Edited version of your written advice

Authorisation Number: 1051418623976

Date of advice: 22 August 2018

Ruling

Subject: International issues - Foreign entities - Foreign superannuation funds

Income tax - Assessable income - Interest income - Interest paid to non-resident

Question 1

Is the Fund exempt from liability to withholding tax on interest, dividend and non-share dividend income under paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

Question 2

Is interest, dividend and non-share 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 periods:

Year ended 30 June 2017

Year ended 30 June 2018

Year ended 30 June 2019

The scheme commences on:

1 July 2016

Relevant facts and circumstances

The Fund

1. The Fund is governed by the Trust Deed and General Rules between the Company and the Trustee.

2. The first Trust Deed was made between the original founder, the Trustee and the Trust, whereby the Scheme, now known as the Fund was established.

3. The Fund is a pension scheme providing benefits for members who were employees of the Company in a foreign country.

4. Until a particular date, the Fund was open to any eligible employee of the Company or participating company. On a particular date, the Company closed the Fund to new entrants. The Company was acquired by another company and the Fund was closed to future accrual on a specific date.

5. The Trustee is the administrator of the Fund and must operate in accordance with the Trust Deed. The Trustee is required to act in the best interests of the contributors and all other members.

6. The Trustee is committed to ensuring the Fund’s objectives are met by managing risk effectively using effective decision making processes and by adopting pension industry ‘best practice’ where this is appropriate for the Fund.

7. The Trustee is managed by a Board of Directors, totalling nine members. The Board of Directors are nominated by the Company and the members of the Fund (collectively, Trustees).

8. Trustees operate under a Charter that lists their role and objectives in managing the Fund. Trustees will:

a. Act in accordance with the Fund’s governing documents and the law

b. Act in the best interests of the members at all times, taking into account the position of each class of member

c. Act prudently, honestly, with integrity and in good faith having taken appropriate professional advice

d. Seek to secure members’ benefits by managing the Fund’s funds effectively

e. Communicate to all members regularly and in a clear and concise way

f. Deliver on high level of service to all members.

9. A Certificate of Residence from the Government Authority certifies that, to the best of their knowledge, that the Trustee of the Fund constitutes a resident in a foreign country in accordance with the Convention in force with Australia.

10. The Fund is a ‘registered pension scheme’ for tax purposes. The Fund’s income is free from Income and Capital Gains tax in the foreign country and tax recoverable on the Fund’s income is treated as part of that income.

11. A statement from the Trustee confirms to the best of their knowledge and belief that the Fund is established as an indefinitely continuing fund and a provident, benefit, superannuation or retirement fund. The Fund has been established in a foreign country and is maintained only to provide benefits for non-residents of Australia. The central management and control is carried on outside of Australia by entities none of whom are Australian residents. Furthermore, no amounts paid to or set aside for the Fund have been or are capable of being claimed as a tax offset, rebate or deduction under any sections of the ITAA 1997.

The Fund’s Investments

12. Trustees are responsible for the investment of the Fund’s assets and set out the key elements of the Fund’s investment policy. Trustees appoint investment managers to deal with the day to day investment decisions in line with the investment policy and rules.

13. The Investment Committee meets quarterly to review the investments and make recommendations regarding changes in strategy or managers.

14. The current investment objective of the Fund is to achieve investment returns that, together with the contributions paid by the Company and by its members, ensures that the assets of the Fund are sufficient to meet the benefits due to each member as they fall due.

15. The investment strategy is to:

a. secure members’ future benefits by reducing risk and delivering consistent, reliable investment performance

b. to meet the requirements of the Company.

16. The Trustee has invested in assets with a profile that closely matches the liabilities by using bond-like assets.

17. The Fund’s investments are classified into two categories:

a. Assets with a relatively low risk.

b. A diversified portfolio of return seeking assets.

The Fund’s Plan Description

Membership

18. The Fund is a mature scheme and on a particular date, closed to future accrual. At this time all active members became deferred members and the Fund stopped receiving ongoing contributions from active membership.

19. As at the closure date, all pensionable service ceased and members were treated as having left service on this date.

20. The Fund has a large number of members either receiving a pension or being deferred members.

Contributions

21. From the date when an employee first became a member, the employer deducted from the employee’s remuneration sums equal to the contributions payable as stated in the Trust Deed.

22. The Fund closed to future accrual on a particular date and there were no active members contributing from that date.

23. Prior to a specified date, a member in Service could pay additional voluntary contributions (AVC) to the Fund.

24. The AVC scheme was closed to new accounts from a specified date and members stopped being able to make payments.

25. AVC’s are invested separately from the Fund’s assets to ensure there are individual funds for each member that are clearly identifiable. The member has the choice to invest in a number of funds.

Retirement Benefits

26. The normal retirement age for both men and women is age 65.

27. On retirement a member will receive a Fund pension paid monthly in advance for the rest of their life.

28. A member may choose to take a tax-free cash sum, subject to the limits set by the Government Authority.

29. If a member has not yet retired, their pension will be deferred until they reach retirement age.

30. A member may apply to start receiving a pension before normal retirement age if they are at least age 50 and have either ceased significant gainful employment or were an active member of the Fund on the date it was closed to accrual.

31. On or after the closure date, a deferred pensioner, who is a closure member, shall be entitled to their deferred benefits from the earliest of:

a. the deferred pensioner’s normal retirement date (NRD); and

b. the date on which:

(i) the member leaves employment with an employer by reason of redundancy; and

(ii) is over age 50; and

(iii) had the member retired from all significant gainful employment to the satisfaction of the Trustee, the member would have been entitled under the Rules applicable to them to start receiving their pension; and

c. such other date permitted pursuant to the Rules applicable to them.

32. Where, on or after the closure date, a deferred pensioner or an acquired deferred pensioner would not have the ability to take their benefits after the NRD, they may request that their pension commences at a date later than the NRD, subject to the agreement of the Trustee that:

a. they shall become a postponed pensioner on their NRD; and

b. the retirement benefits shall not commence being paid until such date as they shall notify the Trustee and increased on a basis certified as reasonable, having regard to:

(i) the period of postponement; and

(ii) increases in the Minimum Pension (as listed in the Trust Deed).

33. Where, a person would be entitled to an immediate pension from the Fund but for any restrictions under the section of the Rules relating to them which require that they have retired from significant gainful employment (or similar) before receiving benefits from the Fund and that person is a closure member, then the Trustee shall disregard such restrictions.

Death Benefits

34. If a member dies prior to retirement, a pension may be payable to a surviving spouse or civil partner at a rate of 50% of the pension increased from date of leaving to date of death. Children and other dependent pensions may also be payable.

35. A lump sum death benefit would also be payable equal to five times the yearly amount of the member’s deferred pension increased to date of death, plus any AVC’s that may have been paid.

36. If a member dies after retirement, the Fund will provide a pension for the member’s surviving spouse or civil partner at the rate of 50% of the member’s pension and a lump sum if the member dies within 5 years of retiring. The lump sum is equal to five times the value of the annual pension when the member retired, less all pension and tax free cash paid since retirement.

37. A pension is automatically payable to the member’s spouse or civil partner and to any dependent children under 16 years of age. A pension may be payable to dependent children up to age 23 if they are unmarried and in full time education.

Benefits in other circumstances

38. If a member becomes ill prior to retirement, they may be able to take their benefits prior to age 50. If a member becomes terminally ill prior to retirement, the Trustee may be permitted to convert the pension to a one-off lump sum.

39. Instead of receiving a pension from the Fund, the member can investigate the option of transferring their benefits to another scheme of their choice.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1936 paragraph 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

Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision

Question 1

Is the Fund exempt from liability to withholding tax on interest, dividend and non-share dividend income under paragraph 128B(3)(jb) of the ITAA 1936?

Answer

Yes.

Detailed reasoning

Section 128B of the ITAA 1936 imposes liability to withholding tax on income derived by a non-resident that consists of dividend income (subsection 128B(1) of the ITAA 1936), interest income (subsection 128B(2) of the ITAA 1936) as well as other income prescribed in that section.

Subsection 128B(3) of the ITAA 1936 notes that section 128B of the ITAA 1936 will not apply to prescribed categories of income. Relevantly, paragraph 128B(3)(jb) of the ITAA 1936 states:

(jb) 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;

The Fund is a non-resident

The Fund is not a resident of Australia for tax purposes. Therefore, the Fund will satisfy this requirement.

The Fund is a superannuation fund for foreign residents

Superannuation fund for foreign residents is a defined term in the ITAA 1936. Subsection 6(1) of the ITAA 1936 states:

superannuation fund for foreign residents has the meaning given by subsection 995-1(1) of the Income Tax Assessment Act 1997.

Subsection 995-1(1) of the ITAA 1997 sets out the following:

superannuation fund for foreign residents has the meaning given by section 118-520.

Section 118-520 of the ITAA 1997 states the following:

(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.

(2) However, a fund is not a superannuation fund for foreign residents if:

(a) an amount is 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.

Consequently, for the Fund to be considered a superannuation fund for foreign residents for the purposes of paragraph 128B(3)(jb) of the ITAA 1936, it must be established that:

● The Fund is an indefinitely continuing fund

● The Fund is a provident, benefit, superannuation or retirement fund

● The Fund was established in a foreign country

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

● The central management and control of the Fund is carried on outside of Australia by entities none of whom are Australian residents

● 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 offsets have been allowed or would be allowable for an amount paid to the Fund or set aside for Invensys.

The Fund is an indefinitely continuing fund

The legislation provides no guidance on the meaning of ‘indefinitely continuing’. It is not a technical legal expression, and the ordinary meanings of indefinitely and continuing involve little ambiguity or controversy.

The Macquarie Dictionary, [Online], viewed on 1 February 2018, ww.macquariedictionary.com.au defines ‘indefinitely’ and ‘continuing’ as follows:

Indefinite:

adjective 1. not definite; without fixed or specified limit; unlimited: an indefinite

number

2. not clearly defined or determined; not precise.

- indefinitely, adverb

Continue:

verb (Continued, continuing)

1. to go forwards or onwards in any course or action; keep on.

2. to go on after suspension or interruption.

3. to last or endure.

4. to remain in a place; abide; stay.

5. to remain in a particular state or capacity

The Trust Deed contains a termination clause that sets out the Fund’s process in the event of the scheme terminating or entering into liquidation. Although the Fund has closed to accrual on a particular date, there is certainly no indication that there is any contemplation of the Fund ending at a defined point in time.

If the Fund were unable to meet their outstanding liabilities or went into some form of bankruptcy, the remaining employers would be subject to a statutory duty to pay enough funds to ensure that all liabilities of the Fund could be purchased from an outside provider of pension annuities.

An agreement has also been reached with another company that the Fund would be able to claim on a guarantee. If the Fund still remained unfunded, the Trustee would be eligible for assessment to enter the Pension Protection Fund provided by the Government.

Therefore, it is accepted that the Fund will continue to operate in accordance with the Rules for an indefinite period of time.

The Fund is a provident, benefit, superannuation or retirement fund

In Scott v. FCT (No. 2) (1966) 40 ALJR 265; 14 ATD 333, Windeyer J stated (40 ALJR 265 at 278; 14 ATD 333 at 351):

There is no definition in the Act of a superannuation fund. The meaning of the term must therefore depend upon ordinary usage, the attributes of a thing thus denominated being those which things ordinarily so described have...the connotation of the phrase in the Act must be determined by one’s general knowledge of the extent of the denotation of the phrase in common parlance...I have come to the conclusion that there is no 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 Mahony v Commissioner of Taxation (1967) 41 ALJR 232; (1967) 14 ATD 519, Kitto J stated:

There was no definition in the Act of ‘a provident, benefit or superannuation fund’, and the meaning of the several expressions must therefore be arrived at in light of ordinary usage and with only one piece of assistance to be gathered from the immediate context. Since a fund, if its income was to be exempt under the provision, was separately required to be one established for the benefit of employees, each of the three descriptive words ‘provident’, ‘benefit’ and ‘superannuation’ must be taken to have connoted a purpose narrower than the purpose of conferring benefits, in a completely general sense, upon employees. Precise definition may be difficult, and in any case is unnecessary for present purposes. All that need be recognized 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 employment, 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 in a general sense, but characterized by some specific future purpose. A funeral benefit is a familiar example.

In Cameron Brae Pty Limited v FCT (2007) 161 FCR 468; [2007] FCAFC 135; 2007 ATC 4936, the Full Federal Court held that the relevant fund was a superannuation fund for the purposes of former section 82AAE of the ITAA 1936. Jessup J at [106] stated:

In answering the question whether the fund was a “superannuation fund” as the term is ordinarily understood, it is, in my view, critical that payments could not have been made out of the fund (other than by way of administration expenses, taxation, etc) save to members of the relevant discretionary class, and save in circumstances which fell within the ordinary understanding of superannuation. A proper characterisation of the fund should, in my view, depend upon the purposes for which the assets and moneys of the fund might have been used rather than upon the quality of the rights of individual members of the fund. If the fund could have been used only to achieve what might be described as a superannuation purpose, I would describe the fund as a “superannuation fund”. That a particular member of a discretionary class might not, ultimately, have received any payment, was not, in my view, disqualifying.

ATO Interpretative Decision ATO ID 2009/67 Income Tax: Superannuation fund for foreign residents (ATO ID 2009/67) refers to these authorities to provide guidance on the meaning of the phrase ‘provident, benefit, superannuation or retirement fund’:

None of the four descriptors 'provident', 'benefit', 'superannuation' or 'retirement fund' in subparagraph (a)(ii) of the definition of 'superannuation fund for foreign residents' in section 118-520 of the ITAA 1997 are defined. The terms have, however, been the subject of judicial consideration.

The courts have held that for a fund to be a 'provident, benefit, superannuation or retirement fund', the fund 's sole purpose must be to provide superannuation benefits, that is, benefits to a member upon the member reaching a prescribed age or upon their retirement, death or other cessation of employment (Scott v. FC of T (No 2) (1966) 14 ATD 333; (1966) 10 AITR 290, per Windeyer J; Mahony v. FC of T (1967) 14 ATD 519, per Kitto J; Walstern Pty Ltd v. Commissioner of Taxation (2003) 138 FCR 1; 2003 ATC 5076; (2003) 54 ATR 423, per Hill J and Cameron Brae Pty Ltd v. Federal Commissioner of Taxation (2007) 161 FCR 468; 2007 ATC 4936; (2007) 67 ATR 178, per Stone and Allsop JJ).

Having regard to the terms of the deed of the Plan, it is considered that the Plan is a 'provident, benefit, superannuation or retirement fund' as that phrase has been interpreted by the relevant authorities. The sole purpose of the Plan is the provision of benefits to, or in respect of, participating employees who:

● cease their employment upon or after reaching retirement age (age 60)

● cease their employment after the satisfaction of certain service requirements

● cease their employment because of death or total and permanent disability, or

● reach age 70, whether or not they have ceased employment.

Therefore, the Plan satisfies subparagraph (a)(ii) of the definition of 'superannuation fund for foreign residents' in section 118-520 of the ITAA 1997.

The above establish that for a fund to qualify as a provident, benefit, superannuation or retirement fund, it must have the sole purpose of providing retirement benefits or benefits in other allowable contemplated contingencies (such as death, disability or serious illness).

The Fund provides retirement, ill-health and death benefits to employees and their families.

Although the Fund closed to accrual and all members became Deferred Members at that time, the payment of retirement benefits is still allowed upon members reaching the specified retirement ages. If a member ceases employment before retirement age they are entitled to a pension once reaching retirement age. They do not get to access the money early.

Further, the Commissioner accepts that the alternate circumstances of access in this case, being incapacity and death, align to the contemplated contingencies of a provident, benefit, superannuation or retirement fund.

Therefore, the Fund will satisfy this requirement.

The Fund was established in a foreign country

The Fund was established and is a resident of a foreign country. Therefore, the Fund will satisfy this requirement.

The Fund was established and maintained only to provide benefits for individuals who are not Australian residents

The Fund was established in a foreign country for its members. It is considered that the possibility of a very small number of members being returned residents or becoming Australian residents after ceasing eligible employment is incidental and should not be taken to conclude that the Fund, in this case, has not been established and is not maintained only to provide benefits for non-residents, based on the rules and operation of the Fund.

Therefore, the Fund will satisfy this requirement.

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

Paragraphs 20 and 21 of Taxation Ruling TR 2008/9 Income tax: meaning of ‘Australian superannuation fund’ in subsection 295-95(2) of the Income Tax Assessment Act 1997 (TR 2008/9) states in respect of the central management and control (CM&C) of a superannuation fund:

20. The CM&C of a superannuation fund involves a focus on the who, when and where of the strategic and high level decision making processes and activities of the fund. In the context of the operations of a superannuation fund, the strategic and high level decision making processes includes:

● formulating the investment strategy for the fund;

● reviewing and updating or varying the fund’s investment strategy as well as monitoring and reviewing the performance of the fund’s investments;

● if the fund has reserves – the formulation of a strategy for their prudential management; and

● determining how the assets of the fund are to be used to fund member benefits.

21. The other principal areas of operation of a superannuation fund that form part of the day-to-day or operational side of the fund's activities will not constitute CM&C. These activities do not form part of the CM&C of the fund because they are not of a strategic or high level nature. Rather, these activities are of a more formalistic or administrative nature. Examples of such activities include the acceptance of contributions that are made on a regular basis, the actual investment of the fund's assets, the fulfilment of administrative duties and the preservation, payment and portability of benefits.

Furthermore, paragraphs 10 and 11 of Taxation Ruling TR 2018/5 Income tax: central management and control test of residency (TR 2018/5) states:

10. Central management and control refers to the control and direction of a company’s operations. It does not refer to a physical location in which the control and direction of a company is located and may ultimately be exercised in more than one location.

11. The key element in the control and direction of a company’s operations is the making of high-level decisions that set the company’s general policies and determine the direction of its operations and the type of transactions it will enter.

The Fund is a pension scheme established by the Company and the Trustee in a foreign country. The Fund is governed by the Trust Deed and General Rules.

The Trust Deed and Rules are administered by the Trustees. Trustees act in the best interests of the contributors and all other members.

Based on this, it is reasonable to conclude that the central management and control of the Fund occurs in a foreign country by entities that are not Australian residents.

Therefore, the Fund will satisfy this requirement.

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

An amount paid to the Fund or set aside for the Fund has not been and cannot be deducted under the ITAA 1997.

A tax offset has not been allowed nor would be allowable for any amount paid to the Company or set aside for the Fund.

Therefore, the Fund will satisfy this requirement.

Consists of interest or dividend and/or non-share dividends paid by a company that is a resident

Paragraph 128B(3)(jb) of the ITAA 1936 will only apply to interest, or to dividends and non-share dividends paid by Australian resident companies.

The Fund will receive interest income from Australian investments, along with dividend and non-share dividend income from companies who are residents of Australia for tax purposes.

Therefore, the Fund will satisfy this requirement.

Is exempt from income tax in the country in which the non-resident resides

The Fund is a ‘registered pension scheme’ in a foreign country for tax purposes. The Fund’s income is free from Income and Capital Gains tax in the foreign country and tax recoverable on the Fund’s income is treated as part of that income.

Therefore, the Fund will satisfy this requirement.

Conclusion

As all the requirements of paragraph 128B(3)(jb) of the ITAA 1936 are satisfied, the Fund will be entitled to an exemption under paragraph 128B(3)(jb) of the ITAA 1936.

Question 2

Is interest, dividend and non-share dividend income derived by the Fund not assessable and not exempt income of the Fund under section 128D of the ITAA 1936?

Answer

Yes.

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.

Section 128D of the ITAA 1936 provides that, inter alia, where withholding tax would be payable but for the operation of paragraph 128B(3)(jb) of the ITAA 1936, the income is not assessable income and is not exempt income.

The interest, dividend and non-share dividend income derived by the Fund from its Australian investments will not be assessable income or exempt income under section 128D of the ITAA 1936 because the aforementioned income:

● would have been subject to withholding tax, and

● is not exempt from withholding tax under any provision other than paragraph 128B(3)(jb) of the ITAA 1936.

Conclusion

The interest, dividend and non-share dividend income derived in Australia by the Fund is not assessable and not exempt income of the Fund under section 128D of the ITAA 1936.