Edited version of your written advice

Authorisation Number: 1051444643613

Date of advice: 29 October 2018

Ruling

Subject: Withholding taxes

Question 1

Is the Pension Plan exempt from liability to withholding tax on interest, dividend and non-share dividend income derived from its investments into Australia 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 Pension Plan from its investments into Australia not assessable and not exempt income of the Pension Plan under section 128D of the ITAA 1936?

Answer

Yes.

This ruling applies for the following period:

30 June 2019

The scheme commences on:

1 July 2018

Relevant facts and circumstances

Background to the Pension Plan

1. The Pension Plan is a defined contribution, defined benefit scheme established by statute. Both employees and employers make contributions under the rules of the Pension Plan. The employer is required to meet all pension obligations arising from the Pension Plan.

2. Current contributions are used to fund current pension liabilities under the Pension Plan. The net amount is paid into the Pension Plan Fund for investment

3. The Pension Plan’s central management and control is not in Australia. All investment decisions relating to the Pension Plan assets are made outside Australia.

4. The Pension Plan was established outside Australia, and has its central management and control also outside Australia.

5. The Pension Plan is exempt from income tax in the country in which it resides.

6. The Pension Plan invests directly into Australia and owns a number of Australian assets in its own name. The first entry point into Australia is directly owned by the Pension Plan and there are no interposed non-resident entities in the investment structure. These investments are covered by this private ruling.

7. The Pension Plan also makes some investments indirectly into Australia via its wholly owned subsidiaries. For the avoidance of doubt, this ruling does not cover these investments.

Pension Plan Description

Membership

8. The Pension Plan is effectively for all people employed by the relevant employer excluding those covered under other pension plans.

Contributions

9. Employees and employers contribute to the Pension Plan. The contributions to be paid depend on an employee’s salary.

10. An employee cannot make contributions after they have reached a certain age.

Other facts

11. The Pension Plan is established by law, and it cannot be discontinued until the legislature repeals any of the statutes that establish them.

12. The Pension Plan is exempt from income tax.

13. The Pension Plan 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.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1)

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 Pension Plan exempt from liability to withholding tax on interest, dividend and non-share dividend income derived from its investments into Australia under paragraph 128B(3)(jb) of the ITAA 1936?

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 that withholding tax, under section 128B of the ITAA 1936, will not be imposed on:

(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 requirements for the exemption from withholding tax under paragraph 128B(3)(jb) of the ITAA 1936 will be discussed below.

The Pension Plan is a non-resident

The Pension Plan is not a resident of Australia for tax purposes. The Pension Plan was established outside Australia, and its management is completely based there. The Pension Plan therefore satisfies this requirement.

The Pension Plan 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 Pension Plan 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 Pension Plan is an indefinitely continuing fund

● the Pension Plan is a provident, benefit, superannuation or retirement fund

● the Pension Plan was established in a foreign country

● the Pension Plan was established and is maintained only to provide benefits for individuals who are not Australian residents

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

● No amount paid to the Pension Plan or set aside for the Pension Plan 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 Pension Plan or set aside for the Pension Plan.

The Pension Plan 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

The Pension Plan is created by statute. Its actuary and annual reports have projections for the sustainability of the Pension Plan for the foreseeable future.

The Pension Plan is established by statute and can only be wound up in the event of a change in the law enacted by the legislature.

There is sufficient evidence to accept that the Pension Plan will continue to operate in accordance with the relevant statutes for an indefinite period of time, satisfying this requirement.

The Pension Plan 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

● cease their employment after the satisfaction of certain service requirements

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

● reach a certain age, 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 guidance establishes 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 rules of the Pension Plan provide retirement, disability, death and survivor benefits to contributors to the Fund and their dependents. The Pension Plan is a scheme where the benefits paid to the relevant contributor are calculated based on a number of factors defined by statute, including the amount contributed, the number of years the person has contributed, the type of service, and the age of the person drawing benefits under the Pension Plan.

There are no benefits provided by the Pension Plan to contributors and beneficiaries beyond those as prescribed in the facts, and the Commissioner accepts that the alternate circumstances of access to the funds, being incapacity, death, the transfer of funds to another retirement fund, and a return of contributions in very limited circumstances, align to the contemplated contingencies of a provident, benefit, superannuation or retirement fund.

The Pension Plan was established in a foreign country

The Pension Plan were established in a foreign country and are not tax residents of Australia. Therefore the Pension Plan will satisfy this requirement.

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

The Pension Plan was established for employees of the relevant non-resident employer. 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 Pension Plan, 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 Pension Plan. Therefore, the Pension Plan will satisfy this requirement.

The Pension Plan’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.

Based on the facts, it is clear that all of the key functions of the Pension Plan are exercised outside of Australia, including the control and direction of the fund’s investments, strategies, fund administration, and operations. As such it is reasonable to conclude that the central management and control of the Pension Plan is exercised outside Australia by entities that are not Australian residents. The Pension Plan therefore satisfies this requirement.

No amount paid to the Pension Plan or set aside for the Pension Plan 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 Pension Plan or set aside for the Pension Plan 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 Pension Plan or set aside for the Pension Plan. Therefore, the Pension Plan 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 to the Pension Plan.

The Pension Plan will receive interest income from its Australian investments, along with dividend and non-share dividend income from companies who are residents of Australia for tax purposes. Therefore, the Pension Plan will satisfy this requirement.

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

The Pension Plan is exempt from income tax and therefore satisfies this requirement.

Conclusion

As all the requirements of paragraph 128B(3)(jb) of the ITAA 1936 are satisfied the Pension Plan will be entitled to a withholding tax exemption under paragraph 128B(3)(jb) of the ITAA 1936 in relation to investments that it holds directly in Australia from which it derives interest, dividend and non-share dividend income.

Question 2

Is interest, dividend and non-share dividend income derived by the Pension Plan from its investments into Australia not assessable and not exempt income of the Pension Plan 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.

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 Pension Plan from its direct 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 by the Pension Plan on its direct investments into Australia is not assessable and not exempt income of the Pension Plan under section 128D of the ITAA 1936.