Edited version of private advice

Authorisation Number: 1051810436500

Date of advice: 26 February 2021

Ruling

Subject: Withholding tax

Question 1

Is Entity A excluded from liability to withholding tax on interest and dividend income derived from its Investments invested on behalf of the Fund, listed in the relevant facts and circumstances of this Ruling, except to the extent that interest or dividend income is derived from assets acquired by Entity A, or the trust in which Entity A invested, after 27 March 2018, based on the exclusion under paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

Question 2

Is interest and dividend income derived from Australia by Entity A from its Investment non-assessable non-exempt income pursuant to section 128D of the ITAA 1936?

Answer

Yes.

This ruling applies for the following period:

The relevant income years.

The scheme commences on:

The relevant start date.

Relevant facts and circumstances

1.    The Fund has its registered office in a country that is not Australia. The Fund's central management and control is not in Australia.

2.    The Fund is governed by its governing documents.

3.    The Fund operates to provide pension benefits to employees of the Employer.

4.    The Fund's central management and control is not in Australia. All investment decisions relating to the Fund assets are made outside Australia.

5.    The benefits the Member has accrued under the Fund shall be retained until such time as the Member retires, dies or terminates employment with the Employer.

6.    The pension entitlements of the Fund are detailed in the Regulations.

7.    The Employer has not set a date for the Fund to be terminated and its termination is not anticipated.

8.    The Fund is managed by Entity A. Entity A was established outside Australia and has its central management and control outside Australia.

9.    Entity A invested on behalf of the Fund in Australia in 2015. It holds the investments and all interest and dividend income derived therefrom for the Fund.

10.  Entity A has made no further investment after 27 March 2018.

11.  An amount paid to the Fund or set aside for the Fund has not been and cannot be deducted under the Income Tax Assessment Act 1997 (ITAA 1997).

12.  A tax offset has not been allowed nor would be allowable for any amount paid to the Fund or set aside for the Fund.

13.  The Fund and Entity A are not residents of Australia for tax purposes.

14.  The Fund is exempt from taxation in accordance with statute in its country of residence.

Reasons for decision

Summary 1

Entity A is excluded from liability to withholding tax on its interest and dividend income derived in respect of its Investments, on behalf of the Fund, under paragraph 128B(3)(jb) of the ITAA 1936, except to the extent that interest or dividend income is derived from assets acquired by the Fund, or the trust in which the Fund invested, after 27 March 2018.

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:

1. derived by a superannuation fund for foreign residents (as defined in section 118-520 of the ITAA 1997), and
2. 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 Commissioner has determined from the facts and circumstances that the Fund is not a resident of Australia.

1.    The Fund is a superannuation fund for foreign residents

The term 'superannuation fund for foreign residents' is defined in section 118-520 of the ITAA 1997 which provides:

118-520(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.

118-520(2) However, a fund is not a superannuation fund for foreign residents if:

(a)          an amount paid to the fund or set aside for the fund has been or can be deducted under this Act;

(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 employer as well as income earned from the investment of the Fund's monies. As such, the Fund meets the requirements of being a 'fund'.

The governing documents provide no indication that there is an intention for the Fund to end at a definite point in time. Therefore, it is accepted that the Fund will continue to operate for an indefinite period.

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) 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 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 primary objective of the Fund is to provide for the Fund members' pension on their retirement or for their families on death before or after retirement. The Fund provides benefits to members via a contributory defined benefit scheme. Furthermore, the Fund does not provide benefits as a result of events other than old age retirement, disability or death.

The Commissioner accepts 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 outside Australia. Therefore, it satisfies this requirement.

4. Was established and maintained only to provide benefits for individuals who are not Australian residents

The Fund was established outside Australia. It operates to implement its pension scheme for its members not in Australia.

It is considered that the possibility of a very small number of members being returned residents or becoming Australian residents after ceasing eligible employment is incidental and should not be taken to conclude that the Fund, in this case, has not been established and is not maintained only to provide benefits for non-residents, based on the rules and operation of the Fund.

Therefore, the Fund will satisfy 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 Commissioner has determined from the facts and circumstances that the Fund's CM&C is outside Australia. Therefore, the Fund satisfies this requirement. 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.

Consequently, based on the statement provided by the applicant, this requirement is satisfied

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.

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

The Fund is exempt from taxation in accordance with section 149(1)(o) of the Canadian Income Tax Act as a registered pension plan.

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. However, transitional rules apply to assets acquired by a superannuation fund for foreign residents on or before 27 March 2018.

Item 3 of Part 2 of Schedule 3 of Treasury Laws Amendment (Making Sure Foreign Investors Pay Their Fair Share of Tax in Australia and Other Measures) Act 2019 provides specific detail in relation to when the extra requirements in subsection 128(3CA) of the ITAA 1936 would apply:

3 Application

(1)  Subject to sub items (2) and (3), the amendments made by this schedule apply in relation to income that is derived on or after 1 July 2019.

(2)  The amendments made by this Schedule apply to income that is derived by a superannuation fund on or after 1 July 2026 if:

(a)  the income was derived by the superannuation fund in respect of an asset; and

(b)  subsection 128A(3) of the Income Tax Assessment Act 1936 does not apply in relation to that income; and

(c)   the superannuation fund acquired the asset on or before 27 March 2018.

(3)  The amendments made by this Schedule apply to income that is derived by a superannuation fund on or after 1 July 2026 if:

(a)  because of the operation of subsection 128A(3) of the ITAA 1936, a superannuation fund derived the income because it holds an interest in a trust estate; and

(b)  the superannuation fund started to hold that interest on or before 27 March 2018; and

(c)   the dividend, non-share dividend or interest that was included in the income of the trust estate as mentioned in that subsection was so included in respect of an asset; and

(d)  the trustee of the trust estate acquired the asset on or before 27 March 2018.

In this case:

•         the Fund derived the income in respect of an asset;

•         Subsection 128A(3) of the ITAA 1936 does not apply to that income;

•         The Fund acquired the asset on or before 27 March 2018.

As such, the amendments made by Schedule 3 of Treasury Laws Amendment (Making Sure Foreign Investors Pay Their Fair Share of Tax in Australia and Other Measures) Act 2019 (being the extra requirements that must be met under subsection 128(3CA) of the ITAA 1936) will not apply to income derived by Entity A in relation to these investment assets until 1 July 2026, to the extent that the income is not derived from underlying assets that were acquired by Entity A after 27 March 2018.

For completeness, it is noted that subsection 128(3CA) of the ITAA 1936 will be required to be satisfied where Entity A derives income from Investments and either:

•         the income relates to units which were acquired after 27 March 2018, or

•         the income derived is in respect of assets acquired by Entity A after 27 March 2018.

Conclusion

Entity A is excluded from withholding tax in relation to interest, dividend and non-share dividend income derived from its current Investments listed in the relevant facts and circumstances of this Ruling to the extent that the assets were acquired before 27 March 2018 and the income derived is included in the income of the relevant trust estates in respect of assets acquired by the relevant trustees on or before 27 March 2018.

Summary 2

The interest and dividend income derived by Entity A on behalf of the Fund in respect of the investments (as listed in the relevant facts and circumstances of this Ruling) is not assessable and not exempt income under section 128D of the ITAA 1936.

Detailed reasoning

Section 128D of the ITAA 1936 provides:

'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.'

Dividend and interest income derived by Entity A would be subject to withholding tax under subsections 128B(1) and 128B(2) of the ITAA 1936 respectively, but for the operation of the exemption in paragraph 128B(3)(jb) of the ITAA 1936. As the interest and dividend income derived by Entity A is income upon which withholding tax would, but for the operation of paragraph 128B(3)(jb), be payable, it is not assessable and not exempt income under section 128D of the ITAA 1936.

Conclusion

The interest and dividend income derived by the Entity A is not assessable and not exempt income under section 128D of the ITAA 1936.

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