Edited version of your written advice

Authorisation Number: 1051490459707

Date of advice: 19 March 2019

Ruling

Subject: Foreign superannuation fund

Question

Is the German Fund a ‘foreign superannuation fund’ for the purposes of the managed investment trust (MIT) regime under paragraph 275-20(4)(c) of the Income Tax Assessment Act 1997¹ (ITAA 1997)?

Answer

Yes.

Question

Does the German Fund have at least 50 members for the purpose of paragraph 275-20(4)(c)?

Answer

Yes.

This ruling applies for the following period:

1 July 2017 to 30 June 2022.

The scheme commences on:

1 July 2017.

Relevant facts and circumstances

1. The German Fund has invested, together with other German investors in an Australian real property asset. The property investment has been made through an Australian unit trust (the AUT), which is proposed to be a withholding managed investment trust (MIT). In order for the AUT to qualify as a withholding MIT, the AUT must satisfy the widely held test in section 275-20. To satisfy this test, it is relevant whether the German Fund is a foreign superannuation fund for the purposes of paragraph 275-20(4)(c).

2. The German Fund is a pension fund established under German Law. The German Fund is part of the German public pension regime.

3. The Fund operates in accordance with the Articles of Association (the Articles).

4. The sole purpose of the German Fund is to provide benefits to their members, or where they are deceased, their surviving dependants.

5. A clause of the Articles gives the power to ‘liquidate’ the German Fund or close accounts to the controlling body. There is no clause in the Articles which requires or contemplates that the German Fund will be terminated or wound up after a specified amount of time or on a specified date.

Members

6. The German Fund was established by a body representing a medical profession in a region of Germany. The German Fund is an institution of that body per clause 1(3) of the Articles.

7. Under German law it is compulsory for persons working in that medical profession in that region of Germany to be a member of the German Fund.

8. At the time of the ruling application approximately X individuals were receiving pension benefits out of German Fund or were entitled to such benefits and will receive such benefits in the future.

Contributions and investment

9. Contributions to the fund are made directly by the members, payable monthly: clause 8 Articles.

10. Benefits are funded by the ‘open capitalisation’ method. This means that a portion of the funds are invested to fund future entitlements, and a portion is used immediately to pay out existing benefit entitlements.

Benefits

11. Per clause 9(1) of the Articles, the German Fund grants the following benefits to members:

a. Retirement pension

b. Occupational disability benefit

c. Widow’s or widower’s benefit

d. Death benefit

e. Orphan’s benefit

12. A Retirement pension is granted to members who have reached 62 years of age. Members can access this up to five years early but are subject to a penalty.

13. Occupational disability benefits are payable when a member can no longer work through no fault of their own, and provides supporting evidence.

14. Widow’s/Widower’s benefits are payable after the death of a member.

15. Death benefits are payable to the widow/widower of a member or the person responsible for their burial costs.

16. Orphan’s benefits are granted to living descendants of a member when they die.

Management and control

17. Per clause 2 of the Articles, the German Fund is administered by three bodies.

18. These bodies are comprised of members of the German Fund. Members are persons working in that medical profession in that region of Germany: clause 3(2), 4(1), 5(1).

19. The offices of the German Fund are in Germany.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 275-20

Income Tax Assessment Act 1997 paragraph 275-20(4)(c)

Income Tax Assessment Act 1997 section 295-95

Income Tax Assessment Act 1997 subsection 295-95(2)

Income Tax Assessment Act 1997 section 960-130

Income Tax Assessment Act 1997 subsection 995-1(1)

Superannuation Industry (Supervision) Act 1993 section 10

Question 1: Reasons for decision

For the AUT to be a withholding MIT, it must satisfy the widely-held requirement in section 275-20. Specifically, paragraph 275-20(4)(c) requires consideration of whether an entity with a participation interest in the proposed MIT is a ‘foreign superannuation fund’ with ‘at least 50 members’.

Foreign superannuation fund

The term ‘foreign superannuation fund’ is defined in subsection 995-1(1):

foreign superannuation fund:

(a) a superannuation fund is a foreign superannuation fund at a time if the fund is not an Australian superannuation fund at that time; and

(b) a superannuation fund is a foreign superannuation fund for an income year if the fund is not an Australian superannuation fund for the income year.

Therefore, in order for the German Fund to be considered a foreign superannuation fund, it needs to meet the criteria of:

(a) being a 'superannuation fund', and

(b) not being an 'Australian superannuation fund' for the ruling period.

Australian superannuation fund

The term ‘Australian superannuation fund’ is defined in subsection 995-1(1) as having the meaning given by section 295-95.

Subsection 295-95(2) states:

A * superannuation fund is an Australian superannuation fund at a time, and for the income year in which that time occurs, if:

(a) the fund was established in Australia, or any asset of the fund is situated in Australia at that time; and

(b) at that time, the central management and control of the fund is ordinarily in Australia; and

(c) at that time either the fund had no member covered by subsection (3) (an active member) or at least 50% of:

(i) the total * market value of the fund's assets attributable to * superannuation interests held by active members; or

(ii) the sum of the amounts that would be payable to or in respect of active members if they voluntarily ceased to be members;

is attributable to superannuation interests held by active members who are Australian residents.

All of the conditions in subsection 295-95(2) must be met for a superannuation fund to be an Australian superannuation fund. Based on the guidance in TR 2008/9 Income tax: meaning of ‘Australian superannuation fund’ in subsection 295-95(2) of the Income Tax Assessment Act 1997 on central management and control of a superannuation fund, the German Fund does not satisfy paragraph 295-95(2)(b) as the central management and control of the fund is not in Australia.

TR 2008/9 states that

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.

There are three bodies of the German Fund responsible for decision making. They are all comprised of persons who work in that medical profession in Germany. Based on this, the central management and control of the German Fund is in Germany, not Australia.

Superannuation fund

To qualify as a ‘foreign superannuation fund’, the German Fund must be a ‘superannuation fund’.

‘Superannuation fund’ is defined in subsection 995-1(1) as having the meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993.

Section 10 of the Superannuation Industry (Supervision) Act 1993 (SIS Act) defined ‘superannuation fund’ as:

(a) a fund that:

(i) is an indefinitely continuing fund; and

(ii) is a provident, benefit, superannuation or retirement fund; or

(b) a public sector superannuation scheme.

Paragraph (b) is not relevant in this case as it relates to superannuation funds established under Australian law. The German Fund was established under German law.

Therefore, for the German Fund to meet this definition, it needs to satisfy the three following criteria:

1) The German Fund must be a ‘fund’, and

2) The German Fund must be an indefinitely continuing fund, and

3) The German Fund must be a provident, benefit, superannuation or retirement fund.

Is the German Fund a fund?

The term 'fund' is not defined in the SIS Act for the purposes of section 10, the ITAA 1997 or the Income Tax Assessment Act 1936 (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'.

Contributions are made directly into the German Fund by members on a monthly basis. These contributions are then used immediately to pay existing benefit entitlements, or are invested to fund future benefit entitlements. Therefore, the German Fund is a fund as it is a stock of money used for the purpose of paying benefits to members.

Is the German Fund an indefinitely continuing fund?

The phrase "indefinitely continuing" is not defined in the ITAA 1936 or the ITAA 1997. The Australian Oxford Dictionary defines 'indefinitely' as for an unlimited time and in an indefinite manner.

The German Fund is an 'indefinitely continuing' fund on the basis that there is no clause the Articles which requires that it will be terminated or wound up after a specified period or on a specific date.

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

The phrase ‘a provident, benefit, superannuation or retirement fund’ is not defined in the ITAA 1997 or the ITAA 1936.

The phrase ‘superannuation fund’ was considered in Walstern Pty Ltd v FCT (2003) 138 FCR 1 where it was concluded (citing Windeyer J in Scott v Commissioner of Taxation (1966) 14 ATD 333 at 352) that:

there is no 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 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.

Based on the case law above, the German Fund is a superannuation fund. This is because the sole purpose of the fund is to provide monetary benefits to members when they reach a certain age or become permanently disabled, or to their widower/widow/orphan in the event of their death.

Therefore, for the purposes of paragraph 275-20(4)(c), the German Fund is a foreign superannuation fund.

Question 2: Reasons for decision

To satisfy paragraph 275-20(4)(c) the German Fund must not only be a foreign superannuation fund, but also have at least 50 members:

a complying superannuation fund, a complying approved deposit fund or a foreign superannuation fund, being a fund that has at least 50 members

A ‘member’ for the purposes of this paragraph is defined in section 995-1 as having the meaning given by section 960-130.

Section 960-130 defines what a ‘member’ is of a company, partnership, trust and public trading trust. Of these four, the German Fund is most akin to a trust, because it holds property for the benefit of the members.

Per item 3 in the table in section 960-139, a ‘member’ of a trust is defined as a ‘beneficiary, unitholder or object of the trust’.

Therefore, to satisfy the requirement in paragraph 275-20(4)(c) of having at least 50 members, the German Fund must have at least 50 beneficiaries, unit holders or objects.

There are over x members of the German Fund that are individuals who are entitled to benefits. They are beneficiaries/unitholders/objects. Therefore, the requirement is satisfied.