Edited version of private advice

Authorisation Number: 1051816356547

Date of advice: 30 March 2021

Ruling

Subject: Superannuation fund for foreign residents - withholding tax

Question

Is the Fund excluded from liability to withholding tax on its interest income derived from its Australian investment (investment X) under paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Fund was established in September 19XX in the Country A. The Fund continues to be a resident of the Country A.

The Fund was established by the relevant City's Ordinances (Ordinances). It was established for the purpose of providing retirement benefits to full time City employees.

The Fund is the entity responsible for the administration and investments of the defined benefit pension plan for the employees of the City (the City Plan) and a pension plan for employees of the Fund itself (the Staff Plan).

The Fund is subject to city and state legislative oversight from the City's Pension Review Board.

The Fund is under the exclusive administration and management of a Board of Trustees (the Board) by the relevant State in the Country A for the purposes of providing retirement benefits. The Board is the highest governing body of the Fund and is charged with the primary responsibility of overseeing the administration of benefits and investment of assets. The Board is made up of several appointed and elected members. All members are residents of the Country A.

The Fund, the City Council, and relevant administrative officials have different responsibilities when it comes to the Fund's retirement plan benefits and the members who receive them.

Prospective changes to benefits, including the timing and scope of changes, are controlled by the City Council.

The assets of the Staff Plan and the City Plan are commingled in the Fund and are managed as a pool of funds by the Board.

The Commissioner has previously issued a private ruling to the Fund in relation to an exemption from Australian withholding tax under paragraph 128B(3)(jb) and section 128D of the ITAA 1936.

City Plan

Membership of the City Plan

The Fund serves active members, retirees and beneficiaries.

The Fund provides the following types of pensions:

12.1    Active members:

a.  Normal retirement;

b.  Special retirement;

c.   Early retirement; and

d.  Disability pension.

12.2    Separated members:

a.  Normal term vested retirement; and

b.  Early term vested retirement.

12.3    Partners pension upon death of member:

a.  Before retirement; and

b.  After retirement.

Benefits of the City Plan

Active member benefits

Active members are paid their benefits in accordance with their tier system.

The benefit at retirement will be based on the members pay, length of participation in the Fund, and the applicable multiplier at the time of retirement.

The formula for both tiers is comprised of three components.

Final Average Compensation (FAC) x Service Credit x Benefit Multiplier = $ Annual Benefit.

As an active member, there are four pension types:

17.1    Normal Retirement:

17.2    Special Retirement:

17.3    Early Retirement:

17.4    Disability Pension:

Separated member benefits

Separated members are paid their benefits in accordance with the tier system:

As a separated member, there are two pension options:

19.1    Normal term vested retirement

19.2    Early term vested retirement

Partners pension upon death of a member:

Partners of members who have died will have their benefits paid in accordance with the tier system:

20.1    Before Retirement

20.2    After Retirement

Staff Plan

The fundamental objective of the Board of Trustees for the Staff Plan, a governmental defined benefit scheme, is to fund the long-term cost of benefits promised to the Staff Plan participants.

The Staff plan was originally established by the board in 20XX and amended in 20XX for the exclusive benefit of the staff employees of the Fund.

Participation of the Fund is mandatory and is in lieu of any other retirement plan for the employees of the Fund.

Membership and Benefits of the Staff Plan

The Staff Plan provides the following benefits to its members:

24.1    Active members:

a.  Retirement benefits

b.  Disability benefits

c.   Pre-retirement death benefits

d.  Post-retirement death benefits

e.  Deferred Vested benefit:

f.    Termination.

24.2 Inactive members

a.  Vested benefit;

b.  Non-vested benefit.

Staff Plan termination

The Board retains the continuing power to amend or terminate the Staff Plan provided that no amendment may result in a reduction of benefits below that level in effect at the time the amendment is scheduled for enactment.

In the event of Staff Plan termination or partial termination, or a complete discontinuance of Fund contributions to the Staff Plan, the accrued benefits of all members will immediately be fully (100%) vested.

Upon termination of the Staff Plan, any assets remaining after the payment of all liabilities and expenses will revert to the Fund.

Management of Investments

The Fund (under both the City Plan and Staff Plan) is financed from its members' contributions with the objective of funding the normal costs, the assumed administrative expenses, and an amount necessary to eliminate the Unfunded Actuarial Accrued Liability.

The Fund collects contributions from the City and its employees and pays out benefits in accordance with the Fund provisions, City Plan and Staff Plan.

The Fund controls the investment decisions and asset allocation, actuarial assumptions and recommends the monetary contributions needed from the City in order to fund benefits to members.

The Fund does not control the market fluctuations that affect the value of the Fund's assets.

No part of the corpus or income of the Fund will revert to the City or be used for, or diverted to, any purpose other than exclusively providing benefits to members and their beneficiaries.

Investments in Australia

The Fund currently holds Australian investments, including investment X.

Other relevant facts

The Fund is a resident of the Country A for the purposes of Country A taxation. The Fund is not a resident of Australia for tax purposes.

The Fund was established in the Country A and is maintained for the sole purpose of providing retirement benefits for individuals who are not residents of Australia.

The central management and control of the Fund is carried on outside of Australia by persons none of whom are residents of Australia.

The City Plan and Staff Plan do not set out procedures for the dissolution of the Fund, have a termination clause or provide any indication that there is any contemplation of the Fund ending at a defined point in time.

An amount paid to the Fund or set aside for the Fund has not been or cannot be deducted under any provision of the ITAA 1936 or Income Tax Assessment Act 1997 (ITAA 1997). Further, no tax offset has been allowed or can be allowed for any such amounts.

Income of the Fund from Australian investments is exempt from taxation in the Country A in accordance with section 501(a) of the Internal Revenue Code (IRC).

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1936 section 128B

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

Income Tax Assessment Act 1936 section 128D

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

Income Tax Assessment Act 1997 Subdivision 880-C

Income Tax Assessment Act 1997 subsection 995-1(1)

Income Tax (Transitional Provisions) Act 1997 Division 880

Superannuation Industry (Supervision) Act 1933 section 10

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.

Each of the requirements of paragraph 128B(3)(jb) will be considered below.

The Fund is a non-resident

The Fund is a resident of the Country A. Therefore, the Fund satisfies this requirement.

Superannuation fund for foreign residents

Section 118-520 of the ITAA 1997 provides:

(1)  A fund is a superannuation fund for foreign residents at a time if:

(a)          at that time, it is:

(i)            an indefinitely continuing fund; and

(ii)           a provident, benefit, superannuation or retirement fund; and

(b)          it was established in a foreign country; and

(c)           it was established, and is maintained at that time, only to provide benefits for individuals who are not Australian residents; and

(d)          at that time, its central management and control is carried on outside Australia by entities none of whom is an Australian resident.

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

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

(b)          a *tax offset has been allowed or is allowable for such an amount.

1.            An indefinitely continuing fund

The term 'fund' is not defined in either the ITAA 1997 or the ITAA 1936. Therefore, it should be given its ordinary meaning subject to the context in which it appears and having regard to any relevant case law authorities.

The Australian Oxford Dictionary, 2004, Oxford University Press, Melbourne defines the term 'fund' as; 1 a permanent stock of something ready to be drawn upon... 2 a stock of money, especially one set apart for a purpose.

In Scott v. FC of T (No 2) (1966) 14 ATD 333; (1966) 10 AITR 290 (Scott), Windeyer J expressed the view that 'fund' in the context of 'superannuation fund' ordinarily meant 'money (or investments) set aside and invested, the surplus income therefrom being capitalised'. Windeyer J's views in Scott were cited with approval by Hill J in Walstern Pty Ltd v. Commissioner of Taxation (2003) 138 FCR 1; 2003 ATC 5076; (2003) 54 ATR 423 who stated that 'for present purposes, the point is the need for "money" or "other property" to constitute a fund'.

The City Plan and Staff Plan do not set out procedures for the dissolution of the Fund, have a termination clause or provide any indication that there is any contemplation of the Fund ending at a defined point in time.

The Fund is subject to City and State legislative oversight from the City Council and State Pension Review Board. As the City Plan and Staff Plan have been established through legislation, any change to the City Plan and Staff Plan would require amendments to be legislated.

Therefore, it is accepted that the Fund will continue to operate in accordance with the City Plan and Staff Plan for an indefinite period of time and is an indefinitely continuing fund.

2.            A provident, benefit, superannuation or retirement fund

None of the four descriptors 'provident', 'benefit', 'superannuation' or 'retirement fund' in subparagraph (a)(ii) of the definition of 'superannuation fund for foreign residents' in section 118-520 of the ITAA 1997 are defined. The terms have, however, been the subject of judicial consideration.

The courts have held that for a fund to be a 'provident, benefit, superannuation or retirement fund', the fund's sole purpose must be to provide superannuation benefits, that is, benefits to a member upon the member reaching a prescribed age or upon their retirement, death or other cessation of employment (Scott v. FC of T (No 2) (1966) 14 ATD 333; (1966) 10 AITR 290, per Windeyer J; Mahony v. FC of T (1967) 14 ATD 519, per Kitto J; Walstern Pty Ltd v. Commissioner of Taxation (2003) 138 FCR 1; 2003 ATC 5076; (2003) 54 ATR 423, per Hill J and Cameron Brae Pty Ltd v. Federal Commissioner of Taxation (2007) 161 FCR 468; 2007 ATC 4936; (2007) 67 ATR 178, per Stone and Allsop JJ).

The above establishes that for a fund to qualify as a provident, benefit, superannuation or retirement fund, it must have the sole purpose of providing retirement benefits or benefits in other allowable contemplated contingencies (such as death, disability or serious illness).

The Fund is a defined benefit plan created for the exclusive purpose of providing retirement benefits to full time City employees. No part of the corpus or income of the Fund will revert to the City or be used for, or diverted to, any purpose other than exclusively providing benefits to members and their beneficiaries.

The Fund controls the investment decisions and asset allocation, actuarial assumptions and recommends the monetary contributions needed from the City to meet these assumptions in order to fund benefits to members. The Fund collects the contributions from the City and its employees and pay out benefits in accordance with the provisions of the City Plan and Staff Plan.

Further, the Commissioner accepts that the alternate circumstances of access in this case, being, disability, death and termination of employment align to the contemplated contingencies of a provident, benefit, superannuation or retirement fund.

Accordingly, the Fund satisfies this requirement.

3.            Established in a foreign country

The Fund was established in the Country A and is a resident of the Country A. The Fund therefore satisfies this requirement.

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

The Fund is a defined benefit plan created for the exclusive purpose of providing retirement benefits to full time City employees.

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.

5.            Central management and control

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 Fund exists for the exclusive purpose of providing retirement benefits to full time City employees. The Fund was established by the City's Ordinances with City and State legislative oversight from the City's Pension Review Board. Income of the Fund will not revert to the City or be used for any purpose other than the exclusive use of providing benefits to members and their beneficiaries.

The Fund is under the exclusive administration and management of the Board by the State in the foreign country for the purposes of providing retirement benefits. The Board is the highest governing body of the Fund and is charged with the primary responsibility of overseeing the administration of benefits and investment of assets. The Board is made up of several members. All members are residents of the foreign country.

Based on this, it is reasonable to conclude that the central management and control of the Fund occurs in the Country A by entities that are not Australian residents.

Therefore, the Fund satisfies this requirement.

6.            Subsection 118-520(2)

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.

Therefore, the Fund satisfies these requirements.

7.            Conclusion

As all the above requirements are satisfied, the Fund meets the requirements of being a superannuation fund for foreign residents as defined by section 118-520 of the ITAA 1997.

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

The Fund is exempt from income tax in its country of residence. Therefore, the Fund satisfies this requirement.

Subsection 128B(3CA) of the ITAA 1936

The Treasury Laws Amendment (Making Sure Foreign Investors Pay Their Fair Share of Tax in Australia and Other Measures) Act 2019 introduced extra requirements that must be met for paragraph 128B(3)(jb) of the ITAA 1936 to apply. Generally, these extra requirements apply to income derived from 1 July 2019 on equity interests:

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

2.            The 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 Fund because of:

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

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

The income derived from the Fund's investment X in Australia will generate interest income.

On the basis that the Fund's investment X in Australia will generate interest income derived by a non-resident superannuation fund for foreign residents, which is exempt from income tax in the country in which the non-resident lives, the elements of paragraph 128B(3)(jb) are satisfied. However, as the income derived is a debt interest rather than an equity interest, the extra requirements that apply to income derived from 1 July 2019, as set out in subsection 128B(3CA), subsection 128B(3CC) and subsection 128B(3CD) are not applicable.

Conclusion

The Fund is excluded from withholding tax in relation to the interest income derived from its current investment X in Australia pursuant to paragraph 128B(3)(jb) of the ITAA 1936.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).