Edited version of private advice

Authorisation Number: 1051794252124

Date of advice: 21 January 2021

Ruling

Subject: Withholding tax exemption - foreign 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 Australian 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 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 62 to 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 who 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 and interest 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

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.

Each of the requirements of paragraph 128B(3)(jb) will be considered below.

The Fund is a non-resident

The Fund is a resident of a country outside 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 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 legislation provides no guidance on the meaning of 'indefinitely continuing'. It is not a technical legal expression, and the ordinary meanings of indefinitely and continuing involve little ambiguity or controversy.

The Macquarie Dictionary, viewed on 20 October 2020, www.macquariedictionary.com.au defines 'indefinitely' and 'continuing' as follows:

Indefinite:

adjective 1. not definite; without fixed or specified limit; unlimited: an indefinite number

2. not clearly defined or determined; not precise.

-   indefinitely, adverb

Continue:

verb (Continued, continuing)

1.    to go forwards or onwards in any course or action; keep on.

2.    to go on after suspension or interruption.

3.    to last or endure.

4.    to remain in a place; abide; stay.

5.    to remain in a particular state or capacity

There is no indication that there is an intention for the Fund to end at a definite point in time. Therefore, the Fund satisfies the requirement that it must be an indefinitely continuing 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.

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 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 purpose of the Fund is to pay pension benefits to eligible members or their dependents upon retirement, death or invalidity in accordance with the pension plan rules.

Therefore, the Fund satisfies this requirement.

Established in a foreign country

The Fund was established in a foreign country. 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 individuals who are not Australian residents. Therefore, the Fund satisfies the requirements.

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 central management and control of the entity is carried on outside Australia by entities none of whom is an Australian resident. 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 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 exempt from income tax in its country of residence. 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.

Each of these requirements is discussed in detail below.

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.

All equity investments held by the Fund are less than 1% of the total equity interests of each Australian company.

In the 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 current Australian equity investments. The portfolio interest test does not apply to its Australian debt interests and is therefore taken to be satisfied.

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 can 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 relevant investments:

•         The Fund does not have any involvement in the day to day management of the business of the Australian entity.

•         The Fund does not have the right to appoint directors to the boards of any of the Australian entities in which it is invested, and none of the directors of these Australian entities acts in accordance with the directions, instructions or wishes of the Fund.

•         The Fund, and any representative of the Fund, does not have any part of any advisory committee of the Australian entities.

•         The Fund does not have any veto rights.

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 with respect to any of its Australian investments.

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 the relevant, current Australian investments.

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