Edited version of your written advice

Authorisation Number: 1051469020407

Date of advice: 20 December 2018

Ruling

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

Question 1

Is the fund excluded from liability to withholding tax on its 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 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 20xx

Year ended 30 June 20xx

Year ended 30 June 20xx

Year ended 30 June 20xx

Year ended 30 June 20xx

Year ended 30 June 20xx

The scheme commences on:

1 July 20xx

Relevant facts and circumstances

1. The Fund was established in a foreign country.

2. Pursuant to the Funds governance, the fund was established for the object to build up a supplementary pension and other benefits and award that pension and those benefits to the participants in the retirement scheme or to their successors, if any, according to the conditions described in the Funds Regulations.

3. The Fund obtained the necessary authorisations to carry out activities for the provision of retirement benefits by virtue of a legislative instrument of the foreign country.

4. The board of directors of the Fund is vested with the overall management of the Fund.

5. The strategic and high level decision making is undertaken by the Board of Directors in the foreign country, whereas the day-to-day operational side of the fund’s activities is carried out by the general manager, finance manager, and operations manager.

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

7. The Fund is established for an indefinite period.

8. The income of the Fund consists of payments made pursuant to the pension scheme, gifts and legacies, proceeds from the assets (e.g. gains made by the investment portfolios) of the Fund and additional amounts from the scheme.

9. The Fund holds a number of Australian securities upon which it derived interest and dividend income. These investments are not held via interposed entities.

10. The Fund is not subject to income tax in the foreign country of its establishment.

11. No amounts have been paid to the Fund, nor set aside to be paid to the Fund, that can be deducted under the ITAA 1936 or the Income Tax Assessment Act 1997 (ITAA 1997).

12. No amounts have been paid to the Fund, or set aside to be paid to the Fund, for which a tax offset has been allowed, or would be allowable under the ITAA 1936 or the ITAA 1997.

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

Reasons for decision

Question 1

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

Answer

Yes.

Detailed Reasoning

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.

Is the Fund’s income derived by 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 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 Fund a ‘fund’ and is an indefinite continuing 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 income of the Fund consists of payments made pursuant to the pension scheme, gifts and legacies, proceeds from the assets (e.g. gains made by the investment portfolios) of the Fund and additional amounts from the scheme. The income of the Fund is used to pay pension benefits. This accords with the view in Scott whereby ‘fund’ in the context of ‘superannuation fund’ ordinarily meant ‘money set aside and invested, the surplus income therefrom being capitalised’.

The term ‘indefinitely continuing’ in the definition of ‘superannuation fund for foreign residents’ in subparagraph 118-520(1)(a)(i) of the ITAA 1997 is not defined. The Australian Oxford Dictionary, 2004, Oxford University Press, Melbourne defines the term ‘indefinite’ as 1 vague, undefined… 2 unlimited… and ‘indefinitely’ as 1 for an unlimited time… 2 in an indefinite manner. The Fund is an ‘indefinitely continuing fund’ within the meaning of subparagraph 118-520(1)(a)(i) of the ITAA 1997 as it has been established for an indefinite period.

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

The phrase ‘a provident, benefit, superannuation or retirement fund’ under paragraph 118-520(1)(a)(ii) of the ITAA 1997 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’ and ‘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.

Pursuant to the Regulations, the sole purpose of the Fund is the provision of pension and other benefits to participants in the retirement scheme or to their successors. Benefits are only payable to participants in the event of the retirement or death before retirement age. This would be considered a ‘provident, benefit or superannuation fund’ per Justice Kitto in Scott.

As such, the Fund satisfies the definition of a “provident, benefit, superannuation or retirement fund” as contemplated in subparagraph 118-520(a)(ii) of the ITAA 1997.

The Commissioner accepts that the other circumstances of access to the Fund align with contemplated contingencies of a provident, benefit superannuation or retirement fund.

Therefore the Commissioner accepts that this requirement is satisfied.

Was the Fund established in a foreign country?

The Fund was established in a foreign country and, therefore, satisfies this requirement.

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

The Fund declared that the fund was established, and is maintained only to provide benefits for individuals who are not Australian residents. 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 satisfies this requirement.

Is the Fund’s central management and control carried on outside Australia by entities none of whom are Australian residents?

The board of directors of the Fund is vested with the overall management of the Fund. The strategic and high level decision making is undertaken by the Board of Directors in the foreign country of establishment, whereas the day-to-day operational side of the fund’s activities is carried out by the general manager, finance manager, and operations manager. This all occurs in the foreign country.

Therefore, the Fund satisfies paragraphs 118-520(1)(b), 118-520(1)(c) and 118-520(1)(d) of the ITAA 1997.

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?

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 to be paid to the Fund, for which a tax offset has been allowed, or would be allowable, under this Act. Consequently, this requirement is satisfied.

The fund rules evidence that the Fund has been established as a genuine pension, superannuation and/or retirement fund solely providing superannuation benefits for non-residents of Australia. It has been set up and maintained outside of Australia by non-residents of Australia. Furthermore, no contributions to the Fund are capable of being claimed as a rebate or deduction under any section of the ITAA 1936 or ITAA 1997. The trustee of the Fund 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.

Does the Fund receive income that consists of interest, or consist of dividends or non-share dividends paid by a company that is a resident

The Fund holds a number of Australian securities upon which it derived interest and dividend income from August 2014 to present. These investments are not held via interposed entities. Therefore, the Fund satisfies the subparagraph 128B(3)(jb)(ii) of the ITAA 1936 in that it consists of interest, or consists of dividends or non-share dividends paid by a company that is a resident.

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

The Fund is not subject to income tax in the foreign country of establishment on interest and dividends derived from Australian investments. Therefore, the Fund satisfies subparagraph 128B(3)(jb)(iii) of the ITAA 1936.

Conclusion

The Fund is a non-resident that is a superannuation fund for foreign residents. Its income consists of interest or dividends or non-share dividends paid by a company that is a resident of Australia and it is exempt from income tax in the foreign country where it resides. Therefore, paragraph 128B(3)(jb) of the ITAA 1936 is satisfied and the interest and dividend income derived by the Fund qualifies for exemption from withholding tax.

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.’

Dividend and interest income 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 will be considered not assessable not exempt income under section 128D of the ITAA 1936.