Edited version of private advice

Authorisation Number: 1051758705408

Date of advice: 24 September 2020

Ruling

Subject: Withholding tax - exemptions - superannuation fund 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 under paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

This ruling applies for the following periods:

1 July 20xx to 30 June 20xx

The scheme commences on:

1 July 20xx

Relevant facts and circumstances

The Fund

The Fund is the administrator of a cost-sharing, multiple employer and employee retirement system that provides retirement, survivor, disability and death benefits to employees.

The plans administered by the Fund include defined benefit plans and a defined contribution plan.

The Fund is currently governed by the Statute, which Statute forms part of the scheme to which this Ruling relates.

The Fund is governed by a board of trustees (the Trustees).

The Trustees are based in Country X.

The main purpose of the Fund is to provide retirement annuities and other benefits for employees, and their dependents.

The Fund operates as one legal entity.

The Trustees have the power to:

a.    contract and act in the Fund's corporate name

b.    hold meetings

c.     consider applications and authorise payments

d.    certify interest rate, to set value of allowances and to adopt actuarial tables

e.    certify amounts and submit vouchers

f.      be custodian of all cash and securities belonging to the system

g.    invest the Fund's money

h.    invest into commingled funds

i.      issue bonds

j.      request information

k.     elect officers and appoint employees

l.      receive, record and deposit payments, and

m.   make rules.

The Fund is made up of two defined benefit schemes and a defined contribution plan:

n.    Defined Benefit Plan 1;

o.    Defined Benefit Plan 2;

p.    Defined Contribution Plan.

A member must choose to join the Defined Contribution Plan.

Both members and employers contribute to the pension scheme. The employee contributes a percentage of their pensionable earnings and the employer will also contribute on a X% funded basis.

Funding to pay benefits is derived from three basic sources: Country X contributions; members' contributions based on their salaries; and income, interest and dividends derived from retirement fund deposits and investments.

Management of Investments

The Fund has a number of investment managers. The Trustees have oversight of all investment managers.

The Trustees have a master trustee and custodian (the Custodian). Assets are held at the Custodian. All returns are paid directly into the appropriate Fund account at the Custodian. The Custodian invests in securities under the instructions of the appointed investment managers.

It is possible for the Fund to invest into commingled funds. There are no such Investments currently in Australia.

Termination of the Fund

The Fund has provided a statement that it is an indefinitely continuing fund.

The Statute contemplates that the Defined Contribution Plan may be terminated. If this was to occur, members of this plan would join the remaining plans on offer.

Benefits provided

Defined Benefit Rules

a.    Normal retirement: a defined benefit pension upon normal retirement age, depending upon years of continuous service provided.

b.    Early retirement: a defined benefit pension before normal retirement age if a member has not reached the standard retirement age and is retiring from service with X% reduction per year. Members may apply for an accelerated pension payment in lieu of the full pension benefits if they meet certain conditions.

c.     Disability retirement annuities or disability benefits: a defined benefit pension where a member becomes unable to work or is dismissed by their employer before normal retirement age due to ill-health or infirmity, provided two years of continuous service are met.

d.    Death and (for the Defined Benefit Plan 1) Survivors Insurance benefits.

Defined Contribution Rules

a.    Normal retirement: a member retires from service at or after normal retirement, is entitled to a defined contribution pension and/or lump sum.

b.    Disability benefits: a member becomes unable to work before normal retirement age is entitled to a defined contribution pension.

c.     No Death and Survivors Insurance benefits.

In accordance with the Statute, members will be refunded of contributions where their employee status is terminated. By accepting the separation refund, all future benefits are forfeited. The member must have terminated employment from all employers covered under Fund or have been laid off for over X days. The member is to instruct where the funds should be sent.

If a member terminates employment and applies for a refund with less than X years of service credit, the member will be entitled to receive the total contributions plus the effective rate of interest accumulated. For X years or more of qualified service, the refund includes member contributions and interest plus an equal match from the employer. The Fund will withhold a certain amount for income tax for those that choose this refund will if it is over a certain amount, and may also be subject to an early withdrawal penalty unless certain factors are met. X years of participation requirement under the Defined Benefit Plan 2 if you were a participant on or before the date the employer elected to offer the optional benefit plans. If this X years requirement is not met, the refund will be paid under the rules of the Defined Benefit Plan 1.

No benefits are paid to a member if they are convicted of a particular crime in relation to their employment.

Other relevant facts

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.

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.

The Fund's employee and employer contributions are treated as being under a particular form of trust with Fund as trustee to its members, which prohibits the beneficiary's interest from being assigned and also prevents a creditor from attaching that interest.

This trust status does not alter the Fund's tax status.

Excess funds are to be used for Fund members, not to provide money for the Fund itself.

The Fund as a trust can only withhold pension payments to an eligible member if so ordered by a court or taxing authority.

The Fund has submitted a notice from the Country X tax authority which states that the Fund is registered and that tax relief and exemptions are available.

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

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

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

The Fund and future Australian investments

The Fund has invested in Australian equity 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, trust or real estate investment trust (REIT).

c.     The Fund would hold less than 10% of the total participation interests in each Australian company, trust or REIT 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, trusts or REITs.

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 company or equivalent role in a trust or REIT.

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, or equivalent role in a trust or REIT.

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

The Fund only holds rights to vote in proportion to its equity interest in each Australian company, trust or REIT.

Further issues for you to consider

We understand that the Fund intends to acquire additional investments from the Ruling issue date to the end of the period to which this Ruling applies ('New Investments').

This Ruling will apply to income derived in respect of New Investments that are acquired by the Fund so long as:

(a)  There are no material changes to the relevant facts or circumstances of this Ruling.

(b)  The Fund satisfies the 'portfolio interest test' referred to in paragraph 128B(3CA) of the ITAA 1936 in relation to the new investments.

(c)   The Fund does not have 'influence of a kind' described in subsection 128B(3CD) of the ITAA 1936 in relation to the new investments.

(d)  Each new investment has all of the characteristics that are listed in paragraph 30 of this Ruling.

Relevant legislative provisions

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

Question 1

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 under paragraph 128B(3)(jb) of the ITAA 1936?

Summary

The Fund is considered a superannuation fund for foreign residents and is excluded from withholding tax in relation to interest, dividend and non-share dividend income derived from its investments under paragraph 128B(3)(jb) or the ITAA 1936.

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 not a resident of Australia.

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.

An indefinitely continuing fund

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

The Statute contemplates that the Defined Contribution Plan may be terminated with the member to join the remaining plans on offer.

The Fund has provided a statement that it is an indefinitely continuing fund.

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 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).

Broadly, the Fund provides benefits to members as follows:

Defined Benefit Rules

a.    Normal retirement: a defined benefit pension upon normal retirement age, depending upon years of continuous service provided.

b.    Early retirement: a defined benefit pension before normal retirement age if a member has not reached the standard retirement age and is retiring from service with X% reduction per year. Members may apply for an accelerated pension payment in lieu of the full pension benefits if they meet certain conditions.

c.     Disability retirement annuities or disability benefits: a defined benefit pension where a member becomes unable to work or is dismissed by their employer before normal retirement age due to ill-health or infirmity, provided two years of continuous service are met.

d.    Death and (for the Defined Benefit Plan 1) Survivors Insurance benefits.

Defined Contribution Rules

a.    Normal retirement: a member retires from service at or after normal retirement, is entitled to a defined contribution pension and/or lump sum.

b.    Disability benefits: a member becomes unable to work before normal retirement age is entitled to a defined contribution pension.

c.     No Death and Survivors Insurance benefits.

In accordance with the Statute, members will be refunded contributions where their employee status is terminated. By accepting the separation refund all future benefits are forfeited. The member must have terminated employment from all employers covered under Fund or lay off for over X days. The member is to instruct where the funds should be sent.

No benefits are paid to a member if they are convicted of a particular crime in relation to their employment.

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.

Established in a foreign country

The Fund was established in Country X.

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 only to provide benefits to those employed by the Fund. The employers and their employees reside in Country X.

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 Trustees exercise the CM&C of the Fund. The Trustees are not Australian residents.

Therefore, the Fund satisfies this requirement.

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.

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 Country X tax authority has confirmed that the Fund has been registered by them and that tax relief and exemptions are available.

Therefore, the Fund satisfies this requirement.

Subsection 128B(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.

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 holds less than 10% of the total participation interests in each Australian company, trust or real estate investment trust (REIT). Further, the Fund would hold less than 10% of the total participation interests in each Australian company, trust or REIT 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.

1. The Fund satisfies the 'influence test'

Subsection 128B(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 referred to in 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, trusts or REITs.

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 or equivalent role in a trust or REIT.

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, or equivalent role in a trust or REIT.

d.    Neither the Fund, nor any related party, has the ability to direct or influence the operation of the Australian company, trust or REIT 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, trust or REIT.

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.

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