Edited version of private advice

Authorisation Number: 1051818892364

Date of advice: 23 March 2021

Ruling

Subject: Superannuation fund for foreign residents - withholding tax

Question

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

Answer

Yes

This ruling applies for the following periods:

1 July 20XX to 30 June 20XX

1 July 20XX to 30 June 20XX

1 July 20XX to 30 June 20XX

1 July 20XX to 30 June 20XX

1 July 20XX to 30 June 20XX

1 July 20XX to 30 June 20XX

1 July 20XX to 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Fund

The Fund was established in the Country A by declaration of trust for the purpose of providing pension and other superannuation benefits for eligible employees.

The Fund is a resident of the Country A as confirmed in a letter from HM Revenue & Customs.

Fund administration

All directors of the Trustee are Country A residents and board meetings are held in the Country A. No directors, employees or agents of the Fund make decisions as to investments or divestments in Australia.

The Trustee exercises the central management and control of the Fund. The Trustee is not an Australian resident.

Rules of the Fund

The Scheme Rules is the constituent document for the Fund. It is a single document comprising the trust deed and scheme rules as amended from time to time and this document in its entirety forms part of the scheme to which this ruling relates.

Membership of the Fund

Only 'eligible employees' can become members of the Fund's pension scheme. An 'eligible employee' is an employee of an institution that is a participating employer in the Fund.

An eligible employee automatically becomes a member of the pension scheme.

Approximately 0.X% of the Fund's active members are Australian residents for income tax purposes (on the basis that these members now reside permanently in Australia, having returned to Australia after joining the Fund). None of the Australian members are contributing to the fund (fund members are only able to contribute to the fund if they are Country A residents) but may be receiving pensions from the Fund. The existence of at least one Australian tax resident member is relevant to the withholding tax exemption.

Contributions

Members contribute X.X% of their salary to the Fund during their membership of the pension scheme. Members can choose to make additional contributions, but the aggregate amount of contributions paid by a member (or treated as having been paid by a member) in any benefit year cannot exceed their salary for that year.

Members can also salary sacrifice contributions to be paid to the Fund.

Employers also contribute XX.X% of the active employees' salary to the Fund to ensure the pension scheme can satisfy the members' pension entitlements.

When a person ceases to be an eligible employee, that person may no longer make contributions to the Fund.

Fund Benefits

The Fund is required to provide the pension to members who retire at the 'normal pension age'. The normal pension is paid as a regular monthly allowance and a once-off tax-free cash sum when the employee retires.

A member can retire early at the age of 55 years or if made redundant in specific circumstances from the age of 50 years. Where a member retires early, their normal pension will be reduced as the pension will be paid over a longer period. The pension will not be reduced where early retirement is caused by long-term sickness or incapacity.

A member can also retire later and continue to contribute to the Fund (including the employer contributions). Where a member retires later, the normal pension will be increased accordingly. At 75 years of age the member is required to draw their pension.

On the death of a member, the Fund holds the lump sum benefits on discretionary trust to provide benefits to the deceased members' nominated survivor, dependant or child.

Tax status

The Fund is an occupational pension scheme and, as such, is a registered scheme under Chapter 2, Part 4 of the Finance Act 2004 (Country A) (Finance Act). Section 186 of the Finance Act relevantly provides that 'no liability to income tax arises in respect of ... income derived from investments or deposits held for the purposes of a registered pension scheme...'.

Section 271(1A) of the Taxation of Chargeable Gains Act 1992 (Country A) states 'a gain accruing to a person of investments or deposits held for the purposes of a registered scheme ... is not a chargeable gain.'

Australian investments

Investment A

The Fund derives income from its investment in Investment A on the basis that:

•           Income derived by the Fund relates to the shares and non-share interests held in Investment A;

•           As the Fund holds the investment in Investment A directly rather than through an interest in a trust estate, subsection 128A(3) does not apply to that particular Fund investment; and

•           The Fund started to hold the investment in Investment A before 27 March 20XX.

All other investments

All other investments held by The Fund on or before 27 March 20XX were held via an interest in different trust estates.

Investment B and Investment C

The Fund is an investor in Investment B and Investment C with its investments held via the following trusts:

•         Trust 1;

•         Trust 2; and

•         Trust 3.

Investment D and Investment E

The Fund is an investor in Investment D and Investment E, with its investments held via Trust 4.

Other relevant facts

The manager of the Fund has provided a statement indicating that:

(i)      The Fund is an indefinitely continuing fund and is a provident, benefit or retirement fund;

(ii)     The Fund was established in a country outside Australia;

(iii)   The fund does not receive contributions from Australian resident individuals;

(iv)   The Fund's central management and control is carried on outside Australia by persons none of whom is a resident of Australia;

(v)    An amount paid to, or set aside for, the Fund has not been or cannot be deducted under either the ITAA 1936 or ITAA 1997;

(vi)   The interest, dividend and non-share dividend income is exempt from income tax in the country in which the Fund is resident; and

(vii)  A tax offset has not been allowed or is not allowable for such an amount.

Relevant legislative provisions

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

Income Tax Assessment Act 1936 Section 128D

Income Tax Assessment Act 1997 Section 118-520

Reasons for decision

Summary

The requirements of paragraph 128B(3)(jb) of the ITAA 1936 are satisfied. The Fund is excluded from liability to withholding tax on interests, dividend and non-share dividend income derived from its Australian Investments acquired on or before 27 March 20XX 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 dividends derived by a superannuation fund for foreign residents (subject to the satisfaction of certain conditions).

For the exclusion to apply, the interest, dividend and/or non-share dividend income must be:

•         derived by a superannuation fund for foreign residents (as defined in section 118-520 of the ITAA 1997); and

•         exempt from income tax in the country in which the superannuation fund for foreign residents arise.

Further, from 1 July 2019, the extra requirements in subsection 128B(3CA) of the ITAA 1936 must also be met.

The Fund is a non-resident

The Fund is not a resident of Australia.

Therefore, the Fund satisfies this requirement.

The Fund is a superannuation fund for foreign residents

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

(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.

The Fund must be a 'fund' that satisfies all of the conditions in subsection 118-520(1) of the ITAA 1936 (and none of the paragraphs in subsection 118-520(2) of the ITAA 1997 to be a 'superannuation fund for foreign residents'.

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 legislation provides no guidance on the meaning of 'indefinitely continuing'. It is not a technical legal expression, and the ordinary meanings of 'indefinitely' and 'continuing' involve little ambiguity or controversy.

The Macquarie Dictionary, viewed on 28 January 2021, www.macquariedictionary.com.au defines 'indefinitely' and 'continuing' as follows:

Indefinite: adjective

1.    not definitive, without fixed or specified limited, unlimited: an indefinite number

2.    not clearly defined or determined; not precise.

Indefinitely: adverb; Continue: verb (continued, continuing)

1.    to go forwards or onwards in any course or action; keep on.

2.    to go on after suspension or interruption.

3.    to last or endure.

4.    to remain in a place; abide; stay.

5.    to remain in a particular state or capacity.

The Fund was created as a trust with the main purpose to provide pensions and other superannuation benefits to the members of the Fund.

The Scheme Rules do not specify a termination date, but the pension scheme will wind up if:

(i)    All participating institutions agree in writing to wind up the pension scheme;

(ii)   Most of the participating institutions agree in writing and the Trustee and the XXXXX concur;

(iii)  The Trustee and the XXXXX decide on the grounds that the object for which the scheme was established no longer exists or that the administration of the pension scheme cannot conveniently be carried on;

(iv)  The 'perpetuity period' expires; or

(v)   An order is made by the Pensions Regulator under section 11 of the Pensions Act 1995 (Country A).

Under the Scheme Rules, the Fund will continue until the later of the expiry of the perpetuity period, which is the period of XX years from its date of establishment, and such other date up to which it may continue without contravening the law against perpetuities. The entire period will be the perpetuity period for the purposes of the pension scheme under the rule against perpetuities for the purpose of section 1 of the Perpetuities and Accumulations Act 1964 (Country A).

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. However, the phrase has been subject to judicial consideration.

In Scott, the High Court examined the terms 'superannuation fund' and 'fund' Justice Windeyer stated at ATD 351; AITR 312; ALJR 278 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 this connexion 'fund', I take it, ordinarily means money (or investments) set aside and invested, the surplus income there from being capitalised.

In a later case, Mahoney v. Commissioner of Taxation (Cth) (1967) 41 ALJR 232; 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; ATD 520; AITR 464 that:

... all that need be recognised 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 contemplate contingencies, and in the other case a provision, to arise on an employee's retirement or death or other cessation of employee, 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 a general sense, but characterised by some specific future purpose.

The Court found that the expression takes its meaning from past usage and the meaning of the several expressions must be arrived at in light of their ordinary usage. As such the term 'benefit' requires a purpose narrower than conferring benefits in a completely general sense. The benefit must be characterised by some future purpose. Likewise, a provident fund must not refer to the provision of funds in a general sense but must relate to a provision against contemplate contingencies.

Both of the above mentioned cases emphasise that the benefits must be provided for a specific purpose and require that there is a connection between the benefit received and the provision by the fund for retirement or death of a member or against contemplated contingencies, such as death, disability or serious illness.

The rules of the Fund are consistent with those of a superannuation fund. The Fund receives contributions from its employee members and employers on behalf of employee members. The Fund holds these funds on trust for the purpose of providing superannuation benefits to its members, including the payment of pension benefits in accordance with the Fund's rules. The Fund also offers benefits for contemplated contingencies such as death, incapacitation and redundancy.

The money collected by the Fund from employee members and employers on behalf of employee members of the Fund, is effectively set aside for investment and for the purposes of providing pensions. Employees are only eligible to receive their retirement benefits where they have been contributing funds and they have reached the age of 55. Members can choose to draw a pension between 55 and 75. At 75 years of age the member is required to draw their pension. Additionally, the Fund provides benefits to survivors and children of a member.

The Commissioner accepts these benefits align with the sole purpose of providing retirement benefits or benefits in other allowable contemplated contingencies.

Therefore, the Fund satisfies this requirement.

Established in a foreign country

The Fund was established in the Country A.

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 is maintained only to provide benefits to employees from entities which participate in the Fund. These entities and their employees reside in the Country A.

Therefore, the Fund satisfies this requirement.

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) state:

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 Trustee exercises the central management and control of the Fund. The Trustee is not an Australian resident.

Therefore, the Fund satisfies this requirement.

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.

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

HM Revenue & Customs confirmed that the Fund is registered under Part 4 of the Finance Act 2004 (Country A) and tax relief and the Fund is generally exempt of Country A tax by virtue of section 186 of the Finance Act 2004 (Country A).

Therefore, the Fund satisfies this requirement.

Accordingly, it appears that the interest and dividends derived by the fund is exempt from income tax in the Country A, and the Fund will satisfy the exclusion from liability to withholding tax in respect of that income under section 128B(3)(jb).

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 (Amendment Act) introduced extra requirements that must be met for paragraph 128B(3)(jb) of the ITAA 1936 to apply. Generally, these extra requirements apply to income derived from 1 July 2019.

However, where a FSF derives income from debt and equity investments acquired on or before 27 March 2018, the FSF need not meet the additional requirements set out in subsection 128B(3CA) in respect of such assets until 1 July 2026 or thereafter.

Item 3 of Schedule 3 to the Amendment Act specifies that unless the income satisfies subitems 3(2) or (3), then subsection 128B(3CA) of the ITAA 1936 will apply:

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

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

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

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

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

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

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

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

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

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

Subsection 128A(3) of the ITAA 1936 provides:

(3)          For the purposes of this Division, a beneficiary who is presently entitled to a dividend, to interest or to a royalty included in the income of a trust estate shall be deemed to have derived income consisting of that dividend, interest or royalty at the time when he or she became so entitled.

Accordingly, a beneficiary of a trust estate will be deemed to have derived income for the purposes of paragraph 128B(3)(jb) when that beneficiary becomes presently entitled to the relevant income.

Application to the Fund's investments held on or before 27 March 2018

Investment A

The Fund is considered to meet the requirements of subitem 3(2) of Schedule 3 to the Amendment Act regarding the income derived from its investment in Investment A acquired on or before 27 March 2018 on the basis that:

•         Income derived by the Fund will relate to the shares and non-share interests held in Investment A;

•         As the Fund holds the investment in Investment A directly rather than through an interest in a trust estate, subsection 128A(3) does not apply to that particular Fund investment; and

•         The Fund started to hold the investment in Investment A before 27 March 2018.

The investment in Investment A will therefore satisfy subitem 3(2) of Schedule 3 to the Amendment Act and the Fund will be excluded from liability to withholding tax on dividend and non-share dividend income received from Investment A for the period starting 1 July 20XX to 1 July 20XX.

All other investments

All other investments held by the Fund on or before 27 March 2018 were held via an interest in trust estates. As part of the Fund's Direct Investments, Item 3(3) of Schedule 3 to the Amendment Act will apply. Accordingly, the Fund will be deemed to have derived income that consists of dividend, interest or royalty income to which the Fund is presently entitled pursuant to subsection 128A(3).

Investment B and Investment C

The Fund is an investor in Investment B and Investment C with its investments held via the following trusts:

•         Trust 1;

•         Trust 2; and

•         Trust 3.

It is necessary to consider whether the requirements of subitem 3(3) of Schedule 3 to the Amendment Act are satisfied. The Fund can be considered to meet the requirements of subitem 3 regarding income derived from Investment B and Investment C (via Trust 1, Trust 2 and Trust 3) on the basis that:

•         The Fund will be deemed to have derived income from Investment B and Investment C that consists of dividend, interest or royalty income pursuant to subsection 128A(3) when it becomes presently entitled to such income through its interests in Trust 1, Trust 2 and Trust 3;

•         The Fund started to hold its interest in Trust 1, Trust 2 and Trust 3 before 27 March 2018; and

•         Dividend, non-share dividends and interest that is included in income of the trust estates (Trust 1, Trust 2 and Trust 3) will relate to the shares held in Investment B and Investment C that were acquired by the trust estates before 27 March 2018.

Accordingly, the investments in Investment B and Investment C satisfy subitem 3(3) of Schedule 3 to the Amendment Act and therefore no withholding tax is be applicable in respect of interest, dividend or non-share dividend income derived via Trust 1, Trust 2 and Trust 3 for which the Fund is presently entitled to the period starting 1 July 20XX to 30 June 20XX.

Investment D and Investment E

The Fund is an investor in Investment D and Investment E, with its investments held via Trust 4.

The Fund is considered to satisfy the requirements of subitem 3(3) of Schedule 3 to the Amendment Act regarding the income derived from Investment D and Investment E on the basis that:

•         The Fund will be deemed to have derived income from Investment D and Investment E that consists of dividend, interest or royalty income pursuant to subsection 128A(3) when it becomes presently entitled to such income through Trust 4;

•         The Fund started to hold the interest in Trust 4 before 27 March 2018; and

•         Dividend, non-share dividends and interest that is included in the income of the trust estate (Trust 4) will relate to the shares held in Investment D and units held in Investment E that were acquired by the trust estate before 27 March 2018.

Accordingly, the investments in Investment D and Investment E satisfy subitem 3(3) of Schedule 3 to the Amendment Act and therefore no withholding tax will be applicable in respect of interest, dividend or non-share dividend income derived via Trust 4 for which the Fund is presently entitled for the period starting 1 July 20XX to 30 June 20XX.

Conclusion

The Fund will satisfy the exclusion from liability to withholding tax provisions in respect of the income derived from its Australian investments under section 128B(3)(jb) of the ITAA 1936, and subitem 3(3) of Schedule 3 to the Amendment Act.

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