Edited version of your written advice

Authorisation Number: 1012916364526

Date of advice: 11 December 2015

Ruling

Subject: Exemption from interest and dividend withholding taxes under paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)

Question 1

Is the Fund a 'superannuation fund for foreign residents' as defined in section 118-520 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Is the trustee of the Fund excluded from liability to withholding tax on interest and/or dividend income derived by the Fund from Australia under paragraph 128B(3)(jb) of the ITAA 1936?

Answer

No.

This ruling applies for the following periods:

Year ended XXXX

The scheme commenced:

During the income year ended XXXX.

Relevant facts and circumstances

The Fund is a social security institution formed in accordance with the laws of the foreign jurisdiction.

The Fund is a defined contribution plan that is funded from both the contributions of the employee and employer.

Income earned on funds belonging to the Fund is exempt from taxes of the foreign jurisdiction.

Whilst separate accounts are maintained for each member, the funds/assets comprising the Fund and thus underpinning these accounts are pooled in a common fund and are not segregated into separate stand-alone funds.

Benefits received by members of the Fund include withdrawals at retirement age, and withdrawals prior to retirement age for purposes such as education, medical expenses, or to acquire a home.

The stated intention for allowing withdrawals prior to retirement age is to assist members in preparing for retirement and enhancing their post-retirement lifestyle.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-520

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

Reasons for decision

Question 1

Detailed reasoning

Pursuant to subsection 118-520(1) of the ITAA 1997, 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.

Furthermore, a fund is not a 'superannuation fund for foreign residents' (subsection 118-520(2) of the ITAA 1997) 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 Fund a 'fund'?

The first question to consider in determining whether the Fund is a 'superannuation fund for foreign residents' within the meaning of section 118-520 of the ITAA 1997 is whether the Fund 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, [Online], viewed 24 November 2015, www.macquariedictionary.com.au (Macquarie Dictionary) defines the term 'fund' as:

1. a stock of money or pecuniary resources. 2. a store or stock of something, now often of something immaterial. 3. an organisation which manages money invested for a particular purpose, such as superannuation.

In Scott v. FC of T (No 2) (1966) 40 ALJR 265; (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'.

On the facts, it is concluded that the Fund is a 'fund'.

Is the Fund an 'indefinitely continuing fund'?

The term 'indefinitely continuing fund' in subparagraph 118-520(1)(a)(i) of the ITAA 1997 is also undefined.

The Macquarie Dictionary defines 'indefinite' as:

1. not definite; without fixed or specified limit; unlimited. 2. not clearly defined or determined; not precise.

There is no requirement for the Fund to be terminated or wound up after a specified period. Therefore, the Fund is a fund that is considered to be indefinitely continuing for the purposes of subparagraph 118-520(1)(a)(i) of the ITAA 1997.

Is the Fund 'a provident, benefit, superannuation or retirement fund'?

The phrase 'a provident, benefit, superannuation or retirement fund' under subparagraph 118-520(1)(a)(ii) is not defined in either the ITAA 1997 or the ITAA 1936. However, the phrase has been subject to judicial consideration.

In Scott, the High Court examined the terms 'superannuation fund' and 'fund'. Windeyer J enunciated at ALJR 278; ATD 351; AITR 312 that:

… 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.

In a later case, Mahoney v. Federal Commissioner of Taxation (1967) 41 ALJR 232; (1967) 14 ATD 519; (1967) 10 AITR 463 (Mahoney), the High Court took a similar view as in Scott, Kitto J expressed the view at ALJR 232; ATD 520; AITR 464 that:

…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 employee, 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 a general sense, but characterised by some specific future purpose.

The court found that the expression 'provident, benefit or superannuation fund' takes its meaning from past usage and the meaning of the several expressions must be arrived at in light of their ordinary usage.

In analysing the components of the expression, Kitto J interpreted the term 'benefit' to require a purpose narrower than the purpose of conferring benefits in a completely general sense upon employees. The benefit must be characterised by some future purpose e.g. a funeral benefit. On the same note, a provident fund must not refer to the provision of funds in a general sense, but must relate to a provision against contemplated contingencies.

Kitto J considered that the terms 'provident fund' and 'benefit fund' have historically been associated with friendly societies and provident societies. Benefit funds have a long history in the vocabulary of friendly and benefit societies, which have given the word a specialised meaning. These societies were established to provide 'benefits' for members on some defined occurrence e.g. sickness, accident, old age and death.

Both of the abovementioned cases emphasise that the benefits must be provided for a specific purpose and require that there is a connection between the benefit received and the provision by the fund for retirement or death of a member or against 'contemplated contingencies', such as a sickness or accident.

Benefits received by members of the Fund include withdrawals at or prior to retirement age.

Withdrawals from the Fund by members are allowed any time prior to retirement age for purposes such as education, medical expenses, or to acquire a home.

It is considered that the connection of the withdrawal of funds prior to retirement age to the provision by the Fund for retirement or death of a member is too remote given that the benefits can be accessed at any time, and possibly many years before the prescribed age of retirement. That is, the specific purposes of the withdrawals are too remote to the broad statement of intention of assisting members prepare for retirement or enhancing their post-retirement lifestyle. Further, benefits for assisting with retirement has too remote a link to actual retirement benefits for the Fund to be considered a fund devoted solely to the purpose of providing retirement benefits.

Therefore, it is necessary to consider whether the withdrawal of funds prior to retirement age are benefits received by members for provident or benefit purposes, and therefore that the Fund is a provident or benefit fund.

At a broad level, such a purpose must be to provide a provision against contemplated contingencies or the payment of benefits on some defined occurrence such as sickness, accident, old age or death.

The withdrawal of funds for the payment of medical expenses is considered to be a benefit received by members that is connected to the provision of a benefit for a 'contemplated contingency' as the withdrawals are subject to the member or their family requiring treatment for an illness.

The withdrawals of funds for the purchase of a house or to finance education are benefits provided to members where there is no connection to the provision by the Fund against 'contemplated contingencies' or on the happening of a defined occurrence such as sickness, accident, old age or death.

In view of the above, it is considered that not all the benefits received by members from the Fund are connected to the provision by the fund for retirement or death of a member or against 'contemplated contingencies' or on defined occurrences such as sickness, accident, old age or death. Therefore, the Fund is not 'a provident, benefit, superannuation or retirement fund' under subparagraph 118-520(1)(a)(ii) of the ITAA 1997.

In view of the above, it is not necessary for the other requirements in subsection 118-520(1) of the ITAA 1997 to be considered. Accordingly, the Fund is not a 'superannuation fund for foreign residents' as defined in section 118-520 of the ITAA 1997.

Question 2

Detailed reasoning

Paragraph 128B(3)(jb) of the ITAA 1936 provides that liability to withholding tax 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;

As discussed in Question 1 above, the Fund is not a 'superannuation fund for foreign residents' in accordance with section 118-520 of the ITAA 1997. Therefore, the requirement in paragraph 128B(3)(jb) of the ITAA 1936 that the interest and dividend income is derived by a 'superannuation fund for foreign residents' is not satisfied. Accordingly, the trustee of the Fund does not qualify for the withholding tax exemption contained in paragraph 128B(3)(jb) of the ITAA 1936.