Edited version of private advice

Authorisation Number: 1051840056647

Date of advice: 24 May 2021

Ruling

Subject: Exemption from withholding tax for a foreign superannuation fund

Question

Is the Fund excluded from liability to withhold tax on interest, dividend and non-share dividend income derived from 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:

The relevant ruling period.

The scheme commences on:

The commencement date.

Relevant facts and circumstances

The Fund

The Fund was established in Country A.

The Fund's registered office is in Country A.

The Fund attests that its central management and control is carried on outside Australia by persons none of whom is an Australian resident.

The Fund is a trust established under its trust deed for the purpose of providing benefits to its Members, being Members in various Plans.

Broadly:

a.    Members will be able to withdraw their pensions from the Fund once Normal Retirement Age has been reached;

b.    Early retirement benefits may be paid between certain ages where elected to be obtained;

c.     Where the Member continues to be employed by the Company after the Normal Retirement Age, benefits may be drawn after their employment is terminated;

d.    Members who become disabled may draw their benefits from the Fund;

e.    Where no benefit has been drawn by a certain age, benefits will start to be paid to the employee; and

f.      Spouses, partners or an elected survivor may obtain the remaining accrued benefits of a Member on their death.

g.    The distribution of benefits are in accordance with the Plans. Broadly, this is calculated based on a Member's accrued benefit and is payable as an annuity.

All Plans under the Fund are defined benefit plans.

The Plans were open to eligible employees of the Company and/or Related Companies of the Company in Country A.

The Fund was established and is maintained only to provide benefits for individuals who are not Australian residents.

The Plans have a legal, contractual relationship with the Fund. The Plans outline the benefits, purpose, principles etc. of the Fund. Further, the Plans governs who was eligible to participate, how and when they can benefit and the various investment options.

The Fund may be terminated at any time by the Company. However, the Company fully intends to continue the Plans indefinitely. Further, the Trust Deed does not indicate an express termination date of the Fund.

Administration of the Fund

The Fund is a legal entity in which Members have a beneficial interest to the income of the trust, calculated in accordance with the Plan they are party to. Multiple plans are serviced by the Fund, meaning the income of the Fund is first allocated to the various plans, which then calculate and determine the benefits their respective Members are entitled to.

The Trustee calculates the benefits (in accordance with each of the Plans) and distributes benefits to the relevant Members via the Plans, despite the Members not holding units/ interests in the Fund.

The assets of the Fund are held, administered, invested and managed in all respects as a single trust fund even though portions of such assets may be attributable to different related companies and the employees of each, or to separate Plans maintained by the same related company or different related companies.

The Fund will receive any contributions paid to it in cash or in other property acceptable to it. All contributions so received together with the income and any other increment constitutes the Fund.

It is impossible, except as otherwise provided under the Fund's governing statute, at any time prior to the satisfaction of all liabilities with respect to the members under the applicable Plan or their beneficiaries, for any part of the Fund, other than such part as is required to pay taxes and expenses of administration of the applicable Plans, to be used for, or diverted to, purposes other than for the exclusive benefit of the members under the Plans or the beneficiaries.

Fund governance

The Fund is governed by the Fund's governing statute. The Company is solely responsible to assure that any Plan does not, in the acquisition or holding of securities or other property of the Company, violate any provision of the Fund's governing statute limiting the amount of such acquisition or holding.

The Plans have each designated the Administration Team as the named fiduciary and have vested in the Administration Team the authority to control and manage the operation of the Plans. The duties of the Administration Team include withdrawal or transfer of funds to facilitate the payment of benefits by the Plans.

The Administration Team is responsible to maintain and determine the appropriate share of the Fund held in respect of any such group of employees in the event that such maintenance or determination shall be required by any Plan, the Trust Deed or the operation of law. The determination by the Administration Team of the shares of the Fund held in respect of any such employee group is final and conclusive.

The Investment Team is responsible for the investment, custody, control, and management of assets of the Fund.

The Investment Team is the named fiduciary for investment matters, including the power to appoint or remove Investment Manager/s and to manage (including the power to acquire and dispose of) any assets of the Fund.

Members of the Investment Team are not residents of Australia.

Australian investments

The Fund has invested in Australian investments (collectively, "the Investments'). The Fund derives Australian sourced interest and dividend income from these Investments.

The Fund holds less than a 10% equity interest in the Investments.

The Fund attests that in regards that Investments, the total participation interest the Fund holds in the test entities would be less than 10% in the circumstances detailed in paragraph 128B(3CC)(b) at all relevant times.

The Fund holds less than 10% of the voting power in the Investments in all cases.

The Fund does not hold any right to appoint a person to a board, committee or similar, either directly or indirectly in respect of the Investments.

None of the directors of these test entities acts in accordance with the directions, instructions or wishes of the Fund. In addition, the Fund (or a representative of the Fund) is not part of any advisory committee to the test entities.

The Fund has not entered into or received any side letters, arrangements or agreements in respect of the Investments.

The Fund does not hold any veto rights on security holder votes in respect of the Investments.

The Fund does not hold any other influence over the Investments, potentially of a kind described in subsection 128B(3CD) of the ITAA 1936.

Other relevant facts

The Fund has not and cannot deduct amounts under either the Income Tax Assessment Act 1997 (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 Fund is exempt from taxation in Country A and is a resident of Country A for purposes of Country A's taxation.

Income of the Fund is not non-assessable non-exempt income because of:

(i)    Subdivision 880-C of the ITAA 1997, or

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

Relevant legislative provisions

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

Income Tax Assessment Act 1936 paragraph 128B(3CA)(a)

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

Income Tax Assessment Act 1936 paragraph 128B(3CC)(b)

Reasons for decision

Section 128B of the ITAA 1936 imposes liability to withholding tax on income derived by a non-resident that consists of dividend income (subsection 128B(1) of the ITAA 1936), interest income (subsection 128B(2) of the ITAA 1936) as well as other income prescribed in that section.

Subsection 128B(3) of the ITAA 1936 notes that section 128B of the ITAA 1936 will not apply to prescribed categories of income. Relevantly, paragraph 128B(3)(jb) 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) must also be met.

The Fund is a non-resident

The Fund is not a resident of Australia for tax purposes. Therefore, the Fund satisfies this requirement.

Superannuation fund for foreign residents

Superannuation fund for foreign residents is a defined term in the ITAA 1936. Subsection 6(1) of the ITAA 1936 states:

superannuation fund for foreign residents has the meaning given by subsection 995-1(1) of the Income Tax Assessment Act 1997.

Subsection 995-1(1) of the ITAA 1997 sets out the following:

superannuation fund for foreign residents has the meaning given by section 118-520.

The term 'superannuation fund for foreign residents' is defined in section 118-520 of the Income Tax Assessment Act 1997 (ITAA 1997) as follows:

118-520 Meaning of superannuation fund for foreign residents

(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 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.

Consequently, for the Fund to be considered a superannuation fund for foreign residents for the purposes of paragraph 128B(3)(jb) of the ITAA 1936, it must be established that:

•         the Fund is an indefinitely continuing fund

•         the Fund is a provident, benefit, superannuation or retirement fund

•         the Fund was established in a foreign country

•         the Fund was established and maintained only to provide benefits for individuals who are not Australian residents

•         The central management and control of the Fund is carried on outside of Australia by entities none of whom are Australian residents

•         No amount paid to the Fund or set aside for the Fund has been or can be deducted under the ITAA 1997, and

•         No tax offsets have been allowed or would be allowable for an amount paid to the Fund or set aside for the Fund.

The Fund is an indefinitely continuing fund

The term 'indefinitely continuing 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 general view is that an indefinitely continuing fund does not have to continue forever, but rather that the governing rules should not fix an express termination date.

The Fund is an indefinitely continuing fund. Neither the rules of the Fund nor and relevant law provides for winding up at a defined point in time. On this basis, the Fund is accepted to be indefinitely continuing.

The Fund is 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 1936 or the ITAA 1997. 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; (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:

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 contemplated 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 contemplated 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.

It is accepted that the Fund is a "provident, benefit, superannuation or retirement fund" on the basis that:

•         The Fund's sole purpose is to provide the relevant participant employees money benefits upon their reaching a prescribed age;

•         The Fund can be described as "provident" on the basis that it provides money benefits upon particular contingencies (e.g. death, ill-health and retirement);

•         The Fund provides benefits upon an employee's retirement or death or other cessation of employment, including to survivors;

•         The terms of the Fund (i.e. the Trust rules) are consistent with a superannuation fund and the terms are strictly adhered to;

•         The amounts collected by the Fund are not used for any purposes other than providing benefits to participants, former participants and their beneficiaries under the Fund and paying the reasonable expenses of administering the Fund; and

•         Contributions are made into the Fund by the participating employer.

•         Therefore, the Fund satisfies this requirement.

The Fund was established in a foreign country

The Fund has been established in a foreign country.

Therefore, the Fund satisfies this requirement.

The Fund was established and maintained only to provide benefits for individuals who are not Australian residents

The Fund was established to provide superannuation benefits to foreign nationals.

The Fund does not provide benefits to Australian residents. Accordingly, the Commissioner accepts that the Fund was established and is maintained only to provide benefits for individuals who are not Australian residents.

The Fund's central management and control is carried on outside Australia by entities none of whom is an Australian resident

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.

Furthermore, paragraphs 10 and 11 of Taxation Ruling TR 2018/5 Income tax: central management and control test of residency (TR 2018/5) states:

10. Central management and control refers to the control and direction of a company's operations. It does not refer to a physical location in which the control and direction of a company is located and may ultimately be exercised in more than one location.

11. The key element in the control and direction of a 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.

The central management and control of the Fund is carried out by the Investment Team as it is responsible for the investment, custody, control, and management of assets of the Fund. Furthermore, the Fund attests that the central management and control of the Fund is carried on outside Australia.

The Commissioner is satisfied in these circumstances that the central management and control of the Fund is in a foreign country and is carried out by individuals who are not Australian residents.

Therefore, the Fund satisfies this requirement.

No amount paid to the Fund or set aside for the Fund has been or can be deducted under the ITAA 1997 and no tax offset has been allowed or is allowable for such an amount

Pursuant to subsection 118-520(2) of the ITAA 1997, a fund is not a superannuation fund for foreign residents if:

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

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

No amount paid to the Fund or set aside for the Fund has been or can be deducted (and no tax offset has been allowed or is allowable for such an amount) under the ITAA 1936 or 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 income, consisting of interest, dividend or non-share dividend income, is derived by the Fund

Subsection 128B(3CA) of the ITAA 1936, along with paragraph 128B(3)(jb) of the ITAA 1936 requires the superannuation fund for foreign residents to derive the interest, dividends or non-share dividends paid by Australian resident companies.

The Fund invests directly into Australia and receives interest, dividend or non-share dividend income directly from its Australian investments. It will, therefore, derive the relevant income for the purposes of subsection 128B(3CA) of the ITAA 1936 and paragraph 128B(3)(jb) of the ITAA 1936.

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

The Fund is exempt from income tax in the foreign country.

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) to apply. Generally, these extra requirements apply to income derived from 1 July 2019.

Relevantly:

• The fund must satisfy the 'portfolio interest test' in relation to the test entity (subsection 128B(3CC)
• The fund must satisfy the 'influence test' (subsection 128B(3CD) in relation to the test entity, and
• The income cannot otherwise be non-assessable non-exempt income of the Fund because of:

-                    Subdivision 880-C of the ITAA 1997, or

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

The Fund satisfies the 'portfolio interest test'

Subsection 128B(3CC) 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.

As per the facts, the Fund does not hold more than 10% of the total participation of any of its Australian Investments.

In these circumstances, the Commissioner is satisfied that the total participation interest the Fund holds in the test entities:

•         is less than 10% pursuant to paragraph 128B(3CC)(a) at all relevant times; and

•         would be less than 10% in the circumstances detailed in paragraph 128B(3CC)(b) at all relevant times.

The Fund therefore satisfies the 'portfolio interest test' in respect of its Australian Investments.

The Fund does not have influence of a kind described in subsection 128B(3CD) of the ITAA 1936 in relation to the test entity at the time the income was derived

Subsection 128(3CD) 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), 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), 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 Fund's Australian Investments:

•         The Fund does not hold any right to appoint a person to a board, committee or similar, either directly or indirectly in respect of the Investments.

•         None of the directors of these test entities acts in accordance with the directions, instructions or wishes of the Fund. In addition, the Fund (or a representative of the Fund) is not part of any advisory committee to the test entities.

•         The Fund has not entered into or received any side letters, arrangements or agreements in respect of the Investments.

•         The Fund does not hold any veto rights on security holder votes in respect of the Investments.

•         The Fund does not hold any other influence over the Investments, potentially of a kind described in subsection 128B(3CD) of the ITAA 1936.

Accordingly, the Fund does not have influence of a kind described in subsection 128(3CD) of the ITAA 1936 in respect of these investments. The Fund does not have capacity to influence (either directly or indirectly) the day-to-day management of the operations of their investments.

Consequently, the Commissioner accepts that the Fund does not have influence of a kind described in subsection 128B(3CD).

The income received by the Fund is not non-assessable and non-exempt income of the Fund because of Subdivision 880-C of the ITAA 1997 or Division 880 of the Income Tax (Transitional Provisions) Act 1997

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.

Income derived by the Fund would not be otherwise treated as not assessable and not exempt income by virtue of the above provisions. Accordingly, the above exclusion should not apply to exclude the Fund from entitlement to the withholding tax exemption for superannuation funds for foreign residents.

Conclusion

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

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