Edited version of your written advice

Authorisation Number: 1051351067681

Date of advice: 20 March 2018

Ruling

Subject: International issues - foreign entities - foreign superannuation funds

Issue 1

Foreign super funds withholding tax exemption

Question 1

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

Answer

No.

Question 2

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

Answer

No.

This ruling applies for the following period

1 July 2017 to 30 June 2020

The scheme commences on

1 July 2017

Relevant facts and circumstances

1. The entity is established by a state-level statutory code (‘the Code’) in an overseas jurisdiction (‘the foreign country’)

2. The entity is established in, and is a resident of, the foreign country

3. The entity is exempt from income tax in the foreign country

4. The entity has statutory responsibility for the investment of funds enumerated in the Code

5. The funds that may participate include state-level agencies, institutions, or political subdivisions

6. The enumerated funds include both pension and non-pension funds

7. The entity implements the policies, investment goals, objectives and asset allocations established by the governing body of each enumerated fund

8. The entity may also provide investment services to, and manage the money of, certain funds pursuant to a written contract

9. The investments are divided into a pension pool, an insurance pool and four individual investment accounts

10. In carrying out its powers and duties, the entity receives income that consists of income and dividends paid by companies that are a resident in Australia for tax purposes

11. Separate accounting is maintained for each of the funds and the accounts that the entity manages, including with respect to the receipt of investment returns

12. The entity is established, and maintained, only to provide benefits to non-residents

13. The entity’s central management and control is carried on outside Australia by entities none of whom are an Australian resident

14. No amounts have been paid to the entity, or set aside to be paid to the entity, that can be deducted under the ITAA 1997

15. No amounts have been paid to the entity, or set aside or be paid to the entity, for which a tax offset has been allowed, or would be allowable, under the ITAA 1997

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 6(1)

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

Issue 1

Foreign super funds withholding tax exemption

Question 1

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

Summary

As the entity is not a ‘provident, benefit, superannuation or retirement fund’ and has not been established and maintained only to provide benefits for individuals, the entity is not a ‘superannuation fund for foreign residents.’ It follows that the entity is not entitled to an exemption from liability to withholding tax on its interest and/or dividend income derived from Australia under paragraph 128B(3)(jb) of 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.

Application of elements in paragraph 128B(3)(jb)

Is the entity a ‘non-resident’?

Under subsection 6(1) of the ITAA 1936, a non-resident is a 'person who is not a resident of Australia'. The entity is established in, and is a resident of, the foreign country. The entity does have a connection to Australia that would bring it within the definition of ‘resident of Australia’ under subsection 6(1) of the ITAA 1936, such as central management or control in Australia. Accordingly, the entity is a non-resident in Australia for the purposes of paragraph 128B(3)(jb) of the ITAA 1936.

Is the entity a ‘superannuation fund for foreign residents’?

The entity is not a ‘superannuation fund for foreign residents,’ as discussed further below under the heading ‘Application of definition of ‘superannuation fund for foreign residents’ in section 118-520 of the ITAA 1997.’

Is the income consisting of dividends or interest ‘derived’ by the entity from Australia?

In carrying out its powers and duties, the entity receives income that consists of interest and dividends paid by companies that are a resident in Australia for tax purposes. However, a question arises as to who ‘derives’ that income.

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 that income. Therefore, under subsection 128A(3) of the ITAA 1936, a beneficiary of the entity will only be deemed to have derived the interest and dividends when it is presently entitled to the income that includes that interest or dividend income.

The Commissioner has not made a determination that the entity operates as a trust. However, for completeness, the following reasoning explains why we consider the entity derives the income from Australia and not the pension fund investors if the entity is found to be a trust.

At the time the liability to withholding arises (when the interest or dividend income is paid from the Australian entities), there is no evidence that a beneficiary of the entity would be ‘presently entitled’ to that income for the purpose of subsection 128A(3) of the ITAA 1936. We acknowledge the applicant has submitted that separate accounting is applied to the different funds that the entity manages. However, present entitlement requires more than the income to be accrued to the pension funds in the accounts of the entity. As no one is considered to be presently entitled to the interest or dividend income, the income is derived by the entity.

Given the income is ‘derived’ by the entity, the entity must meet the definition of ‘superannuation fund for foreign residents.’ As discussed later, the entity is not itself a ‘superannuation fund for foreign residents’ and so is not entitled to the exemption.

Is the entity exempt from income tax in the country in which the entity resides?

This element is satisfied, as the entity is a resident of the foreign country, and is exempt from income tax in the foreign country.

Application of definition of ‘superannuation fund for foreign residents’ in section 118-520 of the ITAA 1997

Is the entity a ‘fund’ and is it an indefinitely continuing 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 entity is established by the Code. It has statutory responsibility for the investment of funds enumerated in the Code, and implements the policies, investment goals, objectives and asset allocations established by the governing body of each enumerated fund. Further, the entity may also provide investment services to, and manage the money of, certain funds pursuant to a written contract. The investments are divided into a pension pool, an insurance pool and individual investment accounts. Based on these facts, the entity is a ‘fund,’ as money is set aside for investment purposes. Further, the entity is an indefinitely continuing fund as there is no provision for it to terminate or wind up after a specified period.

Whether the entity is also a ‘provident, benefit, superannuation or retirement fund’ is discussed later in this ruling.

Was the entity established in a foreign country?

The entity was established in the foreign country, and therefore this element is satisfied.

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

The entity is established, and maintained, only to provide benefits to non-residents. However, the entity is an investment vehicle for various funds that include state-level agencies, institutions, or political subdivisions. Accordingly, it is not established and maintained only to provide benefits to the individual members, and therefore this element is not satisfied.

Was the entity’s central management and control carried on outside Australia by entities none of whom is an Australian resident?

The entity’s central management and control is carried on outside Australia by entities none of whom are an Australian resident, and therefore this element is satisfied.

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

A statement has been provided by the entity confirming that no amounts have been paid to the entity, or set aside to be paid to the entity, that can be deducted under the ITAA 1997. Further, no amounts have been paid to the entity, or set aside or be paid to the entity, for which a tax offset has been allowed, or would be allowable, under the ITAA 1997.

Consequently, based on the statement provided by the entity, this requirement is satisfied.

Is the entity a provident, benefit, superannuation or retirement 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 ‘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. The benefit must be characterised by some future purpose. 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.

The entity does not derive the dividend or interest income from Australia in its capacity as a ‘provident, benefit, superannuation or retirement fund.’ The entity does not have members as described in the abovementioned cases. Rather, it has investors who consist of pension funds, insurance funds and other investors. The investment income made by the entity is not for the sole purpose of providing retirement benefits to members; it is to provide investment income to its investors. Even though some of the entity’s investors are pension funds, who may have a retirement purpose, the entity does not itself have a ‘provident, benefit or superannuation fund’ purpose. Accordingly, the entity is not a ‘provident, benefit, superannuation or retirement fund’ as per subsection 118-520(1) of the ITAA 1997.

As the entity is not a ‘provident, benefit, superannuation or retirement fund’ and has not been established and maintained only to provide benefits for individuals, the entity is not a ‘superannuation fund for foreign residents.’ It follows that the entity is not entitled to an exemption from liability to withholding tax on its interest and/or dividend income derived from Australia under paragraph 128B(3)(jb) of ITAA 1936.

Question 2

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

Summary

As the entity is not entitled to the exemption from liability to withholding tax under paragraph 128B(3)(jb) of ITAA 1936 (and assuming no other exemption applies), section 128D does not apply to make the interest or dividend not assessable and not exempt income of the entity.

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.’

As the entity is not entitled to the exemption from liability to withholding tax under paragraph 128B(3)(jb) of ITAA 1936 (and assuming no other exemption applies), section 128D does not apply to make the interest or dividend income not assessable and not exempt income of the entity.