Edited version of private advice

Authorisation Number: 1051805999545

Date of advice: 17 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 dividend income derived from its Australian investments as listed in Appendix 1 of this Ruling, in accordance with paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commences on:

Relevant facts and circumstances

The Fund is a pension scheme established under the legislation (the Foreign Law) in a foreign country (Country A).

The Fund is a registered pension scheme in accordance with the laws of Country A and is therefore exempt from income tax in respect of income derived from investments or deposits held for the purposes of a registered pension scheme.

The Fund is centrally managed and controlled in Country A by board members that are not Australian residents comprising of employer and employee representatives of the industry in Country A.

The Foreign Law that governs the Fund does not have a specified end date and there is no contemplation of the Fund being terminated.

The Fund operates for the benefit of its retired members and its contributing members, all of whom are previous or current employees of scheme employers based in Country A.

The Fund provides benefits to its members in the event of old age retirement, disability or to a member's survivors in the event of death.

The Fund does not provide benefits as a result of events other than old age retirement, disability or death.

Reasons for decision

The Fund is excluded from liability to withholding tax on interest, dividend and non-share dividend income derived from its current 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 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.

1.    An indefinitely continuing fund

The Foreign Law that governs the Fund does not have a specified end date and there is no contemplation of the Fund being terminated.

Therefore, 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).

The Fund was established to provide retirement benefits to the Fund participants on the satisfaction of the Fund requirements. The Fund has a retirement age and a vesting requirement. It also provides disability benefits and survivors benefits where a member dies before retirement.

Where a vested member terminates their employment before reaching the eligible retirement age, they can either leave their contributions in the Fund and be entitled to all the benefits associated with the plan when they retire, or they can withdraw their contributions at any time and forfeit their right to a monthly pension. There are also tax penalties for withdrawing contributions before retirement.

Therefore, it can be concluded that the sole purpose of the Fund is to provide retirement benefits or benefits in other allowable contemplated contingencies and as such will satisfy this requirement.

3.    Established in a foreign country

The Fund was established in Country A, which is 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 to provide retirement, disability and death benefits to members of the scheme employers of the Fund. These scheme employers and their employees reside in Country A.

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.

Furthermore, paragraph 10 and 11 of the Taxation Ruling TR 2018/5 Income tax: Central Management and Control test of residency (TR 2018/5) states:

10. Central management and control refers to the control and direction of a company's operations. It does not refer to a physical location in which the control and direction of a company is located, and may ultimately be exercised in more than one location.

11. The key element in the control and direction of a company's operations is the making of high-level decisions that set the company's general policies, and determine the direction of its operations and the type of transactions it will enter.

The Fund is a pension scheme established under the Foreign Law enacted in Country A. The Fund

is managed and administered by board members who are not Australian residents comprising of

employee and employer representatives in Country A.

Based on the above, it is reasonable to conclude that the CM&C of the Fund occurs in the Country

A by entities that are not Australian residents.

Therefore, the Fund satisfies this requirement.

6.    Subsection 118-520(2)

An amount paid to the Fund or set aside for the Fund has not been and cannot be deducted under the ITAA 1936 or ITAA 1997. A tax offset has not been allowed nor would be allowable for any amount paid to the Fund or set aside for the Fund. The Fund has also confirmed that no amount paid to the Fund can be deducted under ITAA 1997 or ITAA 1936

Therefore, the Fund satisfies these requirements.

Conclusion on section 118-520 of the ITAA 1997

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.

Subparagraph 128B(3)(jb)(ii) of the ITAA 1936

Paragraph 128B(3)(jb) of the ITAA 1936 will only apply to interest, or to dividends and non-share dividends paid by Australian resident companies.

The Fund will receive interest, dividend or non-share dividend income from companies that are residents of Australia for tax purposes.

Therefore, the Fund will satisfy this requirement.

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

The Fund is a registered pension scheme in accordance with the laws of Country A and is therefore exempt from income tax in respect of income derived from investments or deposits held for the purposes of a registered pension scheme.

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:

-        Subdivision 880-C of the ITAA 1997, or

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

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 each Australian entity to which the Fund has invested. Further the Fund would hold less than 10% of the total participation interests in each entity 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.

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.

Relevantly, in respect of each of the Australian entities to which the Fund has invested:

(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 investments

(b) neither the Fund, nor any related party of the Fund, holds any right to appoint a person to a board, committee or similar, either directly or indirectly, of any of the Australian investments

(c) neither the Fund, nor any related party, holds the right to representation on any investor representative or advisory committee (or similar) of any of the Australian investments

(d) neither the Fund, nor any related party, has the ability to direct or influence the operation of any of the Australian investments outside of the ordinary rights conferred by the equity interest held

(e) the Fund has not entered into or received any side letters, arrangements or agreements, and

(f) the Fund does not hold any veto rights on security holder votes.

Based on 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

Having regard to the requirements of paragraph 128B(3)(jb) of the ITAA 1936, 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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