Edited version of private advice

Authorisation Number: 1051657820008

Date of advice: 09 April 2020

Ruling

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

Question

Is the Fund excluded from liability to withholding tax on interest, dividend and non-share dividend income derived from its investments (listed in Appendix 1 to the relevant facts and circumstances of this Ruling) in accordance with 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 is a tax approved defined benefit occupational pension scheme in the foreign country.

2.    Membership in the Fund is only available to employees working in the local government and for other organisations that have nominated to participate in the Fund.

3.    The Council is the administering authority for the Pension Scheme foreign country. In its capacity as administering authority of the Fund, the Council administers the benefits and invests the assets of the Fund. The Council was established in the foreign country.

4.    All matters in relation to the Fund are delegated to a committee within the Council (the Pensions Committee).

5.    The day to day running of the Fund is delegated to a specialist team who undertake pension administration, accounting and investment functions, managing the majority of the Fund's assets internally.

6.    The main purpose of the Fund is to provide pensions and other benefits to the members of the Fund.

7.    The Fund operates as one legal entity, and legally and beneficially owns all of its investments in Australia.

8.    The Fund is a defined benefit scheme. Both members and employers contribute to the pension scheme. The member's contribution is a percentage of their salary and the employer will pay the balance of the costs of providing retirement benefits, determined in accordance with legislation.

9.    The contribution rate depends on how much a member is paid.

10. The Fund offers contribution flexibility to allow members to stay in the scheme but pay a reduced contribution.

11. If a member earns enough to pay tax, their contributions will attract tax relief at the time they are deducted from the member's pensionable pay. There are restrictions on the amount of tax relief available on pension contributions.

12.  Members are able to make additional contributions to their pension by:

(a)  choosing to make voluntary contributions to a separate investment. Contributions can be taken separately from a member's main benefits provided by the Fund but these may be subject to tax. They can also be taken at retirement in a number of ways including as part of a lump sum.

(b)  buying extra pension contributions. Members can buy extra pension by paying contributions, over a period of time, or as a one-off lump sum. There is maximum amount of additional pension contributions a member can buy. The amount it costs depends on how much extra pension the member wants to buy, the age the member starts paying the extra contributions and the length of time the member wants to pay them for. If a member takes their benefits before a nominated age, their extra contributions will be reduced.

13. If a member opts out of the Fund before completing the minimum required months of membership, that member will be treated as never having been a member and their employer will refund to them, through their pay, any contributions they have paid during that time. If a member opts out of the Fund with more than the minimum required months of membership and before completing the required vesting period, they can take a refund of their contributions (less any statutory deductions) or transfer out their pension to another scheme.

Management of Investments

14.  The officers of the Fund have been delegated responsibility by the Council for managing the Fund, including managing its investments.

Termination of the Fund

15.  The Fund will continue indefinitely unless and until it is wound up pursuant to an order issued by the relevant regulator.

16.  The Fund shall be subject to annulment in the pursuance of a resolution of either House of Parliament.

Benefits provided

17.  The Fund provides a defined benefit pension to members who choose to retire and draw their pension from the Fund at any time from the minimum to the maximum age of retirement, provided the member has met the required vesting period in the scheme. This is subject to certain conditions or qualifications, for example:

a.    if a member chooses to retire before they reach the required pension age, their pension will normally be reduced;

b.    if a member takes flexible retirement before their required pension age, their pension may be reduced;

c.    upon the death of a member, their eligible children or spouse/partner will be entitled to payment of a defined benefit pension; and

d.    if a member who is aged beyond the minimum retirement age or over loses their job through redundancy or business efficiency, they will be entitled to payment of a defined benefit pension.

18. Members who have made extra contributions to increase their benefits will have a number of options in relation to what to do with their benefits on retirement. In certain circumstances members may be able to convert their contributions into extra fund membership in order to increase their benefits from the Fund.

Other relevant facts

19.  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.

20.  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.

21.  The Fund submitted a notice which states that the Fund is entitled to tax relief and exemptions due to its registration under domestic legislation in the foreign country.

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

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

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

The investments

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

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

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

c.    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.

d.    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.

e.    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.

f.     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.

g.    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.

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

Anti-avoidance rules

Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or DPT tax benefit in connection with an arrangement.

If Part IVA applies the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

Reasons for decision

Question 1

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

Answer

Yes.

Detailed reasoning

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).

For the exclusion to apply, the interest, dividend and/or non-share dividend income must be:

·   derived by a superannuation fund for foreign residents (as defined in section 118-520 of the ITAA 1997), and

·   exempt from income tax in the country in which the superannuation fund for foreign residents arise.

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 established in a foreign country.

Therefore, the Fund satisfies this requirement.

Superannuation fund for foreign residents

Section 118-520 of the ITAA 1997 provides:

(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.

1. An indefinitely continuing fund

The Fund was created with the main purpose to provide pensions and other benefits to the members of the Fund.

The Fund was created from legislation in the foreign country, which has no provisions for the winding up of or cancellation of the Fund. The Fund will continue unless there are legislative instruments or otherwise enacted to replace the Fund.

Consequently the Fund will continue until it is wound up pursuant to an order issued by the relevant Pensions Regulator.

Therefore, the Fund satisfies this requirement.

2. 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 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).

Defined Benefit Rules

The Fund provides a defined benefit pension to members who choose to retire and draw their pension from the Fund at any time from the minimum to the maximum, provided the member has met the required vesting period in the scheme. This is subject to certain conditions or qualifications, for example:

a.    if a member chooses to retire before they reach the required pension age, their pension will normally be reduced;

b.    if a member takes flexible retirement before their required pension age, their pension may be reduced;

c.    upon the death of a member, their eligible children or spouse/partner will be entitled to payment of a defined benefit pension; and

d.    if a member who is aged beyond the minimum retirement age or over loses their job through redundancy or business efficiency, they will be entitled to payment of a defined benefit pension.

Defined Contribution Rules

Members who have made extra contributions to increase their benefits will have a number of options in relation to what to do with their benefits on retirement. In certain circumstances members may be able to convert their contributions into extra fund membership in order to increase their benefits from the Fund

If a member opts out of the Fund before completing the minimum required months of membership, that member will be treated as never having been a member and their employer will refund to them, through their pay, any contributions they have paid during that time. If a member opts out of the Fund with more than the minimum required months of membership and before completing the required vesting period, they can take a refund of their contributions (less any statutory deductions) or transfer out their pension to another scheme.

The Commissioner accepts these benefits align with the sole purpose of providing retirement benefits or benefits in other allowable contemplated contingencies.

Therefore, the Fund satisfies this requirement.

3.    Established in a foreign country

The Fund was established in a foreign country.

Therefore, the Fund satisfies this requirement.

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

The Fund was established and is maintained only to provide benefits to employees from local authorities and other organisations which participate in the Fund. These companies and their employees reside in the foreign country.

Therefore, the Fund satisfies this requirement.

5.    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 Council is the administrator of the Fund. Furthermore, all matters in relation to the Fund are delegated to the Council. Together the Council and the Fund exercise the CM&C of the Fund in their capacity as administrators. The administrators are not Australian residents.

Therefore, the Fund satisfies this requirement.

6. Subsection 118-520(2)

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.

7. 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.

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

The Fund is entitled to tax relief and exemptions.

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.

Relevantly:

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

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

·   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.

1. 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 was included in the total paid-up share capital of the company.

The Fund holds less than 10% of the total participation interests in each Australian company. Further, 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.

The Fund therefore satisfies the 'portfolio interest test' in respect of its current investments (listed in Appendix 1 to the relevant facts and circumstances of this Ruling).

2. 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, assesses 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 others 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, assesses 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 directions, instructions or wishes of the Fund.

Relevantly, in respect of the investment listed in Appendix 1 of the relevant facts and circumstances to this Ruling:

a.     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.

b.     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.

c.     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.

d.     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.

e.     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.

3. 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 to the relevant facts and circumstances of this Ruling).

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