Edited version of your written advice

Authorisation Number: 1051468295622

Date of advice: 10 May 2019

Ruling

Subject: Exemption from withholding tax for a superannuation fund for foreign residents

Question 1

Does paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936) apply such that the Fund is not liable to withholding tax on any interest, dividend and non-share dividend income it derives directly from Australia?

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 31 December 2011

Year ended 31 December 2012

Year ended 31 December 2013

Year ended 31 December 2014

Year ended 31 December 2015

Year ended 31 December 2016

Year ended 31 December 2017

Year ended 30 June 2018

Year ended 30 June 2019

The scheme commences on:

1 January 2011

Relevant facts and circumstances

1. The Fund is an independent, self-governing public pension fund for residents of a foreign country.

2. The Fund’s objectives are to receive contributions, manage assets through investments in securities and certain shareholdings as well as related financial instruments, build, own and manage real property, own shares in the Fund’s subsidiary undertakings and manage other businesses with the objective of paying employees pensions.

3. The Fund is managed by a committee of representatives (the Committee), a board (the Board) and a Chief Executive Officer (CEO).

4. The Committee will consist of employers’ representatives and employees’ representatives as well as a chairman.

5. The Board will consist of the Chairman of the Committee and other members elected from the Committee and is responsible for the administration of funds.

6. The Board will set up an executive committee of three members (the Executive Committee). The Executive Committee shall consist of the Chairman of the Board who shall also be the Chairman of the Executive Committee, and two members of the Board appointed by the employers’ representatives and employees’ representatives on the Board. The objective of the Executive Committee is to make decisions following authorisation from the Board as well as to prepare and implement decisions by the Board.

7. The CEO will be responsible for the daily management of the Fund and is responsible to the Board.

8. Members of the Fund include wage earners over the age of 16 who are employed in the foreign country. Self-employed individuals can contribute only if they are already members due to their previous employment.

9. The Board and the Minister lay down the regulations regarding the calculation and payment of supplementary personal pensions. The supplementary personal pension is paid in advance from the first day of the month after a member reaches the state retirement age of 65.

10. Wage earners will be covered by the scheme during absence from work if they qualify for unemployment benefits. The same applies to members who qualify for unemployment benefits.

11. The Board stipulates the size of the annual contributions made by employees and their employers.

12. The fund will invest its assets such that the interests of its members are safeguarded as well as possible. When placing assets, every endeavour will be made to maintain the real value of the assets

13. The Fund derives interest income, along with dividend and non-share dividend income from entities who are residents of Australia for tax purposes.

Other

14. The Fund has its registered office in the foreign country.

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

16. An amount paid to The Fund or set aside for the Fund has not been and cannot be deducted under the Income Tax Assessment Act 1997 (ITAA 1997).

17. The Fund is not a resident of Australia for tax purposes.

18. The Fund is exempt from taxation in accordance and is considered a tax exempt pension fund.

19. There is no evidence of the Fund ending at a defined point in time or any expectation that the Fund will be discontinued.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1936 subsection 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)

Anti-avoidance rules

Part IVA of the ITAA 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtain a tax benefit or imputation benefit in connection with an arrangement.

If Part IVA of the ITAA 1936 applies the tax benefit or imputation benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

Reasons for decision

Question 1

Does paragraph 128B(3)(jb) of the ITAA 1936 apply such that the Fund is not liable to withholding tax on any interest, dividend and non-share dividend income it derives directly from Australia?

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 is considered below.

The Fund is a non-resident

The Fund is not a resident of Australia for tax purposes. The Fund was established and registered in the foreign country with its registered office in the foreign country. Therefore, the Fund satisfies 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 have 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.

There is no evidence of the fund ending at a defined point in time or any expectation that the Fund will be discontinued.

Therefore, it is accepted that the Fund is an indefinitely continuing fund.

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

ATO Interpretative Decision ATO ID 2009/67 Income Tax: Superannuation fund for foreign residents (ATO ID 2009/67) provides 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 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 Fund’s objectives are to receive contributions, manage assets through investments in securities and certain shareholdings as well as related financial instruments, build, own and manage real property, own shares in the Fund’s subsidiary undertakings and manage other businesses with the objective of paying employees supplementary pensions.

The Fund receives mandatory contributions from employees and their employers and invests its assets such that the interests of its members are safeguarded as well as possible.

In the event of a member’s death, a lump sum payment is available to surviving spouses, cohabitees and children of a member.

As both the objective of the Fund and the actual operation of the Fund have the sole purpose of providing retirement benefits, the Fund is considered to be 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. 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 for the purpose of providing supplementary pensions to individuals who are foreign country employees.

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) provides the following:

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 has its registered office in the foreign country. The decision making and management of the Fund is undertaken by a committee of representatives and a board that are made up of a mixture of employer representatives and employee representatives.

Based on the above, 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.

As the above requirements have been satisfied, the Fund meets the definition of a superannuation fund for foreign residents under section 118-520 of the ITAA 1997. Therefore, the Fund is considered a non-resident that is a superannuation fund for foreign residents for the purposes of paragraph 128B(3)(jb)(i) of the ITAA 1936.

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.

However, the operation of paragraph 128B(3)(jb) of the ITAA 1936 is extended by subsection 128A(3) of the ITAA 1936 which states:

For the purposes of this Division, a beneficiary who is presently entitled to a dividend, to interest or to a royalty included in the income of a trust estate shall be deemed to have derived income consisting of that dividend, interest or royalty at the time when he or she became so entitled.

The operation of subsection 128A(3) of the ITAA 1936 will enable interest, dividend and non-share dividend income paid by an Australian resident company and derived by a trust estate to retain its character in the hands of a beneficiary of that trust estate. Furthermore, the beneficiary will be deemed to have derived the relevant income for the purposes of paragraph 128B(3)(jb) of the ITAA 1936 at the point in time that the beneficiary becomes presently entitled to that income.

The Fund derives interest income, along with dividend and non-share dividend income from entities 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 the Act as a tax exempt pension fund.

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 a withholding tax exemption under paragraph 128B(3)(jb) of the ITAA 1936 in relation to investments that it holds in Australia from which it derives interest.

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?

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 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 ITAA1936.