Edited version of your written advice

Authorisation Number: 1051484093948

Date of advice: 19 February 2019

Ruling

Subject: Foreign superannuation funds withholding tax exemption

Question 1

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

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 2018

Year ended 30 June 2019

The scheme commences on:

1 January 2018

Relevant facts and circumstances

The Fund is a fund arranged by International Organisation A for members and personnel of that organisation and an associated employer.

International Organisation A is located in Country A. At 31 December 2017 staff members of International Organisation A were of over 25 different nationalities.

The Fund has its own Board, to oversee the Fund, and CEO, to manage the Fund.

The Fund operates a defined benefit scheme that calculates a pension using a set formula involving several factors such as a member’s salary and years of membership.

As at 31 December 2017 the number of members of the Fund was in the thousands.

A member of the Fund (or that member’s relative) may receive benefits or payments from the Fund prior to the age of 50 if that member:

a) is unable to work due to physical and/or mental impairment;

b) dies; or

c) Receives a ‘Transfer’ payment on ceasing to be a member of the Fund.

Depending on the period for which contributions have been made in respect of a member into the Fund, a Transfer payment may be paid:

● In the case of under 5 years of making contributions – into another pension scheme or to the member himself

● In the case of 5-10 years of making contributions – into another pension scheme or, if that option is not possible, to the member himself

● In the case of more than 10 years of making contributions – into another pension scheme or, if that option is not possible, into a private insurance scheme offering comparable guarantees.

Apart from the circumstances referred to above, benefits are only accessible after the (former) member is 50 years old in the form of either:

● An early retirement pension – only accessible after the (former) member is at least 50 years old

● A retirement pension at the applicable retirement age – only accessible after the (former) member is at least 65 years old.

In the year ended 31 December 2017 the benefits and payments to members and beneficiaries by the Fund were hundreds of million dollars. The total Transfer payments to members was around 3.5% of the Fund’s total benefits and payments.

The Country A - International Organisation Agreement

The income of the Fund is free of taxation in Country A pursuant to an agreement between International Organisation A and Country A. The Agreement also states that the seat of International Organisation A is in Country A and that the organisation has legal capacity in Country A.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 128B

Income Tax Assessment Act 1936 subsection 128B(1)

Income Tax Assessment Act 1936 subsection 128B(2)

Income Tax Assessment Act 1936 subsection 128B(3)

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

Income Tax Assessment Act 1936 subparagraph 128B(3)(jb)(i)

Income Tax Assessment Act 1936 subparagraph 128B(3)(jb)(ii)

Income Tax Assessment Act 1936 subparagraph 128B(3)(jb)(iii)

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 subparagraph 118-520(1)(a)(ii)

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 fund arranged by International Organisation A for members and personnel of it and a second employer.

The only circumstances in which members of the Fund (or their relatives) may directly receive benefits or payments from the fund prior to being at least 50 years old are where a member:

a) is unable to work due to physical and/or mental impairment;

b) dies; or

c) receives a ‘Transfer’ payment on ceasing to be a member of the Fund.

In the circumstances, the Commissioner accepts that the Fund has a purpose of providing a pool of assets for use by current and former employees (of International Organisation A and the other participating employer) 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 Transfer payment is a minor and incidental feature of the Fund. In coming to this conclusion, regard was had to the circumstances of the case including:

● the restrictions on Transfer payments directly to a member after 5 years of pensionable service;

● the quantum of Transfer payments to members as a proportion of total benefits and payments – around 3.5%; and

● the large number of members of the Fund.

It is also relevant that International Organisation A is staffed by a very diverse set of employees. In particular, only a small proportion of staff members of International Organisation A are from Country A (the country where International Organisation A is located). The ability of members to make Transfer payments facilitates the transfer of a member’s entitlements in the Fund to a Pension Fund of the member’s choosing in their home country upon ceasing to be employed by International Organisation A.

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 is also satisfied 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?

In the circumstances, the Commissioner is satisfied that the Fund was established in Country A. Consequently, the requirement in paragraph 118-520(1)(b) of the ITAA 1997 is met.

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 the employees of International Organisation A and the other participating employer (who are not residents of Australia). Consequently, the requirement in paragraph 118-520(1)(c) of the ITAA 1997 is met.

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). In particular, the Fund’s Board and CEO oversee and manage the Fund outside Australia. Consequently, the requirement in paragraph 118-520(1)(d) of the ITAA 1997 is met.

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

The Commissioner is satisfied that 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, the exception in subsection 118-520(2) of the ITAA 1997 does not apply.

Conclusion

The Fund is a ‘superannuation fund for foreign residents’. The Fund (and/or International Organisation A itself) are also ‘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)

In the circumstances, the Commissioner is satisfied that International Organisation A and the Fund ‘reside’ in Country A for the purposes of subparagraph 128B(3)(jb)(iii). Amongst other factors, the Country A - International Organisation Agreement makes it clear that International Organisation A has its seat in Country A and has legal capacity in Country A.

The Fund is also exempt from direct taxation, including income tax, in Country A pursuant to the Country A - International Organisation Agreement. As such, the requirement in subparagraph 128B(3)(jb)(iii) is met.

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.