Edited version of private advice

Authorisation Number: 1052013681568

Date of advice: 28 July 2022

Ruling

Subject: Foreign superannuation fund - withholding tax exemption

Question

Is the Fund excluded from liability to withholding tax on its dividend income derived in respect of its Australian investment in X Company shares acquired on or before 27 March 20XX under 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

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

1.    The Fund was established in a foreign country under a Trust Agreement between an Association and a Union.

2.    The Fund has confirmed that:

a.    the Fund is an indefinitely continuing Fund and a provident, benefit superannuation or retirement Fund,

b.    the Fund was established in a country other than Australia,

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

d.    the central management and control of the Fund is carried on outside Australia by entities none of whom is an Australian resident,

e.    an amount added to the Fund or set aside for the Fund has not been or cannot be deducted under the Income Tax Assessment Act 1997 ('ITAA 1997') or the ITAA 1936,

f.      a tax offset has not been allowed or is not allowable for such an amount, and

g.    the income of the Fund is not non-assessable non-exempt income of the fund because of either

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

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

3.    The Fund provides retirement, disability and death benefits to members of the Union and other plan participants employed by the members of the Association who retire or terminate employment on or after 1 July 20XX.

4.    The Fund is a non-contributory defined benefit plan, meaning participants cannot contribute to the Fund, and is designed to provide retirement benefits to participants of the Fund.

5.    The Fund consists of only one Pension Plan ('the Plan') for retirement benefits.

6.    A person becomes a participant of the Fund on the day their employer is required to make contributions to the Fund on their behalf.

7.    The Fund provides a specific monthly pension benefit amount on retirement that is fixed at the time of retirement based on credited service and is not affected by the investment performance of the assets of the Fund.

8.    Credited service is used to determine the amount of pension benefits.

9.    A participant is vested (i.e. will not lose their rights to pension benefits) when they have earned 5 years of eligibility service or when they reach normal retirement age (generally age 65) while still an active participant.

10.  Eligibility service is used to determine when a participant qualifies to receive pension benefits.

11.  Participation in the Fund continues until a participant stops earning credited service because of a break in service.

12.  The Fund is financed by contributions made by contributing employers to the Fund. The Fund's actuary determines the amount of contributions that must be made to fund the benefit requirements for the Fund. Assets of the Fund are invested by investment managers chosen by the Trustees. There are no employee contributions made to the Fund.

13.  Before 1 January 19XX, participants were eligible to receive one year of eligibility service for each calendar year in which they had at least a certain number of hours of covered employment.

14.  After 31 December 19XX, participants earn a year of eligibility service for each calendar year based on their hours of covered employment.

15.  Normal pension benefits are payable at the later of retirement at age 65 or the fifth anniversary as a non-active participant. Non-active participation is where the employer has stopped making any payments to the scheme for the participant.

16.  From 1 January 20XX, the amount of normal monthly pension benefit is calculated using a formula.

17.  If a participant is single, they will automatically receive a single life pension benefit for as long as they live.

18.  If a participant is married, they will either be eligible for:

a.    a reduced, actuarially equivalent 50% joint and survivor pension benefit, or

b.    if a participant has a qualifying spouse, an enhanced 50% joint and survivor pension benefit, unless they and their spouse, with his or her written and notarized consent, elect otherwise.

19.  Subject to specific conditions, the Fund provides early pension payments, disability pension, deferred pension, late retirement benefit, survivor's benefits and a one-time covid assistance payment.

20.  The Fund is administered under provisions of legislation.

21.  Pursuant to the Trust Agreement, the Fund is managed by a board of trustees ('the Board'). The Board consists of 10 members, 5 appointed by the Association and 5 by the Union.

22.  The Trust Agreement does not specify a date which the Fund must be wound up. It provides that the Trust can be terminated:

a.    if it is in the Trustees' opinion that the Fund is inadequate to carry out the intent and purpose of the Trust agreement or meet the payments that are due or becoming due under the Trust Agreement to persons already drawing benefits,

b.    there are no individuals living who can qualify as employees, or

c.     by operation of law.

23.  The Fund has provided a statement from its countries tax authority which states that the Fund is exempt from taxation in that country and is a resident of that country for taxation purposes.

24.  The Fund is in receipt of Australian sourced income in the form of dividends from an Australian ASX listed company, X Company.

25.  In respect of the Fund's investment in X Company:

a.    the Fund does not hold more than 10% of the total participation interests in each entity in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936,

b.    neither the Fund, nor any related party of the Fund, has involvement in the day-to-day management of the business of the Australian investment,

c.     neither the Fund, nor any related party of the Fund, holds any right to appoint a person to a board, committee or similar, either directly or indirectly, of the Australian investment,

d.    neither the Fund, nor any related party, holds the right to representation on any investor representative or advisory committee (or similar) of the Australian investment,

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

f.      the Fund has not entered into or received any side letters, arrangements or agreements, and

g.    the Fund does not hold any veto rights on security holder votes.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1936 section 128B

Income Tax Assessment Act 1936 subsection 128B(1)

Income Tax Assessment Act 1936 subsection 128B(2)

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

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

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

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

Income Tax Assessment Act 1936 section 128D

Income Tax Assessment Act 1997 section 118-520

Income Tax Assessment Act 1997 subdivision 880-C

Income Tax Assessment Act 1936 subsection 995-1(1)

Income Tax (Transitional Provisions) Act 1997 division 880

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.

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 the Fund's investments in X Company's shares were acquired on or before 27 March 2018, these extra requirements are not applicable.

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

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 residentshas 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 was created in a foreign country to provide retirement benefits to its employees in that country.

The 'money or property set aside and invested' are contributions made to the Trust by employers of Fund participants and income from investments using those contributions from employers of Fund participants.

The Board has provided an attestation that confirms that the Fund is an indefinitely continuing fund and the Plan does not indicate that the Fund will end.

Therefore, the Fund satisfies this requirement.

The Fund is a provident, benefit, superannuation or retirement fund

The phrase 'a provident, benefit, superannuation or retirement fund' under subparagraph 118-520(1)(a)(ii) 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; (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.

The Fund is a multiple-employer retirement plan that provides defined benefits for members of the Union and the Association.

The Fund provides retirement benefits to its members upon the satisfaction of eligibility requirements based upon their age and years of service which are paid upon and following retirement. It also provides disability benefits and death benefits where a member dies before retirement.

The alternate circumstances of access in this case, being death and disability, align to the contemplated contingencies of a provident, benefit, superannuation or retirement fund.

Therefore, the Fund will satisfy this requirement.

The Fund was established in a foreign country

The Fund was 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 and is maintained only to provide benefits to retirement, disability and death benefits to members of the Union and other fund participants employed by the members of the Association and other employers in the construction industry within the jurisdiction of the Union.

The Fund has provided a statement that it was not established to provide benefits to individuals that are 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.

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 in respect of the central management and control (CM&C) of a superannuation fund:

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 Australia by a 10-member Board of Trustees made up of employer and union representatives.

Trustees have the discretion to interpret provisions of the Plan to determine eligibility and Plan benefits and to make rules to implement the Plan. They also have the authority to resolve questions concerning the Plan and to authorise payment of benefits.

Trustees also have the power to invest and re-invest the principal and income of the Fund.

The members of the Board of Trustees all reside in the foreign country in which the Fund was created.

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.

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.

An amount paid to the Fund or set aside for the Fund has not been and cannot be deducted under the ITAA 1997. A tax offset has not been allowed nor would be allowable for any amount paid to the Fund or set aside for the Fund.

Therefore, the Fund will satisfy 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 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 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 under foreign legislation from taxation on the interest, dividend and non-share dividend paid by Australian companies in the foreign country.

Therefore, the Fund will satisfy 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 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

As all the requirements of paragraph 128B(3)(jb) of the ITAA 1936 are satisfied, the Fund will be entitled to an exemption from withholding tax on dividend income derived in respect of X Company shares acquired on or before 27 March 2018 under paragraph 128B(3)(jb) of the ITAA 1936.

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