Edited version of your written advice

Authorisation Number: 1051440342384

Date of advice: 6 November 2018

Ruling

Subject: 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 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 2018

Year ended 30 June 2019

The scheme commences on:

1 July 2017

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The Fund

1. The Fund manages pension, retirement, health and welfare funds for clients in the foreign country.

2. The Fund is a pension fund and implements the pension scheme to ensure that employees, former employees and pension beneficiaries of the Employer and other affiliated institutions to receive the pension they can count on according to the Pension Regulations.

3. The Fund’s operations are specified in its Articles of Association. A Deed of Amendment to the Articles of Association (Deed of Amendment) was duly authorised.

4. The Fund is a foundation with its registered office in the foreign country and is independent of the Employer.

5. The objective of the Fund is to grant benefits in respect of old age, incapacity for work and/or death to participants, former participants, pension beneficiaries or their surviving relatives in accordance with the provisions of the Articles of Association, Pension Regulations and other regulations of the Fund.

6. A Certificate of Residence from the Tax Authority in the foreign country, declares that:

● The Fund is a resident of the foreign country within the meaning of a specific Article of the Convention for the avoidance of double taxation between the foreign country and Australia (the Commonwealth of Australia), and

● The Fund is subject to Income Tax in the foreign country; however the income of the Fund is exempt from taxation in the foreign country.

7. A Statement from the Funds’ Settlements Manager and Head of Treasury states that:

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

● The Fund was established in a country outside Australia and is maintained and applied for the sole purpose of providing superannuation benefits for persons other than persons who are, or would ordinarily be or become, residents of Australia or residents of a Territory

● The central management and control of the Fund is carried on outside of Australia by persons none of whom is a resident of Australia or a resident of a Territory

● The Fund does not receive income for which an amount has been set aside or to which an amount has been paid, by a taxpayer that is an amount that has been allowed or is allowable as a deduction, or in respect of which a rebate of tax has been allowed or is allowable, under any provisions of the Australian Income Tax Legislation.

Pension Fund Description

Plan Administration

8. The administration of the Fund is the responsibility of the Board, and various Committees.

9. The interests of the employer, employees and pension beneficiaries are represented by the Board. The Board of the Fund consists of X members with Y members representing the employers, Z members representing the participants and one member representing the pension beneficiaries.

10. The decision making process of the Board is supported by the Accountability Committee and the Supervisory Committee.

11. The Fund will continue to operate in accordance with the Rules and Regulations for an indefinite period of time.

12. A specific Article of the Deed of Amendment specifies the process that the Fund will follow in the event of dissolution or liquidation including:

● Obligations will be transferred to another Pension Administrator

● Participants and beneficiaries will be provided with documentary evidence regarding their entitlements and rights, and

● Any liquidation balance will be given a use in accordance with the objective of the Fund.

13. There is no indication in the Deed of Amendment (or otherwise) that there is any contemplation of the Fund ending at a defined point in time.

Plan Investments

14. The Fund ensures that all monies are properly invested so that all pensions can be paid out in the future.

15. The objective of the Fund’s investment policy is to fulfil the nominal pension entitlements and pension rights in the long term as well as to strive to keep the pensions in payment and accrued pension entitlements permanently up to date. To achieve this, the Fund keeps the investment results as high as possible in the long term within acceptable risks.

16. The Fund invests in:

● Fixed Income (Securities, Cash and Interest Rate Derivatives)

● Shares (including Private Equity)

● Real Estate (Infrastructure), and

● Hedge Funds.

17. The Fund holds Australian investments and receives interest and dividend income from these investments.

Plan Membership and Contributions

18. The Fund’s membership consists of:

● Active Members

● Deferred Members

● Pensioners, and

● Partners and Orphans

19. Participation in the Fund takes effect on the day the participant’s service commences with the Employer.

20. The membership ends with the Fund:

● On the day before the retirement date, the end of the service relationship with the employer, unless immediately followed by a Service with an employer is contracted or the pension accrual is continued under (partial) incapacity for work;

● On the death of the participant;

● At the end of the month before the Pension Start Date (if this is before the Pension Orientation Date takes place);

● At the end of the month before the retirement date.

21. Monthly pension contributions based on a participant’s pensionable salary (capped at a specific amount) are paid by both the participant and the employer.

22. The Fund contributes at a certain percentage rate and withholds the participant’s pension contribution from their monthly salary at a certain percentage rate.

Benefits Provided

23. The Fund is a defined benefit scheme. The pension received from the Fund is based on the salary that a participant earns and the number of years during which they are enrolled in the scheme.

24. The Fund provides a Retirement Pension when a participant reaches state pension age which is paid monthly as a lifetime pension on top of the state pension received from the Government.

Partial or Early Retirement

25. Participants can choose to retire before reaching pension age although their pension build up will stop earlier and their Retirement Pension will be reduced.

26. In the five years prior to reaching state pension age, a participant has the option of taking a partial retirement. This allows the participant to reduce their hours, take some of their pension and continue to build a pension on the hours worked.

27. Participants can adjust the amount of pension received for the first few years of retirement by choosing to take either a lower or higher Retirement Pension amount.

Partner’s and Orphan’s Pension

28. If a participant of the Fund dies, their partner is entitled to a partner’s pension and their children will receive an orphan’s pension.

29. If a participant dies whist employed by the Fund, their partner will receive a partner’s pension that consists of two parts: a pension built up until that time as well as a pension built up as if the member worked until their retirement date.

30. If a participant dies after leaving the Fund’s employment, their partner will receive a built up partner’s pension.

31. If a participant dies after retirement, their partner will received the partner’s pension that the participant chose before retirement.

32. If a participant retires or leaves employment, they can choose to swap some of their Retirement Pension for an extra partner’s pension. A participant can also swap the partner’s pension for a higher Retirement Pension.

33. An orphan’s pension for the participant’s children is at a certain percentage rate of the partner’s pension and is paid until the age of 18 years unless the child is in school or a student where the orphan’s pension will be paid until 27 years of age.

Invalidity

34. The Fund provides for an invalidity pension if certain conditions are met. A participant may also be eligible for an additional pension on top of the statutory occupational disability benefits payable under the foreign country’s Government.

35. In addition to an invalidity pension, if a participant is more than a certain percentage unfit for work, they may also be entitled to partial continuation of their pension build up without having to pay any contributions. The contribution-free pension build up is based on the degree to which the participant is unfit for work.

Pension Transfer

36. If a participant moves to another employer and joins another pension scheme, they may choose to transfer their pension by making application with their new pension fund. If a participant does not apply for a pension transfer, their pension will continue to be administered by the Fund.

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 the Fund.

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, www.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

A specific Article of the Deed of Amendment sets out the process in the event of the Fund entering into dissolution or liquidation. There is no indication in the Deed of Amendment that there is any contemplation of the Fund ending at a defined point in time.

The Deed of Amendment provides that if the insurance of the pension benefits is at any time regulated in such a way that the continued existence of the Fund becomes superfluous, or no longer has any obligation to fulfil entitlements to any participant, former participant or pension beneficiary, the Board may decide, after obtaining advice from Employers and the various Committees to liquidate the Fund.

In the event of liquidation, the obligations of the Fund are transferred to another pension administrator. Participants, former participants and pension beneficiaries will be provided with documentary evidence regarding their entitlements and rights towards the Fund. Any liquidation balance will be given a use in accordance with the object of the Fund to grant benefits in respect of old age, incapacity for work and/or death to participants, former participants and pension beneficiaries or to their surviving relatives in accordance with the provisions of the Articles of Association, Pension Regulations and other regulations of the Fund.

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 implements the pension scheme and is responsible for ensuring that all employees, former employees and pension beneficiaries of the Employer and other affiliated institutions in foreign country will receive the pension they can count on.

The object of the Fund is to grant benefits in respect of old age, incapacity for work and/or death to participants, former participants, pension beneficiaries or their surviving relatives in accordance with the relevant provisions.

The payment of retirement benefits by the Fund is allowed upon members reaching the specified retirement ages and years of service. Further, the Commissioner accepts that the alternate circumstances of access in this case, being disability, death and transfer upon termination of employment, 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 in the foreign country and is a resident of the 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 the foreign country to ensure that employees, former employees and pension beneficiaries of the Employer and other affiliated institutions receive a pension that they can count on.

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 foundation with its registered office in the foreign country.

The Fund is a resident of the foreign country within the meaning of a specific Article of the Convention for the avoidance of double taxation between the foreign country and Australia (the Commonwealth of Australia) and is subject to Income Tax (in the foreign country), however the income is exempt from taxation in accordance with a specific Article of the relevant Income Tax Act of the foreign country.

The Board and the various Committees are responsible for the administration of the Fund in accordance with the relevant regulations. The Board consists of six members with three members representing the employers, two members representing the participants and one member representing the pension beneficiaries.

Based on this, it is reasonable to conclude that the central management and control of the Fund occurs in the 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 Fund 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, 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 exempt from taxation in the foreign country in accordance with a specific Article of the Income Tax Act of the foreign country.

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.