Edited version of your written advice

Authorisation Number: 1051468807631

Date of advice: 20 December 2018

Ruling

Subject: International issues - Foreign entities - Foreign superannuation funds

Question 1

Is the Trust 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 Trust not assessable and not exempt income of the Trust under section 128D of the ITAA 1936?

Answer

Yes.

This ruling applies for the following periods:

1 July 20xx to 30 June 20xx

1 July 20xx to 30 June 20xx

The scheme commences on:

1 July 20xx

Relevant facts and circumstances

1. The Trust is a pension scheme with headquarters in a foreign country.

2. A letter from the tax authority in the foreign country certifies that the Trust is a resident of that country for tax purposes and is exempt from taxation there.

3. The Trust is governed by the Declaration of Trust (the Declaration) which established the fund in the foreign country.

4. The sole purpose of the Trust is to provide benefits to members who are residents of a foreign country.

5. There is no termination date for the Trust in the Declaration. The trustees have the power to terminate the Trust at any time at their discretion, but there is no termination date in the Declaration.

6. The operation and the trust is the responsibility of the Board of Trustees (the Board).

7. The Board is comprised of members all of whom live and work in the foreign country.

8. Contributions are made to the Trust by Employers of the members of the fund.

Accessing benefits

9. Members can access their full benefit at retirement age, which is 65.

10. Members can also access their benefits from the ‘early retirement age’ of 55. However there is a reduction in the benefit unless the member’s age plus years of service is equal to 85 or higher.

11. Members may access their benefits before retirement if they become totally and permanently disabled.

12. Benefits are also available where members die, which are payable to the surviving spouse or surviving children or grandchildren or parents of the employee.

Investment in Australia

13. The Trust derives income from Australian investments in the form of dividends and interest.

Relevant legislative provisions

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

For the financial years ended 30 June 2008 and onwards, paragraph 128B(3)(jb) of the ITAA 1936 excludes interest and dividend income from 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.

Through its Australian investments, the Trust, an entity which is exempt from tax in the foreign country, derives interest and dividends paid by Australian companies. As such, the key consideration in determining whether the Trust is exempt from liability to withholding tax is whether the Trust is a non-resident that is a superannuation fund for foreign residents.

The term 'superannuation fund for foreign residents' is defined in section 118-520 of the Income Tax Assessment Act 1997 (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

Is the Trust a ‘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'.

Monetary contributions are made into the Trust by employers in order for these funds to be invested to fund benefits for the members of the Trust. Therefore, the Trust is a fund.

Is it an indefinitely continuing fund?

The Declaration gives the power to the Trustees to terminate the Trust at any time at their discretion, but there is no termination date for the Trust in the Declaration and the intention is for the fund to continue indefinitely.

Therefore, for the purposes of section 118-520 of the ITAA 1997, it is accepted that the Trust is an indefinitely continuing fund.

Is the Trust a provident, benefit, superannuation or retirement fund?

The phrase ‘a provident, benefit, superannuation or retirement fund’ under paragraph 118-520(1)(a)(ii) is not defined in either the ITAA 1997 or the ITAA 1936. However, the phrase has been subject to judicial consideration.

In Scott, the High Court examined the terms ‘superannuation fund’. Justice Windeyer stated at ATD 351; AITR 312; ALJR 278 that:

… I have come to the conclusion that there is no essential 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 this connexion “fund”, I take it, ordinarily means money (or investments) set aside and invested, the surplus income there from being capitalised.

In a later case, Mahoney v. Commissioner of Taxation (Cth) (1967) 41 ALJR 232; (1967); 14 ATD 519; 10 AITR 463 (Mahoney case), the High Court took a similar view as in Scott, Justice Kitto expressed the view at ALJR 232; (1967); ATD 520; AITR 464 that:

…all that need be recognised 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 employee, 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 a general sense, but characterised by some specific future purpose.

The court found that the expression ‘provident, benefit or superannuation fund’ takes its meaning from past usage and the meaning of the several expressions must be arrived at in light of their ordinary usage.

As such the term ‘benefit’ requires a purpose narrower than conferring benefits in a completely general sense. The benefit must be characterised by some future purpose. On the same note, a provident fund must not refer to the provision of funds in a general sense, but must relate to a provision against contemplated contingencies.

Both of the abovementioned cases emphasise that the benefits must be provided for a specific purpose and require that there is a connection between the benefit received and the provision by the fund for retirement or death of a member or against ‘contemplated contingencies’, such as a sickness or accident.

The purpose of the Trust is set out in the Declaration. The purpose is to provide specified benefits to members. The benefits are provided in specific circumstances, being retirement, disability and termination of employment. The benefits available to members are based on contributions and years of service.

The Commissioner accepts that the survivor benefits and benefits paid on total and permanent disability align with the contemplated contingencies of a provident, benefit, superannuation or retirement fund.

Therefore, the Commissioner accepts this requirement is satisfied.

Was the Trust established in a foreign country?

The Trust was not established in Australia. Therefore, the Trust satisfies this requirement.

Was the Trust established and is it maintained only to provide benefits for individuals who are not Australian residents?

The Trust was established and is maintained only to provide benefits to members who are residents in a foreign country.

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 Trust, 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.

Ultimately, it is reasonable to assume that the Trust satisfies this requirement given its purpose is to provide benefits to persons that are mainly members of American trade unions.

Is the Trust’s central management and control is carried on outside Australia by entities none of whom is an Australian resident?

The Trust is a foreign resident for tax purposes. The operation and the trust is the responsibility of the Board. The Board is comprised of members all of whom live and work in the foreign country. Based on this, it is reasonable to conclude that the central management and control of the Trust occurs outside of Australia by entities that are not Australian residents.

No amount paid to the Trust or set aside for the Trust has been or can be deducted under the ITAA 1997 and no tax offset has been allowed or is allowable for such an amount?

No amounts have been paid to the Fund, nor set aside to be paid to the Fund, that can be deducted under this Act. Further, no amounts have been paid to the Fund, or set aside or be paid to the Fund, for which a tax offset has been allowed, or would be allowable, under this Act.

Conclusion

The Trust has been established as a genuine pension, superannuation or retirement fund which solely provides benefits for persons who are not tax residents of Australia. It has been set up and maintained outside of Australia by non tax-residents of Australia. No contributions to the Trust are capable of being claimed as a rebate or deduction under any section of the ITAA 1997. The trustee is exempt from income tax in the country of residence. It is therefore considered to be a superannuation fund for foreign residents, as defined by section 118-520 of the ITAA 1997.

As all the requirements of paragraph 128B(3)(jb) of the ITAA 1936 are, therefore, satisfied, the Trust will be entitled to the exemption from liability to withholding tax on interest, dividend and non-share dividend income under paragraph 128B(3)(jb) of the ITAA 1936.

Question 2

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 derived by the Trust 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 Trust will be considered not assessable not exempt income under section 128D of the ITAA 1936.