Edited version of your written advice

Authorisation Number: 1051456441683

Date of advice: 20 November 2018

Ruling

Subject: International issues - foreign entities - foreign superannuation funds – withholding tax exemption

Question 1

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

Answer

Yes.

Question 2

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

Answer

Yes.

This ruling applies for the following period:

1 July 20xx to 30 June 20xx

The scheme commences on:

1 July 20xx

Relevant facts and circumstances

1. The Fund was incorporated in a country outside Australia.

2. The purpose of the Fund is to provide participating employees with retirement, disability and/or death benefits.

3. Benefits are paid when an employee cease employment after reaching retirement age (65 years old), satisfied certain service requirements or because of total and permanent disability or death.

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

5. The amounts held in the Fund are not used for any purposes other than providing benefits to participants, former participants and their beneficiaries under the Fund and paying the expenses necessary for the management of the Fund.

6. Contributions are being made into the Fund by the sponsoring employers of the Fund.

7. Those contributions are invested by the General Board of the Fund with any income from investments being credited to the Fund for the purposes of paying the Pensions.

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

9. It is the intention and expectation that the Fund will be continued indefinitely.

10. The Fund is not one 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 rebate under any section of the ITAA 1936 or ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 118-520

Income Tax Assessment Act 1936 Paragraph 128B(3)(jb)

Income Tax Assessment Act 1936 Section 128D

Reasons for decision

Question 1

Summary

The Fund is excluded from liability to withholding tax on its interest, dividend and non-share dividend income derived from Australia under paragraph 128B(3)(jb).

Detailed reasoning

Paragraph 128B(3)(jb) of the ITAA 1936 excludes income from liability to 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.

Superannuation fund for foreign residents

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

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 Fund is financed by the contributions paid by the employers. The contributions are then being invested by the General Board with any investment return on those contributions being credited to the Fund for the purposes of payment to the members as the pension obligations. Therefore, the contributions and investment income constitute a fund.

Indefinitely continuing

The term 'indefinitely continuing fund' in subparagraph (a)(i) of the definition of 'superannuation fund for foreign residents' in section 118-520 of the ITAA 1997 is not defined.

The Australian Oxford Dictionary defines 'indefinite' as:

1 vague, undefined.

2 unlimited...

and

'indefinitely' as:

1 for an unlimited time...

2 in an indefinite manner.

The requirement that the fund be ‘indefinitely continuing’ simply means that the fund must not have a specific termination date.

The Fund has been in operation since the establishment with the objects to provide pensions/benefits in respect of old age, occupational disability or death of the members in accordance with the provisions of the Fund rules. In respect of the old age pension, the target retirement age is 65 years. The Fund is not required to be terminated after a specified date and it is expected that the Fund will be continued indefinitely.

Therefore, the Fund is an indefinitely continuing fund within the meaning of subparagraph 118-520(1)(a)(i) of the ITAA 1997.

Provident, benefit, superannuation or retirement fund

None of the four descriptors ‘provident, ‘benefit’, ‘superannuation’ or ‘retirement fund’ in subparagraph 118-520(1)(a)(ii) of the ITAA 1997 are defined. However, the terms have, however, been subject to 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 Fund rules, it is considered that the Fund is a ‘provident, benefit, superannuation or retirement fund’ as that phrase has been interpreted by the relevant authorities. The sole purpose of the Fund is the provision of benefits to, or in respect of, participating employee whose participation ends:

● with the death of the Participant;

● upon the termination of employment between the Participant and the Employer, where no right to continued pension accrual exists;

● if the conditions for continued pension accrual are no longer met in the event of full or partial Work Disability or in the event of full and sustained Work Disability; or

● upon or after reaching retirement age of 65 years old

Therefore, the Fund satisfied subparagraph (a)(ii) of the definition of ‘superannuation fund for foreign residents’ in section 118-520 of the ITAA 1997.

Paragraphs 118-520(1)(b), 118-520(1)(c) and 118-520(1)(d) of the ITAA 1997

According to a confirmation statement provided by the Fund:

● the Fund was established in a foreign country

● the Fund was established and is maintained only to provide benefits for participating employees who are not Australian residents, and

● has its central management and control carried on out Australia by entities none of whom is an Australian resident.

Therefore, the Fund satisfies paragraphs 118-520(1)(b), 118-520(1)(c) and 118-520(1)(d) of the definition of ‘superannuation fund for foreign residents’ in section 118-520 of the ITAA 1997.

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.

Further, the General Board of the Fund has provided a statement confirming that no amount paid to the Fund or set aside for the Fund has been or can be deducted under the ITAA 1936 and the ITAA 1997. The statement also confirms that a tax offset has not been allowed or is allowable for such an amount. Therefore, subsection 118-520(2) of the ITAA 1997 has no application.

Accordingly, the Fund is a ‘superannuation fund for foreign resident’ within the meaning of subsection 118-520 of the ITAA 1997. It is therefore a ‘superannuation for foreign residents’ for the repurposes of paragraph 128B(3)(jb) of the ITAA 1936.

Consists of interest, dividends or non-share dividends paid by an Australian resident company

The Fund invests directly into Australian investments from which it derives interest, dividend and non-share dividend income.

Is exempt from income tax in the country in which it resides

The statement issued by the relevant authority in that foreign country confirms that the income derived by the Fund is subject to income tax of that country. However, the income is exempt from taxation in accordance with the relevant provision of that act (Tax exempt Pension Fund).

Accordingly, as all of the requirements have been met, the Fund is excluded from liability to interest and/or dividend withholding tax under paragraph 128B(3)(jb) of the ITAA 1936.

Question 2

Summary

The income derived by the Fund that consists of interest, dividend and non-share dividend income paid by Australian companies is not assessable income 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 from the investments in Australia 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 from Australia will be considered not assessable not exempt income under section 128D of the ITAA 1936.