Edited version of private advice

Authorisation Number: 1051784065824

Date of advice: 26 November 2020

Ruling

Subject: Withholding tax exemption - superannuation fund for foreign residents

Question

Is the Fund excluded from liability to withholding tax on interest, dividend and non-share dividend income from its investments in accordance with paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2020

Year ended 30 June 2021

Year ended 30 June 2022

Year ended 30 June 2023

Year ended 30 June 2024

The scheme commences on:

1 July 2019

Relevant facts and circumstances

BACKGROUND

1.      The Fund was established and exists solely for the purpose of providing retirement, disability and survivor benefits.

2.      The Fund is administered and managed by a board of trustees (the Board).

3.      The Fund's revenue sources are:

a.    mandatory employer contributions

b.    mandatory member contributions, and

c.     investment returns

4.      The Fund is a qualified pension trust.

5.      All assets of the Fund are held in trust for the exclusive benefit of plan participants and beneficiaries.

6.      The plan structure is such that there are three plans.

Benefits

7.      Plan benefits:

-   Benefits are calculated on the basis of age, Final average salary (FAS) and service credit.

-   Members are eligible for retirement benefits at a certain age.

-   Members who retire before meeting the age and years of service credit requirement, receive a reduction in the benefit amount.

-   The base amount of a member's pension benefit is locked in upon receipt of the initial benefit payment for calculation of an annual cost of living adjustment.

8.      Members and/or beneficiaries of all plans may also be eligible for disability benefits, survivor benefits and/or death benefits.

Contributions

9.      Contribution rates are established by the Board, subject to limits set in statute based on the recommendations of the System's actuary.

10.   Member and employer contribution rates were the same for each of the three plans.

Fund A

11.   The investment policy strategy for Fund A provides the broad strategic investment framework for managing Fund A.

12.   Fund A may be used only for providing health care coverage and it is held in trust by the Fund with the same duties and responsibilities as other funds.

13.   The objective of Fund A is to provide coverage for eligible benefit recipients over a solvency period as defined by the Board.

14.   The Board may appoint advisors unaffiliated with the Fund to assist with the investment program, which will be responsible to the Board and perform functions which have been established through contractual agreements.

Agreement A

15.   The Agreement was entered into between the State Treasurer and Entity A.

16.   The term of the agreement is five years.

17.   The Agreement sets out the terms governing custodial, settlement and other associated services offered by Custodian to Treasurer.

18.   Treasurer acknowledges that Custodian is not providing any legal, tax or investment advice in connection with the services.

Agreement

19.   The New Agreement was entered into between the Treasurer and Entity B.

20.   The term of the agreement is four years.

21.   The New Agreement is authorised by provision of the Code.

22.   The New Agreement sets out the custody services to be provided by Entity B for the accounts of the Beneficial Owners.

23.   The Custodian has been authorised by the Treasurer to appoint Entity B as sub-custodian.

24.   Entity B shall be compensated for services according to a schedule of fees

INVESTMENT INFORMATION

25.   A list of the Investments is included in Appendix 1 which are subject to a sub-custodian arrangement (the Agreement) between the Fund and Entity A.

26.   The investments are made in the name of Entity A.

27.   The Fund is authorised by Code to invest through an investment policy.

28.   Plan contributions must be invested with an investment manager approved by the Board.

29.   Investments are generally reported at fair value. Commissions paid to brokers are considered to be part of the investment asset cost and are therefore not reported as expenses of the System.

The Australian investments

30.   The Fund has invested in Australian equity investments (as detailed in Appendix 1). 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.

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

Other relevant facts

31.   A letter, that was provided states that the Fund is:

•       an indefinitely continuing fund and a provident, benefit, superannuation or retirement fund

•       an entity which was established in a foreign country

•       established, and is maintained, only to provide benefits for individuals who are not Australian residents during their term of service, and

•       centrally managed and controlled outside of Australia by entities none of whom is an Australian resident

•       an amount paid to the Fund, or set aside for the Fund, has not been or cannot be deducted under the Income Tax Assessment Act 1997 (ITAA 1997) or the Income Tax Assessment Act 1936 (ITAA 1936)

•       a tax offset has not been allowed or is not allowable for such an amount, and

•       the income of the Fund is not non-assessable non-exempt income because of the operation of Subdivision 880-C of the ITAA 1997 or Division 880 of the Income Tax (Transitional Provisions) Act 1997.

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 (listed in Appendix 1 to the relevant facts and circumstances of this Ruling) 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.

The Fund is a superannuation fund for foreign residents

Section 118-520 of the ITAA 1997 states the following:

(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. The Fund is an indefinitely continuing fund

A document was provided that states the Fund is an indefinitely continuing fund.

Therefore, the Fund satisfies this requirement.

2.The Fund 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) refers to these authorities to provide 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).

The Fund was established and exists solely for the purpose of providing retirement, disability and survivor benefits to employees.

Therefore, the Fund satisfies this requirement.

3.The Fund was established in a foreign country

The Fund was established and is a resident of country X.

Therefore, the Fund satisfies this requirement.

4.The Fund was established and is maintained only to provide benefits for individuals who are not Australian residents

The Fund was established in the Country X for the purpose of providing retirement, disability and survivor benefits to the employees.

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 in respect of the central management and control (CM&C) of a superannuation fund:

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 Board exercises the CM&C of the Fund. The Board members 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.

Is exempt from income tax in the country in which the non-resident resides

The Fund is a registered pension plan and is exempt from tax in Country X.

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.

1. The Fund satisfies the 'portfolio interest test'

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 REIT. Further, the Fund would hold less than 10% of the total participation interests in each Australian company or trust 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 Public Investments (listed in Appendix 1 to the relevant facts and circumstances of this Ruling).

2. 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 public investment listed in Appendix 1 (Appendix K of application) 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, 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.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.

c.     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.

d.    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.

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

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