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Ruling

Subject: Qualification for the purposes of the widely held requirements in section 12-402 of the Tax Administration Act 1953

Question 1

Is Entity X an entity that is covered by the requirements under paragraph 12-402(3)(b) of Schedule 1 of Tax Administration Act 1953 (TAA 1953) (relevantly, is Entity X a foreign superannuation fund)?

Answer

No

This ruling applies for the following periods:

1 January 2012 to 31 December 2012

1 January 2013 to 31 December 2013

1 January 2014 to 31 December 2014

The scheme commences on:

1 January 2012

Question 2

Is Entity X an entity that is covered by the requirements under paragraph 12-402(3)(f) of Schedule 1 of TAA 1953 (relevantly, is Entity X an entity with a principal purpose of funding pensions for citizens or contributors of a foreign country)?

Answer

Yes

This ruling applies for the following periods:

1 January 2012 to 31 December 2012

1 January 2013 to 31 December 2013

1 January 2014 to 31 December 2014

The scheme commences on:

1 January 2012

Relevant facts and circumstances

Entity X is a social security institution in a foreign country formed in accordance with the laws of that country, which provides retirement benefits for members.

Entity X is exempted from income tax in its country.

Entity X's Board was established pursuant to the relevant foreign legislation as the trustee of Entity X and for the purposes of managing Entity X.

The funds held in Entity X are not used for any purposes other than providing benefits to its members and paying reasonable expenses of administration.

The central management and control of Entity X is outside of Australia. Entity X has no place of business or management in Australia.

All private and non-pensionable public sector employees who are employed under a contract of service and their employers must contribute to Entity X.

Every employee and employer is liable to pay monthly contributions to Entity X on the amount of wages for the month at a rate set out by the law.

Pursuant to the law and Entity X's regulations, each member has two accounts and contributions are credited into these accounts according to the following percentages:

· Account I - 70% of monthly contribution

· Account II - 30% of monthly contribution

Account I is established for retirement purposes only and cannot be withdrawn before the member reaches the prescribed age, becomes incapacitated, leaves the country or is deceased.

Account II is established to assist members prepare for a comfortable retirement. Subject to previous approval, withdrawals are allowed for contributions toward purchasing or building a house, financing higher education or providing for medical expenses.

Members are guaranteed a minimum dividend on contributions per annum pursuant to the relevant law.

The return on investment is the result of various investments made by Entity X which are permitted pursuant to the relevant legislation.

At the time of the withdrawal, members will receive the total amount of contributions (from contributions paid by the members and their employers) and the dividend on the total amount of contributions.

Relevant legislative provisions

Taxation Administration Act 1953 Subdivision 12-H

Taxation Administration Act 1953 Paragraph 12-402(3)(b)

Taxation Administration Act 1953 Paragraph 12-402(3)(e)

Taxation Administration Act 1953 Paragraph 12-402(3)(f)(i)

Income Tax Assessment Act 1997 Subsection 118-520(2)

Income Tax Assessment Act 1997 Subsection 995-1(1)

Reasons for decision

Question 1

Is Entity X an entity that is covered by the requirements under paragraph 12-402(3)(b) of Schedule 1 of Tax Administration Act 1953 (TAA 1953) (relevantly, is Entity X a foreign superannuation fund)?

Detailed reasoning

Subdivision 12-H of Schedule 1 to the TAA 1953 deals with 'Pay As You Go' withholding obligations for distributions of managed investment trust income.

Section 12-402 of Schedule 1 of the ITAA 1953 establishes the widely held requirements for the entities included in the section.

Subsection 12-402(3) of Schedule 1 of the TAA 1953 lists the kinds of entity that are covered by section 12-402.

Paragraph 12-402(3)(b) of Schedule 1 of the TAA 1953 specifies the following:

· a complying superannuation fund, a complying approved deposit fund or a foreign superannuation fund, being a fund that has at least 50 members.

In order to determine if Entity X falls within the meaning of this paragraph, it is necessary to determine if Entity X is a 'foreign superannuation fund'.

The term 'foreign superannuation fund' is defined in subsection 995-1(1) of the ITAA 1997 as being a 'superannuation fund' that is not an Australian superannuation fund. Paragraph 295-95(2)(b) of the ITAA 1997 provides that for a superannuation fund to be an 'Australian superannuation fund' at a particular time, the fund must have its central management and control ordinarily in Australia.

The central management and control of Entity X is outside of Australia.

Subsection 995-1(1) of the ITAA 1997 provides that 'superannuation fund for foreign residents' has the meaning given by section 118-520 of the ITAA 1997.

A fund is a 'superannuation fund for foreign residents' at a time under section 118-520 of the ITAA 1997 if:

· at that time, it is:

· an indefinitely continuing fund; and

· a provident, benefit, superannuation or retirement fund; and

· it was established in a foreign country; and

· it was established, and maintained at that time, only to provide benefits for individuals who are not Australian residents; and

· at that time, its central management and control is carried on outside Australia by entitles none of whom is an Australian resident.

Under subsection 118-520(2) of the ITAA 1997, a fund is not a 'superannuation fund for foreign residents' if:

· an amount paid to the fund or set aside for the fund has been or can be deducted under this Act; or

· a tax offset has been allowed or is allowable for such an amount.

Fund

The first question to consider in determining whether Entity X is a 'superannuation fund for foreign residents' within the meaning of section 118-520 of the ITAA 1997 is whether Entity X is a '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 Macquarie Dictionary, 2012, defines the term 'fund' as 1 a stock of money or pecuniary resources 2 an organisation which manages money invested for a particular purpose… 3 money in hand; pecuniary resources.

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 there from 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'.

Under Entity X terms and conditions, employees are required to contribute a percentage of their monthly wages and employers are required to contribute a percentage of the employee's monthly wages towards the employees account with Entity X.

Members are guaranteed a minimum dividend on contributions per annum which continues to accumulate in the member's account and not paid out until member's account is eligible to be withdrawn. The return on investment is the result of various investments made by Entity X which are permitted pursuant to the relevant foreign legislation.

At the time of the withdrawal, members will receive the total amount of contributions (from contributions paid by the members and their employers) and the dividend on the total amount of contributions.

Therefore it is concluded that Entity X is a 'fund'

Indefinitely continuing fund

The term 'indefinitely continuing fund' in subparagraph (a)(i) of the definition of 'superannuation fund for foreign residents' in section 118-520 of the ITAA 1997 is not defined.

The Macquarie Dictionary, 2012, defines 'indefinite' as 1 not definite; without fixed or specified limit; unlimited. 2 not clearly defined or determined; not precise.

There is no provision in the foreign legislation which established Entity X that requires the fund to be terminated or wound up after a specified period. The fund is thus an 'indefinitely continuing fund' within the meaning of subparagraph (a)(i) of the definition of 'superannuation fund for foreign residents' in section 118-520 of the ITAA 1997.

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).

Particularly, the High Court examined both the terms superannuation fund and fund in Scott v Commissioner of Taxation of the Commonwealth (No. 2) (1966) 10 AITR 290; (1966) 40 ALJR 265; (1966) 14 ATD 333 (Scott). In that case, Justice Windeyer stated:

… 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. I do not put this forward as a definition, but rather as a general description

The issue of what constitutes a provident, benefit, superannuation or retirement fund was discussed by the Full Bench of the High Court in Mahony v Commissioner of Taxation (Cth) (1967) 41 ALJR 232; (1967) 14 ATD 519 (Mahony). In that case, Justice Kitto held that a fund had to exclusively be a 'provident, benefit or superannuation fund' and that 'connoted a purpose narrower than the purpose of conferring benefits in a completely general sense…'. This narrower purpose meant that the benefits had to be 'characterised by some specific future purpose' such as the example given by Justice Kitto of a funeral benefit.

Entity X consists of two main accounts, Account I and Account II. 70% of the contributions (both from employers and employees) go to Account I and 30% of the contributions go to Account II.

Account I is established for retirement purposes only and cannot be withdrawn before the member reaches the prescribed age, becomes incapacitated, leaves the country or is deceased.

Account II is established to assist members prepare for a comfortable retirement. Subject to previous approval, withdrawals are allowed for contributions toward purchasing or building a house, financing higher education or providing for medical expenses.

Therefore, it is considered that the fund does not satisfy the requirements in paragraph 118-520(1)(a)(ii) of the ITAA 1997 because Account II of the fund allows members to perform withdrawals before reaching a prescribed age and confers benefits in a completely general sense like for example financing higher learning of family members, purchasing a house and/or providing for medical expenses.

Conclusion

Accordingly, Entity X is not covered by the requirements under paragraph 12-402(3)(b) of Schedule 1 of TAA 1953 because it is not a superannuation fund, it cannot be a foreign superannuation fund and it is not a superannuation fund for foreign residents.

Question 2

Is Entity X an entity that is covered by the requirements under paragraph 12-402(3)(f) of Schedule 1 of TAA 1953 (relevantly, is Entity X an entity with a principal purpose of funding pensions for citizens or contributors of a foreign country)?

Detailed reasoning

Subdivision 12-H of Schedule 1 to the TAA 1953 deals with 'Pay As You Go' withholding obligations for distributions of managed investment trust income.

Section 12-402 of Schedule 1 of the TAA 1953 establishes the widely held requirements for the entities including in the section. Subsection 12-402(3) of Schedule 1 of TAA 1953 lists the kinds of entity that are covered by the section.

Paragraph 12-402(3)(f) of Schedule 1 of TAA 1953 specifies the following:

an entity, the principal purpose of which is to fund pensions (including disability and similar benefits) for the citizens or other contributors of a foreign country, if:

(i) the entity is a fund established by an *exempt foreign government agency; or

(ii) the entity is established under a foreign law for an exempt foreign government agency; or

(iii) the entity is a *wholly-owned subsidiary of an entity mentioned in subparagraph (i).

Entity X is a social security institution formed in accordance with the laws of a foreign country, which has as its principal purpose the provision of retirement benefits for members.

Pursuant to the relevant foreign law and its regulations, each member has two accounts and contributions are credited into these accounts according to the following percentages:

· Account I - 70% of monthly contribution

· Account II - 30% of monthly contribution

Account I is established for retirement purposes only and cannot be withdrawn before the member reaches a prescribed age, becomes incapacitated, leaves the country or is deceased.

Account II allows members to perform withdrawals before reaching a prescribed age and confers benefits in a completely general sense as for example financing higher learning of family members, purchasing a house and/or providing for medical expenses.

Accordingly, given that 70% of the member's contributions are devoted to retirement purposes, it is established that the principal purpose of Entity X is to fund pensions.

The term 'exempt foreign government agency' is defined in section 995-1 as:

· the government of a foreign country, or of part of a foreign country; or

· an authority of the government of a foreign country, if the authority is of a similar nature to an authority that is an *exempt Australian government agency; or

· an authority of the government of part of a foreign country, if the authority is of a similar nature to an authority that is an *exempt Australian government agency.

Since Entity X itself is not a 'government', it is necessary to consider whether it is an 'authority' of a foreign government.

In Commissioner of Taxation v Bank of Western Australia; State Bank of New South Wales (1995) 96 ATC 4009, the Full Federal Court considered the ordinary meaning of the term 'authority' in the context of the former Sales Tax (Exemptions and Classifications) Acts of 1935 and 1992. The Court nevertheless considered the broader definition of the term, concluding that the general characteristic of an 'authority' is a body 'which has the right or power to exercise authority or command' (96 ATC 4009 at 4025 and 4026).

Although stating that 'it is fair to say that no test of universal applicability has emerged', Justice Hill quoted the following passage from the judgement of Gibbs J in Committee of Direction of Fruit Marketing v Australian Postal Commission (1980) 144 CLR 577 at 580 as being 'the closest any judicial comment has come to attempting a definition of the word "authority"':

The expression 'authority of a State' refers to a body which exercises power derived from or delegated by the State, but the fact that a body is established under State law and possesses power conferred upon it by State law will not necessarily mean the body is an authority of a State. In all cases, it is necessary to have regard to all the relevant circumstances in order to determine the character of the body in question.

Justice Hill (with whom Wilcox and Drummond JJ agreed) listed several propositions that can be derived from the decided cases that consider the ordinary meaning of the term 'authority', including the fact that 'a private body, corporate or unincorporated, established for profit will not be an authority' (96 ATC 4009 at 4026). However, another proposition listed by the Court was that '[a]t least where the question is whether a body is a "public authority" the body must exercise control power or command for the public advantage or execute a function in the public interest' (96 ATC 4009 at 4027).

Entity X is a social security institution formed and established in accordance with the laws of a foreign country. Entity X provides retirement benefits for members.

All private and non-pensionable public sector employees who are employed under a contract of service and their employers must contribute to Entity X in accordance with the relevant foreign legislation.

Entity X is an entity formed and established in accordance with the laws of a foreign country which executes a function in the public interest in the form of mandating contributions from employers and employees to provide for retirement and social security benefits. Therefore, it is considered that Entity X is an authority of the government of a foreign country and therefore represents an exempt foreign government agency within the meaning of subsection 995-1 of the ITAA 1997.

Accordingly, Entity X is an entity that is covered by the requirements under paragraphs 12-402(3)(f)(i) and (ii) of Schedule 1 of TAA 1953.