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Edited version of private advice

Authorisation Number: 1052016451039

Date of advice: 4 August 2022

Ruling

Subject: Withholding tax

Question

Is the Fund excluded from liability to withholding tax on dividend income derived from its Australian investment 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 July YYYY - 30 June YYYY

The scheme commences on:

DD MM YYYY

Relevant facts and circumstances

BACKGROUND

1. The Fund was incorporated on DD MM YYYY outside of Australia.

2. The Fund is established, operated and maintained outside of Australia exclusively for the collective investment and reinvestment of funds of trusts which are established and maintained, and to which contributions are made, by the Company or an Affiliate as part of a Plan.

3. There are a number of sub-plans available under the Plan.

4. The Fund is subject to legislation and internal policies.

5. All benefits under the Plan are distributed solely from the Fund.

6. The Fund holds one Australian investment, and it was acquired before DD MM YYYY.

MANAGEMENT OF THE FUND

7. All board meetings are held outside of Australia.

8. A Committee has been appointed by the Board of Directors of the Fund (the Board) to assume the duties and responsibilities of the Fund's Trust Agreement.

9. The Trustee of the fund is located outside of Australia.

10. The Trustee is responsible for maintenance, investment and administration of the Fund.

11. In relation to the Plan, the Board may also appoint an individual, individuals or committee to serve as Plan Administrator.

12. The current administrator is also located outside of Australia.

13. The Plan Administrator holds duties, responsibilities and rights in respect of the Plan. They hold the authority do determine, amongst other things, eligibility, years of service, and payment of benefits under the plan.

14. The Board may remove the administrator at any time.

15. There is no indication that there is any contemplation of the Fund ending at a defined point in time and there is no expectation that the Fund will be discontinued.

DESCRIPTION OF THE PLAN

Common Benefits

Normal Date of Retirement

16. The first day of the month following (or coinciding with) the participants XXth birthday.

Participation under the plan

17. The Fund covers employees working for particular employers.

Contributions

18. Employers are required to make contributions to the Fund which are sufficient to finance the benefits provided by the Plan. Participants are generally not required or permitted to make any contributions to the Plan, however some of the plans do allow for employee contributions.

Service

19. All periods of Service credited to an Employee are aggregated.

20. In some circumstances where a Participant has had their employment terminated and they are reemployed, the amount of time between the termination date and reemployment date may count towards the aggregated service amount.

Distributions

21. Once a Participant has reached the applicable vesting requirement, they are entitled to receive a distribution of their benefit.

22. If a Participant terminates their employment (including on account of death) and the amount accrued at that time or at the end of any month thereafter, does not exceed $X they are entitled to have that benefit amount paid as a single lump sum. Alternatively, they can have the amount rolled over to another retirement plan.

23. If a participant receives a lump sum payment the distribution will be subject to taxes.

24. If a Participant has not satisfied the applicable Vesting Requirement upon his or her Termination of Employment, such Participant's vested interest in his or her benefit under the Plan shall have a value of XXXX ($X).

25. A spouse annuity begins on the death of the participant.

Death Benefit

26. The surviving Spouse or Domestic Partner of a Participant shall be entitled to benefits upon the Participant's death in accordance with the applicable plan.

Disability Benefits

27. The Fund provides disability benefits for participants.

Withholding Requirements

28. Any benefit payment made under the Plan will be subject to any applicable income tax withholding requirements.

Age XX

29. Regardless of whether a Participant has stopped working, they can elect to commence distribution of benefits following the Plan Year of which they turned XX.

Retirement

30. The retirement age of the participant is dependent on the plan and the age/years of service of the participant.

OTHER INFORMATION

31. The Fund provided further information to the Commissioner via a statement letter dated DD MM YYYY:

a.    The Fund is an indefinitely continuing fund established to provide retirement benefits to eligible members and was established in a country other than Australia;

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

c.     The Fund's central management and control is carried on outside of Australia by entities none of whom are Australian residents;

d.    No tax offset would be allowable for an amount paid to the Fund or set aside for the Fund; and

e.    The income of the Fund is not non-assessable non-exempt income of the fund because of Subdivision 880-C of the ITAA 1997.

32. The Fund is a resident of a country other than Australia.

Relevant legislative provisions

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

Income Tax Assessment Act 1936 Section 128D

Income Tax Assessment Act 1997 Section 118-520

Reasons for decision

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) 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:

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 DD MM YYYY. For the purposes of this private ruling, which only considers the Fund's only Australian investment which was acquired before DD MM YYYY, these extra requirements are not applicable.

THE FUND IS A NON-RESIDENT

The Fund was established, operated, and maintained outside 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 residentshas 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;

(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 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 governed by legislation and internal Fund policies. There is no indication that the Fund is to be wound up in the near future. There is sufficient evidence to accept that the Fund will continue to operate in accordance with the relevant governing legislation, internal Fund policies and the Fund will continue indefinitely to meet the obligations to pay benefits under the legislation and internal fund policies.

Further, the Fund has provided a statement to the Commissioner dated DD MM YYYY confirming its intention to indefinitely continue.

Therefore, the Fund satisfies this requirement.

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 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 from being capitalised.

In a later case, Mahoney v. Commissioner of Taxation (Cth) (1967) 41 ALJR 232; (1967) 14 ATD 419; 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 consists of all money and property received by the Trustee from those participating in the Plan. The Plan is a retirement plan which provides multiple sub-plans for eligible employees and participants. Common to each sub-plan are retirement, disability and death benefits for employees. The Plan is a defined benefit retirement plan which provides a fixed, pre-established benefit for members at retirement.

As both the key objective of the Fund and the operation of the Fund have the sole purpose of providing retirement benefits, the Commissioner accepts that the Fund is considered to a 'provident, benefit, superannuation or retirement fund'.

Therefore, the Fund satisfies this requirement.

The Fund was established in a foreign country

The Fund was established outside of Australia.

Therefore, the Fund was established in a foreign country and 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 outside of Australia to provide retirement benefits for employees of participants of the Fund.

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, 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

Paragraph 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 operations 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, paragraph 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 Board of Trustees are composed of non-residents of Australia and all of the decisions are undertaken outside Australia. This is supported by the fact that:

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

Therefore, the Commissioner is satisfied the Fund fulfills this requirement.

No amount paid to the Fund or set aside for the Fund has been or can be deducted under the ITAA 1936 or 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.

The contributors to the Fund, consisting of employees and employers, are based in Country Z.

As the contributors to the Fund are based outside of Australia, the contributions to the Fund are neither eligible for deductions nor allowed as offsets under the ITAA 1936 or ITAA 1997. Further, the Fund has confirmed no amount paid is deductible under ITAA 1997 or ITAA 1936.

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 for the purpose of subparagraph 128B(3)(jb)(i) of the ITAA 1936.

THE INCOME, CONSISTING OF 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 into Australia and receives dividend income directly from its single Australian investment. 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.

Therefore, the Fund will satisfy this requirement.

THE FUND IS EXEMPT FROM INCOME TAX IN THE COUNTRY IN WHICH THE NON-RESIDENT RESIDES

The Fund is exempt from income tax in a foreign country under legislation in the foreign country. Further, the Fund provided a letter to the Commissioner confirming the Fund is tax exempt.

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 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 is excluded from withholding tax in relation to dividend income derived from its Australian investment that it acquired before DD MM YYYY.

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