Edited version of your written advice

Authorisation Number: 1051356388856

Date of advice: 20 April 2018

Ruling

Subject: Liability to withholding tax on interest and/or dividend income

Question 1

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

Answer

Yes

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?

Answer

Yes

This ruling applies for the following period:

1 July 2017 – 30 June 2018

The scheme commences on:

1 July 2017

Relevant facts and circumstances

The Foreign Pension Fund (the Fund) was incorporated in the foreign jurisdiction and its registered office is located in that jurisdiction. The directors and secretary and board members are located in the foreign jurisdiction. The Fund’s central management and control is in the foreign jurisdiction.

The Fund is a contributory defined benefit pension scheme. It provides for the payment of benefits to employees and former employees.

The Fund is financed by contributions from employees, the employer, the admitted and scheduled bodies, and from the Fund’s investments.

A scheme member’s pension is based on their earnings throughout their career, rather than solely on their final salary.

The benefits payable are:

● A guaranteed pension based on career average earnings and length of service;

● Option to take up to 25% of pension as a tax-free lump sum;

● Death and survivor benefits;

● Early payment of pensions in the event of ill health;

● Pension increases in line with Consumer Price Inflation (CPI).

Once a member meets the two year vesting period, they can choose to retire and draw their pension at any time between age 55 and 75. However, if they retire before the relevant State Pension Age, the pension will normally be reduced. Likewise, if they retire after their relevant State Pension Age it will be increased.

The Fund’s investment strategy aims to balance the need to mitigate against the risks of inflation and interest rates. The strategy is also designed to achieve diversification across different asset classes. All investments will be managed by external fund managers.

The Fund is exempt from income tax on interest received and from capital gains tax on the proceeds of investments sold in the foreign jurisdiction.

Relevant legislative provisions

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 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 Income Tax Assessment Act 1936 (ITAA 1936) or the Income Tax Assessment Act 1997 (ITAA 1937). The trustee of the Fund is exempt from income tax in the foreign jurisdiction.

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

Detailed reasoning

For the financial years ended 30 June 2008 and onwards, paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (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 Income Tax Assessment Act 1997 (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 an indefinitely continuing fund which is a provident, benefit, superannuation or retirement 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 ‘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. 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 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 provides benefits at retirement based on the scheme member’s earnings throughout their career. Upon death, or where the member is partially or completely incapacitated, benefits are available to the member or their dependants depending on the situation.

Once a member meets the two year vesting period, they can choose to retire and draw their pension at any time between age 55 and 75. However, if they retire before the relevant State Pension Age the pension will normally be reduced. Likewise, if they retire after the relevant State Pension Age it will be increased.

If a member leaves the Fund early, they have the option to receive a deferred pension, transfer to another pension, or if they are over 55, receive an early pension which may be reduced where the member has not yet reached the relevant State Pension Age.

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 the Fund’s rules upon retirement, death or impairment.

Was the entity/plan established in a foreign country?

The Fund was incorporated in the foreign jurisdiction. 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 the foreign jurisdiction.

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?

No amounts have been paid to the Fund, nor set aside to be paid to the Fund, that can be deducted under this Act. Further, no amounts have been paid to the Fund, or set aside or be paid to the Fund, for which a tax offset has been allowed, or would be allowable, under this Act.

Consequently, this requirement is satisfied.

Conclusion

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 Income Tax Assessment Act 1936 or the Income Tax Assessment Act 1997. The trustee of the Fund is exempt from income tax in the foreign jurisdiction.

Question 2

Summary

Interest and/or dividend income derived by the Fund is not assessable and is 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.