Edited version of private advice

Authorisation Number: 1051818577100

Date of advice: 23 March 2021

Ruling

Subject: Whether a fund is a 'foreign superannuation fund'

Question 1

Is the Fund a 'foreign superannuation fund' for the purposes of paragraph 275-20(4)(c) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Does the Fund have at least 50 members for the purpose of paragraph 275-20(4)(c) of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period

1 July 2020 - 30 June 2021

The scheme commences on:

1 July 2020

Relevant facts and circumstances

The Association

The Association is a legal entity under German public law, whose tasks, amongst other things, include:

•         promoting and representing the interests of their employees;

•         providing vocational and further training and development to the staff employed by their joint organisations.

The Association is headquartered in the Germany and has three key governing bodies, all three of which are comprised of German legal entities and German individuals. These include:

•         the Association's General Assembly

•         the Association's Board of Directors, and

•         the Association's Management Board.

The Association has a less than 100 members, comprised of the regional bodies it represents. The Association does not have a defined end date under its constitution or under any applicable law.

The Fund

The Fund's documentation sets out the Principles under which it is run, funded and managed. It provides that coverage of the pensions shall be ensured through adequate assets, and that pension fund 'funds' may only be used to cover the Association's pension and benefit expenditure.

The Association will provide the Fund with the funds required to cover its pension and benefit obligations, based on actuarial calculations. The actual funds pooled in the Fund will be managed by a part of the Association and shall be invested in fixed-income securities, shares in well-funded companies, securities, and real assets.

Investment outside the above parameters is allowed, but only in consultation with the Association's Board and an investment committee set up to deal with all major issues, including investment strategies.

The Association shall bear all economic investment risks for the pooled funds, and the Fund's annual reports will form part of the Association's overall annual financial statements. However, the Fund's assets shall be kept separate from those of the Association, and from its rights and obligations, and prepared in a separate sub-budget.

As the Fundis not a legal entity separate from the Association, another Association X was established to protect the Fund assets from creditors of the Association. Association X provides security over the Fund assets, and guarantees payment of the pension benefits to entitled individuals.

Entitled individuals

The transition to the pension fund model was implemented as an amendment to the employment contracts of affected employees (i.e. those employed before a certain date who were still actively working for the Association). Once an employee agreed to switch to the pension fund model, the Association commenced allocating funds to the Fund in order to fund their future pension payments. They would only begin benefitting under the pension once they reached the relevant retirement age or became incapable to work.

Entitlement to pension benefits is only awarded after an employee has served a minimum employment period with the Association. In the 1990s, a few hundred people were eligible to switch from the 'dynamic benefits' to the Fund. By the 2020s, more employees had reached the minimum period of employment required to be eligible for pension benefits, and the Fund had grown to almost 500 members. The Fund has no fixed end date and will only cease to exist once all pension benefits committed to relevant individuals have been provided.

The Fund is made available on the basis of an employment relationship with a particular employer or in an industry specific sector and applies in addition to the mandatorily required pension coverage under the German public pension regime. Anyone employed by the Association after a certain is not, and will never be, in a position to obtain a pension from the Fund.

Benefits under the fund

The benefits to be provided to the entitled individuals are governed by the employment contracts of the respective individuals, which refers directly to the pension benefits set out in that law - ie old age, occupational disability pension and surviving dependents benefits.

Fund Structure and the Australian investments

The Association, acting for the Fund, holds units in an existing German wholesale fund (the German fund) which is managed by a German management company. The largest shareholder in the German Fund is itself a foreign super fund with at least 50 members as per paragraph 275-20(4)(c) of the ITAA 1997).

The German Fund established an Australian unit trust (the Head Trust) together with the second unitholder (the Second Unitholder). The Head trust has established one wholly owned Australian unit trust (Sub trust 1). The Head trust acquired (through Sub Trust 1) Australian real property. The Head Trust and Sub Trust 1 have Australian tax resident corporate trustees.

The Head Trust has appointed an investment manager in Australia (the Investment Manager) and entered into an agreement under which a substantial proportion of the investment management activities in relation to the assets of the Head Trust are carried out by sufficiently experienced and skilled personnel of the Investment Manager in Australia.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 275-10

Income Tax Assessment Act 1997 paragraph 275-10(1)(a)

Income Tax Assessment Act 1997 subsection 275-10(3)

Income Tax Assessment Act 1997 paragraph 275-10(3)(e)

Income Tax Assessment Act 1997 subsection 275-20(1)

Income Tax Assessment Act 1997 subsection 275-20(4)

Income Tax Assessment Act 1997 subsection 275-25(1)

Income Tax Assessment Act 1997 subsection 295-95(2)

Income Tax Assessment Act 1997 section 960-130

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

Superannuation Industry (Supervision) Act 1993 section 10

Reasons for decision

Question 1

Is the Fund a 'foreign superannuation fund' for the purposes of paragraph 275-20(4)(c) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Summary

Yes. The Fund is a 'foreign superannuation fund' for the purposes of paragraph 275-20(4)(c) of the ITAA 1997, as it meets the definition of 'foreign superannuation fund' in subsection 995-1 of the ITAA 1997.

Answer

Under the managed investment trust (MIT) withholding tax regime, MITs are required to withhold an amount of income tax when making certain payments to a non-resident member. Foreign investors are eligible for a reduced rate of withholding tax on fund payments from MITs if they are a resident of a country with which Australia has an effective exchange of information treaty.

A MIT is a widely- held and commercially-operated collective investment trust that invests in passive income activities. Broadly, a trust qualifies as a MIT if all of the following apply for the income year in which it operates:

•         the trustee is an Australian resident, or the central management and control of the trust is in Australia

•         the trust does not carry on or control an active trading business

•         the trust is a managed investment scheme

•         the trust meets the widely held requirement

•         the trust meets the closely held restriction

•         the trust is operated or managed by an appropriately regulated entity (see section 275-10 of the ITAA 1997).

The eligibility requirements are designed to ensure that a MIT is a genuine collective investment vehicle, and to limit the ability of foreign residents to adopt trust structures to access concessional withholding tax rates.

More specifically, section 275-10 of the ITAA 1997 provides the legislative definition of a MIT in relation to an income year. Relevantly, paragraph 275-10(1)(a) provides that a trust is a MIT if it is covered under subsection 275-10(3), which states;

A trust is covered under this subsection in relation to an income year if:

(a) at the time the trustee of the trust makes the first *fund payment in relation to the income year, or at an earlier time in the income year:

(i) the trustee of the trust was an Australian resident; or

(ii) the central management and control of the trust was in Australia; and

(b) the trust is not a trust covered by subsection (4) (trading trust etc.) in relation to the income year; and

(c) at the time the payment is made, the trust is a managed investment scheme (within the meaning of section 9 of the Corporations Act 2001); and

(d) at the time the payment is made:

(i) the trust is covered by section 275-15 (trusts with wholesale membership); or

(ii) if the trust is not covered by section 275-15 - the trust is registered under section 601EB of the Corporations Act 2001; and

(e) the trust satisfies, in relation to the income year:

(i) if, at the time the payment is made, the trust is registered under section 601EB of the Corporations Act 2001 and is covered by section 275-15 - either or both of the widely-held requirements in subsections 275-20(1) and 275-25(1); or

(ii) if, at the time the payment is made, the trust is so registered and is not covered by section 275-15 - either or both of the widely-held requirements in subsections 275-20(2) and 275-25(1); or

(iii) if, at the time the payment is made, the trust is not so registered and is covered by section 275-15 - the widely-held requirements in subsection 275-20(1); and

(f) the trust satisfies the closely-held restrictions in subsection 275-30(1) in relation to the income year; and

(g) if the trust is covered by section 275-15 at the time the payment is made - it satisfies the licensing requirements in section 275-35 in relation to the income year.

Subparagraph 275-10(3)(e) of the ITAA 1997 deals with the requirement for the trust to be widely held, which is satisfied by meeting the requirements under subsection 275-20(1) or 275-25(1). Relevant to this issue is subsection 275-25(1), which provides that:

The trust satisfies the requirements in this subsection in relation to the income year if:

(a) one or more entities covered by subsection 275-20(4) have a total *MIT participation interest in the trust of more than 25% at the time the payment mentioned in paragraph 275-10(3)(a) is made; and

(b) at no time in the income year does an entity (other than an entity covered by subsection 275-20(4)) have a MIT participation interest in the trust of more than 60%.

Included in the list of entities covered by subsection 275-20(4) is:

... a *foreign superannuation fund, being a fund that has at least 50 *members.

In this case the Fund has asked the Commissioner to determine whether it meets the definition of a 'foreign superannuation fund' for the purposes of subsection 275-20(4) of the ITAA 1997. This ruling does not consider whether the Australian based Head trust that the Fund ultimately invests in meets the definition of a MIT.

Foreign superannuation fund

The term 'foreign superannuation fund' is defined in subsection 995-1(1) of the ITAA 1997 as:

(a)  a superannuation fund is a foreign superannuation fund at a time if the fund is not an Australian superannuation fund at that time; and

(b)  a superannuation fund is a foreign superannuation fund for an income year if the fund is not an Australian superannuation fund for the income year.

Therefore, in order for the Fund to be considered a foreign superannuation fund, it needs to meet the criteria of:

•         being a 'superannuation fund', and

•         not being an 'Australian superannuation fund' for the ruling period.

Australian superannuation fund

The term 'Australian superannuation fund' is defined in subsection 995-1(1) of the ITAA 1997 as having the meaning given by section 295-95. Subsection 295-95(2) states:

A * superannuation fund is an Australian superannuation fund at a time, and for the income year in which that time occurs, if:

(a) the fund was established in Australia, or any asset of the fund is situated in Australia at that time; and

(b) at that time, the central management and control of the fund is ordinarily in Australia; and

(c) at that time either the fund had no member covered by subsection (3) (an active member) or at least 50% of:

(i) the total * market value of the fund's assets attributable to * superannuation interests held by active members; or

(ii) the sum of the amounts that would be payable to or in respect of active members if they voluntarily ceased to be members;

is attributable to superannuation interests held by active members who are Australian residents.

Guidance on the meaning of an Australian superannuation fund is provided in Taxation Ruling 2008/9 Income tax: meaning of 'Australian superannuation fund' in subsection 295-95(2) of the Income Tax Assessment Act 1997 (TR 2008/9).

The first test is whether the fund is established in Australia, or whether any asset of the fund is situated in Australia. Paragraph 13 of TR 2008/9 provides that the key elements required to bring a super fund into existence are that the trust deed is signed and executed, and that money or other property is transferred to the trustee as an initial contribution that is to be held on trust for the fund members.

The Fund was established by the Association, a legal entity under German public law, in the 1990s. The initial contribution made to establish the Fund was not paid to or accepted by the trustee in Australia, and is therefore not a fund established in Australia. However, the fund has ultimately invested in Australian real property, which is an asset of the fund.

The second test requires that, at a particular time, the central management and control (CM&C) of the fund is ordinarily in Australia. Paragraph 20 of TR 2008/9 outlines that the CM&C of a super fund involves a focus on who, when and where the strategic and high level decision making processes and activities of the fund occur. This 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.

The Fund's Principles provide that its funds shall be managed by institutions of the Association, which is headquartered in Germany. The Fund's Principles also say that an investment committee shall be formed by the Association which will participate in all major issues, but above all 'investment strategies'. Last, it provides guidelines on how the funds pooled in the Fund shall be invested, but notes that investment outside of those parameters is allowed, in consultation with the Association's Board. Accordingly, all strategic and high level decision making processes for the Fund occur in Germany, and not in Australia. Therefore, the Fund does not satisfy the requirement in paragraph 295-95(2)(b) of the ITAA 1997, and is not an Australian superannuation fund.

Superannuation fund

To qualify as a 'foreign superannuation fund', the Fund must first be a 'superannuation fund'.

'Superannuation fund' is defined in subsection 995-1(1) of the ITAA 1997 as having the meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (the SIS Act). It states that a 'superannuation fund' is:

(a) a fund that:

(i) is an indefinitely continuing fund; and

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

(b) a public sector superannuation scheme.

Paragraph (b) of the definition is not relevant in this case as it relates to superannuation funds established under Australian law.

Is the Fund a fund?

The term 'fund' is not defined in the SIS Act for the purposes of section 10 of the ITAA 1997 or the Income Tax Assessment Act 1936 (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'. Justice Windeyer's views in Scott were cited with approval by Hill J in Walstern Pty Ltd v. Commissioner of Taxation (2003) 138 FCR 1; (2003) 54 ATR 423; 2003 ATC 5076 (at paragraph 49 - Walstern) who stated that:

For present purposes, the point is the need for "money" or "other property" to constitute a fund.

The Fund is provisioned with funds from the Association up to a target amount required to cover the pension and benefit obligations, according to actuarial calculations. The funds are invested to fund future benefit entitlements. Therefore, the Fund is a fund as it is a stock of money used for the purpose of paying benefits to members.

Is the Fund an indefinitely continuing fund?

The phrase 'indefinitely continuing' is not defined in the ITAA 1936 or the ITAA 1997. The Australian Oxford Dictionary defines 'indefinitely' as:

1.    for an unlimited time: was postponed indefinitely.

2.    in an indefinite manner.

The Fund is an 'indefinitely continuing' fund on the basis that there is no clause in the its founding documentation which require that it will be terminated or wound up after a specified period or on a specific date. Further, a clause specifically says that the Fund shall be considered 'to have been dissolved when all pension and benefit expenditure has been paid'.

Accordingly, it is accepted that the Fund will continue to operate in accordance with its rules for an indefinite period of time, on the basis that there is no clause in the governing documentation (or German law) which requires that it be terminated or wound up in a specific timeframe.

Is the Fund a provident, benefit, superannuation or retirement fund?

The phrase 'a provident, benefit, superannuation or retirement fund' is not defined in the ITAA 1997 or the ITAA 1936.

The phrase 'superannuation fund' was considered by Windeyer J in Scott where he concluded that:

...I have come to the conclusion that there is no essential single attribute of a superannuation fund established for the benefit of employees except that it must be a fund bona fide devoted as its sole purpose to providing for employees who are participants money benefits (or benefits having a monetary value) upon their reaching a prescribed age.

In Mahoney v. Commissioner of Taxation (Cth) (1967) 41 ALJR 232; (1967); 14 ATD 519; 10 AITR 463 (Mahoney case), the High Court took a similar view as in Scott. Justice Kitto expressed the view at ALJR 232; (1967); ATD 520; AITR 464 that:

There was no definition in the Act of "a provident, benefit or superannuation fund", and the meaning of the several expressions must therefore be arrived at in the light of ordinary usage and with only one piece of assistance to be gathered from the immediate context. Since a fund, if its income was to be exempt under the provision, was separately required to be one established for the benefit of employees, each of the three descriptive words "provident", "benefit" and "superannuation" must be taken to have connoted a purpose narrower than the purpose of conferring benefits, in a completely general sense, upon employees. Precise definition may be difficult, and in any case is unnecessary for present purposes. All that need be recognized is that just as "provident" and "superannuation" both referred to the provision of a particular kind of benefit-in the one case a provision against contemplated contingencies, and in the other case a provision, to arise on an employee's retirement or death or other cessation of employment, of a subvention for him or his estate or persons towards whom he may have stood in some kind of relation commonly giving rise to a legal or moral responsibility-so "benefit" must have meant a benefit, not in a general sense, but characterized by some specific future purpose.

According to its governing documentation, the Fund 'shall only be used for pension and benefit expenditure'. Each relevant employment contract includes a reference to the Bavarian public servant's legislation and refers directly to the pension benefits set out in that law - i.e., a pension benefit is paid upon reaching a certain age, or for occupational disability, or for surviving dependents.

Therefore, the Fund is a bona fide fund devoted as its sole purpose to providing money benefits characterised by some specific future purpose for relevant employees. Accordingly, the Commissioner considers that the Fund is a provident, benefit superannuation or retirement fund.

Conclusion

The Fund is a 'foreign superannuation fund' for the purposes of paragraph 275-20(4)(c) of the ITAA 1997, as it meets the definition of 'foreign superannuation fund' in subsection 995-1 of the ITAA 1997.

Question 2

Does the Fund have at least 50 members for the purpose of paragraph 275-20(4)(c) of the ITAA 1997?

Summary

Yes. As the Fund has more than 50 members that are or will be entitled to benefits, the Fund has 50 members for the purpose of the paragraph.

Detailed reasoning

The Fund, as of 2020, has more than 50 members. Therefore, the requirement in subparagraph 275-20(4)(c) of the ITAA 1997 that the entity has at least 50 members is satisfied.

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