1051816158625 | Legal database

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Edited version of private advice

Authorisation Number: 1051816158625

Date of advice: 17 March 2021

Ruling

Subject: International issues - foreign superannuation funds

Question 1

Is the Fund excluded from liability to withholding tax on interest, dividend and non-share dividend income derived from its investment in Trust A under paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

Question 2

Is the Fund excluded from liability to withholding tax on interest, dividend and non-share dividend income derived from its investment in Trust B under paragraph 128B(3)(jb) of theITAA 1936?

Answer

No.

Question 3

Is the Fund excluded from liability to withholding tax on interest, dividend and non-share dividend income derived from assets acquired by Trust C, Trust D and Trust E on or before XX/mth/XXXX under paragraph 128B(3)(jb) of the ITAA 1936?

Answer

Yes.

Question 4

Is the Fund excluded from liability to withholding tax on interest, dividend and non-share dividend income derived from investments acquired by Trust C, Trust D and Trust after XX/mth/XXXX under paragraph 128B(3)(jb) of the ITAA 1936?

Answer

No.

This ruling applies for the following period:

1 September 20XX to 30 June 20XX

The scheme commences on:

1 September 20XX

Relevant facts and circumstances

Overview of the Fund

The Fund was established by an amendment of a Constitution (the Constitution) of a State (the State) of a Foreign Country (the Foreign Country).

The Fund cannot be terminated without amending the Constitution.

The Fund has the powers, privileges and immunities of a corporation, and also has the powers, privileges and immunities conferred by the State.

The Fund manages a retirement trust (a constitutional trust fund).

The Fund oversees retirement and health benefits for the employees of the State.

Governance

The Fund is governed by its Board (the Board) which is responsible for the general administration and operation of the Fund. The assets of the Fund are held on trust by the Board for the exclusive benefit of the current and former State employees and retirees.

No member of the Board is a resident of Australia for tax purposes and all members are residents of the Foreign Country.

No Australian residents are involved in the central management and control of the Fund in any capacity.

Taxation

The Fund has provided a statement that it is exempt from taxation under the laws of the State and of the Foreign Country.

The Fund's accounts form part of the State's financial reporting and are included in the State's consolidated annual financial report.

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.

The Plans

The Fund administers several plans.

Each plan operated by the Fund has its own segregated account and assets are not commingled between accounts.

Only three plans are actively funded and directly administered by the Fund (the Pension Plans). These three plans are the only plans administered by the Fund that participate in the Australian Investment.

Other plans are not pension plans and are managed by third party administrators (the Other Plans).

The Pension Plans

The Pension Plans are managed as a single plan with the purpose to provide a retirement disability and survivorship benefits employees of the State.

All employees of the State are included in the Pension Plans automatically.

The Pension Plans are funded with contributions from employees, the State and individual agencies of the State. The Fund receives the plan contributions from and distributes benefits directly to members.

Benefits paid under the Pension Plans will be paid upon retirement if the member meets certain age and employment duration requirements.

The Other Plans

Other Plans also include frozen and unfunded plans, a health plan, death benefits plan and savings plans.

The Australian Investment

The Fund has invested in the Australian Investment by acquiring 2.7 per cent of the units in the following stapled trusts (the Trusts):

a) Trust A, being a public trading trust

b) Trust B, being a public trading trust.

c) Trust C, being a managed investment trust

d) Trust D, being a unit trust

e) Trust E, being a unit trust

The Fund acquired its interest in Trust A, Trust C, Trust D and Trust E on a specific date before XX/mth/XXXX when the Fund first made its investment into the Australian Investment. Trust B was subsequently added to the Australian Investment as an alternative investment vehicle and the Fund acquired its 2.7 per cent interest in Trust B on a specific date after XX/mth/XXXX.

Characteristics of the Trusts

Each trust comprising the Australian Investment is a parallel investment vehicle.

Income derived by each of the Trusts flows to the Fund in accordance with its 2.7 per cent unit holding.

Trust A and Trust B are taxed as companies under Division 6C of the ITAA 1936 as these entities are public trusts and also control trading businesses.

Trust C, Trust D and Trust E are flow through trusts. Income distributions from Trust C, Trust D and Trust E are comprised (or are expected to comprise) of Australian interest, capital gains, Australian dividends, Australian other income (both concessional MIT income and non-concessional MIT income), tax deferred distributions and potentially foreign income.

Governance of the Australian Investment

Corporate Trustee One is the trustee of Trust C and Trust D. Corporate Trustee Two is the trustee of Trust A, Trust B and Trust E.

Corporate Trustee One and Corporate Trustee Two (the Trustees) are each organised by a trust deed (the Trust Deeds).

The Advisor has been appointed as advisor to and by the Trustees. The Trustees and the Advisor are wholly owned subsidiaries of the Holding Company.

The Investors' Advisory Committees (IAC)

Trust C and Trust A each have an IAC. The IAC of Trust C also serves as the IAC for Trust B, Trust E and Trust D. Each IAC is comprised of the same members and this has been the case since the formation of the Australian Investment.

The IAC meets to consider and vote to allow or disallow any matters for which the Trustees must obtain its approval as required by the Trust Deeds.

Each IAC is comprised of one non-voting member appointed by the Trustees and between two and eight voting members.There are currently seven members on each IAC.

Decisions of each IAC require a simple majority of votes cast, with voting members entitled to cast one vote each. A valid resolution of the IAC is binding upon each member and on the Unit Holders.

If the IAC votes to disallow an action of a Trustee, the Trustee can still receive authorisation by acquiring an ordinary resolution of Unit Holders. If the Unit Holders provide an ordinary resolution, the ordinary resolution will override the refusal of the IAC to give its approval in respect of any specific matters.

The Trustees select Unit Holders to appoint a member to serve on the IAC at their discretion, and must have regard to, among other factors, the proportionate level of the Unit Holder's committed capital (when aggregated with any commitment to any fund vehicle made by its related bodies corporate) and the date on which the Unit Holder made its commitment.

The IAC is not limited to the largest investors in the Australian Investment and is comprised of investors across a variety of commitment sizes and geographies. The Unit Holders who currently have the right to appoint a member to the IAC were selected by the Trustees on the formation of the Australian Investment. It is not anticipated that any additional Unit Holders will be given a right to appoint their representatives to the IAC.

A member of the IAC nominated by a Unit Holder will serve until they resign (by giving the Trustee 30 days' prior written notice) or they are removed by their nominating Unit Holder.A member of the IAC nominated by a Unit Holder automatically ceases to be a member if its nominating Unit Holder (when aggregated with its related bodies corporate) ceases to hold a commitment in the Trust.

The Fund and the IAC

The Fund entered into a side letter prior to its investment in the Australian Investment, between the Fund, the Trustees and the Advisor (the Side Letter). The Side Letter states that the Trustees acknowledge that the Fund had indicated its interest in having a representative appointed as a member of the IAC if such a position is available at the final close.

The Trustees have nominated the Fund as a member on each IAC, and the Fund has the power to appoint its representative to each IAC. The same individual representing the Fund has had a position on both IACs since the Fund's commitment to the Australian Investment.

The Fund will continue to have the right to appoint a member to both IACs until the time when it ceases to hold a commitment in the Australian Investment. If the current representative member resigns or the Fund decides to remove that member and appoint a new person to fill the position, the Fund may do so by giving notice to the Trustees.

The Fund's role on the IAC provides the Fund with oversight of its investment and the ability to report back to its members. The IAC provides an additional level of review where actions limited by the Trust Deeds are proposed and allows such actions to be brought to the attention of the Unit Holders.

The Fund has stated that it votes and acts independently from other members of the IAC.

Restrictions on Investment Diversification

The Trustees are subject to investment diversification restrictions, where the Trustees must not, without the consent of the IAC:

a) invest, or commit to invest, in any one Investment an amount (when combined with the amount invested, or committed to invest, in the Investment of each other Parallel Fund), that exceeds twenty percent (20 per cent) of the Fund Size

b) invest, or commit to invest, in any Investment where the making of such investment would result in the aggregate value of all Investments located outside Australia (when combined with the amount invested, or committed to invest, in the Investment of each other Parallel Fund) exceeding 40 per cent of the Fund Size

c) make an Investment located predominantly in non-OECD countries

d) make an Investment in publicly traded securities other than as part of an actual or proposed public-to-private transaction. The value of the Trust's aggregate investments in publicly traded securities in respect of all actual or proposed public-to-private transactions (when combined with the value of each other Parallel Fund's aggregate investments in publicly traded securities) must not exceed twenty percent (20 per cent) of the Fund Size

e) invest in subordinated debt (not related to an equity or equity-related investment) with an aggregate value (when combined with the aggregate value of subordinated debt invested in by each other Parallel Fund) that exceeds twenty percent (20per cent) of the Fund Size

f) invest in XXX Investments (with contracted revenue post completion) with an aggregate value (when combined with the aggregate value of XXX Investments invested in by each other Parallel Fund) that exceeds ten percent (10 per cent) of the Fund Size, or

g) make any investment in XXX Investments which do not have contracted revenue post completion.

Matters Requiring IAC Approval

Under the respective Trust Deeds, unless authorised by an Ordinary Resolution of Security Holders, the Trustees must not do any of the following without the prior approval of the IAC:

a) Acquire or make any investment which is not an Authorised Investment.

b) Acquire or make any investment which is outside the Investment Strategy of the relevant Trust.

c) Acquire an asset from, dispose of an asset to, or enter into a services or supply agreement with a Related Body Corporate of the Trustee of any fund managed by a Related Body Corporate of the Trustee (other than a related Body Corporate in its capacity as Trustee of a wholly owned sub-trust of the Trust) the annual or expected value of which exceeds 2 per cent of the total tangible Assets of the Trust at that time.

However, the approval of the IAC is not required for a transaction which is part of a bona fide reorganisation or restructure which does not result in any change in the level or extent of the Trust's interest in an asset.

d) Approve the issue of Units after the Final Close, other than in connection with an Approved Liquidity Plan, a distribution reinvestment, a subscription in accordance with a specified clause (which deals with distributions of carried interest in specified circumstances), or where the proceeds of the issue of those Units will be used to satisfy a request for redemption of Units.

e) Approve any Liquidity Plan under the Trust Deed.

f) Appoint any replacement trustee of the Trust in circumstances where the IAC's approval is required under the Trust Deed.

g) Register a transfer of Carry Units in circumstances where IAC's approval is required under the Trust Deed.

h) Approve a new Named Executive in accordance with the Trust Deed.

i) Agree to pay underwriting fees to any advisory firm appointed for the purpose of raising capital, where those underwriting fees are to be borne out of the assets of the Trust.

j) Do anything else that is prohibited under the Trust Deed without the approval of the IAC.

History of the Actions Taken by the IAC

The IAC has met on thirteen separate occasions since the formation of the Australian Investment and has been required to vote to allow or disallow an action by the Trustees in nine of those meetings. In all instances, the IAC approved the requested action by the Trustee, and Unit Holders have never voted to overturn a decision of the IAC.

As required under the Trust Deeds, the IAC has approved:

a) acquisitions outside the investment strategy of the Trusts (e.g. where an investment would breach single asset concentration limit)

b) new named executives, and

c) syndication of interests in the Australian Investment's assets to the Australian Investment's co-investors as related body corporates of the trustee.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 128B

Treasury Laws Amendment (Making Sure Foreign Investors Pay Their Fair Share of Tax in Australia and Other Measures) Act 2019 Schedule 3

Reasons for Decision

Question 1

Is the Fund excluded from liability to withholding tax on interest, dividend and non-share dividend income derived from its investment in Trust A 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 dividend income 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 non-resident 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 reside.

Subitem 3(1) 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 (2019 Act) provides (subject to subitems (2) and (3)) that for income derived from 1 July 2019, the extra requirements in subsection 128B(3CA) of the ITAA 1936 must also be met.

A non-resident

The Commissioner has determined from the facts and circumstances that the Fund is a resident of the Foreign Country and is therefore not a resident of Australia.

Therefore, the Fund satisfies this requirement.

A 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 Fund was established by an amendment of the Constitution and the Fund cannot be terminated without amending the Constitution.

Therefore, the Fund satisfies this requirement.

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 establish 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).

Broadly, the Fund provides retirement annuity benefits as well as death, disability, survivorship and other benefits to employees of the State through the Pension Plans and the Other Plans.

The Commissioner views the circumstances in which members class can access benefits as being in alignment with the sole purpose of providing retirement benefits or benefits in other allowable contemplated contingencies.

Given the relative size and nature of the other benefits provided by the Fund, the Commissioner considers such benefits in this case to be auxiliary functions of the Fund.

Therefore, the Fund satisfies this requirement.

Established in a foreign country

The Fund was established in the 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 operates to provide retirement benefits to employees of the State the Foreign Country.

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.

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 Board is responsible for the general administration and operation of the Fund. There are five members on the Board, none of the whom are Australian residents for tax purposes, and all are residents of the Foreign Country. No Australian residents are involved in the central management and control of the Fund in any capacity.

Therefore, the Fund satisfies this requirement.

Subsection 118-520(2) of the ITAA 1997

Therefore, the Fund satisfies these requirements.

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 Commissioner has determined from the facts that the Fund is exempt from income tax in the Foreign Country.

Therefore, the Fund satisfies this requirement.

2019 Act - extra requirements and transitional provisions (the Transitional Provisions)

The 2019 Act introduced extra requirements that must be met for paragraph 128B(3)(jb) of the ITAA 1936 to apply.

Subitem 3(1) of Part 2 of Schedule 3 of the 2019 Act (subject to subitems (2) and (3)) provides that the extra requirements in subsection 128B(3CA) of the ITAA 1936 must be met for income derived on or after 1 July 2019.

The Transitional Provisions are provided in subitems 3(2) and 3(3) of Part 2 of Schedule 3 of the 2019 Act, which state that the extra requirements in subsection 128B(3CA) of the ITAA 1936 do not need to be met for income derived before 1 July 2026 in certain circumstances.

Subitem 3(2) of Part 2 of Schedule 3 provides that the extra requirements in subsection 128B(3CA) of the ITAA 1936 do not need to be met for income derived before 1 July 2026 if:

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

b) subsection 128A(3) of the ITAA 1936does not apply in relation to that income, and

c) the superannuation fund acquired the asset on or before XX/mth/XXXX.

Subitem 3(3) of Part 2 of Schedule 3 provides that the extra requirements in subsection 128B(3CA) of the ITAA 1936 do not need to be met for income derived before 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

b) the superannuation fund started to hold that interest on or before XX/mth/XXXX

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 XX/mth/XXXX.

Section 128A(3) of the ITAA 1936 provides that a beneficiary who is presently entitled to a dividend, interest or royalty included in the income of a trust estate is deemed to have derived the income at the time they became so entitled.

Subsection 102T(16) of the ITAA 1936 provides that a reference to subsection 128A(3) of the ITAA 1936 does not include a reference to a trust estate that is a public trading trust or the trustee of a public trading trust.

Application of the Transitional Provisions - Subitem 3(2)

The Fund has derived and will continue to derive income in respect of its ownership of units in Trust A.

Trust A is a public trading trust. Due to the operation of subsection 102T(16) of the ITAA 1936, subsection 128A(3) of the ITAA 1936 does not apply to the income derived by the Fund from its interest in Trust A.

The Fund acquired its interest in Trust A on or before XX/mth/XXXX.

As the requirements of subitem 3(2) of Part 2 of Schedule 3 of the Transitional Provisions are satisfied, the extra requirements in subsection 128B(3CA) of the ITAA 1936 will not apply to the income derived by the Fund from its interest in Trust A until 1 July 2026.

Conclusion

The Fund is excluded from withholding tax in relation to interest, dividend and non-share dividend income derived from its investment in Trust A under paragraph 128B(3)(jb) of the ITAA 1936.

Question 2

Is the Fund excluded from liability to withholding tax on interest, dividend and non-share dividend income derived from its investment in Trust B under paragraph 128B(3)(jb) of theITAA 1936?

Detailed reasoning

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).

It has been established through the reasoning for Question 1 that the Fund:

• is a non-resident

• meets the requirements of the definition of a 'superannuation fund for foreign residents', and

• is exempt from income tax in the Foreign Country.

2019 Act - extra requirements and the Transitional Provisions

The 2019 Act introduced extra requirements that must be met for paragraph 128B(3)(jb) of the ITAA 1936 to apply.

The Transitional Provisions are provided in subitems 3(2) and 3(3) of Part 2 of Schedule 3 of the 2019 Act which state that the extra requirements in subsection 128B(3CA) of the ITAA 1936 do not need to be met for income derived before 1 July 2026 in certain circumstances.

Application of the Transitional Provisions - subitems 3(2) and 3(3)

The requirements of subitem 3(2) of Part 2 of Schedule 3 of the 2019 Act are not satisfied as the Fund acquired its interest in Trust B after XX/mth/XXXX.

The requirements of subitem 3(3) of Part 2 of Schedule 3 of the 2019 Act are also not satisfied. As Trust B is a public trading trust, subsection 102T(16) of the ITAA 1936 operates to the effect that subsection 128A(3) of the ITAA 1936 does not apply to Trust B. As subsection 128A(3) of the ITAA 1936 does not apply, the requirements of subitem 3(3) of Part 2 of Schedule 3 of the 2019 Act are not satisfied.

As the requirements of both subitem 3(2) and 3(3) of Part 2 of Schedule 3 of the 2019 Act have not been met, subitem 3(1) of Part 2 of Schedule 3 of the 2019 Act applies, meaning the extra requirements in subsection 128B(3CA) of the ITAA 1936 must be met for income derived on or after 1 July 2019 by the Fund from its interest in Trust B.

Subsection 128B(3CA) of the ITAA 1936

Subsection 128B(3CA) provides the following extra requirements:

1. The superannuation fund must satisfy the 'portfolio interest test' in relation to the test entity (subsection 128B(3CC) of the ITAA 1936)

2. The superannuation fund must satisfy the 'influence test' (subsection 128B(3CD) of the ITAA 1936) in relation to the test entity, and

3. The income cannot otherwise be non-assessable non-exempt income of the superannuation 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.

The Fund owns 2.7 per cent of the units in Trust B, Trust C, Trust A, Trust D and Trust E which comprise the Australian Investment (the Test Entities). The Fund therefore holds less than 10 per cent of the total participation interests in each of the Test Entities.

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

The Fund therefore satisfies the 'portfolio interest test' in respect of all its investment in the Test Entities, including Trust B.

2. 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

Sub-test 1 is contained within paragraph 128B(3CD)(a) of the ITAA 1936 and assesses whether the superannuation fund is able to directly or indirectly 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. This includes situations where the superannuation fund is able to act in concert with others to determine the identity of a relevant decision-maker in the test entity.

It is considered that a superannuation fund will have influence of a kind described by sub-test 1 where:

the superannuation fund is able to determine the identity of a person
the person (individually or together with others) makes or might reasonably expected to make decisions
those decisions comprise the control and direction of the test entity's operations.

The three requirements of sub-test one are considered below in relation to the Fund's investment in the Test Entities.

1. The superannuation fund is able to determine the identity of a person

Whether the superannuation fund is 'able to determine' the identity of (to settle or decide upon, to choose or appoint) of a person is a question of fact. The phrase 'able to' focuses on the superannuation fund's capacity or power. Sub-test 1 is therefore not limited to situations where the superannuation fund has already determined, or intends to determine, the identity of one of the relevant decision makers. A right to determine will be sufficient for the requisite level of influence to exist.

Trust C and Trust A each have an IAC. The IAC of Trust C also serves as the IAC for Trust B, Trust D and Trust E. The Trustees have nominated the Fund as a member of each respective IAC. The Fund has the power to appoint its representative to each IAC.

The Fund has exercised this power and has had a representative on each IAC since the Fund's commitment to the Australian Investment. The same individual serves on both IACs as a representative of the Fund. The Fund is able to remove and reappoint the individual person whom it has chosen to act as its representative on each IAC. The Fund will continue to have the right to appoint a member to both IACs until the time when it ceases to hold a commitment in the Australian Investment.

Given the above factors, it is clear that the Fund is able to directly 'determine the identity of a person', being the individual representing the Fund on each IAC.

For completeness, even if the Fund removed its representative from each IAC, the Fund would still be 'able to' appoint a person as sub-test 1 focuses on the superannuation fund's capacity or power to appoint a person. The only circumstance in which the Fund will not be 'able to' determine the identity of a relevant person, is if the Fund irrevocably and unconditionally waived its rights to do so by way of a legally enforceable agreement.

2. The person (individually or together with others) makes or might reasonably expected to make decisions

Sub-test 1 requires that the person whose identity is determined by the superannuation fund (individually or together with others), makes or might reasonably be expected to make decisions. Therefore, the person can either make decisions or might reasonably be expected to make the relevant decisions. The decision maker can make the decisions individually or together with others.

The below matters are relevant considerations in determining if the Fund's member on the IAC individually or together with others, makes or might reasonably expected to make decisions:

a) The IAC meets to consider and vote to allow or disallow any matters for which the Trustee must obtain its approval under the Trust Deed.

b) There are currently seven members on each IAC, including the Fund's representative. Decisions of each IAC require a simple majority of votes cast, (one vote per member). the Fund makes its decision independently of other members of the IAC.

c) If the IAC votes to disallow an action of a Trustee, the Trustee can still receive authorisation by an acquiring an ordinary resolution of Unit Holders. If Unit Holders provide an ordinary resolution, the ordinary resolution will override the refusal of IAC to give its approval in respect of any specific matters.

d) The Fund holds only 2.7 per cent of the units in each of the Trusts and therefore only controls 2.7 per cent of voting power in its capacity as a Unit Holder.

Each of these matters is considered below.

a) Approval of decisions

An individual being able to 'make decisions' by approving particular actions was clearly intended to be captured by paragraph 128B(3CD)(a) of the ITAA 1936, as is demonstrated by example 3.4 of the Explanatory Memorandum to the 2019 Act (the EM). Example 3.4 of the EM is as follows:

SFFR is a superannuation fund for foreign residents. SFFR holds 8 per cent of the ordinary share capital of Aus Co.

Under Aus Co's constitution, any investor with an equity interest of 8 per cent or more is entitled to appoint an individual to an Advisory Board of Aus Co. The Board of Directors of Aus Co cannot make certain decisions in relation to the control and direction of Aus Co's operations without the Advisory Board's approval.

In these circumstances, SFFR has influence in relation to Aus Co of the kind described in the Influence Test.

Therefore, any dividends paid by Aus Co to SFFR will not be entitled to a dividend withholding tax exemption under paragraph 128B(3)(jb).

Example 3.4 of the EM is analogous to the Fund's circumstances as the Fund also appoints a member to an advisory body (the IAC) and the Trustees also cannot make certain decisions (or take certain actions) without the advisory body's approval.

In these circumstances there are two decisions that are made. First, is that the Trustees decide that they wish to undertake some action that requires approval of the IAC. Second, the IAC makes the decision to allow or disallow that action to occur. The IAC must still undertake its own decision-making process that results in an outcome occurring.

It is considered that a decision would also be made in circumstances where an advisory body approves matters as a formality and/or always approves the matters that are put to it. In these circumstances the decision-making process and the resulting outcome must still occur for the action to be taken.

It can therefore be concluded that the representative the Fund appoints to the IAC makes decisions by voting to allow or disallow actions of the Trustees.

b) Decisions made as a group

The text of paragraph 128B(3CD)(a) of the ITAA 1936 demonstrates that the application of the Influence Test goes beyond the entity's sole capacity to make a decision. The effect of paragraph 128B(3CD)(a) of the ITAA 1936 is that the person makes (or might reasonably be expected to make) the relevant decisions 'individually or together with others'.

Example 3.4 of the EM demonstrates that circumstances where an individual 'makes decisions' by voting as one of several members on an advisory board or committee was clearly intended to be caught by paragraph 128B(3CD)(a) of the ITAA 1936.

Therefore, the individual appointed by the Fund makes decisions together with others by voting with the other members of the IAC. While the Fund decides its own vote independently of the other members of the IAC, is one of seven members and cannot control the IAC, the individual (and therefore the Fund) still makes the relevant decision by voting together with the IAC as a whole.

c) Decisions that can be overturned or are not binding

The decisions of the IAC can be overridden by a general majority of Unit Holders and are therefore not unequivocally binding on the Trustees. However, this does not prevent the IAC from making a decision as a decision does not need to be binding in nature to be made. A decision that can be overturned or disregarded completely is still a decision that has been made.

In the Fund's circumstances, the Trustees must seek approval from the IAC on particular matters as mandated by the Trust Deed. The Trustees cannot take further action unless they have received a decision from the IAC to either approve or disapprove an action. That the decision of the IAC to disapprove an action can be overturned does not diminish or override the fact that the original decision of the IAC was actually made. The decisions of the IAC are binding on the IAC, the Unit Holders and the Trustees until such a time that a general majority of Unit Holders is sought and secured. As explained above, even if the decisions of the IAC were not binding in this this nature, the decision would still be made.

It can therefore be concluded that the Fund makes decisions through its appointed representative on the IAC by voting to allow or disallow actions of the Trustees, even though those decisions can be overturned at a later date.

d) Low unit holding and ability to make decisions

A relatively low percentage of unit or equity holding does not exclude an entity from having the level of influence prescribed by sub-test 1.

While the Fund cannot control the Trustees by virtue of its 2.7 per cent unit holding in the Australian Investment, the Fund can still have influence of a kind described by subsection 128B(3CD) of the ITAA 1936 based on its ability to directly or indirectly 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. The Influence Test as a whole is not concerned by the size of unit or equity holding that a superannuation fund has in its investment as influence can exist with the smallest of investment sizes.

Further, while the Fund only has a 2.7 per cent unit holding in the Australian Investment this does not prevent the Fund from making a decision through its representative member on the IAC. As stated above, the Influence Test is not concerned with the superannuation fund having control of the investment in any capacity. Therefore, the Fund's ability to make a decision in the circumstances described above is not affected by the size of its investment.

Given the above factors, the Fund is able to directly determine the identity of a person who, individually or with others, makes or is reasonably expected to make decisions.

3. Those decisions comprise the control and direction of the test entity's operations

Sub-test 1 requires that the person whose identity is determined by the superannuation fund, individually or together with others, makes or might reasonably be expected to make the decisions that comprise the control and direction of the test entity's operations. It has already been established that the Fund is able to determine the identity of a person and that person makes decisions through the IAC. Therefore, if the decisions that the IAC makes comprise the direction and control of the Australian Investment's operations, then the Fund will have the level of influence described in sub-test 1.

The control and direction of the Australian Investment

Paragraph 24 of Law Companion Ruling LCR 2020/3 The superannuation fund for foreign residents withholding tax exemption and sovereign immunity (LCR 2020/3) provides that 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 operation will depend on the specific facts and circumstances.

Paragraph 26 provides that normally, where a company is run by its directors in accordance with its constitution and the relevant company law rules which give its directors the power to manage the company, the company's directors will control and direct its operations.

Paragraph 27 states that the class of persons included within the group of relevant decision makers is not restricted to the directors (and shadow directors) of a company. Any person who has a role in the high-level decision-making processes or governance of the company may satisfy the relevant criteria. This could include, for example, a member of an advisory or investment committee where such committee is required to approve decisions in relation to the control and direction of the operation of the company.

The Test Entities consist of a group of stapled trusts forming the Australian Investment. The Trustees run the Australian Investment in accordance with their respective Trust Deeds, which give the Trustees the power to manage the trusts. Therefore, the Trustees will control and direct the operations of the Australian Investment. As the trustees are corporate trustees, the control and direction are exercised through their respective governing boards.

However, in accordance with paragraph 27 of LCR 2020/3, the relevant decision makers can include a member of an advisory or investment committee where such committee is required to approve decisions in relation to the control and direction of the operation of the company.

Paragraph 128B(3CD)(a) of the ITAA 1936 states that the relevant person '...make (or might reasonably be expected to make) the decisions...' indicating that the IAC does not need to have actually made such decisions. The IAC might reasonably be expected to make a decision to either approve or not approve any of the actions prescribed in the respective Trust Deeds as requiring IAC approval.

Therefore, the key question is if the decisions that the IAC (and therefore the Fund through its representative on the IAC) may vote to allow or disallow relate to the control and direction of the Australian Investment's operations.

Paragraph 25 of LCR 2020/3 explains (through consideration of the factors outlined in Taxation Ruling TR 2018/5 Income tax: central management and control test of residency (TR 2018/5)) that in the context of a company or a trust, the key element in the control and direction of the 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. This could include setting the investment or operational policy, appointing key management personnel, matters of finance or entering into of key business contracts.

The examples provided to demonstrate 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, have been considered below.

Appointing Key Management Personnel

IAC approval is required to appoint a new named executive of the Holding Company or its related bodies corporate in accordance with the Trust Deed. This includes a named executive of either of the Trustees being related bodies corporate of the Holding Company. The Trust Deed provides that the Trustee may at any time provide written notice to each member of the IAC to nominate a qualified person as a named executive. A nominee election will be effective upon the affirmative vote of a majority of the voting members of the IAC.

In at least one of the instances in which the IAC has been required to decide to allow or disallow an action by the Trustees, the IAC has made a decision to approve the appointment of new named executives.

An 'executive' in its ordinary meaning, is 'a person or body having administrative authority as in a company'. We consider a person having authority in a company to be key management personnel and appointing such a person would be a high-level decision of the Australian Investment.

That the IAC makes or might reasonably expected to make decisions appointing named executives (being key management personnel) demonstrates that the IAC (and therefore the Fund through its representative on the IAC) makes decisions that comprise the control and direction of the Australian Investment and the Trusts.

IAC approval is also required to appoint any replacement trustee of the Trusts in certain circumstances as required under the Trust Deed. The Trust Deed explains that IAC approval is required where a Trustee has retired and proposed to appoint a replacement trustee that is not a Related Body Corporate of the Trustee.

A similar reasoning follows in that a trustee, being ordinarily defined as 'a person, usually one of a body of persons, appointed to administer the affairs of a company, institution, etc,' would be considered key management personnel of a trust. Therefore, the IAC being able to vote to allow a decision to appoint a trustee, even in specific and restricted circumstances, demonstrates that the IAC (and therefore the Fund through its representative on the IAC) makes decisions that comprise the control and direction of the Australian Investment and each of the five Trusts.

To establish that the Fund has influence of a kind described in paragraph 128B(3CD)(a) of the ITAA 1936 requires the Fund to appoint a person and that person makes at least one decision that comprises the control and direction of the Test Entities' operations. This has been established through approval of key management personnel. However, for completeness, consideration of other decisions the IAC can make have been considered below.

Matters of Finance

The IAC must approve any liquidity plan prepared under the Trust Deed. The Trustee must prepare a liquidity plan under certain circumstances as detailed in the Trust Deed.

Pursuant to the Trust Deed, a liquidity plan prepared by the Trustee must contain an overview of the way in which the Trustee proposes to seek to facilitate realisation of units with respect to which exit requests have been validly given. The liquidity plan must also target a price per unit equal to the net asset value per unit for the relevant class at the time of realisation.

As the liquidity plan contains information regarding how the Trustees will fund requests of Unit Holders to exit from the Australian Investment and the price at which these units will be realised it is reasonable to conclude that approval of the liquidity plan would be considered a matter of finance. Therefore, the approval of a liquidity plan demonstrates a decision that comprises the control and direction of the Australian Investment and each of the five Trusts.

Setting the Investment or Operational Policy and entering into of key business contracts

Paragraph 16 of TR 2018/5 provides that setting the investment and operational policy includes:

• setting the policy on disposal of trading stock, and/or the use and development of capital assets

• deciding to buy and sell significant assets of the company

The Trustees are subject to investment diversification restrictions that require IAC approval. Broadly, IAC approval is required:

• to invest more than 20 per cent of the fund in one investment

• to invest more than 40 per cent of the fund in investments outside Australia

• to invest in non-OECD countries

• to invest in publicly traded securities outside of a public-to-private transaction

• to invest in subordinate debt exceeding 20 per cent of the fund size

• to invest in XXX investments exceeding 10 per cent of the fund size

• to invest in XXX investments with no contracted revenue post completion.

The IAC is also required to approve decisions to acquire an investment that is not an authorised investment under the Trust Deed, and to acquire or make any investment which is outside the investment strategy of the trusts.

The nature of the decisions listed above indicate that IAC approval is required for the Trustee to make significant transactions that may compromise the risk level and diversification of the Australian Investment. The decisions listed above are indicative of the investment and operational policy and the types of contracts or investments that the Trustees of the Australian Investment will enter into. To take an action falling outside of this policy requires approval of the IAC. In giving or denying approval, the IAC is allowing or disallowing the expansion or deviation of the investment or operational policy and making a decision on the types of contracts and investments the Australian Investment will enter into.

Therefore, the approval of actions that fall outside the investment diversification restrictions and the acquisition of investments that are not approved investments or outside the investment strategy of the Trusts is evidence of decisions that comprise the control and direction of the Australian Investment and each of the five Trusts.

Conclusion of Sub-test 1

Given the above factors, the Fund has the level of influence described by paragraph 128B(3CD)(a) of the ITAA 1936 as it is able to directly determine the identity of a person who, individually or with others, makes or is reasonably expected to make decisions, and those decisions comprise the direction and control of the Test Entities' operations.

Based upon the above, the Commissioner concludes that the Fund has influence of a kind described in subsection 128B(3CD)(a) of the ITAA 1936. As the Fund has influence of a kind described in subsection 128B(3CD) of the ITAA 1936, the requirements of subsection 128B(3CA) of the ITAA 1936 have not been satisfied and therefore the requirements of paragraph 128B(3)(jb) of the ITAA 1936 have not been met.

Therefore, paragraph 128B(3)(jb) of the ITAA 1936 does not apply to exclude the Fund from liability to withholding tax on interest, dividend and non-share dividend income derived from its investment in the Australian Investment (including Trust B).

For completeness, sub-test 2 has been considered below in the event that the decisions of the IAC are not considered to comprise the control and direction of the Australian Investment's operations.

Sub-test 2

Sub-test 2 is contained within paragraph 128B(3CD)(b) of the ITAA 1936 and assesses whether at least one of the relevant decision makers is accustomed or obliged, or might reasonably be expected to act, in accordance with the directions, instructions or wishes of the superannuation fund. The directions, instructions or wishes of the superannuation fund may be expressed directly or indirectly, or through the superannuation fund acting in concert with others.

The phrase 'at least one of the persons' is a reference to the persons (from paragraph 128B(3CD)(a)) 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.

Sub-test 2 only requires that the superannuation fund is able to influence a person and that person makes decisions that comprise the control and direction of the test entity's operations. There is no requirement for the superannuation fund to influence particular decisions relating to the control and direction of the test entity's operations, only that the superannuation fund is able to influence a person that makes those decisions.

Therefore, sub-test 2 will be met where

there is a person (who individually or together with others, makes (or might reasonably be expected to make) the decisions that comprise the control and direction of the test entity's operations), and
that person 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).

These two requirements are considered below in relation to the Fund's investment in the Test Entities.

1. A person makes the decisions that comprise the control and direction of the test entity's operations

As explained above in the analysis for sub-test 1, the Trustees make the decisions that comprise the control and direction of the Test Entities' operations through each of the Trust's governing boards (disregarding the conclusion above that the IAC also makes decisions that comprise the control and direction of the Test Entities' operations).

2. That person 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)

In order for the Fund to have influence of a kind described in paragraph 128B(3CD)(b) of the ITAA 1936 the Trustees must be accustomed, obliged or might reasonably be expected to act in accordance with the directions, instructions or wishes of the Fund.

LCR 2020/3 provides at paragraph 29 that the three matters ('accustomed', 'obliged' or 'might reasonably be expected to') are not a composite phrase denoting a single test; they comprise different considerations each of which is sufficient to establish influence:

• Whether a person is 'accustomed' to act in accordance with the directions, instructions or wishes of the relevant entity requires an analysis of past facts. This necessitates an examination of any discernible pattern of the person following the directions, instructions or wishes given by the relevant entity.

• Whether a person is 'obliged' to act in accordance with the directions, instructions or wishes of the relevant entity depends upon a formal or informal obligation existing at the relevant time.

• Whether a person 'might reasonably be expected' to act in accordance with the directions, instructions or wishes of the relevant entity requires a prediction as to future events and a consideration as to the objective likelihood of those future events occurring. This requires a consideration of all of the facts and circumstances impacting upon the relationship between the two parties.

Paragraph 30 of LCR 2020/3 provides the following:

Determining whether a person acts 'in accordance with' directions, instructions or wishes requires consideration of the degree to which those directions, instructions or wishes contribute to the action, or any other link between them. The link that is required is informed by statutory context. In the context of these provisions, an action will be in accordance with directions, instructions or wishes if it is in harmonious correspondence, agreement or conformity with them. The sub-test requires something more than mere coincidence, and it is not enough that the relevant decision maker is purely acting in their own interests in a way that happens to align with the wishes of another. However, the sub-test does not require control, nor is it necessary to establish a causal link if there is some other basis to conclude that the person acts, or might reasonably be expected to act, in accordance with the relevant directions, instructions or wishes. This is a factual inquiry and will depend on the circumstances in each case.

Paragraph 36 provides that:

Rights to appoint an observer to a Board or Committee, the provision of a side letter, or the existence of additional rights/variations specific to the relevant entity are all factors which would potentially indicate that one of the relevant decision makers is accustomed or obliged to act, or might reasonably be expected to act, in accordance with the directions, instructions or wishes of the relevant entity.

Might reasonably be expected to act

Determining if the Trustees might reasonably be expected to act in accordance with the directions, instructions or wishes of the IAC (and therefore the Fund) requires a prediction as to the likelihood of future events occurring and a consideration of all the facts and circumstances impacting upon the relationship between the two parties.

Therefore, sub-test 2 requires a consideration of the facts and circumstances impacting upon the relationship between the Fund and the Trustees. Sub-test 2 also requires a prediction as to the likelihood of the Fund expressing its directions, instructions or wishes to the Trustees and the likelihood of the Trustees acting in accordance with those directions, instructions or wishes.

The Fund was chosen by the Trustees to have a position on the IAC. The members of the IAC are selected by the Trustees, at their discretion, to represent the interests of particular investors who hold interests in the Australian Investment. The Fund entered into a Side Letter prior to making its investment in the Test Entities, where the Trustees acknowledged that the Fund indicated its interest in having a representative appointed as a member of the IAC if such a position was available.

In choosing members for an IAC, the Trustees must have regard to, among other factors, the proportionate level of the Unit Holder's committed capital and the date on which the Unit Holder made its commitment. However, the IAC is not limited to the largest investors in the Australian Investment and is comprised of investors across a variety of commitment sizes and geographies. The Unit Holders who currently have the right to appoint a member to the IAC were selected by the Trustees on the formation of the Australian Investment. It is not anticipated that any additional Unit Holders will be given a right to appoint their representatives to the IAC.

The position held by members of the IAC (including the Fund through its representative) is elevated beyond the position of standard Unit Holders as it provides members of the IAC with more rights and responsibilities regarding their investment in the Australian Investment. This provides the members of the IAC a position where they hold more influence over the actions of the Trustees than a standard Unit Holder investing in the Australian Investment.

As the Trustees must seek approval from the IAC on particular matters (as mandated by the Trust Deed), it is reasonable to determine that the Fund, acting through its individual representative on the IAC, might reasonably be expected to express its directions, instructions or wishes on those particular matters to the Trustees. It is also likely that the Fund, as a member of the IAC, would be likely to express directions, instructions or wishes to the Trustees regarding matters outside of those that the IAC is required decide under the Trust Deed.

In particular, the Fund's investment in the Australian Investment is substantial for the Fund and its role on the IAC assists the Fund in complying with its written investment objectives, its fiduciary obligations to its members and provides a level of oversight to manage the risks associated with the investments it makes. Given the importance of the Fund's investment in the Australian Investment and its position on the IAC, it is reasonably likely that the Fund would express directions, instructions or wishes to the Trustees in circumstances where it wished them to be heard.

The Trustees might reasonably be expected to act in accordance with the directions, instructions or wishes expressed by the members of the IAC as a whole (including the Fund) given the Trustees obligation to gain IAC approval in numerous circumstances. As the Trustees chose the members of the IAC and the members of the IAC have been the same since the formation of the Australian Investment, the Trustees might reasonably be expected to act in accordance with the directions, instructions or wishes of the IAC as a whole in any matter the IAC is asked to consider and vote to allow or disallow.

Given the relationship between the Trustees and the IAC, it is reasonable to make the prediction that the Trustees are likely to act in alignment with the IAC, be it though the formal process outlined in the Trust Deeds or by the wishes expressed by the IAC or its individual members. It is unlikely that the Trustees would act against the wishes of the members of the IAC, given the Trustees chose the members over other Unit Holders at their discretion and by having regard to a number of factors as mentioned above.

It is considered, based on the above, that the Trustees might reasonably be expected to act in accordance with the directions, instructions or wishes of the IAC (and therefore the Fund through its representative). On the basis that the Trustees might reasonably be expected to act in accordance with the directions, instructions or wishes of the IAC, this is sufficient to establish that the Fund has influence of a kind described in paragraph 128B(3CD)(b) of the ITAA 1936. As such, there is no requirement to consider 'obliged to act' and 'accustomed to act'. However, for completeness, both of these have been considered for the purposes of providing a full explanation.

Obliged to Act

In determining whether a person is 'obliged' to act in accordance with the directions, instructions or wishes of the relevant entity depends upon a formal or informal obligation existing at the relevant time.

The Trustees must (as mandated by the Trust Deed) seek approval from the IAC before the Trustees can undertake particular actions. The Trustees must obtain a decision from the IAC to allow or disallow such an action. At this point in time there is an obligation for the Trustees to seek a decision from the IAC before the trustees can undertake particular actions.

If the IAC votes to disallow an action, the Trustees can override the decision by gaining a general majority vote of Unit Holders to allow the action. The Trustees cannot seek a general majority vote of Unit Holders until the IAC has made a decision. Therefore, while the direction of the IAC can be overturned (which has not happened to date), the Trustees still have an obligation to act in accordance with the direction given by the IAC, until such time it is overturned.

In the event that the Trustees seek and gain a general majority of Unit Holders to overturn a decision of the IAC, it is only at this point in time that the obligation to act in accordance with the directions of the IAC ceases to exist. However, the fact that the Trustees may seek to overturn the decision of the IAC as a residual course of action does not diminish the primary obligation on the Trustees to firstly seek a decision from the IAC and act in accordance with that decision once it has been obtained.

It can therefore be concluded that the Trustees are obliged to act in accordance with the directions, instructions or wishes of the Fund acting through its member on the IAC. That the Trustees are obliged to act in accordance with the directions, instructions or wishes of the IAC establishes that the Fund has influence of a kind described in paragraph 128B(3CD)(b) of the ITAA 1936.

Accustomed to act

To determine if a person is accustomed to act requires an examination of any discernible pattern of the person following the directions, instructions or wishes given by the relevant entity.

The IAC has been required to vote to allow or disallow an action by the Trustees in nine instances, in all of which, the IAC approved the requested action by the Trustee.

Therefore, the IAC has expressed its direction, instruction or wish that the Trustees undertake a particular action on nine occasions. In any instance where the IAC has voted to allow an action, the Trustees must either take the action or not take the action.

In any instance where the Trustees did take the requested action (which is highly likely given the Trustees sought approval to take the action) the Trustee acted in 'harmonious correspondence, agreement or conformity' with the direction given by the IAC (and the Fund acting through its member on the IAC).

The directions, instructions or wishes of the IAC contribute directly to the action taken by the Trustees, as the action cannot occur without the IAC voting to allow it.

It can therefore be concluded, that the Trustees are accustomed to act in accordance with the directions, instructions or wishes of the Fund through its membership on the IAC and therefore the Fund has influence of a kind described in paragraph 128B(3CD)(b) of the ITAA 1936.

Conclusion of Sub-test 2

Based upon the above, the Commissioner concludes that the Fund has influence of a kind described in subsection 128B(3CD)(b) of the ITAA 1936. As the Fund has influence of a kind described in subsection 128B(3CD) of the ITAA 1936, the requirements of subsection 128B(3CA) of the ITAA 1936 have not been satisfied and therefore the requirements of paragraph 128B(3)(jb) have not been met.

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

The exclusion to liability for withholding tax on interest, dividend and non-share dividend income in paragraph 128B(3)(jb) of the ITAA 1936 does not apply to the Fund in respect of income it derives from Trust B. This is because the Fund has influence of a kind described in section 128B(3CD) of the ITAA 1936 and therefore does not satisfy the extra requirements under subsection 128B(3CA) of the ITAA 1936.

Question 3

Is the Fund excluded from liability to withholding tax on interest, dividend and non-share dividend income derived from assets acquired by Trust C, Trust D, and Trust E on or before XX/mth/XXXX under paragraph 128B(3)(jb) of the ITAA 1936?

Detailed reasoning

It has been established through the reasoning for Question 1 that the Fund:

• is a non-resident

• meets the requirements of the definition of a 'superannuation fund for foreign residents'

• is exempt from income tax in the Foreign Country.

2019 Act - extra requirements and transitional provisions

The 2019 Act introduced extra requirements that must be met for paragraph 128B(3)(jb) of the ITAA 1936 to apply.

Transitional provisions are provided in subitems 3(2) and 3(3) of Part 2 of Schedule 3 of the 2019 Act which state that the extra requirements in subsection 128B(3CA) of the ITAA 1936 do not need to be met for income derived before 1 July 2026 in certain circumstances.

Application of transitional provisions - Subitem 3(3)

The Fund has derived and will continue to derive income in respect of its ownership of units in Trust C, Trust D and Trust E.

Subsection 128A(3) of the ITAA 1936 applies to the income derived by the Fund from its interest in Trust C, Trust D and Trust E.

The Fund acquired its interest in Trust C, Trust D and Trust E before XX/mth/XXXX.

The income that was included in the income of Trust C, Trust D and Trust E was included in respect of assets held by Trust C, Trust D and Trust E.

Trust C, Trust D and Trust E acquired the assets on or before XX/mth/XXXX.

Therefore, the requirements of subitem 3(3) of Part 2 of Schedule 3 of the 2019 Act are satisfied.

As the requirements of subitem 3(3) of Part 2 of Schedule 3 of the 2019 Act are satisfied, the extra requirements in subsection 128B(3CA) of the ITAA 1936 will not apply to the income derived by the Fund from assets acquired by Trust C, Trust D and Trust E until 1 July 2026.

Conclusion

As the extra requirements in 128B(3CA) of the ITAA 1936 do not apply, the Fund is excluded from liability to withholding tax on interest, dividend and non-share dividend income derived from assets acquired by Trust C, Trust D and Trust E on or before XX/mth/XXXX under paragraph 128B(3)(jb) of the ITAA 1936.

Question 4

Is the Fund excluded from liability to withholding tax on interest, dividend and non-share dividend income derived from investments acquired by Trust C, Trust D and Trust E after XX/mth/XXXX under paragraph 128B(3)(jb) of the ITAA 1936?

Detailed Reasoning

It has been established through the reasoning for Question 1 that the Fund:

• is a non-resident

• meets the requirements of the definition of a 'superannuation fund for foreign residents'

• is exempt from income tax in the Foreign Country.

2019 Act - extra requirements and transitional provisions

The 2019 Act introduced extra requirements that must be met for paragraph 128B(3)(jb) of the ITAA 1936 to apply.

Application of transitional provisions - subitems 3(2) and 3(3)

The requirements of subitem 3(2) of Part 2 of Schedule 3 of the 2019 Act are not satisfied as subsection 128A(3) of the ITAA 1936 does apply in relation to the income derived by the Fund from Trust C, Trust D and Trust E.

The requirements of subitem 3(3) of Part 2 of Schedule 3 of the 2019 Act have also not been met as Trust C, Trust D and Trust E acquired or will acquire the assets after XX/mth/XXXX.

Subsection 128B(3CA) of the ITAA 1936

Subsection 128B(3CA) of the ITAA 1936 provides the following extra requirements:

1. The Fund satisfies the 'portfolio interest test'

This has been established in the reasoning for Question 2. Therefore, the Fund satisfies this requirement.

2. The Fund satisfies the 'influence test'

It has been established in the reasoning for Question 2 that the Fund does not satisfy this requirement in respect of the Fund's investment in the Australian Investment, which includes the Trust C, Trust D and Trust E.

3. Otherwise non-assessable non-exempt

This has been established in the reasoning for Question 2. Therefore, the Fund satisfies this requirement.

Conclusion

The exclusion to liability for withholding tax on interest, dividend and non-share dividend income in paragraph 128B(3)(jb) of the ITAA 1936 does not apply to the Fund in respect of income it derives from assets that are acquired by Trust C, Trust D and Trust E after XX/mth/XXXX. This is because the Fund has influence of a kind described in section 128B(3CD) of the ITAA 1936 and therefore does not satisfy the extra requirements under subsection 128B(3CA) of the ITAA 1936.

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