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Edited version of private advice

Authorisation Number: 1051720359329

Date of advice: 21 July 2020

Ruling

Subject: Withholding tax exemption the foreign superannuation fund for foreign residents

Question 1

Is the Fund excluded from liability to withholding tax on its interest and/or dividend income derived from its investments in Australia under paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

Question 2

Is interest and/or dividend income derived by the Fund from its investments in Australia non-assessable income of the Fund under section 128D of the ITAA 1936?

Answer

Yes.

This ruling applies for the following periods:

·        Year ended 20XX to 20XX

The scheme commences on:

1 Month 20XX

Relevant facts and circumstances

·        The Fund was established in a foreign country and is a qualified tax- exempt pension Fund under the relevant law of that country.

·        The purpose of the Fund is to provide eligible employees (Participants) within the foreign country with retirement and pension benefits (including permanently disabled benefits).

·        The retirement and pension benefits are paid when Participants reaching the specified retirement ages (with the normal retirement age of 65) and certain service requirements being satisfied.

·        The Fund assets include contributions by the sponsoring employer. Those contributions are then invested by the trustee of the Fund with any earnings and increments being credited to the Fund accounts (Fund assets).

·        The Fund assets are held for the exclusive purpose of providing retirement benefits to Participants wo are not Australian residents.

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

·        It is the intention and expectation that the Fund will be continued indefinitely.

·        The amount set aside or paid to the Fund is not allowable for a deduction or for a tax offset under the Income Tax Assessment Acts 1936 or 1997.

·        The Fund derived income from its Australian investments being dividends paid by Australian companies.

Relevant legislative provisions

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

Income Tax Assessment Act 1936 Section 128D

Income Tax Assessment Act 1997 Subsection 118-520(1)

Income Tax Assessment Act 1997 Subdivision 880-C

Income Tax (Transitional Provisions) Act 1997 Division 880

Reasons for decision

Question 1

Summary

The Fund is excluded from liability to withholding tax on its interest and/or dividend income derived from its investments in Australia under paragraph 128B(3)(jb).

Detailed reasoning

Paragraph 128B(3)(jb) of the ITAA 1936 excludes income from liability to withholding tax where that income:

     (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.

Superannuation fund for foreign residents

The term 'superannuation fund for foreign residents' is defined in section 118-520 of the ITAA 1997 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

Fund

The first question to consider in determining whether the Master Trust is a 'superannuation fund for foreign resident' within the meaning of section 118-520 of the ITAA 1997 is whether the Master Trust is a '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 assets consist of contributions made by the sponsoring Company and the earnings from the investments. The Fund assets will be held by the Trustee of the Fund for the exclusive purpose of providing benefits to Participants.

Therefore, the Fund assets constitute a fund for the purposes of subsection 118-520(1) of the ITAA 1997.

Indefinite continuing fund

The term 'indefinitely continuing fund' in subparagraph (a)(i) of the definition of 'superannuation fund for foreign residents' in section 118-520 of the ITAA 1997 is not defined.

The Australian Oxford Dictionary defines 'indefinite' as 1 vague, undefined. 2 unlimited... and 'indefinitely' as 1 for an unlimited time... 2 in an indefinite manner.

The requirement that the fund be 'indefinitely continuing' simply means that the fund must not have a specific termination date.

The Fund has been in operation since it was established by the sponsoring employer in XXXX.The purpose of the Fund is to provide retirement benefits for Participants when they attain the normal retirement age of 65. Further, the Fund is not required to be terminated after a specified date. From the facts, it is the intention and expectation of the sponsoring employer that the Fund will be continued indefinitely.

Therefore, the Fund is an indefinitely continuing fund within the meaning of subparagraph 118-520(1)(a)(i) of the ITAA 1997.

Provident, benefit, superannuation or retirement fund

None of the four descriptors 'provident, 'benefit', 'superannuation' or 'retirement fund' in subparagraph 118-520(1)(a)(ii) of the ITAA 1997 are defined. However, the terms have, however, been subject to 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 Fund assets are held by the Trustee of the Fund for the exclusive purpose of providing retirement benefits to Participants when reaching the retirement age of 65 or when meeting the relevant requirements of other types of pensions, e.g. permanently disabled.

Therefore, it is considered that the Fund is a 'provident, benefit, superannuation or retirement fund' in subparagraph 118-520(1)(a)(ii) of the ITAA 1997.

Paragraphs 118-520(1)(b), (c) and (d) of the ITAA 1997

The Fund was established in a foreign country and is maintained only to provide retirement benefits to Participants who are not Australian residents. The Fund's central management and control is carried on in that foreign country by the entities none of whom is an Australian resident.

Therefore, the Fund satisfies all of the requirements in paragraphs 118-520(1)(b), (c) and (d) of the definition of 'superannuation fund for foreign residents' in section 118-520 of the ITAA 1997.

Paragraphs 118-520(2)(a) and (b) of the ITAA 1997

No amount paid to or set aside for the Fund has been or can be deducted. under the ITAA 1936 or 1997 and no tax offset has not been allowed or is allowable for such an amount.

Therefore, paragraphs 118-520(2)(a) and (b) of the ITAA 1997 have no application.

Accordingly, the Fund is a 'superannuation fund for foreign resident' within the meaning of subsection 118-520 of the ITAA 1997.

Withholding Tax Exemption

For income derived prior to the 2019 income year

Subparagraphs 128B(3)(jb)(i), (ii) and (iii) of the ITAA 1936

As discussed above, the Fund is a superannuation fund for foreign residents as defined in section 118-520 of the ITAA 1997. The Australian investments of the Fund consist only of shares in Australian companies from which the dividend income has been derived by the Fund. Further, the Fund is a qualified tax-exempt pension Fund under the relevant law of that foreign country.

Accordingly, the Fund satisfies all of the requirements under subparagraphs 128B(3)(jb)(i), (ii) and (iii) of the ITAA 1936.

For income derived from the 2019 income year

Schedule 3 to the Treasury Laws Amendment (Making Sure Foreign Investors Pay Their Fair Share of Tax in Australia and Other Measures) Act 2019 (the Act) limits access to tax concessions for foreign investors by limiting the withholding tax exemption for superannuation funds for foreign residents to portfolio-like investments only (i.e. a fund that holds an ownership interest of less than 10% of the entity and does not have influence over the entity's key decision making).

The Act introduced extra requirements that must be satisfied by the superannuation fund for paragraph 128B(3)(jb) of ITAA 1936 to apply. Generally, these extra requirements apply to income derived from 1 July 2019.

However, under the transition rules, the exemption continues to apply until 1 July 2026 for income derived from investment assets acquired by the superannuation fund on or before 27 March 2018.

Subsection 128B(3CA) of the ITAA 1936 states that paragraph 128B(3)(jb) of the ITAA 1936 applies to income derived by a superannuation fund for foreign residents as mentioned in subparagraph 128B(3)(jb)(i) of the ITAA 1936 only if the superannuation fund:

(a)   satisfies the 'portfolio interest test' in subsection 128B(3CC) in relation to the test entity (as defined in subsection 128B(3CB):

                         (i)          at the time the income was derived, and

                        (ii)          throughout any 12 months period that began no earlier than 24 months before that time and ended no later than that time; and

(b)   does not, at the time the income was derived, have 'influence of a kind' described in subsection 128B(3CD) in relation to the test entity; and

(c)   the income is not 'non-assessable non-exempt income' (NANE) of the superannuation fund because of:

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

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

The portfolio interest test

A superannuation fund for foreign residents satisfies the portfolio interest test in subsection 128B(3CC) of the ITAA 1936 in relation to the test entity (as defined in subsection 128B(3CB) of the ITAA 1936 at a time if, at that time, the total participation interests (as defined in section 960-180 of the ITAA 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 (under section 960-190 of the ITAA 1997) that any entity holds in a company:

               (i)          an equity holder was 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 is a superannuation fund for foreign residents as established above. On the facts, the only investments in Australia are shares in Australian companies. The total participation interests held by the Fund in its Australian investments are less than 10% which does not provide the Fund with any rights to appoint a member to a board or similar, either directly or directly, nor any veto rights on security holder vote.

Accordingly, the Fund satisfied the portfolio interest test in subsections 128B(3CC) of the ITAA 1936.

The influence test

A superannuation fund for foreign residents has influence of the kind described in subsection 128(3CD) of the ITAA 1936 in relation to the test entity if:

(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 the total participation interests held by the Fund in Australian companies are less than 10%, this minority direct interest does not provide the Fund with the capacity to determine the identity of any person who makes decisions that comprise the control and direction of the operation of the Australian companies. Further, there is no evidence to suggest that any of those persons is accustomed or obliged to act or might reasonably be expected to act in accordance with the directions, instructions or wish of the Fund (whether those directions, instructions or wishes are expressed directly or indirectly, or through the Fund acting in concert with others)..

Therefore, the Fund does not have influence of a kind described in subsection 128B(3CD) of the ITAA 1936.

Question 2

Summary

The dividend income derived by the Fund from its Australian investments is considered NANE of the Fund under section 128D of the ITAA 1936.

Detailed reasoning

Section 128D of the ITAA 1936 provides that 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 income from the Australian investments derived by the Fund would, but for the operation of the withholding tax exemption under paragraph 128B(3)(jb), be subject to withholding tax liability under subsections 128B(1) and 128B(2) respectively.

As paragraph 128B(3)(jb) is specifically referred to in section 128D, any dividend income derived by the Fund from the investments in Australia will be considered NANE income of the Fund.

Not otherwise be NANE income because of Subdivision 880-C or Division 880 of the Income Tax (Transitional Provisions) Act 1997

Division 880 - Sovereign entities and activities

A 'sovereign entity' is defined in section 880-15 of the ITAA 1997 as any of the following:

(a)   a body politic of a foreign country, or a part of a foreign country;

(b)   a foreign government agency;

(c)   an entity:

               (i)          in which an entity covered by paragraph (a)or (b) holds a total participation interest of 100%; and

              (ii)          that is not an Australian resident; and

            (iii)          that is not a resident trust estate for the purposes of Division 6d of Part III of the ITAA 1936.

On the facts, the Fund was established by the sponsoring Company to which none of the paragraph 880-15(a),(b) or (c) of the ITAA 1997 applies. The Fund assets comprise the contributions by the Company and the earnings and increments thereon.

Therefore, the Fund is not a' sovereign entity' as defined in section 880-15 of the ITAA 1997 and therefore Subdivision 880-C or Division 880 of the Income Tax (Transitional Provisions) Act 1997 has no application.

Accordingly, any dividend income derived by the Fund from its Australian investments is considered NANE income of the Fund under section 128D and not because of Subdivision 880-C of the ITAA 1997.

 

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