Edited version of private advice

Authorisation Number: 1052317240616

Date of advice: 14 October 2024

Ruling

Subject: Superannuation fund for foreign residents - withholding tax exemption

Question 1

Is the Fund excluded from liability to withholding tax on interest, dividend and non-share dividend income derived from its investments in accordance with paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

Question 2

If the Fund is excluded from liability to interest and/or dividend withholding tax under paragraph 128B(3)(jb) of the ITAA 1936, is the interest and/or dividend income derived by the trustee on behalf of the entity 'non-assessable, non-exempt' (NANE) income under section 128D of the ITAA 1936?

Answer

Yes.

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

1.    The Fund has rules governing the operation of the Fund.

2.    The Fund was established in a foreign country.

3.    The object of the Fund is to provide pension and retirement benefits.

4.    The Fund does not operate for any purpose other than providing pension and retirement benefits to members and their beneficiaries.

5.    The Fund is managed by a Board in accordance with the rules of the Fund.

6.    The Board is made up of persons none of whom are Australian residents.

7.    The Fund is an indefinitely continuing fund and was established and is maintained only to provide benefits for individuals who are not Australian residents.

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

9.    Members of the Fund make contributions to the Fund

10.  Contributions are used to pay pension and retirement benefits.

11.  The Fund does not provide benefits as a result of events other than old age retirement, disability or death.

The Fund's Australian investments

12.  The Fund holds investments in Australia.

13.  In respect of each of the Australian entities to which the Fund has invested:

(a)  the Fund holds less than 10% of the total participation interests in each entity and has never held more than a 10% participation interest.

Furthermore, no substantial security holder (SSH) notices as required under subsection 671B(1) of the Corporations Act 2001 have been issued in respect of the Fund's interest in the Australian resident companies.

SSH notices are required to disclose any interests held by the Fund, together with its associates, representing 5% or more (being a 'substantial holding'), of the votes in a listed company, body or listed registered managed investment scheme. Disclosure must also be made when a substantial holding changes by 1%.

Accordingly, the Fund does not hold (and has not held) an interest of 5% or more of the total participation interests in each of the Australian resident companies

(b)  the Fund will hold less than 10% of the total participation interests in each entity in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936

(c)   neither the Fund, nor any related party of the Fund, has involvement in the day to day management of the business of any of the Australian investments

(d)  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 any of the Australian investments

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

(f)    neither the Fund, nor any related party, has the ability to direct or influence the operation of any of the Australian investments outside of the ordinary rights conferred by the equity interest held

(g)  the Fund has not entered into or received any side letters, arrangements or agreements, and

(h)  the Fund does not hold any veto rights on security holder votes.

Additional facts

14.  The Fund is exempt from taxation in the jurisdiction it was established.

15.  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.

16.  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.

17.  The income of the Fund is not non-assessable non-exempt income of the Fund because of either:

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

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

Reasons for decision

Issue 1

Question 1

Is the Fund excluded from liability to withholding tax on interest, dividend and 'non-share dividend' income derived from its investments in accordance with paragraph 128B(3)(jb) of the ITAA 1936?

Summary

The Fund is excluded from liability to withholding tax on interest, dividend and non-share dividend income derived from its current Australian investments 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(4) of the ITAA 1936), interest income (subsection 128B(5) 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 states:

(jb) income that:

(i) is derived by a non-resident that is a superannuation fund for foreign residents; and

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

(iii) is exempt from income tax in the country in which the non-resident resides;

Note:

See subsection (3CA) for extra requirements relating to this paragraph.

These requirements of paragraph 128B(3)(jb) of the ITAA 1936 are considered below.

Subparagraph 128B(3)(jb)(i) of the ITAA 1936

Is the Fund a non-resident?

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

Is the Fund 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 Income Tax Assessment Act 1997 (ITAA 1997) sets out the following:

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

Section 118-520 of the ITAA 1997 states the following:

(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.

Each of these elements will be considered below.

Is the Fund an indefinitely continuing fund?

The legislation provides no guidance on the meaning of 'indefinitely continuing'. It is not a technical legal expression, and the ordinary meanings of indefinitely and continuing involve little ambiguity or controversy.

The Fund will continue to operate in accordance with its rules and relevant legislation in the jurisdiction it was established for an indefinite period of time.

Therefore, the Fund satisfies this requirement.

Is the Fund 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.

ATO Interpretative Decision ATO ID 2009/67 Income Tax: Superannuation fund for foreign residents (ATO ID 2009/67) refers to several authorities to provide guidance on the meaning of the phrase 'provident, benefit, superannuation or retirement fund':

None of the four descriptors 'provident', 'benefit', 'superannuation' or 'retirement fund' in subparagraph (a)(ii) of the definition of 'superannuation fund for foreign residents' in section 118-520 of the ITAA 1997 are defined. The terms have, however, been the subject of judicial consideration.

The courts have held that for a fund to be a 'provident, benefit, superannuation or retirement fund', the fund's sole purpose must be to provide superannuation benefits, that is, benefits to a member upon the member reaching a prescribed age or upon their retirement, death or other cessation of employment ( Scott v. FC of T (No 2) (1966) 14 ATD 333; (1966) 10 AITR 290, per Windeyer J; Mahony v. FC of T (1967) 14 ATD 519, per Kitto J; Walstern Pty Ltd v. Commissioner of Taxation (2003) 138 FCR 1; 2003 ATC 5076; (2003) 54 ATR 423, per Hill J and Cameron Brae Pty Ltd v. Federal Commissioner of Taxation (2007) 161 FCR 468; 2007 ATC 4936; (2007) 67 ATR 178, per Stone and Allsop JJ).

Having regard to the terms of the deed of the Plan, it is considered that the Plan is a 'provident, benefit, superannuation or retirement fund' as that phrase has been interpreted by the relevant authorities. The sole purpose of the Plan is the provision of benefits to, or in respect of, participating employees who:

•         cease their employment upon or after reaching retirement age (age 60)

•         cease their employment after the satisfaction of certain service requirements

•         cease their employment because of death or total and permanent disability, or

•         reach age 70, whether or not they have ceased employment.

Therefore, the Plan satisfies subparagraph (a)(ii) of the definition of 'superannuation fund for foreign residents' in section 118-520 of the ITAA 1997.

The above guidance establishes that for a fund to qualify as a provident, benefit, superannuation or retirement fund, it must have the sole purpose of providing retirement benefits or benefits in other allowable contemplated contingencies (such as death, disability or serious illness).

The objective of the Fund is to provide pension and retirement benefits. Furthermore, there are no circumstances outside of these under which a member can obtain benefits from the Fund.

The circumstances in which a member of the Fund can receive the funds are clearly consistent with those of a provident, benefit, superannuation or retirement fund as they are only provided after attaining a retirement age or 'contemplated contingencies' such as death.

As both the objective of the Fund and the actual operation of the Fund have the sole purpose of providing retirement benefits, the Fund is considered to be a provident, benefit, superannuation or retirement fund.

Therefore, the Fund will satisfy this requirement.

Was the Fund established in a foreign country?

The Fund was established in a foreign country. Therefore, the Fund will satisfy this requirement.

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

The Fund is a pension fund that was established in a foreign country for its members who are residents of that country. The Fund operates to provide retirement benefits for its members in the foreign country. Therefore, the Fund will satisfy this requirement.

Is the Fund's central management and control 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, paragraph 10 and 11 of the 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 Fund was established in a foreign country. The decision making and management of the Fund is undertaken by the Board. The Board is made up of persons none of whom are Australian residents.

Based on the above, it is reasonable to conclude that the central management and control of the Fund occurs in a foreign country by entities that are not Australian residents. Therefore, the Fund will satisfy 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

An amount paid to the Fund or set aside for the Fund has not been and cannot be deducted under the ITAA 1936 or 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. The Fund has also confirmed that no amount paid to the Fund can be deducted under ITAA 1997 or ITAA 1936.

Therefore, the Fund will satisfy this requirement.

Subparagraph 128B(3)(jb)(ii) of the ITAA 1936 - the Fund derives the relevant income

Paragraph 128B(3)(jb) of the ITAA 1936 will only apply to interest, or to dividends and non-share dividends paid by Australian resident companies.

The Fund will receive interest income from Australia, along with dividend and non-share dividend income from companies who are residents of Australia for tax purposes.

Therefore, the Fund will satisfy this requirement.

Subparagraph 128B(3)(jb)(iii) 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 taxation in accordance with the income tax legislation in the country in which the Fund resides.

Therefore, the Fund will satisfy 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) of the ITAA 1936 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) of the ITAA 1936)

•         the Fund must satisfy the 'influence test' (subsection 128B(3CD) of the ITAA 1936) in relation to the test entity, and

•         the income cannot otherwise be non-assessable non-exempt income of the Fund because of:

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

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

1.    The Fund satisfies the 'portfolio interest test'

Subsection 128B(3CC) of the ITAA 1936 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.

The Fund holds less than 10% of the total participation interests in each Australian entity to which the Fund has invested. Further, the Fund would hold less than 10% of the total participation interests in each entity in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936.

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

2.    The Fund satisfies the 'influence test'

Subsection 128B(3CD) of the ITAA 1936 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).

Relevantly, in respect of each of the Australian entities to which the Fund has currently invested:

(a)  the Fund holds less than 10% of the total participation interests in each entity and has never held more than a 10% participation interest,

(b)  the Fund will hold less than 10% of the total participation interests in each entity in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936,

(c)   neither the Fund, nor any related party of the Fund, has involvement in the day to day management of the business of any of the Australian investments,

(d)  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 any of the Australian investments,

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

(f)    neither the Fund, nor any related party, has the ability to direct or influence the operation of any of the Australian investments outside of the ordinary rights conferred by the equity interest held,

(g)  the Fund has not entered into or received any side letters, arrangements or agreements, and

(h)  the Fund does not hold any veto rights on security holder votes.

Therefore, the Fund does not have influence of a kind described in subsection 128B(3CD) of the ITAA 1936.

3.    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.

Conclusion

Having regard to the requirements of paragraph 128B(3)(jb) of the ITAA 1936, the Fund is excluded from withholding tax in relation to interest, dividend and non-share dividend income derived from its current Australian investments.

Question 2

If the Fund is excluded from liability to interest and/or dividend withholding tax under paragraph 128B(3)(jb) of the ITAA 1936, is the interest and/or dividend income derived by the trustee on behalf of the entity 'non-assessable, non-exempt' (NANE) income under section 128D of the ITAA 1936?

Summary

The dividend income derived by the Fund from its Australian investments is considered NANE of the Fund under section 128D of the ITAA 1936.

Detailed reasoning

Section 128D of the ITAA 1936 provides that income other than income to which section 128B applies by virtue of subsection (2A), (2C) or (9C) of that section upon which withholding tax is payable, or upon which withholding tax would, but for paragraph 128B(3)(ga),(jb) or (m), section 128F, section 128FA or section 128GB, be payable, is not assessable income and is not exempt income of a person.

Interest or dividend income from the Australian investments derived by the Fund would, but for the operation of the withholding tax exemption under paragraph 128B(3)(jb), be subject to withholding tax liability under subsections 128B(1) and 128B(2) respectively.

As paragraph 128B(3)(jb) is specifically referred to in section 128D, any dividend income derived by the Fund from the investments in Australia will be considered NANE income of the Fund.

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