Edited version of private advice

Authorisation Number: 1051811135297

Date of advice: 5 March 2021

Ruling

Subject: International issues - foreign entities - foreign superannuation funds

Question

Is the Fund excluded from liability to withholding tax on its interest, dividend and non-share dividend income derived in respect of its investments listed in Appendix 1 of this Ruling, in accordance with paragraph 128B(3)(jb) of the ITAA 1936?

Answer

Yes

This ruling applies for the following periods:

1 July 2020 to 30 June 2025

The scheme commences on:

1 July 2020

Relevant facts and circumstances

The Fund

1.    The Fund was incorporated on a specific date.

2.    The Fund is a not for profit, industry wide pension fund which provides benefits to the employees of a broad range of employers in the Foreign Country.

3.    The Fund is supervised by the Central Bank of the Foreign Country.

4.    The Fund is a resident of the Foreign Country.

5.    The registered office of the Fund is in the Foreign Country.

6.    The Fund is exempt from taxation in the Foreign Country.

7.    The Fund's objective is to provide pensions to participants, former participants and to participant's surviving relatives.

8.    The Fund meets its objective by collecting premiums from the affiliated employers, investing and managing these funds and by making payments from these funds in case of old age, death and disability.

Governance

9.    The oversight duties and powers of the Fund are undertaken by the following:

a)    Governing Board (the Board)

b)    Accountability Body

10.  The principal duties and powers of the Board are outlined in the Fund's Articles of Association and include:

a)    directing the Fund's administration and financial management

b)    defining strategic policy

c)    monitoring compliance with policy

d)    implementing pension schemes, and

e)    amending the Articles of Association and regulations.

11.  The Accountability Body has the power to give an opinion on the actions of the Board, the policy executed by the Board, as well as policy choices for the future.

12.  The Fund has appointed external managers to assist in the management of its investments.

13.  The central management and control of the Fund is carried out in the Foreign Country.

Membership

14.  Once an employer has an administration agreement in place with the Fund all employees of that employer will become participants of the Fund.

Fund Features and Benefits Provided

15.  Broadly, the benefits provided to participants and former participants of the Fund include:

a)    retirement pensions to participants and former participants

b)    partner's pensions to the partner of a participant or former participant

c)    temporary partner's pensions to the partners of participants or former participants

d)    orphan pensions to the children of participants, and

e)    disability pensions to participants.

16.  The Fund utilises three pension schemes to provide these benefits: Scheme 1, Scheme 2 and Scheme 3.

Scheme 1

17.  The Scheme 1 is a defined benefit agreement with a standard retirement age of 68 years.

18.  Pensions are calculated based on the number of years the participant has been a member and their pensionable income.

19.  The Fund offers several flexibility options to its participants including:

a)    Early commencement of the retirement pension. Participants can commence their pension early if the participant retires and declares they have no intention of returning to work. In these circumstances the accumulated retirement pension will be reduced.

b)    Exchange partner's pension. Participants can choose to exchange all or part of their partner's pension for an increase in their retirement pension. The partner's pension of a former participant who does not have a partner will automatically be fully exchanged for an increase in their old age pension.

20.  Upon termination of membership before the standard retirement date other than through death, entitlements to pensions will be replaced by a lump-sum payment that may only be used to purchase pension entitlements from the pension provider of a new employer. If the participant does not take up new employment the pension will be held by the Fund until the participant's retirement date. The pension will then be paid out in accordance with the Fund's pension regulations.

Scheme 2

21.  Scheme 2 is a defined contributions scheme in which the employer contributes to the pension capital of the participant. The contribution is withheld by the employer from the participant's salary.

22.  The standard retirement age upon which the pension becomes available is 68 years.

23.  The date at which the pension can be accessed may be lowered as young as 60 years of age, although advancing access to a date earlier than five years before the state pension age is only possible if the participant declares they are retiring and have no intention of returning to work.

Scheme 3

24.  Scheme 3 is a defined contributions scheme in which both the employer and participant must contribute.

25.  Scheme 3 is intended for participants of Scheme 2 who have salaries above the government-imposed cap.

26.  The date at which the pension can be accessed may be lowered as young as 60 years of age, although advancing access to a date earlier than five years before the state pension age is only possible if the participant declares they are retiring and have no intention of returning to work.

Winding-up or liquidating of the Fund

27.  The Articles of Association authorise the Board to dissolve the Fund at a meeting convened for that purpose, at which the complete Board is present, and where at least three quarters of votes cast are in favour of winding up the Fund.

28.  The Articles of Association also state that the Board members are entrusted with the liquidation after the Board has adopted the resolution to liquidate the pension fund. The Board will appoint an actuary and accountant to assist the liquidation.

The Fund's Investments

29.  The Fund's Australian investments include equity interests and fixed income bonds. The investments have the following characteristics:

a)    The Fund holds less than 10% of the total participation interests in each entity it has invested in and has never held more than a 10% participation interest.

b)    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.

c)    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.

d)    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 investments.

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

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

g)    The Fund only holds rights to vote in proportion to its interest in each Australian investment.

h)    The Fund has not entered into or received any side letters, arrangements or agreements.

i)      The Fund does not hold any veto rights on security holder votes.

30.  The Fund legally and beneficially owns the investments.

Other relevant facts

31.  The Fund has not and cannot deduct amounts under either the Income Tax Assessment Act 1997 (ITAA 1997) or the ITAA 1936 for amounts paid to it.

32.  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.

33.  The Income of the Fund is not non-assessable non-exempt income because of:

a.    Subdivision 880-C of the ITAA 1997, or

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

Relevant legislative provisions

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

Income Tax Assessment Act 1936 subsection128B(3CA)

Income Tax Assessment Act 1997 section 118-520

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.

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 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, [Online], viewed on 16 November 2020, 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

The Fund's Articles of Association contain provisions that provide how the Fund can be wound up. Specifically, they provide that the Fund can be wound up by a resolution adopted by the management Board through a meeting expressly convened for the purpose of winding up the Fund, where the complete Board is present and where three quarters of the number of votes cast are in favour of a resolution to wind up the Fund.

Notwithstanding the Articles of Association, there is no indication that the Fund is to be wound up in the near future. The Fund does not have a termination date and the provisions in the Articles of Association that contemplate the winding up of the Fund require a substantial majority. There is sufficient evidence to accept that the Fund will continue to operate for an indefinitely continuing period of time.

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 established 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 administers three pension schemes for employees of affiliated employers.

The benefits provided to participants of the Fund through these schemes include:

a)    retirement pensions to participants and former participants

b)    partner's pensions to the partner of a participant or former participant

c)    temporary partner's pensions to the partners of participants or former participants

d)    orphan pensions to the children of participants, and

e)    disability pensions to participants.

The payment of benefits is only allowable in circumstances of retirement, death or disability.

The Fund offers certain 'flexibility options', however, these options do not allow for the provision of benefits in circumstances other than retirement, death or disability and none of the flexibility options offered by the Fund conflict with the meaning of 'provident, benefit, superannuation or retirement fund'.

If a participant ceases employment with an affiliated employer before retirement the benefits may either be transferred to the new employer's fund or will be paid out upon the participants retirement. They will not be able to access the benefits early.

The Fund has advised that it conducts no activities other than the provision of retirement benefits to its members.

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 in the Foreign Country.

Therefore, the Fund satisfies the requirement.

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

The Fund was established in the Foreign Country to be an occupational pension fund that provides benefits to employees from companies operating in the specific industries within the Foreign Country.

The Fund was not established to provide benefits to individuals that are Australian residents.

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 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:

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, paragraphs 10 and 11 of Taxation Ruling TR 2018/5 Income tax: central management and control test of residency (TR 2018/5) state:

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 managed in the Foreign Country by the Board which is composed of employer and participant representatives.

The Fund has advised that the CM&C of the Fund is carried out in the Foreign Country.

Based on the above, it is reasonable to conclude that the CM&C of the Fund occurs in the Foreign Country by entities none of whom are Australian residents.

Therefore, the Fund satisfies this requirement.

6. Subsection 118-520(2) of the ITAA 1997

The Fund has advised that it has not and cannot deduct amounts under either the ITAA 1997 or the ITAA 1936 for amounts paid to it. In addition 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 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.

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

The Fund has advised it is exempt from income tax in the Foreign Country.

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.

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.

Based on the review of their Australian investments, the Fund holds less than 10% of the total participation interests in each of the Australian investments.

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

Therefore, the Fund satisfies the 'portfolio interest test' in respect of its Australian 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 the Fund's Australian investments:

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, has the right to appoint a director to the Board of Directors 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 the Australian investments.

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

e.    The Fund only holds rights to vote in proportion to its equity interest in each Australian investment.

f.      The Fund has not entered into or received any side letters, arrangements or agreements.

g.    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 Fund has advised that 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.

Therefore, the Fund satisfies this requirement.

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 Australian investments.

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