Edited version of private advice

Authorisation Number: 1051803985407

Date of advice: 12 February 2021

Ruling

Subject: Exemption from withholding tax for a 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 Australian 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:

Year ending 30 June 20xx

Year ending 30 June 20xx

Year ending 30 June 20xx

Year ending 30 June 20xx

Year ending 30 June 20xx

The scheme commences on:

1 July 20xx

Relevant facts and circumstances

The Fund

The Fund ('the Fund') is a fund run by Entity A for its employees and the employees of various other participating employers. The Fund was established in the Foreign Jurisdiction and is an indefinitely continuing provident, benefit, superannuation or retirement fund.

The Fund is part of a wider pension scheme in the Foreign Jurisdiction and Entity A is the relevant responsible entity.

The Fund is a defined benefit pension scheme that calculates a pension using a set formula involving several factors such as a member's current or past salary and length of service.

There are regulations governing the scheme in the Foreign Jurisdiction. Changes to scheme rules can only be made with the approval of the Foreign Jurisdiction. The income of the Fund is free of taxation in the Foreign Jurisdiction.

There are dozens of participating employers and tens of thousands of members of the Fund. Only employees of participating employers can join the scheme.

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

No contributions to the Fund are capable of being claimed as a tax offset or as a deduction under either the Income Tax Assessment Act 1997 (ITAA 1997) or the ITAA 1936.

Income of the Fund is not 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.

The Fund is a resident of the Foreign Jurisdiction.

Administration of the Fund

As the responsible entity for the Fund, Entity A acts, in effect, as the Fund's trustees.

Entity A has delegated all pension scheme matters to a Pensions Committee. The Pensions Committee's specific functions include setting the Fund's objectives and ensuring that appropriate strategies, policies and procedures are put in place to achieve these objectives.

A Sub-Committee and Board have also been established to assist in investment management and regulatory compliance.

The Fund itself does not directly employ any staff. All staff are employed by Entity A and their costs reimbursed by the Fund.

The staff employed by Entity A undertake the following functions:

•         Membership and Benefits Administration

•         Investment Management

•         Funding and Accounting

The Fund is managed and administered from Entity A headquarters in the Foreign Jurisdiction.

Contributions, vesting period and refunds

Contributions to the Fund are made by both members and employers according to a complex set of rules. Members contributions are set at a percentage of the member's salary with higher salaries being subject to higher contribution rates.

A member can increase their pension by paying extra contributions (which are subject to tax relief). The member also has the option to pay half their normal contributions in return for half their normal pension.

Employer contributions ensure that the costs of providing members' benefits are fully funded. An independent actuary calculates the contribution rates for participating employers.

The vesting period (being one of the conditions to receive a retirement pension) is x years. This requirement would generally be satisfied if an individual has been a member of the Fund for more than x years. There may also be circumstances in which the requirement is satisfied prior to x years of membership (e.g. on the death of a member).

A member can choose to receive a refund of contributions less a deduction for tax if they leave the Fund before meeting the vesting period requirement.

Benefits provided

The Fund provides the following types of benefits to members.

Retirement Benefits

A pension amount is worked out every year and added to a member's pension account. The pension amount is equal to a certain fraction of the member's salary in the relevant year. The total amount in a member's account is adjusted annually to account for changes in the cost of living.

Members can choose to retire and draw a pension at any time from the age of xx provided they have met the x-year vesting period. Members may also be eligible to retire and draw a pension between the ages of xx and xx in some circumstances. However, if a member chooses to take a pension before the age of xx it will generally be reduced.

A lump sum can be taken at the date of retirement in exchange for a reduction in pension benefits.

Ill Health Retirement Benefits

Members may receive ill health retirement benefits from any age if:

•         They have met the x-year vesting period; and

•         Their employer is satisfied, based on an opinion from an independent expert, that the relevant member will be permanently unable to do their own job until their normal pension age.

Death Benefits

Lump sum or pension benefits may be payable to a member's beneficiaries on a member's death according to a complex set of rules.

Appendix 1

The Fund provided a list of its Australian equity investments ('Australian Investments').

The Australian equity investments of the Fund have the following characteristics ('Equity Characteristics'):

(a)  All investments are listed on the Australian Securities Exchange (ASX).

(b)  The Fund holds less than 10% of the total equity interests on issue of each Australian company or trust.

(c)   The Fund has no involvement in the day to day management of the business of any of the Australian companies or trusts.

(d)  The Fund has no right to appoint a director to the Board of Directors of the Australian company or equivalent role in a trust.

(e)  The Fund has no right to representation on any investor representative or advisory committee (or similar) of the Australian company, or equivalent role in a trust.

(f)    The Fund has no ability to direct or influence the operation of the Australian company or trust outside of the ordinary rights conferred by the equity interest held.

(g)  The Fund only holds rights to vote in proportion to their equity interest in each Australian company or trust.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 6

Income Tax Assessment Act 1936 Division 6

Income Tax Assessment Act 1936 section 128B

Income Tax Assessment Act 1936 subsection 128B(1)

Income Tax Assessment Act 1936 subsection 128B(2)

Income Tax Assessment Act 1936 subsection 128B(3)

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

Income Tax Assessment Act 1936 subsection 128B(3CA)

Income Tax Assessment Act 1936 subsection 128B(3CB)

Income Tax Assessment Act 1936 subsection 128B(3CC)

Income Tax Assessment Act 1936 subsection 128B(3CD)

Income Tax Assessment Act 1997 section 118-520

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

Income Tax Assessment Act 1997 subsection 118-520(2)

Income Tax Assessment Act 1997 Subdivision 880-C

Income Tax Assessment Act 1997 Subdivision 960-GP

Income Tax Assessment Act 1997 section 995-1

Income Tax (Transitional Provisions) Act 1997 Division 880

Reasons for decision

All references are to the Income Tax Assessment Act 1936 (ITAA 1936) unless otherwise noted.

Question

Is the Fund excluded from liability to withholding tax on its interest, dividend and non-share dividend income derived in respect of its Australian Investments, listed in Appendix 1 to the relevant facts and circumstances of this Ruling, under paragraph 128B(3)(jb)?

Summary

The Fund is excluded from liability to withholding tax on its interest, dividend and non-share dividend income derived in respect of its Australian Investments 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 resides.

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 the Foreign Jurisdiction. 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.

1. 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'.

In this case, the Fund is financed by the contributions made by members and their employers as well as income earned from the investment of the Fund's monies. As such, the Fund meets the requirements of being a 'fund'.

In addition, the Fund was established as an indefinitely continuing fund through Foreign Jurisdiction legislation and regulation. The Fund would only be wound up through a change in the relevant legislation and regulation and there is no indication that any such winding up will occur.

Consequently, the Fund satisfies 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 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 the circumstances, the Fund has a purpose of providing a pool of assets for use by current and former employees of participating employees only on their retirement or contemplated contingencies (such as death or disability).

The Commissioner also accepts that the ability of some members to receive refunds is a minor and incidental feature of the Fund in the circumstances.

Therefore, the Fund satisfies this requirement.

3. Established in a foreign country

The Fund was established in the Foreign Jurisdiction. 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 created in order to provide benefits to employees of Entity A and related participating employers in the Foreign Jurisdiction. The Commissioner is satisfied that the Fund was established, and is maintained, only to provide benefits for individuals who are not Australian residents.

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) state:

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.

As the responsible entity for the Fund, Entity A acts, in effect, as the Fund's trustees. Entity A has delegated all pension scheme matters to a Pensions Committee. The Pensions Committee's specific functions include setting the Fund's objectives and ensuring that appropriate strategies, policies and procedures are put in place to achieve these objectives. A Sub-Committee and Board have also been established to assist in investment management and regulatory compliance.

The Fund is managed and administered from Entity A headquarters in the Foreign Jurisdiction.

The Commissioner is satisfied that the central management and control of the Fund is carried on in the Foreign Jurisdiction and by entities that are not Australian residents. Therefore, the Fund satisfies this requirement.

6. Subsection 118-520(2)

No contributions to the Fund are capable of being claimed as a tax offset or as a deduction under either the Income Tax Assessment Act 1997 (ITAA 1997) or the ITAA 1936.

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.

The Fund is exempt from income tax in the country in which the non-resident resides

The Fund is exempt from income tax in the Foreign Jurisdiction. Therefore, the Fund satisfies this requirement.

Subsection 128(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 are discussed in detail below.

1. 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 the Australian Investments. Further, the Fund would hold less than 10% of the total participation interests in the Australian Investments in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936.

The Fund therefore satisfies the 'portfolio interest test' in respect of the Australian Investments (listed in the relevant facts and circumstances of this Ruling).

2. The Fund satisfies the 'influence test'

Subsection 128(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.

The following points are relevant in considering whether the Fund has influence of a kind described in subsection 128B(3CD) in relation to the 'test entities':

•         The Fund has no involvement in the day-to-day management of the business of those test entities;

•         The Fund has no right to appoint a director to the Board of Directors of those test entities;

•         The Fund has no right to representation on any investor representative or advisory committee (or similar) of those test entities;

•         The Fund has no ability to direct or influence the operation of those test entities outside of the ordinary rights conferred by the equity interests held; and

•         The Fund only holds rights to vote in proportion to their equity interest in each of those test entities.

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

Income of the Fund is not 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.

Therefore, this requirement is satisfied.

Conclusion

The Fund is excluded from liability to withholding tax on its interest, dividend and non-share dividend income derived in respect of its Australian Investments.

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