Edited version of your written advice

Authorisation Number: 1051479595904

Date of advice: 8 February 2019

Ruling

Subject: Foreign superannuation funds withholding tax exemption

Question 1

Is the Fund excluded from liability to withholding tax on its interest and/or dividend income under paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

Question 2

Is interest and/or dividend income derived by the Fund not assessable and not exempt income of that entity under section 128D of the ITAA 1936?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 2017

Year ending 30 June 2018

Year ending 30 June 2019

The scheme commences on:

1 July 2016

Relevant facts and circumstances

The Fund (‘the Fund’) is a fund established in a foreign country to provide retirement and death benefits for all eligible employees of various employers.

Members of the Fund receive pensions that are calculated using a set formula involving several factors such as a member’s current or past salary.

As at 31 March 2018, there were many thousands of members of the Fund.

A member of the Fund may receive benefits or payments from the Fund prior to the age of 60 if that member:

a) elects to receive a reduced pension in certain circumstances starting from between 50 and 60 years old;

b) dies;

c) is unable to work due to illness or injury; or

d) receives a refund of contributions on leaving their employment or opting out of the Fund within 2 years of joining the Fund.

Members may also choose to have the value of their benefits transferred to another Registered Pension Scheme, Qualifying Overseas Scheme or used to purchase a pension-style financial product from a Life Insurance Company in certain situations.

Apart from the circumstances referred to above, benefits are only accessible after the member is 60 years old.

In the year ended 31 March 2018, the benefits payable by the Fund (including death benefits) was over a hundred million British Pounds. The total refunds of contributions of members in the same period were less than a million British Pounds.

Tax attributes of the Fund

The Fund is a resident of a foreign country for the purposes of the Convention between the Government of Australia and the Government of X for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital Gains [2003] ATS 22 (X Convention).

The Fund is a “registered pension scheme” for the purposes of the Finance Act 2004 (X). As the Fund is a registered pension scheme, the income of the Fund is free of taxation in the foreign country pursuant to the Finance Act 2004.

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

The central management and control of the entity is carried on outside Australia by entities (none of whom is an Australian resident).

An amount paid to the Fund or set aside for the Fund has not been or cannot be deducted (and a tax offset has not be allowed and is not allowable) under the ITAA 1936 or Income Tax Assessment Act 1997 (ITAA 1997).

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 128B

Income Tax Assessment Act 1936 subsection 128B(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 118-520(1)

Income Tax Assessment Act 1997 paragraph 118-520(1)(a)

Income Tax Assessment Act 1997 paragraph 118-520(1)(b)

Income Tax Assessment Act 1997 paragraph 118-520(1)(c)

Income Tax Assessment Act 1997 paragraph 118-520(1)(d)

Income Tax Assessment Act 1997 subsection 118-520(2)

Reasons for decision

All references are to the Income Tax Assessment Act 1936 (ITAA 1936) unless otherwise noted.

Question 1

Summary

The Fund is excluded from liability to withholding tax on its interest and/or dividend income under paragraph 128B(3)(jb).

Detailed reasoning

A non-resident that derives income consisting of a dividend or interest may be liable to pay income tax upon that income under section 128B (Withholding Tax).

However, subsection 128B(3) contains a list of income to which section 128B will not apply. To the extent that it is relevant, subsection 128B(3) states:

(3) This section does not apply to: …

(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; …

Therefore, an entity will not be liable to withholding tax on income if the criteria in subparagraph 128B(3)(jb)(i), subparagraph 128B(3)(jb)(ii) and subparagraph 128B(3)(jb)(iii) are satisfied in relation to that income.

Subparagraph 128B(3)(jb)(i)

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 Meaning of superannuation fund for foreign residents

(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 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.

As such, the Fund must be a ‘fund’ that satisfies all of the conditions in subsection 118-520(1) of the ITAA 1997 (and none of the paragraphs in subsection 118-520(2) of the ITAA 1997) to be a ‘superannuation fund for foreign residents’.

Is the Fund a ‘fund’ and does it satisfy paragraph 118-520(1)(a) of the ITAA 1997?

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 phrase ‘a provident, benefit, superannuation or retirement fund’ under subparagraph 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’ 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 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. Likewise, 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.

In this case, the Fund is a ‘registered pension scheme’ for the purposes of the relevant legislation in the foreign country.

A member of the Fund may only directly receive benefits or payments from the fund prior to reaching an age of 60 if the member:

a) elects to receive a reduced pension in certain circumstances starting from between 50 and 60 years old;

b) is unable to work due to illness or injury;

c) dies; or

d) receives a refund of contributions on leaving their employment or opting out of the Fund within 2 years of joining the Fund.

In the circumstances, the Fund has a purpose of providing a pool of assets for use by current and former employees (of various employers) only on their retirement, death or contemplated contingencies such as being unable to work.

The Commissioner also accepts that the ability of members to receive a refund of contributions is a minor and incidental feature of the Fund in the circumstances. The factors that point to this conclusion include that:

● the Fund is a “Registered Pension Scheme” associated with a large employer in the foreign country; and

● the benefits payable by the Fund on retirement or death of members was significantly greater than refunds of contributions in the year ended 31 March 2018.

Therefore, the Fund satisfies the meaning of ‘superannuation fund’ as the Commissioner accepts that its sole purpose is to provide a benefit to members upon their retirement, death or inability to work. The Commissioner also accepts that the Fund is indefinitely continuing and, as such, satisfies paragraph 118-520(1)(a) of the ITAA 1997.

Does the Fund satisfy paragraph 118-520(1)(b) of the ITAA 1997?

The Fund was established in the foreign country. Therefore, this condition is satisfied.

Does the Fund satisfy paragraph 118-520(1)(c) of the ITAA 1997?

The Fund was established, and is maintained, only to provide benefits for individuals who are not Australian residents. Therefore, this condition is satisfied.

Does the Fund satisfy paragraph 118-520(1)(d) of the ITAA 1997?

The Fund’s central management and control is carried on outside Australia by entities (none of whom is an Australian resident).Therefore, this condition is satisfied.

Does subsection 118-520(2) of the ITAA 1997 apply?

No amount paid to the Fund or set aside for the Fund has been or can be deducted (and no tax offset has been allowed or is allowable for such an amount) under the ITAA 1997. Therefore, subsection 118-520(2) of the ITAA 1997 does not apply.

Conclusion

The Fund is a ‘superannuation fund for foreign residents’. The Commissioner is also satisfied that the Fund and/or the Fund’s trustee are ‘non-residents’ for the purposes of subparagraph 128B(3)(jb)(i). As such, subparagraph 128B(3)(jb)(i) is satisfied.

Subparagraph 128B(3)(jb)(ii)

This ruling will only apply to income consisting of interest or dividends and, as such, subparagraph 128B(3)(jb)(ii) is satisfied.

Subparagraph 128B(3)(jb)(iii)

The Fund is a ‘registered pension scheme’ under the Financial Act 2004 (X) and therefore its income is free of taxation in the foreign country pursuant to that Act.

Consequently, the relevant interest and/or dividend income of the Fund is exempt from income tax in the country in which it resides (being the X) and subparagraph 128B(3)(jb)(iii) is satisfied.

Conclusion

Paragraph 128B(3)(jb) applies to interest and/or dividend income of the Fund such that the fund is excluded from liability to withholding tax on that interest and/or dividend income.

Question 2

Summary

Interest and/or dividend income derived by the Fund is not assessable and not exempt income of the Fund under section 128D.

Detailed reasoning

Section 128D provides:

128D Certain income not assessable

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 128B would apply to dividend and interest income derived by the Fund (by virtue of subsections 128B(1) and 128B(2) respectively), but for the operation of the withholding tax exemption under paragraph 128B(3)(jb). As paragraph 128B(3)(jb) is specifically referred to in section 128D, any interest or dividend income derived by the Fund will be considered not assessable and not exempt income under section 128D.