Edited version of your written advice

Authorisation Number: 1051506681704

Date of advice: 18 April 2019

Ruling

Subject: Superannuation funds for foreign residents

Question 1

Does the Fund qualify as a 'superannuation fund for foreign residents' as defined in subsection 118-520(1) of the Income Tax Assessment Act 1997, and if so 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?

Answer

Yes

Question 2

If the answer to question 1 is yes, is the interest and/or dividend income derived by the trustee of the Fund not assessable and not exempt income of the Fund under section 128D of the Income Tax Assessment Act 1936?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

XX XX 19XX

Relevant facts and circumstances

1. The Fund is a trust located in Country A.

2. The purpose of the Fund is to provide retirement and related benefits for the present and future employees.

3. The office-holders of the Fund are non-residents of Australia.

4. The Fund was registered as a domiciled retirement scheme in Country A.

5. The Fund is exempt from income tax on its interest and dividend income in Country A.

6. The Fund has confirmed:

a. It is an indefinite continuing fund and a provident, benefit, superannuation or retirement fund.

b. It was established in a foreign country.

c. It was established, and is maintained only to provide benefits for individuals who are not Australian residents.

d. The central management and control of the Fund is carried on outside Australia by entities none of whom is an Australian resident.

e. An amount paid to the Fund or set aside for the Fund has not been or cannot be deducted under the Income Tax Assessment Act 1936 and the Income Tax Assessment Act 1997.

f. A tax offset has not been allowed or is not allowed for such an amount.

7. The non-Australian resident board members of the Fund are responsible for all of high level decisions which occur outside of Australia.

8. The Fund is governed by its own rules and regulations which are contained in its articles of association and business memorandum.

9. The fund expects to receive dividends and interest income as a result of its investments in Australia.

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

Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision

Question 1

Does the Fund qualify as a 'superannuation fund for foreign residents' as defined in subsection 118-520(1) of the Income Tax Assessment Act 1997, and if so 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?

Detailed reasoning

1. Section 128B imposes liability to withholding tax on income derived by a non-resident that consists of dividend income (subsection 128B(1)), interest income (subsection 128B(2)) as well as other income prescribed in that section.

2. Subsection 128B(3) notes that section 128B will not apply to prescribed categories of income. Relevantly, paragraph 128B(3)(jb) 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

3. The Fund is not a resident of Australia for Australian tax purposes. Therefore, the Fund will satisfy this requirement.

The Fund is a superannuation fund for foreign residents

4. Superannuation fund for foreign residents is a defined term in the ITAA 1936. Section 6 states:

Superannuation fund for foreign residents has the meaning given by subsection 995-1(1) of the Income Tax Assessment Act 1997.

5. 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.

6. 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.

7. Consequently, for the Fund to be considered a superannuation fund for foreign residents for the purposes of paragraph 128B(3)(jb), it must be established that:

a. The Fund is an indefinitely continuing fund

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

c. The Fund was established in a foreign country

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

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

f. No amounts paid to the Fund or set aside for the Fund has been or can be deducted under this Act, and

g. 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

8. 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.

9. 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

10. The Fund has provided a declaration that at the time of making this application that the Fund is an indefinitely continuing fund

11. It is accepted that there is no specific plans for the Fund to cease in the foreseeable future and therefore the Fund will continue to operate in accordance with the articles of association or business memorandum for an indefinite period of time. Accordingly, the Fund will satisfy this requirement.

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

12. 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.

13. 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.

14. 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:

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.

15. 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.

16. 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). If a fund provides benefits in other circumstances, it will not satisfy the requirement to be a provident, benefit, superannuation or retirement fund.

17. 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.

18. The members of the Fund can become eligible for benefits under the following circumstances:

a. old age

b. occupational disability or death

c. early retirement

19. The purpose of the Fund is to provide payments to beneficiaries upon old age, occupational disability, death and early retirement to members of the Fund. The retirement eligibility allows member benefits to be provided upon reaching retirement age. The alternative circumstances of access, being retirement due to disability, early retirement from employment and death also align with contemplated contingencies of a provident, benefit, superannuation or retirement fund.

20. Therefore, the Fund will satisfy this requirement.

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

21. The Fund was established in Country A as a pension fund, with the purpose of providing retirement and related benefits to its members based in Country A

22. 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.

23. Therefore, the Fund will satisfy this requirement.

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

24. 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 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.

25. Furthermore, paragraphs 6 and 7 of the Taxation Ruling TR 2018/5 Income tax: Central Management and Control test of residency (TR 2018/5) states:

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.

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.

26. The Fund is domiciled in Country A. The objective of the Fund is to provide payments to beneficiaries upon old age, occupational disability, death and early retirement

27. All high level decision making of the Fund is undertaken by the non-Australian resident board which is carried on outside Australia.

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

29. 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?

30. An amount paid to the Fund or set aside for the Fund has not been or cannot be deducted under the ITAA 1936 or ITAA 1997 and tax offsets have not been allowed or is not allowable for such amount.

31. The Fund has provided confirming that the it has not set aside or deducted an amount paid to the Fund, nor allowed a tax offset for such amount

32. Therefore, the Fund will satisfy this requirement.

Consists of interest and/or dividends paid by a company that is a resident

33. Paragraph 128B(3)(jb) will only apply to interest, or to dividends paid by Australian resident companies.

34. The Fund will receive interest income, along with dividend income from companies who are residents of Australia for tax purposes.

35. Therefore, the Fund will satisfy this requirement.

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

36. The Fund is exempt from income tax in Country A in accordance with the laws of Country A.

37. Therefore, the Fund will satisfy this requirement.

Conclusion

38. The Fund qualifies as a superannuation fund for foreign resident pursuant to section 118-520. Furthermore, as all the requirements of paragraph 128B(3)(jb) are satisfied, the Fund will be entitled to an exemption under paragraph 128B(3)(jb)

Question 2

If the answer to question 1 is yes, is the interest and/or dividend income derived by the trustee of the Fund not assessable and not exempt income of the Fund under section 128D of the Income Tax Assessment Act 1936?

Detailed reasoning

1. Section 128D states:

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.

2. Section 128D provides that, inter alia, where withholding tax would be payable but for the operation of paragraph 128B(3)(jb), the income is not assessable income and is not exempt income.

3. As discussed in question 1, the Fund will be entitled to an exemption under paragraph 128B(3)(jb).

4. Therefore, the interest and dividend income derived by the Fund from its Australian investments will not be assessable income or exempt income under section 128D because the aforementioned income is income that would have been subject to withholding tax but for paragraph 128B(3)(jb)..

Conclusion

5. As the requirements of paragraph 128B(3)(jb) have been met, the interest and dividend derived in Australia by the Fund is not assessable and not exempt income under section 128D.

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