Edited version of private advice

Authorisation Number: 1051840179565

Date of advice: 20 May 2021

Ruling

Subject: Foreign super fund - exemption from income tax/withholding tax

Question

Is the Fund excluded from liability to withhold tax on dividend income derived from its Australian investments (listed in the facts and circumstances of this Ruling) in accordance with paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

This ruling applies for the following period:

1 January 20XX to 31 December 20XX

The scheme commences on:

1 January 20XX

Relevant facts and circumstances

Background/creation:

The Fund comprises Scheme 1 and Scheme 2.

Scheme 1 - established for all new employees, and members of the Scheme 2 who moved to the scheme on a certain date.

Scheme 2 - closed to new members on a certain date.

Both are funded schemes with contributions received from the employees and employer, which are then invested to assist with meeting the benefit requirements in future years.

Plan management:

The Fund is governed and administered under the relevant government legislation.

The Fund is administered by a Pension Team on behalf of the Treasurer (the Administrator of the schemes).

The Fund is managed by Management Committee. It sets the investment strategy, appoints and instructs the Actuary and investment and legal advisers, and works to ensure that benefits are paid to members in accordance with law.

The Management Committee appoints and terminates investment managers with the approval of the relevant Minister.

The Management Committee consists of employer nominated members, employee nominated members and an independent chairperson.

Purpose:

The purpose of the Fund is the provision of retirement pensions and other benefits for and in respect of employees covered under the Rules.

Membership:

At the beginning of 20XX most active members of the Scheme 2 moved to the Scheme 1 for future accrual. At the end of 20XX, the active membership of the Fund comprised of x,xxx Scheme 1 members and xxx Scheme 2 members, x,xxx in total.

New employees cannot join the Scheme 2, any new employees from a certain date are admitted to Scheme 1. Most current members of Scheme 2 were subject to automatic transition to Scheme 1 if they met certain criteria and became 'active members' of the Scheme 1.

Eligibility:

Membership of the Fund is available to all Government employees.

Contributions:

The employer pays a contribution rate of a percentage of pensionable earnings for all members of the Fund. The employer contribution rate is capped in legislation at a percentage of pensionable earnings.

Members can make additional voluntary contributions (AVCs) to increase their annual pension and any lump sum. AVCs will also increase any survivor benefits in the event of death.

Benefits:

Scheme 1

Scheme 1 is calculated at a rate of the amount of that year's pensionable earnings (and any notional pensionable earnings) the member is paid. The accrual rate may be subject to change following an actuarial valuation.

If a member has to leave work due to illness or injury, they may be entitled to receive immediate payments of their benefits.

To qualify for ill health benefits the member must have at least 2 years' service in the Scheme and their employer, on an opinion from an Independent Occupational Health Advisor, must be satisfied that:

•         they are unlikely to be able to perform their current duties due to ill health or injury; and

•         they meet the criteria for one of the categories of ill health pension.

A member of the scheme will receive immediate life cover and a pension for their spouse, civil partner, co-habiting partner or dependent, and any eligible children in the event of their death. A lump sum will also become payable if the member dies whilst an active member.

If a member dies, a lump sum is paid to an individual(s) as disclosed on the completed Expression of Wish form.

Scheme 2

The final salary pension is calculated using the pensionable service that a member has accumulated to the date they leave the scheme and their final salary.

The accrual rate is the proportion of earnings that the scheme pays for each year of service. The rate is dependent on what type of member and the set of regulations that relate to their membership in the scheme.

If a member dies a pension will be payable to their widow, widower, surviving civil partner or dependents.

Lump sum payments are only available on retirement.

Central management and control:

The central management and control of the Fund is not carried out in Australia.

Wind up and insolvency:

Legislation states that the Fund operates under a provision to secure protection against costs or risks with the winding up or liquidation of the employer. Further, the Fund Rules and Trust Deed do not specify a date on which the trust must be wound up.

Tax status:

The Fund is an approved pension scheme under the provisions of the relevant State's law and is exempt from income tax in respect of income derived from investments and deposits of the scheme.

Australian investments:

The Fund provided a list of its Australian investments (all are shares).

The investments were acquired prior to 27 March 2018.

The investments are Australian equity investments. These equity investments have the following characteristics:

a.    All investments are listed on the Australian Securities Exchange (ASX).

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

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

d.    The Fund has no right to appoint a director to the Board of Directors of the Australian company or equivalent role in a trust.

e.    The Fund has no right to representation on any investor representative or advisory committee (or similar) of the Australian company, or equivalent role in a trust.

f.      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.

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

Relevant legislative provisions

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

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or DPT tax benefit in connection with an arrangement.

If Part IVA applies the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: 'Part IVA: the general anti-avoidance rule for income tax'.

Reasons for decision

These reasons for decision accompany the Notice of private ruling for The Fund.

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Summary

The Fund is excluded from liability to withhold tax on dividend income derived from its 'Australian Investments' as listed in the facts in accordance with paragraph 128B(3)(jb) of the ITAA 1936.

Detailed reasoning

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.

It is noted that 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 from 1 July 2019 onwards. These extra requirements apply only to assets which were acquired after 27 March 2018. As per the facts, the Fund's investments were acquired before 27 March 2018, therefore these extra requirements are not applicable.

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.

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 rules of the Fund do not provide for winding up at a defined point in time. The relevant legislation states that the Fund operates under a provision to secure protection against costs or risks with the winding up or liquidation of the employer. On that basis, the Fund is accepted to be indefinitely continuing. 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 1936 or the ITAA 1997.

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 (i.e. immediate annuities, deferred annuities, etc as explained above);
• 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 and children of the employee;
• The terms of The Fund(i.e. the Trust rules) are consistent with a superannuation fund and the terms are strictly adhered to (evidenced by the fact that the terms of The Fund are enacted in law and violation of them could lead to criminal or civil sanctions);
• 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, but in this case not exclusively.

Therefore, The Fund satisfies this requirement.

Established in a foreign country

The Fund has been governed and administered under the relevant legislation of the State. Furthermore, the trustee and administrator of the Fund attests that the Fund has been established in a country outside Australia.

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 provided benefit to members who were employees in the State. 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.

It is considered that the possibility of a very small number of members being returned residents or becoming Australian residents after ceasing eligible employment is incidental and should not be taken to conclude that the Fund, in this case, has not been established and is not maintained only to provide benefits for non-residents, based on the rules and operation of the Fund.

Therefore, the Fund satisfies this requirement.

Central management and control (CM&C) 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 on outside of Australia.

The Commissioner is satisfied in these circumstances that the central management and control of the Fund 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 for the purposes of subparagraph 128B(3)(jb)(i) of the ITAA 1936.

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 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

As per the facts provided the Fund is an approved pension scheme under the relevant State's law and is therefore entitled to exemption from income tax in respect of income derived from investments and deposits of the scheme.

Therefore, the Fund satisfies this requirement.

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.

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 liability to withhold tax on interest, dividend and non-share dividend income derived from its investments in Australia as listed in the facts.

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