Edited version of private advice

Authorisation Number: 1051776704656

Date of advice: 6 November 2020

Ruling

Subject: Foreign super fund - exemption from withholding tax

Question

Is the Fund excluded from liability to withholding tax on interest, dividend and non-share dividend income in respect of the Public 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 periods:

1 July 20XX to 30 June 20XX

The scheme commences on:

1 June 20XX

Relevant facts and circumstances

The Fund

The Fund was established in a foreign country and administered by the laws of that country.

The Fund is administered by a Board of Trustees.

The Plan provides retirement, disability and death benefits to eligible employees.

The Plan

Contributions

An employee working 30 hours or more per week is automatically a member of the Fund. A member contributes a percentage of their base pay, excluding overtime.

Participation is mandatory and the individual contribution rate cannot be changed.

The employer also contributes to the Fund each pay period equal to the same percentage of a member's base pay (excluding overtime and other types of pay).

Benefits

Benefits are determined by a formula which includes the members salary and years of service credit.

Contributions are invested by the Fund, under direction of the Board of Trustees, to provide benefits to all present and future members.

The Fund provides members with a lifetime retirement benefit once they meet certain eligibility requirements.

Eligibility requirements

Group A

If a member's full-time, regular employment date is before a certain date, they are eligible for normal retirement and can receive a monthly benefit for life when they meet one of these requirements:

•         They reach age 62*,

•         They reach age 55 and have at least 20 years of service credit,

•         They obtain at least 23 years of service credit regardless of their age.

*to retire at 62 they must be:

•         An active contributing member when they turn age 62;

•         A terminated vested member with at least 5 years' service credit; or

•         A proportionate member with 5 years of combined service credit.

Group B (Employees who became members on or after the certain date)

If a member's full-time, regular employment date is on or after the certain date, they are eligible for normal retirement and can receive a monthly benefit payment for life when they meet one of these requirements:

•         They reach age 65 and have at least 5 years of service credit,

•         They reach age 62 and have at least 30 years of service credit.

Group B members may be eligible for early retirement from 55 where they have at least 10 years of service credit. Early retirement benefits are reduced by a calculation taking in the members age in years and months at the time they retire.

Portability of benefits

Where an employee ceases employment with the employer, they have two options:

Option 1, a member can discontinue their membership and receive a refund of their contributions and any interest credited (not including any contributions from the employer). They can receive this as a lump sum taxable payment (as contributions were tax deferred) or they can roll over all or a portion of this amount without penalty into a tax deferred retirement plan.

Option 2, a member with 5+ years of service (a vested member) may retain their membership, service credit, Group A status (where appropriate) and corresponding eligibility requirements.

Death and disability benefits

A member may choose from various options upon retirement which may or may not include allowing benefits to continue to be paid to a survivor upon their death. The benefits may be full benefits (where they nominate no survivor) or are reduced where the option is selected to continue paying a nominated survivor.

Where a member dies before they retire, their beneficiary is entitled to a lump sum payment of their contributions and interest plus a death benefit equal to the amount of their contributions and interest.

If a member becomes disabled in a manner that is likely to be permanent and prevent them from performing any type of employment duties, they may be eligible for a disability retirement benefit.

Place of establishment

The Fund was established in a foreign country.

Central management and control

The office and central management and control are outside of Australia.

Statements from the managers of the Fund have been provided with the ruling application indicating that:

•         The Fund is an indefinitely continuing fund;

•         The Fund was established in a country other than Australia;

•         The Fund was established and maintained only to provide benefits for individuals who are not Australian residents;

•         The Fund's central management and control is carried outside of Australia by entities none of whom are Australian residents;

•         No amount paid to the Fund can be deducted under the ITAA 1997 or the ITAA 1936;

•         No tax offsets would be allowable for an amount paid to the Fund or set aside for the Fund;

•         The income of the Fund is not non-assessable non-exempt income of the Fund because of either:

-        Subdivision 880-C of the ITAA 1997, or

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

•         Formal certification from Internal Revenue Service of the United States of America was supplied with this ruling confirming that the Fund is generally exempt from tax in its home country.

Australian Investments

All investments in Australia are listed on the ASX with a total participation interest in respect of each investment being below 10%.

The Fund holds no rights to appoint a person to a board, committee or similar, either directly or indirectly.

The Fund has not entered into, or received, any side letters, arrangements or agreements.

The Fund holds no veto rights on security holder votes.

The Fund does not have influence of a kind described in subsection 128(3CD) of the ITAA 1936 in respect of these equity investments. The Fund does not have capacity to influence (either directly or indirectly) the day to day management of the operations of its investments.

Reasons for decision

Summary

The requirements of paragraph 128B(3)(jb) of the ITAA 1936 are satisfied. The Fund is excluded from liability to withholding tax on interest, dividend and non-share dividend income derived in respect of assets derived from its Australian investment under paragraph 128B(3)(jb) of 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.

Superannuation fund for foreign residents

Superannuation fund for foreign residents is a defined term in the ITAA 1936. Subsection 6(1) of the ITAA 1936 states:

Superannuation fund for foreign residents has the meaning given by subsections 995-1(1) of the Income tax Assessment Act 1997.

Subsection 995-1(1) of the ITAA 1997 sets out the following:

Superannuation fund for foreign residents has the meaning given by section 118-520.

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 in a foreign country; 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.

The Fund must be a 'fund' that satisfies all of the conditions in subsection 118-52-(1) of the ITAA 1997 (and none of the paragraphs in subsection 118-520(2) of the ITAA 1997) to be a 'superannuation fund for foreign residents'.

1. An indefinitely continuing fund

The term 'indefinitely continuing fund' is not defined in either the ITAA 1997 or the ITAA 1936. The general view is that this does not mean that the Fund must continue forever, but rather that the governing rules should not fix an express termination date.

Further, the Fund does not provide for winding up at a defined point in time. On that basis, the Fund is an indefinitely continuing fund.

Therefore, the Fund will satisfy 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 Funds'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 extract 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).

In this case, the Fund provides retirement, disability and death benefits to eligible employees.

The only circumstances in which members of the Fund (or their relatives) may directly receive benefits or payments from the Fund prior to being at least 55 years old are where a member:

a) is unable to work due to physical and/or mental impairment;

b) dies; or

c) on ceasing to be a member of the Fund where the member chooses to receive a refund of their contributions and any interest (not including contributions from the employer), which they can receive as a taxable lump sum payment or roll over a portion or all of the amount without penalty into a tax deferred retirement plan.

Therefore, the Fund has a purpose of providing a pool of assets for use by employees only on their retirement, death or contemplated contingencies such as being unable to work. 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 eligible employees who 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 Fund is governed by the relevant country's law and is administered by a Board of Trustees.

The Fund's central management and control is carried on outside Australia by entities who are not resident in Australian.

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.

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

In the circumstances, the Commissioner is satisfied that the Fund 'resides' in a foreign country for the purposes of subparagraph 128B(3)(jb)(iii). Amongst other factors, the fact that the Fund is governed by that country's law makes it clear that it has its seat in and has legal capacity in the foreign country.

Therefore, the Fund will satisfy this requirement.

Subsection 128B(3CA):

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) 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)

•         The Fund must satisfy the 'influence test' (subsection 128B(3CD) 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) 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.

As per the facts, the Fund does not hold more than 10% ownership of any of the entities listed in the 'Australian Investments' section. Furthermore, the Fund's Australian Investments also meet certain 'Equity Characteristics' as listed.

In these circumstances, the Commissioner is satisfied that the total participation interest the Fund holds in the test entities:

•         Is less than 10% pursuant to paragraph 128B(3CC)(a) at all relevant times; and

•         Would be less than 10% in the circumstances detailed in paragraph 128B(3CC)(b) at all relevant times.

The Fund therefore satisfies the 'portfolio interest test' in respect of its Australian investments listed in the relevant facts of this Ruling.

2. The Fund satisfies the 'influence test'

Subsection 128(3CD) 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), 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), 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 investments listed in the relevant facts of this ruling:

•         Neither the Fund, nor any related party, is involved in the day to day management of the business of any of the Australian companies or trusts;

•         Neither the Fund, nor any related party, has the right to appoint a director to the Board of Directors of the Australian company, Australian debt issuer or equivalent role in a trust;

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

•         Neither the Fund, nor any related party, has the ability to direct of influence the operation of the Australian companies or trusts 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 or trust.

Accordingly, the Fund does not have influence of a kind described in subsection 128(3CD) of the ITAA 1936 in respect of these equity investments. The Fund does not have capacity to influence (either directly or indirectly) the day to day management of the operations of their equity investments.

Consequently, the Commissioner accepts that the Fund does not have influence of a kind described in subsection 128B(3CD).

3. Otherwise non-assessable non-exempt

Section 128D of the ITAA36 provides the following:

"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."

Income derived by the Fund would not be otherwise treated as not assessable and not exempt income by virtue of the above provisions. Accordingly, the above exclusion should not apply to exclude the Fund from entitlement to the withholding tax exemption for superannuation funds for foreign residents.

Conclusion

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

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