Edited version of private advice

Authorisation Number: 1052389430213

Date of advice: 1 May 2025

Ruling

Subject: Withholding tax - double tax convention

Question 1

Is Entity A exempt from withholding tax on dividends paid by Australian resident companies under subparagraph 4d) of Article 10 of the Convention between Australia and the XXX Confederation for the Avoidance of Double Taxation with respect to Taxes and Income, with Protocol [2014] ATS 33 (the Convention)?

Answer 1

Yes.

Question 2

Is Entity A exempt from withholding tax on interest paid on its Australian investments under subparagraph 3d) of Article 11 of the Convention?

Answer 2

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Entity A

Entity A is an investment foundation whose purpose is to manage the assets of Pension Fund.

Pension Fund's purpose is to provide occupational pensions for the employees of the Employer Group and for their relatives and survivors against the economic consequences of old age, disability and death.

Entity A is an investment foundation. Investment foundations are established specifically to invest and manage assets that are used exclusively to provide occupational pension plan benefits to employees.

Entity A does not carry on a business through a permanent establishment situated in Australia and does not perform independent personal services from a fixed base in Australia.

Entity A is tax resident of country B.

Australian Investments of Entity A

The Umbrella Fund and its Sub-Funds

The Umbrella Fund is a contractual fund for qualified investors. Only Entity A is permitted to be an investor in the Umbrella Fund.

The Umbrella Fund is a contractual arrangement for collective investments established under a contract between Entity A (as the sole investor in the Umbrella Fund), the Fund Management Company and the Custodian Bank (the Fund Contract).

The Umbrella Fund is an open-ended collective investment scheme in the form of a contractual fund where Entity A as the sole investor has either a direct or indirect legal entitlement to redeem their units at the net asset value.

The Umbrella Fund's investments are held by its Sub-Funds.

As a contractual arrangement, the Umbrella Fund and its Sub-Funds do not have separate legal personalities, are fiscally transparent and are not subject to tax in country B. The incomes of the Umbrella Fund and the sub-funds are considered to be the income of Entity A as the sole investor in the Umbrella Fund.

The Sub-Fund holds interest in Australian resident companies (including managed investment trusts) listed on the ASX (Investee Companies) which provide a return through the payment of dividends/distributions which may include dividend income and/or interest income.

Entity A holds directly no more than XX per cent of the voting power in the Investee Companies held through the Sub-Fund.

Other than by virtue of it being the sole investor in the Umbrella Fund, Entity A does not hold, directly or indirectly, any securities in the same Australian entities held by the Umbrella Fund.

The Fund Manager may not acquire equity securities in an Investee Company that represent more than XX% of the voting rights in an Investee Company or which would enable it to exert a material influence on the management of an Investee Company.

Entity A does not, in aggregate, hold Australian investments that represent more than XX% of the voting rights in any Investee Company.

No special relationship exists between any Investee Company and Entity A which results in the amount of interest being paid exceeding the amount that would otherwise have been expected to have been paid had such a special relationship not been in existence.

The Fund Contract

The Fund manager must be a company limited by shares based in Country B.

The custodian bank is responsible for the safekeeping of the assets of the sub-funds. It handles the issue and redemption of fund units as well as payment transfers on behalf of the sub-funds. The custodian bank is subject to the same duties, and acts in the same interests, as the Fund Manager.

On acceding to the Fund Contract and the payment of cash, Entity A acquires a claim against the Fund Manager in respect of a participation in a sub-fund's assets and income, evidenced in the form of fund units. By virtue of its subscription for units, Entity A is not personally liable for the liabilities of the Umbrella Fund or sub-funds and is only entitled to the assets and returns of the sub-fund in which it holds an interest.

The Fund Manager manages the sub-funds on the account of the investor independently and by its own name, but for the account of Entity A. The Fund Manager exercises all the rights belonging to the Umbrella Fund and to the sub-funds independently and its own name. The Fund Manager can, with the agreement of the custodian bank and the approval of the supervisory authority, create, cancel or merge various unit classes at any time.

The Fund Manager and its agents are subject to the duties of loyalty, care and information. They act independently and safeguard only interests of the investor.

The custodian bank safeguards the assets of the sub-funds, deals with the issue and redemption of fund units and the payment transactions for the sub-funds. The custodian bank and its agents are subject to the duties of loyalty, care and information.

The Fund Contract provides that the asset managers of Sub-Fund have been delegated the investment decisions regarding the Sub-Fund.

The circle of investors in the FCP's Sub-Fund is limited to Entity A as the sole investor, which holds the units of the FCP's Sub-Fund for its members and represents their interests.

Entity A may terminate the Fund Contract at any time and demand that its participation in a sub-fund be paid out in cash (i.e. a redemption of units). The redemption price for such redemptions shall take place based on the net asset value per unit of the relevant sub-fund.

Other

The Australian resident companies that pay dividends from the investments are not dual residents of both Australia and country B.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 128B

International Tax Agreements Act 1953 subsection 3AAA(1)

International Tax Agreements Act 1953 subsection 5(1)

Reasons for decision

Question 1

Detailed Reasoning

Subsection 128B(1) of the Income Tax Assessment Act 1936 (ITAA 1936) provides that, subject to certain exclusions, section 128B of the ITAA 1936 will apply to income derived by a non-resident that consists of a dividend paid by an Australian resident company (franked dividends are specifically excluded from the operation of section 128B by paragraph 128B(3)(ga) of the ITAA 1936).

Subsection 128B(4) of the ITAA 1936 provides that a person who derives dividend income to which section 128B of the ITAA 1936 applies, is liable to pay withholding tax on that dividend income. The withholding tax rate applicable is generally 30% of the dividend amount (section 7 of the Income Tax (Dividends, Interest and Royalties Withholding Tax) Act 1974).

Unfranked dividends derived by the taxpayer from Australian resident companies are therefore subject to withholding tax unless otherwise excluded.

However, in determining liability to Australian tax on Australian source income derived by a non-resident, it is necessary to consider not only the income tax laws but also any applicable Convention or Double Taxation Agreement contained in the International Tax Agreements Act 1953 (the Agreements Act).

Section 4 of the Agreements Act incorporates that Act with the ITAA 1936 and the Income Tax Assessment Act 1997 (ITAA 1997) so that those Acts are read as one. The Agreements Act effectively overrides the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except for some limited provisions).

Consideration of the Convention is outlined below.

The Convention - application to Entity A

In order for the Convention to apply, Article 1 of the Convention states 'This Convention shall apply to persons who are residents of one or both of the Contracting States.'

Entity A must therefore be considered both a 'person' and a 'resident of a Contracting State' for the Convention to apply.

Person

Entity A is treated as a company for tax purposes in country B. Therefore, Entity A satisfies the definition of a 'company' and thus is considered to be a 'person' in accordance with the Convention for the purposes of applying the Convention.

Resident of a Contracting State

The Convention provides that the term 'resident of a Contracting State' includes a person that is a pension scheme stablished in that Contracting State.

Entity A satisfies the relevant definition of a 'pension scheme' under the Convention, and was established in country B.

Conclusion

Entity A meets the requirements of the Convention and is therefore subject to its application.

The Convention - application to taxes

The Convention applies to all taxes imposed on income and in particular applies to Australian income tax.

Section 128B of the ITAA 1936 imposes liability to withholding tax on dividend, interest and royalty income derived by non-residents. As such, withholding tax payable in respect of dividends to non-residents is considered to be an Australian income tax and is covered by the Convention.

Dividend Income

For the Convention to apply to Entity A to provide an exemption from withholding tax on dividends, it must satisfy the following:

•                     There are dividends that are paid by companies that are residents of Australia

•                     Entity A derives and is the beneficial owner of the dividends

•                     Entity A holds directly no more than 10 per cent of the voting power in the companies paying the dividends, and

•                     Entity A is a pension scheme and its investment income is exempt from tax in country B.

There are dividends that are paid by companies that are residents of Australia

The Umbrella Fund's Sub-Funds hold shares in Australian resident companies which pay dividends in relation to those shares.

Therefore, there are dividends that are paid by companies that are residents of Australia from the investment held by Entity A through the Umbrella Fund and its Sub-Funds.

The beneficial owner of the dividends

The term 'beneficial owner' is not defined in the Convention.

As such, the definition of the term 'beneficial owner' in relation to interest derived from an Australian source shall be guided by the context of its use in the Convention or, without such context, by the laws of Australia for the purposes of taxation.

In applying these principles to Entity A, the Umbrella Fund and its Sub-Funds:

•                     The Fund Manager as manager of the Umbrella Fund, holds legal title to the assets.

•                     The custodian bank also acts to safeguard the assets.

•                     The assets are not held by the Fund Manager or custodian bank for their own benefit, but they act for the interests of Entity A, which is the only unitholder of the Umbrella Fund and its Sub-Funds.

•                     Entity A is beneficially entitled to the income of the Umbrella Fund and its Sub-Funds and can at any time require payment of its interest in the Umbrella Fund and its Sub-Fund.

Based upon the above rights and obligations, a trust relationship exists between the Entity A, the Umbrella Fund, the Fund Manager and the custodian bank. Due to Entity A's sole beneficial interest in the assets of the Umbrella Fund and its Sub-Funds, where it can require payment of its interest at any time, Entity A accrues income from the investments as it arises.

Additionally, the Umbrella Fund and its Sub-Funds are not subject to income tax in country B and are fiscally transparent. The income of the Sub-Funds are considered to be the income of Entity A as the sole investor in the Umbrella Fund.

Accordingly, Entity A is presently entitled to the income of the Umbrella Fund and its Sub-Funds. As such, Entity A is considered to be the beneficial owner of the dividends for the purposes of the Convention.

Entity A holds directly no more than 10 per cent of the voting power in the companies paying the dividends

Entity A holds directly no more than 10 per cent of the voting power in the Australian resident companies paying dividends from the investments held through the Umbrella Fund and its Sub-Funds.

Based upon the above, this condition is satisfied.

Pension scheme and investment income is exempt from tax

As established above, Entity A is a pension scheme, pursuant to the Convention, and is exempt from tax.

Other provisions of Article 10 of the Convention

Entity A does not meet any of the restrictions on the availability of the exemption regarding its investments via the Umbrella Fund and its Sub-Funds under Article 10 of the Convention.

Consequently, the restrictions, prescribed in the Convention, to the availability of the exemptions from income and withholding tax on interest income discussed above will not be applicable in respect of the interest income derived by Entity A on its Australian investments.

Conclusion

Entity A is a pension scheme whose investment income is exempt from tax in country B. In addition, Entity A is the beneficial owner of the dividends paid by Australian resident companies held through the Umbrella Fund and its Sub-Funds. Furthermore, Entity A holds directly no more than 10 per cent of the voting power in the Australian resident companies paying dividends.

Therefore, Article 10 of the Convention will operate to exempt Entity A from withholding tax on dividends paid by Australian resident companies from the investments held through the Umbrella Fund and its Sub-Funds.

Question 2

Detailed Reasoning

A non-resident is liable to pay withholding tax under subsection 128B(5) of the ITAA 1936 if the 'non-resident' derives income that consists of interest and the requirements of subsection 128B(2) of the ITAA 1936 are satisfied in relation to that income. Subsection 128B(2) of the ITAA 1936 provides that:

Subject to subsection (3), this section... applies to income that:

(a)           is derived... by a non-resident; and

(b)           consists of interest that:

(i)            is paid to the non-resident....

However, in determining liability to Australian tax on Australian source income derived by a non-resident, it is necessary to consider not only the income tax laws but also any applicable Convention or Double Taxation Agreement contained in the Agreements Act.

Section 4 of the Agreements Act incorporates that Act with the ITAA 1936 and the Income Tax Assessment Act 1997 (ITAA 1997) so that those Acts are read as one. The Agreements Act effectively overrides the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except for some limited provisions).

Consideration of the Convention is outlined below.

XXX Convention - application to Entity A

As determined above, Entity A is deemed to be a person and a pension scheme established in country B. As such Entity A is a resident of a Contracting State for the purposes of the Convention.

Furthermore, Entity A meets the requirements of the Convention and is therefore subject to its application.

XXX Convention - application to taxes

As determined above, the Convention applies to all taxes imposed on income and in particular applies to Australian income tax.

Section 128B of the ITAA 1936 imposes liability to withholding tax on dividend, interest and royalty income derived by non-residents. As such, withholding tax payable in respect to interest to non-residents is considered to be an Australian income tax and is covered by the Convention.

Interest income

Article 11 of the Convention is the relevant provision in relation to interest income.

For subparagraph 3(d) of Article 11 of the Convention to apply to Entity A, in respect of an exemption from withholding tax on interest income, it must satisfy the following:

•                     There is interest that arises in Australia,

•                     Entity A is the beneficial owner of the interest,

•                     Entity A is a resident of country B, and

•                     Entity A is a pension scheme and its investment income is exempt from tax in Country B.

Interest that arises in Australia

Interest income arises from the Australian investments held by Entity A through the Umbrella Trust and its Sub-Funds.

Additionally, all interest income arising from the Australian investments is paid by Australian residents for the purposes of Australian tax, and all such income is not connected to a permanent establishment or a fixed base situated outside Australia.

Therefore, interest arises in Australia from the Australian investments held by Entity A through the Umbrella Fund and its Sub-Funds in accordance with the Convention.

The beneficial owner of the interest

For the purposes of the Convention, Entity A is the beneficial owner of the income which it derives via the Umbrella Fund and its Sub-Funds, which are not entities but contractual relationships which are fiscally transparent. The income of the Umbrella Fund and its Sub-Funds are considered to be the income of Entity A as the sole investor in the Umbrella Fund and its Sub-Funds. As such, Entity A will be the beneficial owner of the interest and will be considered to derive the interest.

Resident of country B

As determined above, Entity A is a resident of Country B as it satisfies the definition of a 'resident of a Contracting State' and was established in country B.

Pension scheme and investment income is exempt from tax in country B

As determined above, Entity A is a pension scheme, pursuant to the Convention, and is exempt from tax in country B.

Other provisions of Article 11 of the Convention

Entity A does not meet any of the restrictions on the availability of the exemption regarding its investments via the Umbrella Fund and its Sub-Funds under Article 11 of the Convention.

Consequently, the restrictions, prescribed in the Convention, to the availability of the exemptions from income and withholding tax on interest income discussed above will not be applicable in respect of the interest income derived by Entity A on its Australian investments.

Conclusion

Entity A is a pension scheme whose investment income is exempt from tax in country B. In addition, it derives interest income from Australian investments held via the Umbrella Fund and its Sub-Funds.

As none of the restrictions prescribed in the Convention regarding the availability of the exemptions from tax on interest income apply, Article 11 of the Convention will operate to exempt Entity A from withholding tax on interest paid to Entity A from the Australian investments held via the Umbrella Fund and its Sub-Funds.

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