Edited version of your written advice

Authorisation Number: 1051305609064

Date of advice: 8 November 2017

Ruling

Subject: Foreign Superannuation Funds Withholding Tax Exemption

Summary of the facts:

The Fund was incorporated in X and its registered office is located in Y. The directors and secretary and board members are located in Y.

The Fund provides pensions at retirement based on members’ earnings near retirement and length of membership in the scheme.

The Fund investment strategy aims for long-term performance without taking unnecessary risks.

The Fund rules relevantly provide that:

Contributions by Employers

Each employer must contribute to the scheme in respect of members who are or have been employed by it at nominated rate.

Additional voluntary contributions by Members

A member in service may pay additional voluntary contributions to the Fund on a basis agreed with the Trustee. These additional contributions will be used to provide additional benefits for the member.

Entitlement of Pensions for Members

Members are entitled to a pension and or lump sum (if applicable) where a member:

● retires at retirement age

● is totally or partially incapacitated or

● dies.

Pensions are payable monthly upon entitlement. Members may elect a lump sum instead of a pension. A lump sum is payable on a member’s death if certain conditions are met, such as if the member dies in service or dies within 5 years of receipt of pension etc. Where a member dies and leaves behind a surviving spouse, the spouse will receive a pension for life. Where a member dies leaving dependent children, a children’s pension will be paid.

The Fund is generally exempt from X tax by virtue of section 186 of the Finance Act 2004.

The Fund:

● was established and is maintained in the X only to provide benefits for individuals who are not Australian residents.

● the central management and control of the entity is carried on by X entities.

Question 1

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

Reasons for decision

For the financial years ended 30 June 2008 and onwards, paragraph 128B(3)(jb) of the ITAA 1936 excludes interest and dividend income from withholding tax where that income:

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.

The term 'superannuation fund for foreign residents' is defined in section 118-520 of the ITAA 1997 as follows:

118-520(1) 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.

118-520(2) However, 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;

(b) a tax offset has been allowed or is allowable for such an amount

Is the Fund a superannuation 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 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. 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 therefrom 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'.

The phrase ‘a provident, benefit, superannuation or retirement fund’ under paragraph 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’. Justice Windeyer stated at ATD 351; AITR 312; ALJR 278 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. Commissioner of Taxation (Cth) (1967) 41 ALJR 232; (1967); 14 ATD 519; 10 AITR 463 (Mahoney case), the High Court took a similar view as in Scott, Justice Kitto expressed the view at ALJR 232; (1967); 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 takes its meaning from past usage and the meaning of the several expressions must be arrived at in light of their ordinary usage.

As such the term ‘benefit’ requires a purpose narrower than conferring benefits in a completely general sense. The benefit must be characterised by some future purpose. Likewise, a provident fund must not refer to the provision of funds in a general sense, but must relate to a provision against contemplated contingencies.

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.

The Fund undertakes investment strategies for the long term benefit of its members. It aims for long-term performance without taking unnecessary risks.

The Fund provides pensions at retirement based on members’ earnings near retirement and length of member of the scheme upon retirement age. Upon death or where the member is partially or completely incapacitated, entitlement of pension is available to the member or the member’s dependants (spouse or children) depending on the situation.

If a member leaves the scheme early they have the option to receive a deferred pension, transfer to another pension or, if they are 50 or older, receive an early pension. All these options are consistent with a retirement purpose.

Therefore, the Fund satisfies the meaning of ‘superannuation fund’ as its sole purpose is to provide a benefit by way of a pension or lump sum (depending on the circumstances) through their investment strategies as outlined in their fund rules upon retirement, death or impairment.

Was the entity/plan established in a foreign country?

The Fund was incorporated X.

Therefore, it was established in a foreign country.

Was the entity/plan established and is maintained only to provide benefits for individuals who are not Australian residents?

The Fund provides benefits to qualifying members who are not Australian residents.

The entity/plans’ central management and control is carried on outside Australia by entities none of whom is an Australian resident?

The Fund’s central management and control is carried on in X through a trustee. The directors and secretary and board members are located in Y.

Their registered office is located in Y. Therefore, central management and control are carried on outside Australia.

No amount paid to the fund or set aside for the fund has been or can be deducted under the ITAA 1997 and no tax offset has been allowed or is allowable for such an amount?

The Fund confirms that no amount paid to the fund or set aside for the fund has been or can be deducted under the ITAA and no tax offset has been allowed or is allowable for such amount.

In accordance with the documentation supplied, the fund rules show that the Fund has been established as a genuine pension, superannuation and/or retirement fund solely providing superannuation benefits for non-residents of Australia. It has been set up and maintained outside of Australia by non-residents of Australia. Furthermore, no contributions to the Fund are capable of being claimed as a rebate or deduction under any section of the ITAA 1936 or ITAA 1997. The trustee of the Fund is exempt from income tax in the country of residence.

Question 2

Is interest and/or dividend income derived by the Fund not assessable and not exempt income of the Fund under section 128D of the ITAA 1936?

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),(jb) or (m), 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 Fund would be subject to withholding tax under subsections 128B(1) and 128B(2) of the ITAA 1936 respectively, but for the operation of the withholding tax exemption under paragraph 128B(3)(jb) of the ITAA 1936. As paragraph 128B(3)(jb) of the ITAA 1936 is specifically referred to in section 128D of the ITAA 1936 any interest or dividend income derived by the Fund will be considered not assessable not exempt income under section 128D of the ITAA 1936.

ATO view documents

ATO Interpretative Decision ATO ID 2009/67 Income Tax – Superannuation fund for foreign residents

Other references (non ATO view)

Scott v. FC of T (No 2) (1966) 40 ALJR 265; (1966) 14 ATD 333; (1966) 10 AITR 290

Mahoney v. Federal Commissioner of Taxation (1967) 41 ALJR 232; (1967) 14 ATD 519; (1967) 10 AITR 463