Edited version of your written advice

Authorisation Number: 1051497234982

Date of advice: 25 March 2019

Subject: International issues - Foreign entities - Foreign superannuation funds - Withholding tax exemption

Ruling

Question 1

Is the Fund exempted from liability to withholding tax on its interest, dividend and/or 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/or non-share dividend income derived from Australia by the Fund not assessable and not exempt (NANE) income under section 128D of the ITAA 1936?

Answer

Yes.

This ruling applies for the following period:

1 July 20xx to 30 June 20xx

The scheme commences on:

1 July 20xx

Relevant facts and circumstances

1. The Fund was established in a foreign country.

2. Letters from the relevant authority in the foreign country confirm that the Plan is a registered pension plan pursuant to the laws of that country which provide that no taxable income is payable for a period when the fund is governed by a registered pension plan. The Fund is the funding vehicle for a registered pension plan and accordingly is exempt from income taxes in the foreign country.

3. The assets of the Fund include money constituted by the employer and employee contributions, investments and investment earnings.

4. The purpose of the Fund is to provide participating employees within the foreign country with retirement benefits. Its primary goal is to ensure that the assets of the Fund are invested in a prudent manner so as to meet the future pension liabilities of the Fund and to maintain its ongoing solvency and long term sustainability.

5. Benefits are paid when an employee cease employment after reaching retirement age, satisfied certain service requirements or because of termination of employment or death.

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

7. The amounts held in the Fund are not used for any purposes other than providing such benefits to participants, former participants and their beneficiaries under the Fund and paying the expenses necessary for the administration of the Fund.

8. Contributions are being made into the Fund by the participating employees and employers of the Fund.

9. Those contributions are invested by the Trustee of the Fund with any income from investments being credited to the Fund for the purposes of paying the pensions.

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

11. It is the intention and expectation that the Fund will be continued indefinitely.

12. The Fund is not one for which an amount has been set aside, or to which an amount has been paid, by a taxpayer that is an amount that has been allowed or is allowable as a deduction or rebate under any section of the ITAA 1936 or ITAA 1997.

13. The Fund invests in public equity and fixed income markets across the globe including stocks, bonds, money market, and real estate. In relation to its Australian investments, the Fund derives interest and dividends paid by Australian companies.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 118-520

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

Income Tax Assessment Act 1936 Section 128D

Reasons for decision

Question 1

Summary

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

Detailed reasoning

Paragraph 128B(3)(jb) of the ITAA 1936 excludes income from liability to 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 derived by a non-resident Superannuation fund for foreign residents

The Fund was established in a foreign country and is not a resident of Australia.

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

An indefinitely 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 assets of the Fund, being constituted by the employer and employee contributions, investments and investment earnings constitute a fund as they are money or investments set aside and invested.

The term ‘indefinitely continuing fund’ in paragraph 118-520(1)(i) of the ITAA 1997 is not defined.

The Australian Oxford Dictionary defines 'indefinite' as:

1 vague, undefined.

2 unlimited...

and 'indefinitely' as:

1 for an unlimited time...

2 in an indefinite manner.

The requirement that the fund be ‘indefinitely continuing’ simply means that the fund must not have a specific termination date.

The Fund has been in operation since the establishment with its primary goal is to ensure that the assets of the Fund, together with the expected contributions, shall be invested in a prudent manner so as to meet the future liabilities of the Fund and to maintain its ongoing solvency and long term sustainability. Further, the Fund does not have a specific termination date.

Therefore, the Fund is considered to be an ‘indefinitely continuing fund’ within the meaning of subparagraph (a)(i) of the definition of ‘superannuation fund for foreign residents’ in section 118-520 of the ITAA 1997.

Provident, benefit, superannuation or retirement fund

None of the four descriptors ‘provident, ‘benefit’, ‘superannuation’ or ‘retirement fund’ in subparagraph 118-520(1)(a)(ii) of the ITAA 1997 are defined. However, the terms have, however, been subject to judicial consideration.

The courts have held that for a fund to be a ‘provident, benefit, superannuation or retirement fund’, the fund’s sole purpose must be to provide superannuation benefits, that is, benefits to a member upon the member reaching a prescribed age or upon their retirement, death or other cessation of employment (Scott v. FC of T (No 2) (1966) 14 ATD 333; (1966) 10 AITR 290, per Windeyer J; Mahony v. FC of T (1967) 14 ATD 519, per Kitto J; Walstern Pty Ltd v. Commissioner of Taxation (2003) 138 FCR 1; 2003 ATC 5076; (2003) 54 ATR 423, per Hill J and Cameron Brae Pty Ltd v. Federal Commissioner of Taxation (2007) 161 FCR 468; 2007 ATC 4936; (2007) 67 ATR 178, per Stone and Allsop JJ).

Having regard to the terms of the Fund rules, it is considered that the Fund is a ‘provident, benefit, superannuation or retirement fund’ as that phase has been interpreted by the relevant authorities. The purpose of the Fund is to provide employees with retirement, termination, or death benefits. Fund members are eligible for a pension upon reaching the relevant criteria prescribed in the Fund rules.

The retirement pension and death benefits available to members in respect of their contributions and years of service are a provision by the Fund for retirement or death. Further, the Commissioner accepts that the alternate circumstances of access in this case, such as the transfer of accrued balances to other pension plans, survivor benefits and very limited scope for refunds of contributions for non-vested members, align to the contemplated contingencies of a provident, benefit, superannuation or retirement fund.

Therefore, the Fund satisfies the definition of ‘a provident, benefit, superannuation or retirement fund’ in subparagraph 118-520(1)(a)(ii) of the ITAA 1997.

Paragraphs 118-520(1)(b), 118-520(1)(c) and 118-520(1)(d) of the ITAA 1997

The Fund was established in a foreign country. It was established and is maintained only to provide benefits for participating employees who are not Australian residents has its central management and control carried on outside of Australia by entities none of whom is an Australian resident.

Therefore, the Fund satisfies paragraphs 118-520(1)(b), 118-520(1)(c) and 118-520(1)(d) of the definition of ‘superannuation fund for foreign residents’ in section 118-520 of the ITAA 1997.

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.

No amount paid to the Fund or set aside for the Fund has been or can be deducted under the ITAA 1936 or ITAA 1997 and no tax offset has been allowed or is allowable for such an amount

The statement provided by the Administrator of the Fund also confirms that 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 ITAA 1997. Further, no amounts have been paid to the Fund, or set aside or be paid to the Fund, for which a tax offset has been allowed, or would be allowable, under the ITAA 1936 or ITAA 1997.

Therefore, paragraphs 118-520(2)(a) and (b) of the ITAA 1997 have no application.

As all of the above requirements are satisfied, the Fund meets the requirements of being a superannuation fund for foreign residents as defined by section 118-520 of the ITAA 1997 for the purposes of subparagraph 128B(3)(jb)(i) of the ITAA 1936.

Consists of interest, dividends or non-share dividends paid by an Australian resident company

The Fund invests in public equity and fixed income markets across the globe including stocks, bonds, money market, and real estate. In relation to its Australian investments, the Fund derives interest and dividends paid by Australian companies.

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

The letters from the relevant authority in the foreign country confirm that the Plan is a registered pension plan pursuant to the laws of that country which provide that no taxable income is payable for a period when the fund is governed by a registered pension plan. The Fund is the funding vehicle for a registered pension plan and accordingly is exempt from income taxes in the foreign country.

Conclusion

Accordingly, as all of the requirements have been met, the Fund is excluded from liability to interest and dividend withholding tax under paragraph 128B(3)(jb) of the ITAA 1936.

Question 2

Summary

The interest and dividend income derived by the Fund is NANE of the Fund under section 128D of the ITAA 1998.

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 from the investments in Australia 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 from Australia will be considered NANE income under section 128D of the ITAA 1936.