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Authorisation Number: 1012410316086

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Ruling

Subject: Australian sourced dividend and interest income received by an overseas fund

Question 1

Will the Fund be considered to be a transparent vehicle for Australian tax treaty purposes, such that Australian sourced dividend and interest income received by a company will get the benefit of the reduced withholding tax rates?

Answer

Yes

This ruling applies for the following periods:

Year of income ended 30 June 2012

Year of income ended 30 June 2013

Year of income ended 30 June 2014

Year of income ended 30 June 2015

Year of income ended 30 June 2016

Year of income ended 30 June 2017

The scheme commences on:

1 July 2011

Relevant facts and circumstances

The scheme

The Fund will invest in listed and unlisted shares in Australian companies and units in Australian unit trusts. The Fund also expects to invest in bonds and other interest bearing securities and potentially derive Australian sourced interest income. The Fund may also invest in derivatives. In addition, the Fund may also hold cash.

The Fund will also be making similar investments in other jurisdictions.

The Company will be an investor in the Fund.

Initially the 'pooled assets' of the Fund will consist of assets primarily belonging to pension plans of entities within a large corporate group, resident in Country X and Country Y.

Relevant entities

The Company

The Company is incorporated under the laws of Country X.

The central management and control of the Company is carried on outside Australia by persons none of whom is a resident of Australia.

The Company is a company that is a tax resident of Country X for the purposes of the Agreement between the Commonwealth of Australia and Country X for the avoidance of double taxation (the Country X Treaty).

Fund Manager

The Fund Manager is a wholly owned subsidiary of the corporate group. It is the manager and central administration agent for the Fund. The Fund Manager is a public company with limited liability, incorporated under the laws of Country Y, having its registered office in Country Y.

The Fund Manager does not carry on, or intend to carry on a business in Australia through a dependent agent who has the authority and habitually exercises such authority to conclude contracts on behalf of the Fund Manager. The Fund Manager does not have or intend to have a place of business (ie a physical presence such as an office) in Australia.

The Fund Manager, as the management company and central administration agent for the Fund, has the overall responsibility for the management of the assets of the Fund in accordance with the Prospectus, the Management Regulations, and various laws and regulations of Country Y. The Fund Manager manages the co-ownership of assets of the Fund on behalf of the investors as joint owners.

The Fund Manager has legal title (but not beneficial title) to the Fund's assets.

The Fund

The Fund is an Investment Fund in Country Y.

The applicant has advised that for Country Y corporate law purposes, the Fund does not have a separate legal personality. It is an unincorporated contractual arrangement for the co-ownership of transferable securities and other liquid financial assets managed solely and exclusively in the interests of its investors.

The applicant has advised that the Fund is not a legal partnership.

The Fund's investments are managed in distinct portfolios of assets and liabilities, each constituting a sub fund. A separate pool of assets and liabilities are maintained for each Sub Fund and invested in accordance with the investment objectives applicable to the relevant Sub Fund. Each Sub Fund operates independently.

Investors are able to choose which Sub Fund is most appropriate for their specific risk and return expectations.

Investor's interests in the Fund are represented by units of different classes within each Sub Fund.

Units in the Fund are not shares but represent the proportion of the underlying assets and liabilities of the Sub Funds to which an investor is beneficially entitled. Ownership of units entitles a unit holder to participate and share in the property of the relevant Sub Fund.

The Custodian

The Custodian is a company incorporated and resident in Country Y and is the custodian of the Fund's assets. As the custodian, it

· Carries out the day to day administration of the assets comprising the Fund;

· Performs its duties pursuant to the Management Regulations; and

· Executes transactions at the direction of Fund Manager, the manager.

The Custodian does not carry on or intend to carry on a business in Australia through a dependent agent who has the authority and habitually exercises such authority to conclude contracts on behalf of the Custodian. The Custodian does not have or intend to have a place of business (ie a physical presence such as an office) in Australia.

Relevant agreements

The operation of the Fund, roles of the Manager and the Custodian are specified in the Prospectus, Management Regulations and Custodian Agreement:

Relevant legislative provisions

section 128B of the Income Tax Assessment Act 1936 (ITAA 1936)

subsection 128B(1) of the ITAA 1936

subsection 128B(3) of the ITAA 1936

subsection 128B(3A) of the ITAA 1936

subsection 128B(3D) of the ITAA 1936

subsection 128B(3E) of the ITAA 1936

subparagraph 128B(3)(ga)(i) of the ITAA 1936

subsection 128B(2)

subsection 128B(4) of the ITAA 1936

section 7 of the Income Tax (Dividends, Interest and Royalties Withholding Tax) Act 1974

subsection 128B(5) of the ITAA 1936

section 4 of the International Tax Agreements Act 1953 (ITAA 1953)

section 17A of the ITAA 1953

Reasons for decision

Section 128B of the ITAA 1936 sets out the circumstances in which a taxpayer is liable to, and exempted from, withholding tax.

Specifically, pursuant to subsection 128B(1) of the ITAA 1936, withholding tax is imposed on dividends derived by a non-resident on or after 1January 1968 and paid by an Australian resident company, subject to the specific exemption in subsection 128B(3), (3A), (3D) and (3E) of the ITAA 1936.

Section 128B of the ITAA 1936 however will not apply to the franked part of a dividend (Subparagraph 128B(3)(ga)(i) of the ITAA 1936).

Subsection 128B(2) of the ITAA 1936 covers payment of interest.

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).

Similarly, subsection 128B(5) of the ITAA 1936 provides that a person who derives interest income to which section 128B of the ITAA 1936 applies, is liable to pay withholding tax on that interest income. The withholding tax rate applicable to interest income is currently 10%.

However, in determining liability to Australian tax on Australian sourced income derived by a non-resident, it is necessary to consider not only the income tax laws but also any applicable tax treaty.

Section 4 of the International Tax Agreements Act 1953 (ITAA 1953) incorporates that Act with the ITAA 1936 and the ITAA 1997 so that those Acts are read as one. Except for some limited provisions, the ITAA 1953 overrides the ITAA 1936 and the ITAA 1997 where there are inconsistent provisions.

Section 17A of the ITAA 1953 provides that the amount of withholding tax imposed shall not exceed the tax limit specified in the relevant tax treaty agreement.

The Fund is a resident of Country Y. There is no tax treaty between Australia and Country Y.

The Company is a resident of Country X. The Country X Agreement operates to avoid double taxation of income received by Australian and Country X residents.

Therefore, to determine whether the Country X agreement will provide withholding tax relief on dividends paid, it is necessary to determine whether any of the dividend income flowing from the Australian investments of the Fund are dividends paid to a Country X resident that is beneficially entitled to those dividends.

Who is beneficially entitled to the dividend and interest income?

In considering who is beneficially entitled to the dividend and interest income, it is first necessary to consider whether there is a trust relationship between the manager/custodian of the Fund and the unit holders.

Trust or Trust estate is not defined in the ITAA 1936 or ITAA 1997. Trustee is defined in subsection 6(1) of the ITAA 1936:

trustee in addition to every person appointed or constituted trustee by act of parties, by order, or declaration of a court, or by operation of law, includes:

a) an executor or administrator, guardian, committee, receiver, or liquidator; and

b) every person having or taking upon himself the administration or control of income affected by any express or implied trust, or acting in any fiduciary capacity, or having the possession, control or management of the income of a person under any legal or other disability.

A description of the nature of a trust is provided in Jacobs' Law of Trusts in Australia:(7^th ed, LexisNexis Butterworths, 2006, paragraph 101)

A trust exists when the holder of a legal or equitable interest in certain property is bound by an equitable obligation to hold his interest in that property not for his own benefit, but for benefit, as to the whole or part of such interest, of another person or persons or for some object or purposes permitted by law.

In Underhill, Law of Trusts and Trustees (Butterworths, 13^th edn, 1979, page 1) the following description is provided:

A trust is an equitable obligation binding a person (who is called a trustee to deal with property over which he has control (which is called the trust property), for the benefit of persons (who are called beneficiaries...) of whom he may himself be one, and any one of whom may enforce the obligation.

French J in Harmer & Ors v. Federal Commissioner of Taxation 89ATC 5180 stated that a trust is notably a definition of a relationship by reference to obligations. He went on to state that the four essential elements of a trust are:

1. the trustee who holds a legal or equitable interest in the trust property;

2. the trust property which must be property capable of being held on trust and which includes a chose in action;

3. one or more beneficiaries other than the trustee; and

4. a personal obligation on the trustee to deal with the trust property for the benefit of the beneficiaries which obligation is also annexed to the property.

Having regard to the Prospectus and Management Regulations and the Custodian Agreement in relation to the Fund, it is considered that all four elements necessary for a trust are present so as to give rise to a trust relationship between the Manager/Custodian and the unitholders in the Fund.

The Country X Agreement

The Country X Agreement provides that dividends paid by an Australian resident company to a resident of Country X may be taxed in Australia to a maximum of 15% of the gross amount of the dividends. Similarly interest may be taxed to a maximum of 10%.

It is accepted that there is a trust relationship between the manager/custodian of the Fund and the unitholders. In accordance with Article 11 of the Management Regulations of the Fund, the unitholders are beneficially entitled to the gross income of the Fund in proportion to the Units owned by them. Further, unitholders are entitled to a share of the gross income as it arises and can realise the income either by redeeming their Units or through distribution.

Therefore the Company is beneficially entitled to its share of any Australian sourced dividend and interest income of the Fund.

Accordingly, the Australian sourced unfranked-dividends to which the Company (being a resident of Country X for Country X tax purposes) is beneficially entitled will be subject to a maximum 15% withholding tax under the Country X Agreement. Similarly Australian sourced interest income to which the Company is beneficially entitled will be subject to a maximum 10% withholding tax under the Country X Agreement.