Edited version of your written advice

Authorisation Number: 1051497003685

Date of advice: 22 March 2019

Ruling

Subject: International issues - Foreign entities - Foreign superannuation funds
Income tax - Assessable income - Interest income - Interest paid to non-resident

Question 1

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

Answer

No

Question 2

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

Answer

No

Relevant facts and circumstances

1. The Educational Assistance Act (Foreign Country) establishes the Educational Assistance Commission (the Commission).

2. The membership of the Commission consists of representatives of various educational institutions in Foreign Country.

3. The Commission is a government entity exempt from income tax in the Foreign Country, and is a resident of Foreign Country for taxation purposes.

4. The purpose of the Educational Assistance Act (Foreign Country) is the provision of higher education and to address financial hurdles to qualified students completing their education.

5. The purpose of the Tuition Financial Assistance Act (Foreign Country) is to enable families in Foreign Country to help themselves finance the cost of higher education.

6. The Tuition Financial Assistance Act (Foreign Country) establishes the tuition support program (the Program) so that the full cost of tuition at universities and colleges may be paid in advance through the purchase of a tuition contract (Advance Tuition Contract).

7. The Program is to be administered by the Commission.

8. A trust fund (the Trust Fund) is created for assets and amounts received by the Commission in administering the Program.

9. In the event the Commission determines the Program to be financially infeasible, the Commission may discontinue the Program.

10. The Commission shall receive advice and counsel from an investment panel (the Panel) on investments of the Program

11. The Commission may enter into an Advance Tuition Contract with a purchaser under which the Commission undertakes to pay full tuition at an educational institution for a beneficiary to attend the institution.

12. The Commission determines the terms of each contract necessary for furthering the educational objectives of the Program.

13. The ‘beneficiary,’ to be qualified, must meet certain residency requirements in respect of Foreign Country.

Dividend and Interest Income

14. The Commission derives income that consists of interest and/or dividends paid by an Australian resident company.

Amounts paid to or set aside for fund

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

Relevant legislative provisions

Income Tax Assessment Act 1936 section 128B

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

Income Tax Assessment Act 1936 section 128D

Income Tax Assessment Act 1997 section 995-1

Income Tax Assessment Act 1997 section 118-520

Reasons for decision

Legislative references in this Ruling are to provisions of the ITAA 1936, or to provisions of the ITAA 1997 unless otherwise indicated.

A reference in these Reasons for Decision to a ‘Fund’ is to be taken as a reference to the Commission acting in its capacity as administrator of the Program.

Question 1

Summary

The income consisting of interest and dividends derived from Australia is not excluded from liability to interest and dividend withholding tax under paragraph 128B(3)(jb).

Detailed reasoning

For the financial years ended 30 June 2008 and onwards, paragraph 128B(3)(jb) 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;

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.

The term 'superannuation fund for foreign residents' is defined in section 118-520 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

Does the Fund qualify as a ‘superannuation fund for foreign residents’ as defined in subsection 118-520(1)?

Is the Fund a ‘fund’ and is it 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 Fund is a ‘fund’ for the purposes of section 118-520 as money and investments are set aside in a ‘Trust Fund’ for a particular purpose, being the Program.

Further, while the Commission may discontinue the Program if the Program is financially infeasible, the Fund is an indefinitely continuing fund as it does not have a specified end date.

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) 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.

The laws detailing the establishment of the Program and the Fund, the benefits provided and the governing rules indicate that the Fund is not a ‘provident, benefit, superannuation or retirement fund.’

The object of the Program is to enable families in Foreign Country to help themselves finance the cost of higher education. The Program is administered so that tuition fees at universities and colleges may be paid in advance through the Advance Tuition Contract. On the facts provided, there are no limits on the beneficiary’s entitlements such that the provision of a benefit arises on death, retirement or against the contemplated contingencies referred to in the Mahoney case. The Commission determines the terms of the Advance Tuition Contract necessary for ensuring the educational objectives.

In light of this, we do not consider that the Fund is a ‘provident, benefit or superannuation fund.’

Was the Fund established in a foreign country?

The Fund was established under a statute of Foreign Country.

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

The ‘beneficiary,’ to be qualified, must meet certain residency requirements in respect of Foreign Country. Based on this, it is reasonable to conclude that the Fund is established and maintained only to provide benefits for individuals who are not Australian residents.

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

Paragraphs 20 and 21 of Taxation Ruling TR 2008/9 Income tax: meaning of ‘Australian superannuation fund’ in subsection 295-95(2) of the Income Tax Assessment Act 1997 states in respect of the central management and control (CM&C) of a superannuation fund:

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.

21. The other principal areas of operation of a superannuation fund that form part of the day-to-day or operational side of the fund's activities will not constitute CM&C. These activities do not form part of the CM&C of the fund because they are not of a strategic or high level nature. Rather, these activities are of a more formalistic or administrative nature. Examples of such activities include the acceptance of contributions that are made on a regular basis, the actual investment of the fund's assets, the fulfilment of administrative duties and the preservation, payment and portability of benefits.

Furthermore, paragraphs 10 and 11 of Taxation Ruling TR 2018/5 Income tax: central management and control test of residency states:

10. Central management and control refers to the control and direction of a company’s operations. It does not refer to a physical location in which the control and direction of a company is located and may ultimately be exercised in more than one location.

11. The key element in the control and direction of a company’s operations is the making of high-level decisions that set the company’s general policies and determine the direction of its operations and the type of transactions it will enter.

The strategic and high level decision making processes and activities of the Fund are undertaken by the Commission with advice and counsel from the Panel. The membership of the Commission consists of representatives of various educational institutions in Foreign Country.

Based on this, it is reasonable to conclude that the central management and control of the Fund occurs outside Australia by entities that are not Australian residents.

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?

An amount paid to the Commission or set aside for the Commission has not been or cannot be deducted under the ITAA 1997, and a tax offset has not been allowed or is not allowable for such an amount.

Conclusion

As the Fund is not a provident, benefit, superannuation, retirement fund, the Fund is not a ‘superannuation fund for foreign residents.’

Is the Fund excluded from liability to interest and dividend withholding tax under paragraph 128B(3)(jb)?

Based on the information provided, the other elements in paragraph 128B(3)(jb) are satisfied. Australian interest and dividends are ‘derived’ by the Fund that is a non-resident. The Fund is exempt from income tax in Foreign Country. However, because the Fund is not a provident, benefit, superannuation, retirement fund, income consisting of interest and dividends derived from Australia is not excluded from liability to interest and dividend withholding tax under paragraph 128B(3)(jb).

Question 2

Detailed reasoning

Section 128D 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.

As withholding tax applies under subsection 128B(1) and 128B(2) and the Fund is not entitled to the exemption from liability to withholding tax under paragraph 128B(3)(jb) of ITAA 1936, section 128D does not apply so that the interest or dividend income is not assessable and is not exempt income of the Fund.