Edited version of your private ruling

Authorisation Number: 1012085148001

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Ruling

Subject: Withholding tax and income tax exemption and 50% capital gains tax reduction for a foreign pension fund.

Issue 1

Question 1

Does the taxpayer qualify as a 'superannuation fund for non-residents' as defined by section 118-520 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

Yes.

Question 2

Is the taxpayer exempt from liability to interest and dividend withholding tax under paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer 2

Yes.

Question 3

Is the income that is exempt from liability to interest and dividend withholding tax under paragraph 128B(3)(jb) of the ITAA 1936 also non-assessable non-exempt income under section 6-23 of the ITAA 1997?

Answer 3

Yes.

Issue 2

Question 1

Does the taxpayer qualify as a trust under paragraph 115-10(c) of the ITAA 1997 and is therefore entitled to treat gains on future disposals of taxable Australian property as discount capital gains under section 115-5 of the ITAA 1997, provided that the requirements of sections 115-15, 115-20, and 115-25 of the ITAA 1997 have been met?

Answer 1

Yes.

Question 2

Is 50% the applicable discount rate under section 115-100 of the ITAA 1997?

Answer 2

Yes.

This ruling applies for the following periods:

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

The scheme commences during:

Year ended 30 June 2012

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The taxpayer was established in a European country many years ago to provide pension benefits to employees of specified parts of the public sector in that country.

Under its domestic law, the taxpayer is a special purpose company which holds property on behalf of its members, not exclusively for itself, but subject to obligations. Therefore the taxpayer owes fiduciary type duties to its members.

Although the taxpayer has no shareholders, it does have capital and a separate legal existence. The taxpayer is within the scope of the corporate income tax Act under its domestic law, but its status means that it does not pay tax in its country of residence.

The central management and control of the taxpayer is carried out in the European country by the board members of the taxpayer, none of whom are Australian residents or Territory residents.

A number of documents were enclosed with the application.

Details of the relevant terms of the bylaws were also enclosed.

The bylaws provide that the Board must manage the affairs of the taxpayer on behalf of its members. Also, the Board has a fiduciary duty to invest the financial contributions from members in order to provide pension benefits in the event of old age.

As part of its international investments, the Board has invested in Australian property as long term investments for the benefit of the members. The Australian property could be direct or indirect real property interest.

The year end used by the taxpayer in its country of residence is 31 December.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 128B.

Income Tax Assessment Act 1936 Section 128D.

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

Income Tax Assessment Act 1997 Section 115-10.

Income Tax Assessment Act 1997 Section 115-15.

Income Tax Assessment Act 1997 Section 115-20.

Income Tax Assessment Act 1997 Section 115-25.

Income Tax Assessment Act 1997 Section 115-30.

Income Tax Assessment Act 1997 Section 115-40.

Income Tax Assessment Act 1997 Section 11-55.

Income Tax Assessment Act 1997 Section 118-520.

Income Tax Assessment Act 1997 Section 6-15.

Income Tax Assessment Act 1997 Section 6-23.

Income Tax Assessment Act 1997 Section 115-100.

Income Tax Assessment Act 1997 Section 995-1.

Superannuation Industry (Supervision) Act 1993 Section 45.

Reasons for decision

These reasons for decision accompany the Notice of private ruling.

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Issue 1 Question 1

Summary

The taxpayer is an indefinitely continuing fund established and controlled, in the European country for the benefit of resident employees for all relevant times. The taxpayer has advised that it is not a fund to which an amount has been paid or set aside that can be deducted or has been allowed or is allowable as a tax offset under any Act.

As a result, the taxpayer is covered by the definition of 'superannuation fund for foreign residents' in section 118-520 of the Income Tax Assessment Act 1997 (ITAA 1997).

Detailed reasoning

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

SECTION 118-520  Meaning of superannuation fund for foreign residents  

118-520(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.

118-520(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.

In this case, the taxpayer has advised that it is an indefinitely continuing fund. It has also advised that it was established in the European country many years ago. It was established in the European country and has always been controlled in that country by residents of that country.

The taxpayer was established to provide pension benefits to employees in specific public sectors in the European country, so the members of the fund who are current employees are not Australian residents.

The taxpayer has advised that it is not a fund to which an amount has been paid or set aside that can be deducted or has been allowed or is allowable as a tax offset under any Act.

From the above, the taxpayer is within the definition outlined in section 118-520 of the ITAA 1997, so the taxpayer will be a superannuation fund for foreign residents.

Issue 1 Question 2

Summary

From question 1 above, the taxpayer is a foreign resident superannuation fund. The taxpayer has provided a notice from the relevant Taxation Authority that it is exempt from income tax in its country of residence.

As a result, paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936) exempts the taxpayer from the withholding tax liability that is payable under sub-sections 128B(1) and 128B(2) of the ITAA 1936.

Detailed reasoning

Sub-section 128B(1) of the ITAA 1936 requires that withholding tax be paid on dividends paid by resident companies to non-resident shareholders.

Sub-section 128B(2) of the ITAA 1936 requires that withholding tax be paid on interest paid by resident entities to non-resident entities.

Paragraph 128B(3)(jb) of the ITAA 1936 covers interest or dividend income paid by a resident entity to a non-resident entity that is defined as a superannuation fund for non-residents, and the income is also exempt from income tax in the country of residence of the superannuation fund.

If paragraph 128B(3)(jb) of the ITAA 1936 applies, then the interest or dividend income is exempt from withholding tax.

In this case, the taxpayer is a non-resident entity, so any Australian sourced dividend or interest income paid to the taxpayer would be covered by sub-sections 128B(1) or 128B(2) of the ITAA 1936.

From question 1 above, the taxpayer does come within the definition of 'superannuation fund for foreign residents'. The taxpayer has also provided a notice from the relevant Taxation Authority which shows that it is exempt from income tax in that country, which is the taxpayer's country of residence.

Therefore paragraph 128B(3)(jb) of the ITAA 1936 does apply to the taxpayer which means that the taxpayer is exempt from withholding tax on dividend or interest income paid to it by Australian resident entities.

Issue 1 Question 3

Summary

Section 128D of the ITAA 1936 means that any amounts subject to interest, dividend, or royalty withholding tax are non-assessable non-exempt income for the purposes of sections 6-15, 6-23, and 11-55 of the ITAA 1997.

In this case, the withholding tax was not payable due to the operation of paragraph 128B(3)(jb) of the ITAA 1936. However, section 128D of the ITAA 1936 will still apply to consider the amounts to be non-assessable non-exempt income if the sole reason that the withholding tax was not payable was due to the operation of paragraph 128B(3)(jb).

Therefore the interest, dividend and royalty income will be non-assessable non-exempt income for the purposes of section 6-23 of the ITAA 1997, which means that these amounts will not be assessable income because of section 6-15 of the ITAA 1997.

Detailed reasoning

Section 128D of the ITAA 1936 states the following:

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) or (jb), section 128F, section 128FA or section 128GB, be payable, is not assessable income and is not exempt income of a person.

Section 6-23 of the ITAA 1997 defines non-assessable non-exempt income.

Section 11-55 of the ITAA 1997 provides a list of the amounts that are within the category of non-assessable non-exempt income. Section 128D of the ITAA 1936 is listed under the heading 'foreign aspects of income taxation' and the exemption covers dividend, interest, or royalty income that is subject to withholding tax.

Section 6-15 of the ITAA 1997 excludes non-assessable non-exempt income from being considered as assessable income.

In this case, the taxpayer is a foreign superannuation fund receiving dividend and interest income.

The exemption listed above indicates that if the amount is subject to dividend, interest, or royalty withholding tax, then it is non-assessable non-exempt income. This is because section 128D of the ITAA 1936 specifically excludes any amount that is subject to withholding tax under section 128B of the ITAA 1936 for being counted again as assessable income.

Subparagraph 128B(3)(jb)(i) of the ITAA 1936 excludes income that is derived by a foreign superannuation fund that benefits foreign resident members only from paying any withholding tax under section 128B of the ITAA 1936. This would mean that this superannuation fund would not be paying withholding tax on the interest or dividend income, so the automatic exemption does not apply here.

However, section 128D of the ITAA 1936 extends the income tax exemption to interest or dividends that would be covered by section 128B of the ITAA 1936 if the only reason that the income was exempt from withholding tax was via the operation of paragraphs 128B(3)(ga) or 128B(3)(jb) of the ITAA 1936.

Paragraph 128B(3)(jb) of the ITAA 1936 provides an exemption for all interest, dividends and royalty income earned by a foreign superannuation fund with only foreign members.

Paragraph 128B(3)(ga) of the ITAA 1936 provides an exemption to all fully franked dividends that have been received by a non-resident entity. This would mean that any fully franked dividend income received by the taxpayer would be non-assessable non-exempt income, as it is covered by both paragraphs listed above.

Therefore, as the taxpayer is a foreign superannuation fund that is providing benefits for foreign members only for the period under review, the only reason that withholding tax on interest, dividends other than fully franked dividends, or royalties will not be payable is because of the operation of paragraph 128B(3)(jb) of the ITAA 1936. As that paragraph is the only reason that withholding tax would not be payable, the interest, dividends other than fully franked dividends, or royalties will still not be assessable income or exempt income under section 128D of the ITAA 1936. As a result, these amounts will also be considered to be non-assessable non-exempt income for the purposes of section 11-55 of the ITAA 1997.

In relation to the franked dividends, these are not subject to withholding tax due to the operation of both paragraphs 128B(3)(ga) and 128B(3)(jb) of the ITAA 1936. However in situations where two provisions apply to the one amount, usually the most relevant provision will be applied. In this case, the most relevant provision is that the taxpayer is a foreign superannuation fund providing benefits to foreign residents only, so paragraph 128B(3)(jb) will be taken to exempt the fully franked dividend from withholding tax, even though paragraph 128B(3)(ga) appears first in the legislation. As a result, it will be taken that the reason that withholding tax will not be payable is the operation of paragraph 128B(3)(jb), so this means that section 128B of the ITAA 1936 will still apply to the taxpayer's situation.

Therefore the interest, dividends and royalty amounts received by the taxpayer will be exempt from withholding tax under section 128B(3)(jb) of the ITAA 1936, and will also be non-assessable non-exempt income and so exempt from income tax sections under 11-55 and 6-20 of the ITAA 1997.

As a result, the amounts will not be counted as assessable income because of section 6-15 of the ITAA 1997.

Issue 2 Question 1

Summary

The taxpayer does fit within the general rules of a trust. After the taxpayer was created by the settlor, the deed required that the trustees have a duty to hold the fund assets for the benefit of the employee members.

Therefore, where relevant, the taxpayer will be considered to be a trust for the purposes of the income tax legislation, provided that this does not conflict with the fact that the taxpayer is also a foreign superannuation fund.

Detailed reasoning

Section 995-1 of the ITAA 1997 does not define the word 'trust'. Therefore the ordinary meaning of the word must be used. A trust requires four things - a settlor who sets the parameters, a trustee, a beneficiary, and an asset. Essentially, a fiduciary relationship is imposed on the trustee who is then required to hold the asset on behalf of the beneficiary. Whilst we have used the singular, the plural can be applied to all of these requirements. A trust deed can be made which formalises the powers of the trustee.

Section 115-10 of the ITAA 1997 lists the entities that are entitled to a discounted capital gain. These entities include individuals, trusts, complying superannuation entities, and some specified assets of a life insurance company.

Although the taxpayer is a foreign superannuation fund, there are no provisions for these types of entities in section 115-10 of the ITAA 1997, and there are no specific exclusions for them either. Therefore the taxpayer can be considered to be a trust for the purposes of section 115-10 of the ITAA 1997.

In this case, the taxpayer does contain these four elements in that there are a group of trustees, who are holding various assets for the benefit of the beneficiaries, who are the members of the pension fund. The fourth element is the settlor, who is the person who originally formalised the original parameters under which the pension fund was to operate when it originally commenced.

Therefore, the taxpayer does fit within the definition of a trust. This will mean that some parts of the income tax law will apply to the taxpayer. However, the taxpayer also fits within the definition of a foreign superannuation fund, so any income tax legislation that applies to foreign superannuation funds will take precedence over the more general trust rules.

The specific issue under review here is with section 115-10 of the ITAA 1997. This section lists individuals, trusts, complying superannuation entities, and some assets of life insurance companies as being entitled to claim a discount.

A complying superannuation entity includes complying superannuation funds, complying approved deposit funds and pooled superannuation trusts. A complying superannuation fund is a fund that complies with section 45 of the Superannuation Industry (Supervision) Act 1993. The first requirement of that section is that the fund be a resident of Australia, which the taxpayer fails.

There is no provision within the capital gains tax rules which specifically excludes foreign superannuation funds being considered as trusts.

As a result, the taxpayer can be considered as a trust for the purposes of section 115-10 of the ITAA 1997.

Issue 2 Question 2

Summary

Once all of the conditions relating to discount capital gains have been satisfied, the taxpayer is entitled to the discount percentage that relates to trusts, which is a discount of 50%.

Detailed reasoning

Section 115-10 of the ITAA 1997 determines which entities are entitled to a discounted capital gain. The relevant one for the taxpayer is a trust.

Sections 115-15, 115-20, 115-25, 115-30, and 115-40 of the ITAA 1997 provide for various conditions that must be complied with before a capital gain can be a discounted capital gain. Effectively, the asset must have been sold after 21 September 1999, the cost base must not have been indexed using the indexation method, the asset must have been held for more than 12 months, and the discounted method only applies to some CGT events.

Section 115-100 of the ITAA 1997 sets the discount percentage for discounted capital gains.

In this case, the taxpayer is a trust, so this would mean that if all of the conditions in sections 115-15, 115-20, 115-25, 115-30, and 115-40 of the ITAA 1997 have been satisfied, then the capital gain can be subject to a discount. The conditions have been mentioned above, but the main three conditions that apply in recent years relate to the period of ownership (more than 12 months), the cost base must not have been indexed, and the CGT event must be one that allows the discount method to be applied.

Once these conditions have been satisfied, the discount method can be applied. Section 115-100 of the ITAA 1997 sets the discount percentage at 50% for trusts.