Edited version of private advice

Authorisation Number: 1051832522941

Date of advice: 29 April 2021

Ruling

Subject: Superannuation fund for foreign residents - withholding tax exemption

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 under paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 ( ITAA 1936)?

Answer

Yes

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Entity 1

Entity 1 is a foreign local government authority.

Entity 1 is located overseas.

Entity 1 has established the Fund which is a defined benefit pension plan.

The Fund has invested in Australian assets.

The Fund Rules

The Fund is created under the Foreign Legislation.

The Fund's members consist of the employees of Entity 1.

The Fund, as per the Foreign Legislation, is controlled by a Board of Trustees (the Board) composed of members of Entity 1 and the Fund. The Board makes decisions with respect to the Fund.

The Fund's investments are controlled by an administrator.

The Fund is the owner, legally and beneficially, of the Australian assets.

The Fund also contains advisory committees which represent fund members in the decisions made about the Fund.

Under the Foreign Legislation, participants in the Fund make contributions to the Fund from their compensation for employment.

The following benefits are available to all members of the Fund:

a.    Pre-retirement death benefits

b.    Retirement benefits

c.     Disability Benefits.

A member is entitled to retirement benefits once they have satisfied the age and service requirements.

Any member with at least X years of service (the minimum period where a member has a vested interest in pension from the Fund) and terminating their employment may leave their contributions in the plan until they reach 60 years of age (aka vested/deferred retirement).

If a member leaves their employment before the member has attained a vested interest in a pension, the employee may have their contributions refunded together with interest. If the member leaves their employment with a vested interest in a pension, they may choose whether they will receive a refund of their contributions or leave the contributions in the fund to obtain a pension upon retirement.

Any amounts withdrawn by the employee from the Fund and not transferred to an eligible retirement fund would be subject to income tax.

Under the Foreign Legislation, if the Fund is terminated, the assets of the Fund will be distributed by the Board and Entity 1 Administrators to the members.

If a member is found guilty of specific crimes against the Fund, they shall forfeit all rights and benefits under the plan.

In accordance with the Foreign Legislation, where an employee terminates or has their employment terminated, the employees may transfer the balance of their pension accounts to an eligible retirement plan.

Other relevant facts

The Fund is a resident of the Foreign Country.

The Fund is exempt from taxation in the Foreign Country in which it resides. This has been confirmed by the Foreign Government.

The Board of the Fund is located outside of Australia and has its meetings outside of Australia.

The Fund will receive interest income from Australian investments, along with dividend and non-share dividend income from companies who are residents of Australia for tax purposes.

Amounts paid to, or set aside for, the Fund have not been and cannot be deducted under the Income Tax Assessment Act 1997 (ITAA 1997).

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 Fund's income from its Australian investments is not 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.

The Fund's Australian Investments

The Fund has invested in Australian equity investments (as detailed in Appendix 1). These equity investments have the following characteristics:

•         All investments are in entities listed on the Australian Securities Exchange (ASX).

•         The Fund holds less than 10% of the total equity interests on issue of each Australian company.

•         The Fund has no involvement in the day to day management of the business of any of the Australian companies.

•         The Fund has no right to appoint a director to the Board of Directors of the Australian company.

•         The Fund has no right to representation on any investor representative or advisory committee (or similar) of the Australian company.

•         The Fund has no ability to direct or influence the operation of the Australian company or trust outside of the ordinary rights conferred by the equity interest held.

•         The Fund only holds rights to vote in proportion to its equity interest in each Australian company.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 Section 118-520

Reasons for decision

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 under paragraph 128B(3)(jb) of the ITAA 1936?

Summary

The Fund is excluded from liability to withholding tax on its interest, dividend and non-share dividend income 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 a resident of Foreign Country.

Therefore, the Fund satisfies this requirement.

The Fund is 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 to provide retirement, disability and death benefits to its members. The Fund can only be dissolved by an amendment to the Foreign Legislation.

Entity 1 has advised that the Fund is an indefinitely continuing fund.

There is sufficient evidence to accept that the Funds will continue to operate for an indefinite period of time.

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) refers to these authorities to provide 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 benefits to its members as follows:

1. Pre-retirement death benefits
2. Retirement benefits
3. Disability benefits

In addition to the above, members who leave their employment before they have attained a vested interest in the Fund can either receive a refund of contributions together with interest, or alternatively can have their contributions and interest transferred to another retirement fund. If an employee has a vested interest in a pension from the Fund, and the employee leaves their employment, they may choose to receive a refund of their contributions, defer their pension with the Fund until retirement age, or transfer their funds to another retirement fund.

There are no benefits provided by the Fund to members and their beneficiaries beyond those as prescribed above. The Commissioner accepts that the alternate circumstances of access to the funds, being incapacity, death, the transfer of funds to another retirement fund, and a return of contributions in very limited circumstances, align to the contemplated contingencies of a provident, benefit, superannuation or retirement fund.

Therefore, the Fund satisfies this requirement.

Established in a foreign country

The Fund was established in 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 in Foreign Country for its members, being employees of Entity 1, to provide retirement benefits. These employees reside in Foreign Country.

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 Fund is managed by the Board and the administrator. The Board is composed of representatives of the employees of Entity 1. The Board makes decisions regarding the operation of the Fund. The administrator conducts the administrative duties of the Fund, including the investing of the Fund's assets.

There are also a several advisory committees which represent Entity 1's employees and their pension interests.

None of these entities which make or participate in decisions with respect to the Fund are Australian residents.

Based on the above, it is reasonable to conclude that the central management and control of the Fund occurs outside of Australia by entities that are not Australian residents.

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.

Therefore, the Fund satisfies this requirement.

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 income, consisting of interest, dividend or non-share dividend income, is derived by the Fund

In order to be excluded from withholding tax under paragraph 128B(3)(jb) of the ITAA 1936, the interest, dividend and/or non-share dividend income must be derived by a non-resident superannuation fund for foreign residents.

The Fund is the legal and beneficial owner of the Australian investments and derives dividend income from those Australian investments.

Therefore, the Fund satisfies this requirement.

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

The Foreign Government has stated that the Fund is a resident of Foreign Country for tax purposes and is exempt from taxation.

Therefore, the Fund satisfies this requirement.

Subsection 128(3CA) of the ITAA 1936

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

Relevantly:

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

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

iii.            The income cannot otherwise be non-assessable non-exempt income because of:

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

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

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 holds less than 10% of the total participation interests in each Australian company in which it has invested. Further, the Fund holds less than 10% of the total participation interests in each Australian company or trust in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936.

The Fund therefore satisfies the 'portfolio interest test' in respect of its current investments.

The Fund satisfies the 'influence test'

Subsection 128(3CD) of the ITAA 1936 states:

A superannuation fund has influence of a kind described in this subsection in relation to the test entity at a time if any of the following requirements are satisfied at that time:

(a) the superannuation fund:

(i) is directly or indirectly able to determine; or

(ii) in acting in concert with others, is directly or indirectly able to determine;

the identity of at least one of the persons who, individually or together with others, make (or might reasonably be expected to make) the decisions that comprise the control and direction of the test entity's operations;

(b) at least one of those persons is accustomed or obliged to act, or might reasonably be expected to act, in accordance with the directions, instructions or wishes of the superannuation fund (whether those directions, instructions or wishes are expressed directly or indirectly, or through the superannuation fund acting in concert with others).

As such, there are two distinct sub-tests within the influence test.

Sub-test 1 of the influence test, as contained in paragraph 128B(3CD)(a) of the ITAA 1936, assesses whether the Fund is able to determine the identity of at least one of the persons who, individually or together with others, makes or is reasonably expected to make, decisions comprising the control and direction of the test entity's operations. This includes situations where the Fund is able to act in concert with others to determine the identity of a relevant decision-maker in the test entity.

Sub-test 1 also extends to situations where the Fund, in its own right, holds the ability to approve or veto decisions which go to the control or direction of the test entity.

Sub-test 2 of the influence test, as contained in paragraph 128B(3CD)(b) of the ITAA 1936, assesses whether at least one of the relevant decision-making persons of the test entity is accustomed or obliged to act, or might reasonably be expected to act, in accordance with the directions, instructions or wishes of the Fund.

Relevantly, in respect of the Australian investments:

a.    Neither the Fund, nor any related party, has involvement in the day to day management of the business of any of the Australian companies.

b.    Neither the Fund, nor any related party, has the right to appoint a director to the Board of Directors of the Australian company.

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

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

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

Based upon the above, the Commissioner accepts that the Fund does not have influence of a kind described in subsection 128B(3CD) of the ITAA 1936.

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 Fund is excluded from withholding tax in relation to interest, dividend and non-share dividend income derived from its current Australian investments.

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