Edited version of private advice

Authorisation Number: 1051522768246

Date of advice: 14 June 2019

Ruling

Subject: Exemption from withholding tax for a superannuation fund for foreign residents

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 period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Fund is a defined benefit pension plan that was established in the Country Y. The Fund's members are, or were, employees of various entities in the Country Y.

Administration of the Fund is managed by a Board, which consists of several members. Board meetings are held in the Country Y. The Fund's registered office is also in the Country Y.

The Fund is exempt from Country Y taxation in accordance with § 501(a) of the Internal Revenue Code of the Country Y.

For the purposes of the ITAA 1936 and the Income Tax Assessment Act 1997 (ITAA 1997):

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

·         The Fund is not a resident of Australia.

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

·         An amount paid to the Fund or set aside for the Fund has not been and cannot be deducted.

·         A tax offset has not been allowed nor would be allowable for any amount paid to the Fund or set aside for the Fund.

Membership

Membership of the Fund is automatic for full time employees of certain entities.

There are various categories of membership depending, amongst other factors, on when the relevant member was hired by their employer.

Contributions

Contributions to fund retirement benefits come from three sources:

·         Contributions from members (generally deducted pre-tax from a member's wage);

·         Contributions from employers; and

·         Investment earnings of the Fund.

Contributions are generally calculated as a percentage of the employee's base pay plus any special payments. Contribution rates of the employee and employer are generally determined by the category of membership of the employee and their age of entry into the Fund. Employee and employer contribution rates can also change based on the results of periodic actuarial studies.

Members may not borrow from, or withdraw, any contributions while employed. However, when a member's employment is terminated that member may withdraw accumulated funds in one of two ways:

·         A direct payment to the member, which may be subject to taxes and penalties; or

·         A rollover to a qualified tax-deferred retirement account, which will not be subject to taxes and penalties.

Refunds of member contributions paid by the Fund totalled a few million dollars in the year ended 30 June 2018. The retirement and death benefits paid by the Fund totalled a few hundred million over the same period.

Retirement credit

Members accumulate one year of retirement credit for each year of active, full-time employment. For part-time employment, credit will accumulate proportionately.

Members can purchase and receive additional retirement credit in respect of military service, medical leave and in some other circumstances.

Vesting

Members are vested in the Fund after attaining x years of retirement credit. A member who is vested is entitled to receive a pension from the Fund once certain other eligibility requirements are fulfilled.

If a member leaves their employment before reaching x years of retirement credit then that member can choose to leave their contributions on deposit but will not be entitled to a pension unless more retirement credit is attained at a later time.

Deferred Retirement

Deferred retirement is available to members that cease being employees of their employer after x or more years of service.

A deferred member may receive a retirement allowance at the time that they would have been eligible for retirement if they had remained employed.

Deferred members can generally terminate their membership by withdrawing their accumulated contributions and interest at any time prior to receiving a retirement allowance.

Retirement Benefits

Retirement benefits can be categorised as either 'retirement benefits' or 'disability retirement benefits'.

Retirement Benefits

A member is eligible for retirement upon reaching a certain age and/or having a certain amount of retirement credit (depending on the category of membership). Retirement is generally only available to members that are at least 50 years old or that have at least xx years of retirement credit.

The amount of retirement benefits after retirement will be calculated using one of several formulas (depending on membership category).

These formulas take into account the member's age at retirement, total years of retirement credit and final average monthly compensation.

Disability Retirement Benefits

A member who becomes disabled and permanently unable to perform their usual job duties may be eligible for disability retirement on providing proof of that disability through a medical report. Disability retirement benefits may differ depending on:

·         whether the injury or illness occurred as a result of the member's employment; and

·         the member's retirement credit with the Fund.

A disabled employee may also transfer to a new position (or receive a job modification) in order to align their capabilities with their employment duties. If the new position pays less than the former position, the Fund will pay the difference until the compensation for the new position equals or exceeds the compensation of the former position.

Death Benefits

Death of an active member

Certain death benefits may arise for a member's designated beneficiary if that member dies before retiring. The amount of the benefits paid to the designated beneficiary will depend on whether the death was a result of the member's employment and the amount of the member's retirement credit. The benefits may take the form of a reoccurring allowance and/or a lump sum payment.

Death of a deferred member

A lump sum payment of contributions and interest will be made to a deferred member's designated beneficiary if that deferred member dies before retirement.

Death of a retired member

Benefits may also continue to be paid in full, or in part, to a designated beneficiary after the death of a retired member. The designated beneficiary may also receive a lump sum payment.

Income of the Fund

The Fund will receive interest and dividend income from companies who are residents of Australia for tax purposes.

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

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 defined benefit pension plan for employees of certain entities. A member of the Fund may only directly receive benefits or payments from the fund prior to reaching an age of 50 if the member:

a)    has sufficient retirement credits;

b)    is unable to work due to illness or injury (i.e. disability retirement benefits);

c)    dies (i.e. death benefits); or

d)    withdraws their contributions after their employment has been terminated.

In the circumstances, the Fund has a purpose of providing a pool of assets for use by current and former employees of certain entities 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 refunds of member contributions paid by the Fund in the year ended 30 June 20XX were insignificant relative to the retirement and death benefits paid by the Fund; and

·         taxes and penalties are applied to any direct refund of a member's contributions (creating a disincentive to withdraw funds in this manner).

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 Country Y. 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 is a 'non-resident' 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 exempt from Country Y taxation in accordance with § 501(a) of the Internal Revenue Code of the Country Y.

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 Country Y) 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 Fund will be considered not assessable and not exempt income under section 128D.