Edited version of private advice

Authorisation Number: 1051652622131

Date of advice: 30 March 2020

Ruling

Subject: The withholding tax exemption for superannuation funds for foreign residents

Question

Is the Fund excluded from liability to withholding tax on its interest, dividend and non-share dividend income derived in respect of its current investments (listed in Appendix 1 to the relevant facts and circumstances of this Ruling) under paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

This ruling applies for the following period:

1 July 20xx to 30 June 20xx

The scheme commences on:

1 July 20xx

Relevant facts and circumstances

The Fund

1. The Fund was established in the foreign country.
2. The Fund is a Master Trust created to receive and hold the assets for the Plan. The Plan is an employee sponsored, domestic, non-contributory qualified defined benefit retirement plan.
3. The Plan was established by its sponsor.
4. The Fund has been designated exclusively for the Plan.

5.    The registered office of the Fund sponsor is located within the country in the Fund resides.

6.    The Plan Committee is responsible for the Plan's operations. The Committee is not responsible for Plan investments and does not have the power to amend the Plan.

7. Members of the Committee are not residents of Australia.
8. The Plan Design Committee, reserve the right to amend or and/or terminate the Plan at any time for any reason.
9. The Master Trustee of the Fund was appointed by Master Trust Agreement.
10. The Fund's assets are held by the Master Trustee for the sole benefit of the participants and beneficiaries of the Plan.
11. The Company's funding policy for the Plan is to make contributions with the objective of accumulating sufficient assets to pay all qualified pension benefits when due under the terms of the Plan. Contributions to provide benefits under the Plan are made solely by the Company.

12.  The Fund has provided a letter to the Commissioner which states that the Fund is an indefinitely continuing fund.

13. The Summary Plan Description (SPD) states that the plan's sponsor expects the plan to continue indefinitely.
14. The laws which govern the Fund give no indication that the Fund will end at a defined point in time.

Benefits provided

15. All benefits are paid to members by the Fund.
16. The Fund provides benefits to members as follows:

(i)    Normal retirement pension: a defined benefit pension upon a member attaining the age of 65.

(ii)   Early Retirement: a defined benefit pension for a member that has attained the age of 55 having completed a minimum of five years of credited service and ceased employment.

(iii)  Deferred retirement: a defined benefit pension paid to a member that has previously attained the age of 65 upon cessation of employment.

(iv) Disability retirement.

(v)  Death benefits.

Investments

17.  The Fund's Investment Fiduciary is responsible for management and investment of the Fund's assets.

18.  The Fund's Investment Fiduciary appoints investment managers for management of the majority of the Fund's assets and manages a portion of the Fund's assets internally.

19.  Investment purchases and sales are settled by the Master Trustee on instruction from an 'Authorised Person'.

20. 'Authorised Person' is defined in the Master Trust Agreement.

21.  As at 31 December 2019, the Fund holds Australian equity investments.

Australian investments

22. The Fund has invested in Australian equity investments. These equity investments all have the following characteristics:

(i)            All investments are listed on the Australian Securities Exchange (ASX).

(ii)           The Fund holds less than 10% of the total participation interests in each Australian company.

(iii)          The Fund would hold less than 10% of the total participation interests in each Australian company in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936.

(iv)         Neither the Fund, nor any related party of the Fund, has involvement in the day to day management of the business of any of the Australian companies.

(v)          Neither the Fund, nor any related party of the Fund, has the right to appoint a director to the Board of Directors of the Australian company.

(vi)         Neither the Fund, nor any related party, holds the right to representation on any investor representative or advisory committee (or similar) of the Australian company.

(vii)        Neither the Fund, nor any related party, has the ability to direct or influence the operation of the Australian company outside of the ordinary rights conferred by the equity interest held.

(viii)       The Fund only holds rights to vote in proportion to its equity interest in each Australian company.

Other relevant facts

23.  The Fund has not and cannot deduct amounts under either the Income Tax Assessment Act 1997 (ITAA 1997) or the ITAA 1936 for amounts paid to it.

24.  The Fund has not been allowed a tax offset or a tax offset is not allowable for an amount that has been paid to it.

25.  The Fund submitted a certificate which states that the Fund is exempt from taxation within the country in which it resides.

26.  Income of the Fund is not non-assessable non-exempt income because of:

(i)    Subdivision 880-C of the ITAA 1997, or

(ii)   Division 880 of the Income Tax (Transitional Provisions) Act 1997.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 128B

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

Income Tax Assessment Act 1936 subsection 128B(3CA)

Income Tax Assessment Act 1936 subsection 128B(3CB)

Income Tax Assessment Act 1936 subsection 128B(3CC)

Income Tax Assessment Act 1936 subsection 128B(3CD)

Income Tax Assessment Act 1997 Section 118-520

Reasons for decision

Question

Is the Fund excluded from liability to withholding tax on its interest, dividend and non-share dividend income derived in respect of its current investments (listed in Appendix 1 to the relevant facts and circumstances of this Ruling) under paragraph 128B(3)(jb) of the ITAA 1936?

Detailed reasoning

Section 128B of the ITAA 1936 imposes liability to withholding tax on income derived by a non-resident that consists of dividend income (subsection 128B(1) of the ITAA 1936), interest income (subsection 128B(2) of the ITAA 1936) as well as other income prescribed in that section.

Broadly, paragraph 128B(3)(jb) of the ITAA 1936 provides an exclusion from withholding tax for interest, dividends and non-share dividends derived by a superannuation fund for foreign residents (subject to the satisfaction of certain conditions). Relevantly, paragraph 128B(3)(jb) of the ITAA 1936 applies to:

(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;

Further, from 1 July 2019, the extra requirements in subsection 128B(3CA) of the ITAA 1936 must also be met.

The Fund is a non-resident

The Commissioner has determined from the facts and circumstances that the Fund is not a resident of Australia.

Therefore, the Fund satisfies this requirement.

Superannuation fund for foreign residents

Section 118-520 of the ITAA 1997 states:

(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 is paid to the fund or set aside for the fund has been or can be deducted under this Act; or

(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.

An indefinitely continuing fund

The Fund was created with the main purpose of providing pension benefits to participants and former participants and their beneficiaries.

The laws and rules that govern the Fund give no indication that it will end at a defined point in time. The Fund has provided a letter to the Commissioner which states that the Fund is an indefinitely continuing fund. The SPD also states that the Plan sponsor expects the Plan to continue indefinitely.

Therefore, the Fund satisfies this requirement.

A provident, benefit, superannuation or retirement fund

The phrase 'provident, benefit, superannuation or retirement fund' under subparagraph 118-520(1)(a)(ii) of the ITAA 1997 is not defined in either the ITAA 1997 or the ITAA 1936.

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).

The above establishes 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).

Broadly, the Fund provides benefits to members as follows:

(i)    Normal retirement pension: a defined benefit pension upon a member attaining the age of 65.

(ii)   Early Retirement: a defined benefit pension for a member that has attained the age of 55, completed a minimum of five years of credited service and ceased employment.

(iii)  Deferred retirement: a defined benefit pension paid to a member that has previously attained the age of 65 upon cessation of employment.

(iv) Disability retirement.

(v)  Death benefits.

The Commissioner accepts these benefits align with the sole purpose of providing retirement benefits or benefits in other allowable contemplated contingencies. As such, the Fund is considered to be a 'provident, benefit, superannuation or retirement fund'.

Therefore, the Fund satisfies this requirement.

Established in a foreign country

The Fund was established within the foreign country in which it resides.

Therefore, the Fund satisfies this requirement.

Was established and maintained only to provide benefits for individuals who are not Australian residents

The Fund was established and is maintained in the foreign country for eligible employees.

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, the Fund satisfies this requirement.

Central management and control (CM&C)

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:

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.

The registered office of the Fund is within the foreign country in which it resides. The decision making and management of the Fund is undertaken by the Committee. The Fund is managed in accordance with the laws that govern the Fund and the regulations, policies and procedures adopted by the Committee.

Based on the above, it is reasonable to conclude that the CM&C of the Fund occurs in a foreign country by entities that are not Australian residents.

Therefore, the Fund satisfies 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

The Fund has not and cannot deduct amounts under either the ITAA 1997 or the ITAA 1936 for amounts paid to it. The Fund has not been allowed a tax offset or a tax offset is not allowable for an amount that has been paid to it.

Therefore, the Fund satisfies these requirements.

Conclusion

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.

The Fund may receive interest income from the Australian investments listed in Appendix 1, along with dividend and non-share dividend income from companies who are residents of Australia for tax purposes.

Therefore, the Fund will satisfy this requirement.

The Fund is exempt from income tax in the country in which the non-resident resides

The Fund is exempt from taxation in the foreign country in which it resides.

Therefore, the Fund satisfies this requirement.

Subsection 128(3CA) of the ITAA 1936

The Treasury Laws Amendment (Making Sure Foreign Investors Pay Their Fair Share of Tax in Australia and Other Measures) Act 2019 introduced extra requirements that must be met for paragraph 128B(3)(jb) of the ITAA 1936 to apply. Generally, these extra requirements apply to income derived from 1 July 2019.

Accordingly:

(i)    The Fund must satisfy the 'portfolio interest test' in relation to the test entity (subsection 128B(3CC) of the ITAA 1936)

(ii)   The Fund must satisfy the 'influence test' (subsection 128B(3CD) of the ITAA 1936) in relation to the test entity, and

(iii)  The income cannot otherwise be non-assessable non-exempt income of the Fund because of:

a.    Subdivision 880-C of the ITAA 1997, or

b.    Division 880 of the Income Tax (Transitional Provisions) Act 1997.

The Fund satisfies the 'portfolio interest test'

Subsection 128B(3CC) of the ITAA 1936 states:

A superannuation fund satisfies the portfolio interest test in this subsection in relation to the test entity at a time if, at that time, the total participation interest (within the meaning of the Income Tax Assessment Act 1997) the superannuation fund holds in the test entity:

(a) is less than 10%; and

(b) would be less than 10% if, in working out the direct participation interest (within the meaning of that Act) that any entity holds in a company:

(i) an equity holder were treated as a shareholder; and

(ii) the total amount contributed to the company in respect of non-share equity interests were included in the total paid-up share capital of the company.

The Fund currently does not hold more than 10% ownership of any of the Australian companies in which it holds equity investments. Further, the Fund would hold less than 10% of the total participation interests in each Australian company listed in Appendix 1 in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936.

The Fund therefore satisfies the 'portfolio interest test' in respect of its current investments listed in Appendix 1.

The Fund satisfies the 'influence test'

Subsection 128(3CD) of the ITAA 1936 states:

A superannuation fund has influence of a kind described in this subsection in relation to the test entity at a time if any of the following requirements are satisfied at that time:

(a) the superannuation fund:

(i) is directly or indirectly able to determine; or

(ii) in acting in concert with others, is directly or indirectly able to determine;

the identity of at least one of the persons who, individually or together with others, make (or might reasonably be expected to make) the decisions that comprise the control and direction of the test entity's operations;

(b) at least one of those persons is accustomed or obliged to act, or might reasonably be expected to act, in accordance with the directions, instructions or wishes of the superannuation fund (whether those directions, instructions or wishes are expressed directly or indirectly, or through the superannuation fund acting in concert with others).

As such, there are two distinct sub-tests within the influence test

Sub-test 1 of the influence test, as contained in paragraph 128B(3CD)(a) of the ITAA 1936, assess whether the Fund is able to determine the identity of at least one of the persons who, individually or together with others, makes or is reasonably expected to make, decisions comprising the control and direction of the test entity's operations. This includes situations where the Fund is able to act in concert with other to determine the identity of a relevant decision-maker in the test entity.

Sub-test 1 also extends to situations where the Fund, in its own right, holds the ability to approve or veto decisions which go to the control or direction of the test entity.

Sub-test 2 of the influence test, as contained in paragraph 128B(3CD)(b) of the ITAA 1936, assess whether at least one of the relevant decision-making persons of the test entity is accustomed or obliged to act, or might reasonably be expected to act, in accordance with the direction, instructions or wishes of the Fund.

In respect of the investments listed in Appendix 1 of the relevant facts and circumstances to this Ruling:

(i)    Neither the Fund, nor any related party of the Fund, has involvement in the day to day management of the business of any of the Australian companies.

(ii)   Neither the Fund, nor any related party of the Fund, has the right to appoint a director to the Board of Directors of the Australian company or equivalent role in any of the Australian companies.

(iii)  Neither the Fund, nor any related party, holds the right to representation on any investor representative or advisory committee (or similar) of any of the Australian companies.

(iv) Neither the Fund, nor any related party, has the ability to direct or influence the operation of the Australian company outside of the ordinary rights conferred by the equity interest held.

(v)  The Fund only holds rights to vote in proportion to its equity interest in each Australian company.

Based upon the above, the Commissioner accepts that the Fund does not have influence of a kind described in subsection 128B(3CD) of the ITAA 1936.

Otherwise non-assessable non-exempt

The income received by the Fund will not be non-assessable non-exempt income because of Subdivision 880-C of the ITAA 1997 or Division 880 of the Income Tax (Transitional Provisions) Act 1997.

Conclusion

The Fund is excluded from withholding tax in relation to interest, dividend and non-share dividend income derived from its current investments listed in Appendix 1.

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