Edited version of private advice

Authorisation Number: 1052082083125

Date of advice: 18 April 2023

Ruling

Subject: International issues - superannuation funds for foreign residents

Question

Is the Fund exempt from liability to withholding tax on its dividend income derived from Australian investments acquired before 27 March 2018 under paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

This ruling applies for the following periods:

XX Month XXXX to XX Month XXXX

The scheme commenced on

XX Month XXXX

Relevant facts and circumstances

The Fund was established in a country outside Australia.

The Fund provides pension benefits for participating employees in the Plan.

The financing of pension benefits is based on contributions from employers, employees, and investment income.

All contributions made to the Fund are held in trust and managed by the Trustees for the exclusive benefit of qualified participants.

The investments and loans of the Fund's assets will be restricted to those permitted by the relevant Act.

The Fund is a registered pension trust as defined in the relevant Actand is not subject to income taxes in that country.

The Fund is governed by the Plan Rules.

Employees can participate in the Plan if they work for a contributing employer.

Employees become participants in the Plan upon the earliest of the following dates:

•                     Employees' contributions are remitted on their behalf by a contributing employer, or

•                     Completion of specified hours of employment, or

•                     Any earlier date specified by the relevant law.

If an employee works for two or more different contributing employers during a calendar year, the employee will accrue pension benefits as if all the work had been done for one employer.

If a contributing employer fails to make the required contributions, The Plan cannot be continued for the employees of such employer.

The participation of a contributing employer terminates when:

•                     the employer is no longer obligated to make contributions to the Fund on the basis required by the Trustees; or

•                     the employer fails to pay an amount due to the Fund, and termination is deemed appropriate by the Trustees; or

•                     the employer fails to comply with administrative procedure adopted by the Trustees and termination is deemed appropriate by the Trustees.

Employees' Plan participation terminates at the end of a period of specified consecutive months during which no contributions were made to the Fund on their behalf and they submit a written request to the Trustees to terminate their Plan participation.

The Plan offers following pension benefits:

•                     Normal pension/retirement - age 65

•                     Early retirement - at least age 55

•                     Deferred pension - at normal retirement age or elect to receive a reduced benefit at any time after age 55

•                     Disability pension- whenbecoming permanently and totally disabled

•                     Death benefits - upon death

Employees have an option to transfer the commuted value of their pension to another pension plan subject to the requirements of the applicable law.

Australian Investment

The Fund derives dividend income from their Australian investment acquired before 27 March 2018.

Confirmation Statement

The Fund provided a statement confirming that:

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

•                     the Fund was established in a country other than Australia,

•                     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 of Australia by entities none of whom are Australian residents,

•                     no amount paid to/set aside for the Fund can be deducted under the Income Tax Assessment Act 1997 (ITAA 1997) or ITAA 1936,

•                     no tax offsets would be allowable for an amount paid to the Fund or set aside for the Fund, and

•                     the income of the Fund is not NANE income of the Fund because of either:

-              Subdivision 880-C of the ITAA 1997, or

-              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 section 128D

Income Tax Assessment Act 1997 section 118-520

Income Tax Assessment Act 1997 subdivision 880-C

Income Tax Assessment (Transitional Provisions) Act 1997 Division 880

Reasons for decision

Question

Summary

The Fund is a non-resident superannuation fund for foreign residents for the purposes of section 118-520 of the ITAA 1997 and is exempt from income tax in the country outside Australia. Therefore, the Fund is exempt from liability to withholding tax on its dividend income derived from the Australian investment acquired before 27 March 2018 under 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, interest income 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 exemption from withholding tax for interest, dividends and non-share dividends derived from Australian investments by a non-resident that is a superannuation fund for foreign residents (subject to the satisfaction of certain conditions).

Paragraph 128B(3)(jb) of the ITAA 1936 excludes interest, dividend and/or non-share dividend income from withholding tax where that income:

•                     is derived by a non-resident that is a superannuation fund for foreign residents; and

•                     consists of interest, or consists of dividends or non-share dividends paid by a company that is a resident; and

•                     is exempt from income tax in the country in which the non-resident resides.

Each of these requirements is considered below:

Income is derived by a non-resident that is superannuation fund for foreign residents

The Fund was established in the foreign country and is not a resident of Australia for income tax purposes.

The term 'superannuation fund for foreign residents' is defined in section 118-520 of the 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

An indefinitely continuing fund

The term '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 assets of the Fund, being funded by the employer and employee contributions and investment earnings, constitute a fund as they are money or investments set aside and invested.

The term an 'indefinitely continuing fund' in subparagraph 118-520(1)(a)(i) of the ITAA 1997 is not defined.

The Australian Oxford Dictionary defines 'indefinite' as: 1 vague, undefined. 2 unlimited... and 'indefinitely' as: 1 for an unlimited time... 2 in an indefinite manner.

The requirement that the fund be 'indefinitely continuing' simply means that the fund must not have a specific termination date.

The Fund has been in operation since it was established and does not have a specific termination date. Further, it is the intention of the Trustees to continue the Plan into the foreseeable future.

Therefore, the Fund is considered to be an indefinitely continuing fund within the meaning of subparagraph 118-520 (1)(a)(i) of the ITAA 1997.

A provident, benefit, superannuation, or retirement fund

None of the four descriptors 'provident, 'benefit', 'superannuation' or 'retirement fund' in subparagraph 118-520(1)(a)(ii) of the ITAA 1997 are defined. However, the terms have, however, 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.

Having regard to the Plan Rules, it is considered that the Fund is a 'provident, benefit, superannuation, or retirement fund' as that phase has been interpreted by the relevant authorities. The purpose of the Fund is to provide participating employees with retirement benefits as well as disability and death benefits. Participating employees are eligible for a benefit upon reaching any of the following criteria:

•                     Normal retirement age at age 65,

•                     Early retirement pension (for reduced benefits) at age 55,

•                     Deferred pension at normal retirement age but can elect to start receiving a reduced benefit after age 55,

•                     Disability pension when participants become permanently and totally disabled with at least specified hours of covered employment and are not eligible to retire on a normal pension, or

•                     Upon death

The retirement pension and death benefits available to participating employees in respect of their contributions and years of service are a provision by the Fund for their retirement, disability, or death. Further, the Commissioner accepts the alternate circumstances of access in this case, such as, portability option and survivor benefits.

Therefore, the Fund satisfies the definition of a 'provident, benefit, superannuation, or retirement fund in subparagraph 118-520(1)(a)(ii) of the ITAA 1997.

Fund was established outside Australia and is maintained at that time only to provide benefits for individuals who are not Australian residents

The Certificate of Registration issued by the relevant official Department confirms the Fund was established in the foreign country to provide pension benefits for participants in the Plan.

Despite none of those participants is Australian resident, it is considered that a small number of participants may be returned residents or becoming Australian residents after ceasing eligible employment. This is incidental and should not be taken to conclude that the Fund has not been established and is maintained at that time only to provide benefits for non-residents, based on the Plan Rules.

Therefore, the Fund satisfies the requirements in paragraphs 118-520(1)(b) and (c) of the ITAA 1997.

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 governing body of the Fund is the Board of Trustees none of whom is an Australian resident. The responsibility for high-level decisions is vested in the Board of Trustees including the authority to amend or revise the Rules. Further, the statement from the Fund confirms that the CM&C of the Fund is carried on outside Australia by entities none of whom is an Australian resident.

Therefore, the Fund satisfies the requirement in paragraph 118-520(1)(d) of the ITAA 1997.

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

The statement provided by the Fund confirms that no amounts have been paid to the Fund, nor set aside to be paid to the Fund, that can be deducted under the ITAA 1936 or ITAA 1997. Further, no amounts have been paid to the Fund, nor set aside or be paid to the Fund, for which a tax offset has been allowed, or would be allowable, under the ITAA 1936 or ITAA 1997.

Therefore, paragraphs 118-520(2)(a) and (b) of the ITAA 1997 have no application.

As all of the above requirements are satisfied, the Fund is considered to be 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.

Income is paid by an Australian resident company

The Fund's Australian investment is common shares in an Australian publicly listed company, from which the Fund derives dividend income.

Therefore, the Fund derives the dividend income paid by the Australian company for the purposes of subparagraph 128B(3)(jb)(ii) of the ITAA 1936.

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

The Certificate issued by the relevant Tax Authority and the Fund's Financial Statements confirm that the Fund is a registered pension trust as defined in the Income Tax Act in the foreign country and is not subject to income taxes in that country.

Therefore, the Fund satisfies the requirement in subparagraph 128B(3)(jb)(iii) of the ITAA 1936.

Conclusion

Accordingly, as all of the requirements have been met, the Fund is exempted from liability to dividend withholding tax under paragraph 128B(3)(jb) of the ITAA 1936.

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