Edited version of your written advice

Authorisation Number: 1051512654051

Date of advice: 2 May 2019

Ruling

Subject: Foreign superannuation funds and Assessable income

Question 1

Is the Fund excluded from liability to withholding tax on its interest and 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 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 2018

Year ended 30 June 2019

Relevant facts and circumstances

Establishment and Governance of the Fund

1. The Employer, resident in Foreign Country, established the Fund in Foreign Country.

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

3. The Fund is governed by a plan (the Plan).

4. Another company (the Trustee) holds funds and property under a trust agreement for the exclusive benefit of the Plan members and beneficiaries.

5. The Plan is administered by a committee (the Committee) appointed the Employer. The committee shall be the named fiduciary with respect to control or management of the operation and administration of the Plan.

6. Another committee (the Investment Committee) is the named fiduciary with respect to control or management of the assets of the Plan, and is appointed by the Employer.

7. The powers of the Investment Committee include:

a. To establish the funding policy for the Plan consistent with the objectives of the Plan;

b. To establish the Plan’s overall investment policy, including asset allocation, investment policy statement or investment guidelines;

c. To appoint and remove a Trustee;

d. To direct such Trustee with respect to the investment and management of the Plan’s assets.

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

9. The cost of the benefits provided by the Plan shall be paid by the Employer.

Termination of the Plan

10. While the Plan is expected to continue indefinitely, the right is reserved by the Employer to terminate its participation in the Plan.

Taxation

11. 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 1997 (ITAA 1997), and a tax offset has not been allowed or is not allowable for such an amount.

Investments in Australia

12. The Fund invests assets of the Plan directly in Australia.

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

Eligibility and Membership

14. Each Employee shall be a Member of the Plan.

15. The employees that participate in the Fund shall not include a person who is not a resident of the Foreign Country.

16. ‘Member’ shall mean an Employee who has been admitted to participation, and who continues to participate in the Plan.

Retirement Dates

17. Normal Retirement Date – A Member’s Normal Retirement Date shall be the day on which he shall attain age 65.

18. Early Retirement Date – A Member may elect to retire at his own option on the first day of any month following his attainment of age 55 and completion of at least 10 years of Service.

19. Disability Retirement Date – A Member who has completed at least 10 years of Service and who becomes totally and permanently disabled prior to his Normal Retirement Date shall be retired on the earlier of:

a. The first day of the month following his completion of six months of continuous disability, if on the date on which the Member became disables he had attained age 55; or

b. The first day of the month following the month in which he becomes eligible for and receives a Social Security disability benefit.

Retirement Pensions for non-Cash Account Members

20. The general formula for calculating the Accrued Benefit is a percentage of a Member’s salary and wages multiplied by his or her credited service.

21. The annual pension of a non-Cash Account Member who shall retire on or after his Normal Retirement Date shall be the Accrued Benefit worked out under the Plan.

22. The annual pension of a non-Cash Account Member who shall retire on or after his Early Retirement Date shall be his Accrued Benefit as of said Early Retirement Date.

23. The annual pension of a non-Cash Account Member who shall retire on a Disability Retirement Date shall be his Accrued Benefit on his Annuity Starting Date.

24. Death benefits before and after retirement are provided for under the Plan.

Cash Account Members

25. An Account shall be established and maintained for each Cash Account Member. The opening balance of the Account shall be $0. The Account shall be credited with Pay Credits and Interest Credits.

26. A Cash Account Member may elect to receive an immediate distribution of his Account upon becoming disabled.

27. Death benefits on the death of a Cash Account Member are provided for under the Plan.

28. A Cash Account Member shall be fully vested in his or her Account on his attainment of Normal Retirement Age. A Cash Account Member with 3 or more Years of Service shall be fully vested in his or her Account.

29. A vested Cash Account Member can elect to commence to receive his or her Account as of the first day of any month after his or her termination of employment.

Vesting – General Rules

30. A Member shall be fully vested in his Accrued Benefit (including his Account) if he remains employed by the Employer on his Normal Retirement Date. If a Member’s employment shall be terminated prior to his Normal Retirement Date, he shall be vested in his Accrued Benefit (including his Account) if he has been credited with at least 5 years of Service (3 years with respect to a Cash Account Member). Such Member who is fully vested in his Accrued Benefit shall be entitled to receive a monthly pension for life as follows:

a. Commencing on the first day of the month following his Normal Retirement Date, his Accrued Benefit as of the date of termination of his employment; or

b. Commencing at an Early Retirement Date. If a Member’s employment shall be terminated after he attained age 55 and completed at least 10 years of Service, he shall be deemed to have elected to retire pursuant to Section 5.2.

31. If a Member’s employment shall be terminated prior to his being credited with at least 5 years of Service (3 years with respect to a Cash Account Member) or the attainment of his Normal Retirement Date, he shall not be entitled to any benefits under the Plan except the refund of his own contributions.

Payments of $5,000 or less

32. If the Member is vested and the present value of the benefit under the Pension Plan is $1000 or less when they leave the Employer, they may elect to have the Pension Plan benefit paid directly to them in cash or rolled over to a retirement account or eligible retirement plan of their choice. If they do not make an election, the entire amount will be distributed to the Member in a single payment of cash within a reasonable period of time after the employment ends.

33. If the Member is vested and the present value of the Pension Plan benefit is greater than $1,000 but not greater than $5,000, they may elect to have the Pension Plan benefit paid directly to them in cash or rolled over to a retirement account or eligible retirement plan of their choice. If they do not make a distribution election, the vested Pension Plan benefit will be rolled over into a retirement account established on their behalf by the Committee.

34. If the Member is vested and dies before benefits begin, the Pension Plan provides a benefit to the surviving spouse or named beneficiary.

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 this Ruling are to provisions of the ITAA 1936, or to provisions of the ITAA 1997 unless otherwise indicated.

Question 1

Summary

The income consisting of interest and dividends derived from Australia is excluded from liability to interest and dividend withholding tax under 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.

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

Does the Fund qualify as a ‘superannuation fund for foreign residents’ as defined in subsection 118-520(1)?

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’.

The Fund is a ‘fund’ for the purposes of section 118-520 as money and investments are set aside for a particular purpose, being the Plan.

Further, while the Fund may be discontinued, the Fund is an indefinitely continuing fund as it does not have a specified end date.

Is 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, superannuation or retirement 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.

Perusal of the Plan detailing the establishment of the Fund, the benefits provided and the governing rules indicates the Fund is a ‘provident, benefit, superannuation or retirement fund.’

Members and beneficiaries may be entitled to benefits at Normal Retirement Date and Early Retirement Date. The other benefits (death benefits, disability benefits, payments on termination of employment) are benefits of a kind which do not prevent a fund, the principal purpose of which is the provision of retirement benefits, from being a provident, benefit, superannuation or retirement fund.

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

Was the Fund established in a foreign country?

The Fund was established in a foreign country.

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

The employees that participate in the Fund shall not include a person who is not a resident of the Foreign Country. Accordingly, 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?

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 strategic and high level decision making processes and activities of the Fund are undertaken by the Committee or the Investment Committee. In particular, the Investment Committee has powers of establishing the funding policy of the Plan and the overall investment policy. The Employer shall appoint the Committee and Investment Committee.

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

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 or cannot be deducted under the ITAA 1997, and a tax offset has not been allowed or is not allowable for such an amount.

Conclusion

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

Is the Fund excluded from liability to interest and dividend withholding tax under paragraph 128B(3)(jb)?

Based on the information provided, the other elements in paragraph 128B(3)(jb) are satisfied. Interest and dividends paid by Australian companies are ‘derived’ by the Fund that is a non-resident. The Fund is exempt from income tax in the Foreign Country. Accordingly, income consisting of interest and dividends derived from Australia is excluded from liability to interest and dividend withholding tax under paragraph 128B(3)(jb).

Question 2

Detailed reasoning

Section 128D 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) respectively, but for the operation of the withholding tax exemption under paragraph 128B(3)(jb). As paragraph 128B(3)(jb) is specifically referred to in section 128D any interest or dividend income derived by the Fund from Australia will be considered not assessable not exempt income under section 128D.

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).