Edited version of your written advice

Authorisation Number: 1051313575328

Date of advice: 14 December 2017

Ruling

Subject: Withholding tax

Question 1

Is the trustee of the Trust excluded from liability to withholding tax on its interest and/or dividend income derived from Australia under paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No

Question 2

Is interest and/or dividend income derived from Australia by the trustee of the Trust non-assessable and not exempt income under section 128D of the ITAA 1936?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

Year ended 30 June 2017

Year ending 30 June 2018

Year ending 30 June 2019

Year ending 30 June 2020

Year ending 30 June 2021

The scheme commences on:

1 July 2009

Relevant facts and circumstances

The application includes the following documents:

● Certificate of Residence from Country A tax authorities stating that the Trust is not itself resident in Country A for the purposes of the Double Tax Convention between Country A and Australia and that the pension plans are bodies resident in Country A.

● Certificate from the Trust confirming that the Trust is exempt from income tax in Country A,

● A statement from the Secretary to the Trust confirming that;

● The entity is an indefinitely continuing fund and a provident, benefit, superannuation or retirement fund,

● The entity was established in a foreign country,

● The entity was established, and is maintained, only to provide benefits for individuals who are not Australian residents,

● The central management and control of the entity is carried on outside Australia by entities none of whom is an Australian resident,

● An amount paid to the entity or set aside for the entity has not been or cannot be deducted under the Income Tax Assessment Act 1997 (ITAA 1997), and

● A tax offset has not been allowed or is not allowable for such an amount.

● A letter from the Trust advising that the total investment in Australia would be less than 5% of the total pension fund, that the return on investment in Australia is around 10% and the estimated date of the first dividend from the investment would be August 20XX.

● Annual Report & Financial Statements of the Trust for 2014

● Annual Report & Financial Statements of the Trust for 2015

● Annual Report & Financial Statements of the Trust for 2016, and

● The Definitive Trust Deed for the Trust.

The Definitive Trust Deed states that the Trust is a common investment fund for occupational pension schemes that provide benefits for employees and former employees of the Principal Employer and other group companies.

The Definitive Trust Deed provides that the current participating trustees in the Trust are A Limited and B Limited (the “Current Participants”), as trustees of the A Pension Plan and the B Pension Plan respectively both of whom are registered pension schemes for the purposes of Country A’s legislation.

The Annual Report & Financial Statements of the Trust for 2016 states that;

The Trust holds the assets of the A Pension Plan and the B Pension Plan. The Trust is managed by a corporate Trustee, which is owned by the same Trustee Holding Company that owns the two Plan Trustee Companies and who’s Directors are also Trustee Directors of the Plans. The Trust is a bare trust and operates under the terms of a Trust Deed between the two participating Plan Trustees, the Plans’ sponsoring employer and the Trustee.

Ownership of the assets remains vested in the participating Plans who are deemed to hold units in the Trust to the value of the initial contribution as adjusted for their subsequent introduction/withdrawal of value from the Trust, and market movements. In general, units issued and redeemed in this process will be at a price calculated by the custodian at the month end prior to the issue or redemption. If the size of the transaction or movement in markets between the valuation date and the date of the transaction is sufficiently large to make a material difference to the value of the units issued or redeemed, an estimate will be made at a date closer to the date of the transaction and the unit price adjusted accordingly.

Clause 4.1 of the Definitive Trust Deed provides that the Trust shall comprise one or more separately managed portfolios of assets (“Sub-funds”) each of which shall be:

a. constituted by Contributions made from time to time by the Participants in accordance with rule 9 {Initial Contributions} and rule 10 {Further Contributions}; and

b. notionally divided into Units, which shall be allocated in accordance with rule 11.1.

Clause 6.1 of the Definitive Trust Deed states that the Trustee will hold on bare trust for the Participants all the Contributions and other assets which they receive and the property representing them and all the income in accordance with the terms of the rules contained in this Schedule 1 (as amended from time to time) for the purposes of the Trust.

Clause 6.2 of the Definitive Trust Deed states that legal title to the Contributions and other assets will pass from the Participants to the Trustee. However, the Participants shall be beneficially entitled as owners in common of the assets of each Sub-fund to which they contributed and their respective interests as owners in common in a Sub-fund shall be represented by Units of the Sub-fund allocated to them in accordance with the provisions of the rules contained in this schedule. Units are allocated solely for the purpose of measuring the interest of a Participant in the Sub-fund concerned and shall not give rise to a separate right or interest.

Clause 7.1 of the Definitive Trust Deed states that the exercise of every power or discretion by the Trustees, in relation to the Trust is at their absolute discretion unless it is expressly restricted by the terms of this deed or the terms of the trust deed and rules for the time being of the Plan.

Clause 9.1 of the Definitive Trust Deed states that on the Effective Date, the assets currently in the Trust shall be deemed to be Initial Contributions from the Current Participants to the Trust (to be allocated between them in relation to such Sub-funds and is such proportions as the Trustee may decide).

Clause 10.1 of the Definitive Trust Deed states that any Participant may make Further Contributions, in such amounts to be determined by the Participant, to the Trust after the Effective Date. The Participant shall direct the Trustee as to which Sub-fund or Sub-funds each Further Contribution shall be transferred in accordance with rule 11.1.

Clause 11.1 of the Definitive Trust Deed states that where practicable the Trustee will invest each Contribution in the Sub-fund or Sub-funds as directed by the relevant Participants immediately upon receipt. If it is not practicable for the Trustee to invest a Contribution in the Sub-fund or Sub-funds chosen by the Participant immediately upon receipt, it shall instead:

a. Invest the Contribution in either the cash Sub-fund or an interest bearing bank account operated by the Trustee (as the Trustee decides is appropriate); and

b. Transfer the Contribution to the relevant Sub-fund chosen by the Participant as soon as practicable and, in any event, no later than the following Valuation Date.

Clause 11.2 of the Definitive Trust Deed states that the number of Units allocated in respect of each Contribution will be calculated by dividing the amount or value of the Contribution by the value of one of the relevant Units in the relevant Sub-fund as at the relevant Valuation Date (before account is taken of the amount or value of the Contribution or the number of Units to be issued in respect of it) For this purpose:

a. The amount of any cash contribution, or Contribution invested in accordance with rule 11.1(a), will include any interest added to it for the period between its receipt by the Trustee and investment in the relevant Sub-fund; and

b. The Trustee may adjust the number of Units to be acquired or reduce the amount of any cash contribution to be invested to take account of any expenses of investing (and where appropriate disinvesting).

Clause 11.3 of the Definitive Trust Deed states a Participant may on the expiry of at least one month’s written notice to the Trustee (or such shorter period of notice as agreed with the Trustee) effect an Exchange of all or any Units on the terms set out in rule 11.4.

Clause 11.5 of the Definitive Trust Deed states that the Trustee will create and cancel Units in each Sub-fund, if and as necessary, on each Valuation Day in relation to that Sub-fund to give effect to a Contribution, Exchange or Withdrawal of Units as directed by the Participants.

Clause 11.6 of the Definitive Trust Deed states that at any time when a Sub-fund is first created, Units in that Sub-fund will be assigned an initial value of £10 per unit or such other amounts as the Trustee may choose in order to facilitate the initial allocation of Units in that Sub-fund.

Thereafter, Units in each Sub-fund will be valued as at each Valuation Day in relation to that Sub-fund by:

a. Calculating the value of the Sub-fund in accordance with rules 7.23 to 7.27; and

b. Dividing the result by the number of issued Units in that Sub-fund.

Provided that where Units in a Sub-fund are being valued for the purposes of a creation, cancellation, Exchange or withdrawal of Units, the valuation will be made before account is taken of any resulting change in the value of the Sub-fund or in the number of issued Units in that Sub-fund.

Clause 12.1 of the Definitive Trust Deed states that subject to rules 12.2 and 12.9, a Participant may on the expiry of twelve months written notice to the Trustee (or such shorter or longer period of notice as may be agreed with the Trustee) (a “Withdrawal Notice”) require the Trustee to realise all or any whole number of its holding of Units in any Sub-fund. Units will be surrendered on the next Valuation Date following the expiry of the Withdrawal Notice in relation to each relevant Sub-fund, unless the Trustee agrees a different time with the relevant Participant. The Units will be valued as described in rule 11.6 {Valuation of units}.

Clause 12.2 of the Definitive Trust Deed states that subject to rule 12.6, if the assets of the CIF or a Sub-fund include assets that either cannot be realised in time to make payment or switch out of the CIF on the next Valuation Date following expiry of the Withdrawal Notice or can be realised in time only on terms that the Trustee considers to be unfavourable to one or more of the other Participants, the Trustee may in its absolute discretion decide how to proceed. The Trustee may defer the realisation of Units until the first Valuation Date after the assets can be realised on terms that the Trustee considers acceptable provided that it notifies the Participant who gave the Withdrawal Notice of its intended action.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 128A(3)

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

Income Tax Assessment Act 1936 Section 128D

Income Tax Assessment Act 1997 Section 118-520

Reasons for decision

Question 1

Summary

The trustee is not excluded from liability to withholding tax on its interest and/or dividend income derived from Australia under paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936).

Detailed reasoning

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 Trust a ‘fund’? and is it an indefinitely continuing fund?

On consideration of the relevant facts, circumstances and the constituent documents of the Trust, there is no question that the Trust is a ‘fund’ that is indefinitely continuing.

Is the Trust a provident, benefit, superannuation or retirement fund for the purposes of 118-520 of the ITAA 1997?

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 v FCT (No. 2) (1966) 40 ALJR 265; 14 ATD 333; 10 AITR 290 (Scott), the High Court examined the terms ‘superannuation fund’ and ‘fund’. Justice Windeyer 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 Commissioner of Taxation (Cth) (1967) 41 ALJR 232; (1967); 14 ATD 519; 10 AITR 463 (Mahoney), the High Court took a similar view as in Scott, Justice Kitto 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.

As such the term ‘benefit’ requires a purpose narrower than conferring benefits in a completely general sense where 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.

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.

Application to the facts

The Trust operates like a unit trust. This is made apparent in clause 4.1 of the Definitive Trust Deed which states that the Trust shall comprise one or more separately managed portfolios of assets (“Sub-funds”) each of which shall be constituted by Contributions made from time to time by the Participants in accordance with rule 9 {Initial Contributions} and rule 10 {Further Contributions} and notionally divided into Units, which shall be allocated in accordance with rule 11.1.

Each of the current participants may invest some or all of its assets in a common investment fund and may commingle those assets with the assets of other participants.

The operation of the Trust in this way leads to a conclusion that it is not a superannuation fund for foreign residents. It does not operate to provide retirement benefits to its members. It operates as a common investment fund to make investments and provide benefits to the funds that invest in its units. Therefore, the Trust is not a superannuation fund for foreign residents for the purposes of paragraph 128B(3)(jb) of the ITAA 1936.

Do the primary pension funds in the Trust derive the income?

Since the Trust fails to meet the definition of being a superannuation fund for foreign residents, the only way an exemption can be granted is if it can be shown that it is the A Pension Plan and the B Pension Plan that actually derive the income, not the Trust.

A non-resident beneficiary is liable for withholding tax when the beneficiary derives a dividend or interest included in the income of an Australian trust estate (Taxation Ruling IT 2680 Income Tax: withholding tax liability of non-resident beneficiaries of Australian trusts). Subsection 128A(3) of the ITAA 1936 provides that a beneficiary who is presently entitled to income of a trust estate, which includes interest or dividends, shall be deemed to have derived the income consisting of the interest or dividends at the time they became presently entitled to the income, of the trust estate that includes that interest or dividends.

IT 2680 and ATO Interpretative Decision ATO ID 2008/61 Income Tax: Withholding Tax Exemption: interest and dividends paid by an Australian resident and received by a Dutch Stitching as unitholder in an Irish Common Contractual Fund make it clear that it is the terms of the trust deed that determines present entitlement in these cases.

Therefore, under subsection 128A(3) of the ITAA 1936, a unit holder in the Trust will only be deemed to have derived the interest and dividend income when the unit holder is presently entitled, under the terms of the Definitive Trust Deed, to the income from the Trust that includes that interest or dividend income.

While present entitlement is not defined in the legislation, numerous court cases have developed the requirements needed to show present entitlement (Harmer v Federal Commissioner of Taxation (1991) 22 ATR 726 at 729,730, Taylor v Federal Commissioner of Taxation (1970) 110 CLR 444 at 452). A beneficiary of a trust becomes presently entitled to income from the trust if all of the following requirements are met:

● the relevant income is legally available for distribution;

● the beneficiary has an absolutely vested beneficial interest in possession in the whole of the relevant income; and

● the beneficiary would succeed in an action to recover the income from the trustees ignoring for this point the existence of any legal disability from giving a valid discharge to the trustees

For the purposes of determining whether the fund derives the income subject to withholding tax, the liability to withholding comes into existence at the time the payment is made to a non-resident.

At the time payments are made from the Australian entities, it does not appear that A Pension Plan and B Pension Plan would be presently entitled to any income of the Trust that includes that interest and dividend income.

The initial value of each Unit shall be £10. Thereafter the Trustee shall determine the value of each Unit within a Sub-fund at each Valuation Day by calculating the value of the Sub-fund in accordance with rules 7.23 to 7.27 and dividing the result by the number of issued Units in that Sub-fund (clause 11.6).

In addition, Withdrawals from a Sub-fund under the Trust may be made on expiry of twelve months written notice to the Trustee (or such shorter or longer period of notice as may be agreed with the Trustee) (clause 12.1). If the assets of the Trust or a Sub-fund include assets that cannot be realised in time to make the payment or can only be realised in time only on terms that the Trustee considers to be unfavourable to one or more of the other Participants the Trustee may defer the realisation of Units until the first Valuation Date after the assets can be realised on terms that the Trustee considers acceptable (clause 12.2). A Participant may on the expiry of at least one month’s written notice Exchange all or any Units (clause 11.3).

The Trust derives the income and gains from the investment in each Sub-fund then undertakes a process by which the net is allocated to the Sub-funds within the Trust. Those funds are then valued to determine the value of the units held by A Pension Plan and B Pension Plan. Based on the details around the operation of the Trust, set out in the Definitive Trust Deed, at no point does present entitlement to the income derived from the Australian investments arise to A Pension Plan and B Pension Plan.

This can be contrasted with the funds involved in ATO ID 2008/61 where it was found that any interest or dividend income accrued to the unit holder as it arose. The Trust Deed in this case does not work to allow A Pension Plan and B Pension Plan to accrue the income as it arises.

Accordingly, the Trust will not be entitled to an exemption under paragraph 128B(3)(jb) of the ITAA 1936.

Question 2

Summary

Interest and/or dividend income derived from Australia by the trustee of the Trust is not non assessable and not exempt income under section 128D of the ITAA 1936.

Detailed reasoning

Section 128D of the ITAA 1936 provides that interest and dividend income that is excluded from withholding tax pursuant to paragraph 128B(3)(jb) of the ITAA 1936 is not assessable income.

As the Trust will not be entitled to an exemption under paragraph 128B(3)(jb) of the ITAA 1936, the interest or dividend income derived by the Trust will not be considered non-assessable and non-exempt income under section 128D of the ITAA 1936.