement is satisfied.

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 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 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 bodies that would be undertaking the ‘strategic and high level decision making processes and activities’ of the Fund are the Board of Directors of the Management Company, the Investment Committee and the Audit Committee. In particular, investment decisions are made by the Board of Directors of the Managing Company and the Investment Committee. No Directors on the Board of Directors, Investment Committee or Audit Committee are Australian residents. The management and control of the Fund and all other funds under management are carried out outside Australia.

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?

No amounts paid to the Fund or set aside for it have been deducted or can be deducted under the ITAA 1997. Further, no tax offsets are allowable for such amounts.

Conclusion

As the elements in section 118-520 are satisfied, the Fund is a ‘superannuation fund for foreign residents.’

Does the Fund ‘derive’ income that consists of interest or dividends?

The Fund derives dividend and interest income from Australia paid by a company that is a resident.

Is the Fund exempt from income tax in the country in which it resides?

The Fund is exempt from income tax in Foreign Country.

Conclusion

The elements in paragraph 128B(3)(jb) are satisfied. Accordingly, the Australian interest and dividend income derived by the Fund is excluded from withholding tax under section 128B as the Fund is a ‘superannuation fund for foreign residents’ covered by paragraph 128B(3)(jb).

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