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Ruling

Subject: Sovereign immunity

Question 1:

1. Is the foreign government pension fund a superannuation fund for foreign residents for the purposes of section 118-520(1) of the ITAA97?

Answer:

Yes.

Question 2:

2. Is the interest and dividend income received by the fund from an Australian resident entity exempt from WHT pursuant to section 128B(3)(jb) of the ITAA36?

Answer:

Yes.

Question 3:

3. Is the foreign government pension fund exempt from income tax in Australia under the international law doctrine of sovereign immunity in respect of its investment in an Australian company?

Answer:

Yes.

This ruling applies for the following periods:

1 July 2011 to 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

The pension trust fund is established outside Australia and administers and has the responsibility for operating the retirement plan. The foreign government pension fund provides benefits for individuals who are not Australian residents and is funded by contributions from both the employee and the employer.

The manager has made the following statement in relation to the foreign government pension fund:

· The foreign government pension fund is an indefinitely continuing fund and a provident, benefit, superannuation or retirement fund;

· The foreign government pension fund is established in a foreign country;

· The foreign government pension fund is established, and maintained, only to provide benefits for individuals who are not Australian residents;

· The central management and control of the foreign government pension fund carried on outside Australia by entities none of whom is an Australian resident;

· No amount has been paid to the foreign government pension fund or set aside for the foreign government pension fund which has been or can be deducted under the ITAA97; and

· No tax offset has been allowed or is allowable for such an amount.

Relevant legislative provisions

Income Tax Assessment Act 1936

section 128B

subsection 128B(3)

paragraph 128B(3)(jb)

Income Tax Assessment Act 1997

section 118-520

subsection 118-520(1)

paragraph 118-520(1)(a)

paragraph 118-520(1)(b)

paragraph 118-520(1)(c)

paragraph 118-520(1)(d)

subsection 118-520(2)

paragraph 118-520(2)(a)

paragraph 118-520(2)(b)

Reasons for decision

Section 118-520 of the ITAA 1997 defines a superannuation fund for foreign residents as:

A fund is a superannuation fund for foreign residents at a time 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 is 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.

However, 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 deduced under this Act; or a tax offset has been allowed or is allowable for such an amount.

The fund

The term 'fund' is not defined in the Acts. Therefore its ordinary meaning should be used subject to the context in which it appears.

The Australian Oxford Dictionary, 2004, Oxford University Press, Melbourne 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 (Scott's case), 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'. Hill J confirmed this view in Walstern v Federal Commissioner of Taxation [2003] 54 ATR 423 stating that 'for present purposes, the point is the need for "money" or "other property" to constitute a fund'.

Based on the ordinary usage of the word 'fund' and the relevant case law it becomes apparent that for a fund to exist there must be money and it must be set aside for a purpose and/or invested.

On the basis that the money collected by the foreign government pension fund from its members is effectively 'set aside' and appropriately segregated and identifiable as the foreign government pension fund it is clear that the foreign government pension fund will constitute a 'fund' for the purposes of subsection 118-520(1).

Indefinitely continuing fund

The term 'indefinitely continuing fund' is not defined. Therefore its ordinary meaning should be used subject to the context in which it is used. The general view is that this does not mean that the fund must continue forever, but rather that the governing rules should not fix a termination date.

For example, if it can be shown that a fund was created to help ensure the long-term sustainability of the fund, and that the fund does not appear to be one which will terminate or be wound up after a specific period then the 'indefinitely continuing' criteria should be satisfied.

The terms of the legislation, do not provide for the winding up of the foreign government pension fund at a defined point in time. On this basis the requirement that the fund is continuing has been satisfied for the purposes of section 118-520(1)(a)(i).

Provident, benefit, superannuation or retirement fund

The expression "provident, benefit, superannuation or retirement fund" is not defined in the Act. Therefore, it takes its ordinary meaning.

In Scott's case, 'superannuation fund' was not defined in the relevant legislation and therefore the court considered its ordinary meaning. In a single judge decision, Windeyer J said:

"There is no definition in the Act of a superannuation fund. The meaning of the term must therefore depend upon its ordinary usage, the attributes of a thing thus denominated being those which things ordinarily so described have. To say that all that one need to decide whether there was a superannuation fund of the required kind is to study the deed is a mistake, because the deed must be read with a preconception of what such a fund is, otherwise reading it can provide no answer."

Windeyer J went on to say:

'…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 monetary value) upon their reaching a prescribed age'

In further discussing the analysis of a trust deed (at the time of the trusts were the usual forms of superannuation funds), Windeyer J stated that:

'… the parties concerned must have intended that the deed should take effect and operate according to its tenor.'

Another seminal case on the matter is Mahony and Another v Federal Commissioner of Taxation 14 ATD 519 (Mahoney's case). In this case the court considered the ordinary meaning of the term 'provident, benefit or superannuation fund'. Kitto J said the following:

'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 benefits, in a completely general sense, upon employees. Precise definition may be difficult, and in any case is unnecessary for present purposes. All that need be recognized 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 relation 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.'

The foreign government pension fund is a 'provident, benefit, superannuation or retirement fund' on the basis that:

· The foreign government pension fund can be described as a 'superannuation fund' on the basis that its purpose is to provide the members of the foreign government pension fund money benefits upon their reaching a prescribed age;

· The foreign government pension fund can be described as "provident" on the basis that it will provide money benefits upon particular contingencies;

· The foreign government pension fund can be described as 'superannuation' in nature as it provides benefits to a member upon their retirement, disability or death; and

· The terms of the foreign government pension fund are consistent with a superannuation fund and the terms are strictly adhered to (evidenced by the fact that the terms of the foreign government pension fund are enacted in law and violation of them could lead to criminal or civil sanctions).

On this basis the foreign government pension fund is a 'provident, benefit, superannuation or retirement fund' for the purposes of subparagraph 118-520(1)(a)(ii) of the ITAA97.

Foreign country establishment

The plan has been established outside Australia. Paragraph 118-250(1)(b) of the ITAA97 is satisfied.

Non Australian resident members

The manager has confirmed that the foreign government pension fund has been established and maintained only to provide benefits to its members who are not Australian residents. Paragraph 118-520(1)(c) of the ITAA97 is satisfied.

Central management and control

The manager has confirmed that the central management and control of the foreign government pension fund is carried on outside Australia by entities none of whom is an Australian resident. Paragraph 118-520(1)(d) of the ITAA97 is satisfied.

Deduction and tax offset

On the basis that a deduction or tax offset is not available in Australia for amounts contributed to the foreign government pension fund, the negative limb is not applicable.

Conclusion

All the conditions under section 118-520 of the ITAA97 are satisfied, therefore the foreign government pension fund is a superannuation fund for foreign residents.

Question 2:

Section 128B of Division 11A of the ITAA36 imposes WHT on payments of dividends, interest and royalties made by Australian residents to non-residents and subsection 128B(3) of the ITAA36 lists certain types of income to which WHT under section 128B of the ITAA36 does not apply. In particular, paragraph 128B(3)(jb) of the ITAA36 provides an exclusion from WHT for certain superannuation funds for foreign residents for income that: is derived by a non-resident that is a superannuation fund for foreign residents; and consists of interest, or consists of dividends or non-share dividends paid by a company that is resident; and is exempt from income tax in the country in which the non-resident resides.

Derives the income

The fund derives the income in its role as the administrator of the foreign government pension fund and will attribute income to the fund. Therefore, the foreign government pension fund derives the income in accordance with subparagraph 128B(3)(jb)(i) of the ITAA36.

Non-resident

The foreign government pension fund is non-resident on the basis that:

· it is established in a foreign country;

· its central management and control is carried on in a foreign country; and

· the persons carrying on the central management and control of the foreign government pension fund are non-residents.

Therefore, the foreign government pension fund is a non-resident in accordance with subparagraph 128B(3)(jb)(i) of the ITAA36.

Superannuation fund for foreign residents

The foreign government pension fund is a superannuation fund for foreign residents as determined in Question 1. Therefore, the income has been derived by a superannuation fund for foreign residents in accordance with subparagraph 128B(3)(jb)(i).

Interest, dividends and non-share dividends

The income derived by the foreign government pension fund will be interest or dividends. Therefore, the requirement in subparagraph 128B(3)(jb)(ii) of the ITAA36 will be satisfied.

Paid by a resident

The interest and dividends will be paid by resident entities. Therefore, the requirement in subparagraph 128B(3)(jb)(ii) will be satisfied.

Exempt from tax in foreign country

The fund is exempt from tax in the foreign country. Therefore, the interest and dividends paid will be exempt from tax in the foreign country. Therefore, the requirement in subparagraph 128B(3)(jb)(iii) of the ITAA36 will be satisfied.

Conclusion

The requirements of paragraph 128B(3)(jb) have been satisfied. Therefore, section 128B does not impose WHT on the payment of interest or dividends by a resident to the Fund.

Question 3:

The doctrine of sovereign immunity provides that income derived by a foreign State from sources in another State should not be subject to tax in the State in which the income has its source.

The requirements in ATO ID 2002/45 that must be satisfied in establishing that sovereign immunity applies to exempt dividend and interest income from WHT are:

· The person making the investment (and therefore deriving the income) is a foreign government or an agency of a foreign government;

· The moneys being invested are and will remain government moneys; and

· The income is being derived from a non-commercial activity.

Whilst these requirements specifically deal with sovereign immunity in the context of WHT, if the requirements listed are satisfied, the foreign entity should be exempt from all Australian income taxes in respect of the relevant instrument (i.e. including capital gains tax on the future realisation of that investment).

Agency of a foreign government

For an entity to obtain an income tax exemption under the doctrine of sovereign immunity, the entity making the investment into Australia must be a foreign government or agency of a foreign government on the basis that a foreign government pension fund has been created by a statute of the foreign country and therefore has an objective and real connection to that country;

The majority of the Board members of foreign government pension fund are members of the government or have been appointed by the head of government, providing the requisite control necessary to satisfy the sovereign immunity requirements in respect of foreign government pension fund.

The 2010 Annual Report of foreign government pension fund declares it to be an agency of the foreign country.

In light of the above facts it is possible to conclude that foreign government pension fund is an agency of the foreign country.

Government moneys

For an entity to obtain an income tax exemption under the doctrine of sovereign immunity, the moneys being invested are and will remain government moneys.

The money used by foreign government pension fund to indirectly invest in the Australian company is and will remain the property of the foreign government on the basis that:

· The indirect investment in the Australian company was made using moneys from the Fund and the members and employers have a compulsory obligation as prescribed by legislation to contribute moneys to the fund;

Legislation prescribes that foreign government pension fund is responsible for the management and control of the money in the fund;

Legislation provides the circumstances in which a member is entitled to benefits. These are defined benefits and are not contingent on underlying investment performance. The foreign country is legally obligated to provide the vested member benefits regardless of whether there is a shortfall.

In light of the above facts it is possible to conclude that the moneys invested by foreign government pension fund are and will remain the moneys of the government.

Non-commercial activity

For an entity to obtain an income tax exemption under the doctrine of sovereign immunity, the income being derived must be from non-commercial activities. The foreign government pension fund will derive the relevant income (interest, dividends and capital gains from the sale of shares or units) from non-commercial activities on the basis that:

· The foreign government pension fund is a passive investor in the Australian company;

· The foreign government pension fund will not in any way participate in the management of the Australian company ; and

· The foreign government pension fund's total indirect interest in the Australian company amounts to less than 10%.

In light of the above facts it is possible to conclude that foreign government pension fund will derive the relevant income from non-commercial activities.

Conclusion

As the requirements of sovereign immunity are satisfied, any income foreign government pension fund derives from its investment in the Australian company will be exempt from income tax in Australia.

Interest derived by foreign government pension fund from loans will be exempt from Australian income tax and will not be subject to Australian withholding tax.

Dividends derived by foreign government pension fund will be exempt from Australian income tax and will not be subject to Australian withholding tax; and in the event that a capital gain is derived by foreign government pension fund from the sale of an interest in the assets of the Australian company, and that sale is otherwise subject to Australian income tax, it will not be subject to Australian income tax due to the doctrine of sovereign immunity.