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Ruling

Subject: Withholding tax exemption for dividend and interest income

Question 1

Is the company excluded from liability to withholding tax on interest and dividend income it derives from Australian securities held as part of its pensions fund under paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No

Question 2

Does section 128D of the ITAA 1936 apply to treat interest and dividend income derived by the company from Australian securities held as part of its pensions fund, as not assessable income and not exempt income?

Answer

Yes

This ruling applies for the following periods:

1 July 2011 to 30 June 2012

1 July 2012 to 30 June 2013

1 July 2013 to 30 June 2014

The scheme commences on:

During the income year ended 30 June 2012.

Relevant facts and circumstances

The company is not incorporated in Australia and is a resident of another country for tax purposes. The company's business includes its pensions fund business.

The Company's Pensions Fund Business

The company is required to hold assets used to meet the liabilities arising from its pensions fund business separately and those assets may only be used for the purpose of meeting those liabilities. The assets so held are referred to as the pensions fund and the company must maintain a separate accounting record in respect of the fund.

By the legal terms of the policies being written, the pensions fund is not capable of having surpluses (assets of the pensions fund exceeding the liabilities payable to policyholders), and therefore there are no surpluses in the pensions fund that are able to be paid to shareholders of the company.

Practical operation of the pensions fund

Policyholders who invest in the pensions fund do so by way of purchase of a policy.

The policyholder has no property rights in the assets of the fund, which instead are legally and beneficially owned by the company.

A policyholder has contractual rights against the company.

A policyholder in the company's pensions fund may surrender for cash or assets, the whole or part of the policy.

The only revenue that the company derives from its management of the pensions fund is fee based income.

Policyholders of the pensions fund

All of the policyholders in the company's pensions fund warrant, under their policies, to the company that they are either registered pension schemes in the company's country of residence or relevant overseas pension schemes, and to inform the company of any change in their status.

If any policyholder in the company's pensions fund loses their status as a registered pension scheme in the company's country of residence or relevant overseas pension schemes, the company is entitled to immediately cancel the policy.

Other

All of the company's Australian assets (that is, all of the company's assets that are potentially subject to Australian withholding tax) are held as part of the pensions fund.

The company's Australian interest and dividend income is derived from investment in Australian securities held as part of the pensions fund.

The company does not have any Australian policyholders.

The company's pensions fund is exempt from income tax on its interest and dividend income in its country of residence. This is on the basis that all of the policyholders in the company's pensions fund are either registered pension schemes in the company's country of residence or relevant overseas pension schemes which satisfy relevant regulation in the company's country of residence.

The company's pensions fund policy is an indefinite contract. However, the company has the right to require the issue of a new policy and to amend the terms and conditions of the policy in certain circumstances.

The company is not a resident of Australia for tax purposes.

Relevant legislative provisions

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

Income Tax Assessment Act 1936 Section 128D

Does Part IVA apply to this ruling?

Part IVA of the ITAA 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

Question 1

Detailed reasoning

Section 128B of the ITAA 1936 sets out the rules for liability to withholding tax.

Subsection 128B(1) of the ITAA 1936 provides that the following type of income, is 'income' to which this section applies:

(a) income derived, on or after 1 January 1968, by a non-resident; and

(b) consists of a dividend paid by a company that is a resident.

Subsection 128B(2) of the ITAA 1936 also provides that the following type of income, is 'income' to which this section applies:

(a) income derived, on or after 1 January 1968, by a non-resident; and

(b) consists of interest that:

(i) is paid to the non-resident by a person to whom this section applies and is not an outgoing wholly incurred by that person in carrying on a business in a country outside Australia at or through a permanent establishment of that person in that country; or

(ii) is paid to the non-resident by a person who, or by persons each of whom, is not a resident and is, or is in part, an outgoing incurred by that person or those persons in carrying on business in Australia at or through a permanent establishment of that person or those persons in Australia.

In this case, the relevant income, interest and dividends, is income to which section 128B applies as per subsections 128B(1) and 128B(2) of the ITAA 1936.

The definition of the term 'non-resident' in subsection 6(1) of the ITAA 1936 states that, unless contrary intention appears, a non-resident is a 'person who is not a resident of Australia'. The definition of 'person' in subsection 6(1) of the ITAA 1936 refers to the meaning in the Income Tax Assessment Act 1997 (ITAA 1997). Subsection 995-1(1) of the ITAA 1997 provides that the term 'person' includes a company. The company is not incorporated in Australia and is a resident of another country for tax purposes, and is not a resident of Australia. Therefore, the company is a non-resident for the purposes of section 128B of the ITAA 1936. It would follow that the company is liable to withholding tax on interest and dividend income it derives on Australian securities held in the pensions fund unless an exemption applies.

Paragraph 128B(3)(jb) of the ITAA 1936 provides that section 128B does not apply to 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.

Subsection 6(1) of the ITAA 1936 states that 'superannuation fund for foreign residents' has the meaning given by subsection 995-1(1) of the ITAA 1997. Subsection 995-1(1) of the ITAA 1997 in turn states 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 subsection 118-520(1) of the ITAA 1997 if:

(a) at that time, it is:

(i) an indefinitely continuing fund; and

(ii) 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 entities 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:

(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.

Is the pensions fund a 'fund'?

The term 'fund' is not defined in 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 (The Australian Oxford Dictionary) 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. Federal Commissioner of Taxation (No 2) (1966) 14 ATD 333; (1966) 10 AITR 290 (Scott) Windeyer J, at ATD 351; AITR 312, expressed the view that 'fund' in the context of 'superannuation fund' ordinarily meant 'money (or investments) set aside and invested, the surplus income 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, at FCR 15; ATC 5085; ATR 434, that 'for present purposes, the point is the need for "money" or "other property" to constitute a fund'.

The company's business includes its pensions fund business. Consequently, the company is required to hold assets used to meet the liabilities arising from its pensions fund business separately and those assets may only be used for the purpose of meeting those liabilities.

As the assets held in the pensions fund have been set aside by the company to meet the liabilities arising from its pensions fund business the pensions fund would constitute a 'fund'.

Is the pensions fund a fund that is a 'superannuation fund for foreign residents'?

Indefinitely continuing fund

The term 'indefinitely continuing fund' is not defined. Accordingly 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 defines 'indefinite' as 1. vague, undefined. 2. unlimited… and 'indefinitely' as 1. for an unlimited time…2. in an indefinite manner.

Generally speaking, in the context of a superannuation fund, the requirement that the fund be 'indefinitely continuing' means that the fund must not be one which will terminate or be wound up after a specified period. It does not mean that the fund must continue forever.

As discussed above, the pensions fund represents the assets of the company which have been set aside by the company to meet the liabilities arising from its pensions fund business. The policies written by the company in relation to its pensions fund business are indefinite in duration. It would follow that as long as the company writes policies in relation to its pensions fund business, the pensions fund would be required to be maintained by the company. Therefore, it is reasonable to conclude that the pensions fund is an indefinitely continuing fund.

'Provident', 'benefit', 'superannuation' or 'retirement' fund

Having determined that the pensions fund is an 'indefinitely continuing fund', whether it is a 'provident', 'benefit', 'superannuation' or 'retirement' fund within the meaning of subparagraph (a)(ii) of the definition of 'superannuation fund for foreign residents' in subsection 118-520(1) of the ITAA 1997 needs to be considered. None of the four descriptors are the subject of definition. Accordingly, it is necessary to look to the ordinary meaning of the words taking into account their context and having regard to any relevant case law authorities.

In Scott at ATD 351; AITR 312, Windeyer J made the following observations in respect of the phrase 'a provident, benefit or superannuation fund established for the benefit of employees'

There is no definition in the Act of a superannuation fund. The meaning of the term must therefore depend upon ordinary usage, the attributes of a thing thus denominated being those which things ordinarily so described have the connotation of the phrase in the Act must be determined by one's general knowledge of the extent of the denotation of the phrase in common parlance 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.

A similar view as to the meaning of the words 'provident, benefit or superannuation fund' was expressed by Kitto J in Mahony v. Commissioner of Taxation (1967) 41 ALJR 232 (Mahony) where his Honour stated at ALJR 232:

There was no definition in the Act of a "provident, benefit or superannuation fund", and the meaning of the several expressions must therefore be arrived at in light of ordinary usage and with only one piece of assistance to be gathered from the immediate context. Since a fund, if its income was to be exempt under the provision, was separately required to be one established for the benefit of employees, each of the three descriptive words "provident", "benefit" and "superannuation" must be taken to have connoted a purpose narrower than the purpose of conferring benefit, in a completely general sense, upon employees. Precise definition may be difficult. 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 employment, of a subvention for him or his estate or persons towards whom he may have stood in some kind of relations commonly giving rise to a legal or moral responsibility-so "benefit" must have meant a benefit, not in a general sense, but characterized by some specific future purpose. A funeral benefit is a familiar example.

In Cameron Brae Pty Ltd v. FC of T (2007) 161 FCR 468; 2007 ATC 4936; 67 ATR 178 (Cameron Brae), the Full Federal Court considered the meaning of the phrase 'provident, benefit, superannuation or retirement' fund in the definition of 'superannuation fund' in section 10 of the Superannuation Industry (Supervision) Act 1993. Stone and Allsop JJ cited, at FCR 481; ATC 4945; ATR 190, the decisions in Scott and Mahony amongst other authorities to reach the conclusion that a 'trust is only a superannuation fund if its sole purpose is for the payment of superannuation benefits'.

After referring to the relevant extracts from the judgements of Windeyer J in Scott and Kitto J in Mahony cited above, Jessup J in his dissenting judgement in Cameron Brae expressed, at FCR 505; ATC 307; ATR 212, the following view in relation to the ordinary meaning of a 'superannuation fund'.

Neither party suggested that the ordinary meaning of the term "superannuation fund" was not as identified by Windeyer J and Kitto J, or that the trial Judge ought not to have been guided by their Honours' statements. Thus, as a matter of common understanding, it would seem that a superannuation fund is a fund which has as its sole purpose the provision of benefits to participating employees upon their reaching a prescribed age (per Windeyer J) or upon their retirement, death or other cessation of employment (per Kitto J).

Accordingly, in view of the relevant case law authorities, for a fund to be classified as a 'provident, benefit, superannuation or retirement' fund its sole or exclusive purpose must be the provision or payment of benefits to members of the fund upon their reaching a prescribed age or upon their retirement, death or other cessation of employment.

The pensions fund represents the assets of the company which have been set aside by the company to meet the liabilities to policyholders arising from its pensions fund business. The company's revenue from its management of the pensions fund is fee based income. Therefore, the sole purpose of the company's pensions fund is not the provision of benefits to members that are characterised by some specific future event such as reaching a prescribed age or upon retirement, death or cessation of employment.

Having regard to the nature and purpose of the pensions fund it is considered that the company's pensions fund is not a 'provident, benefit, superannuation or retirement fund' as that phrase has been interpreted by the relevant authorities.

Therefore, the pensions fund does not satisfy subparagraph (a)(ii) of the definition of 'superannuation fund for foreign residents' in subsection 118-520(1) of the ITAA 1997. It would follow that the company's pensions fund is not a superannuation fund for foreign residents as the term is defined in subsection 118-520(1) of the ITAA 1997. Accordingly, the company is not excluded from liability to withholding tax on interest and dividend income it derives from Australian securities held as part of its pensions fund under paragraph 128B(3)(jb) of the ITAA 1936.

For completeness, it is noted that subsection 128A(11) of the ITAA 1936 does not operate to deem the company to be a trustee of the pensions fund. While the reference to 'a fund' in that subsection could be read as referring to any fund, the Explanatory Memorandum to the Taxation Laws Amendment Bill (No. 4) 1994 which introduced that subsection makes it clear that the reference to a 'fund' is to a provident, benefit, superannuation or retirement fund (see paragraph 7.85). As the company's pensions fund is not a provident, benefit, superannuation or retirement fund, this subsection has no application.

It is also noted that under Articles 10 (Dividends) and 11 (Interest) of the relevant tax treaty, Australia has the right to tax the dividend and interest income subject to the limitations prescribed therein.

Question 2

Detailed reasoning

Section 128D of the ITAA 1936 provides:

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.

Dividend and interest income derived by the company from Australian securities held in its pensions fund is subject to withholding tax and is not assessable income and not exempt income in accordance with section 128D of the ITAA 1936.