Edited version of private advice

Authorisation Number: 1051534465067

Date of advice: 12 July 2019

Ruling

Subject: Withholding tax exemption - 128b ITAA 1936

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 the Fund under section 128D of the ITAA 1936?

Answer

Yes.

This ruling applies for the following period:

1 July 2018 to 30 June 2019

The scheme commences on:

1 July 2018

Relevant facts and circumstances

The Fund

1.      The Fund provides employees of foreign local governments and school districts with payments for retirement, disability and death benefits. The Fund is separate from the Foreign Government and is not included in the government's financial statements.

2.      An Act of Law (the Act) determines how the Fund administers its benefit plans. The relevant sections are produced below:

·   All persons (with some exceptions) who are employees; of any municipality or participating instrumentality, electing to be a participating employee, and occupy the position of school nurse shall be beneficiaries from the Fund.

·   An annuity is to be paid to eligible employees. In summary, an employee who is at least aged 55 is entitled to an annuity if they can no longer be a member of the Fund and have at least eight years of service. Early retirement options are available to eligible participants of the Fund at 50 years of age and with 20 years of service. The annuity is not available if the Foreign Government terminates the Fund.

·   Temporary disability benefits will be paid to participating employees if they meet the criteria.

·   Eligible employees will also be entitled to total and permanent disability benefits if they have a permanent physical or mental disability which prevents them from engaging in 'gainful activity'.

·   A surviving spouse annuity is payable to the eligible surviving spouse of a participating employee.

·   A child of a participating employee is entitled to an annuity provided the employee dies with no surviving spouse and the child /children are under 18 years of age and unmarried.

·   Death benefits are payable to a beneficiary defined in the Act.

·   The Act creates the Fund's board. Eight members are to be appointed to the board of trustees and will be authorized to carry out the provisions the Act. Each Trustee is required to be a participating employee of a participating municipality or participating instrumentality or annuitant of the Fund.

·   The Fund is required to invest all available cash (after annuities have been paid) in securities in accordance with the Act.

·   The Fund may participate in commingled investment funds. The Fund can invest in the Commingled Investment Fund (CIF).

·   The Fund can by resolution transfer all the investments it owns to the CIF.

·   The Fund is required to keep appropriate reserves for the payment of annuities, disability benefits, death benefits, and variations in benefit payments.

·   The assets of the Fund are to be invested as one fund and no particular person, municipality, or instrumentality will have any right to any specific security or item of cash other than an undivided interest in the whole.

3.      The Fund's board of trustees (the Board) resides outside of Australia. There are no Australian residents on the Board.

4.      The Board has eight members which consist of four employee trustees, three executive trustees and one annuitant (retiree) trustee. The trustees only receive a reimbursement for their expenses. The Board meetings are held outside of Australia.

5.      The Board does not represent any other retirement fund under the Act.

6.      All of the Fund's members reside (or at least contribute from employers) in the Foreign Government's jurisdiction.

7.      The Fund advised that it does not have any commingled funds from the CIF invested in Australia.

8.      The Fund stated that the Board has no intention to transfer its investments or relinquish control of its investment making decision to the CIF.

Commingled Investment Fund

9.      The CIF was created in accordance with the Act. Its stated purpose is to manage, invest and reinvest, the reserves, funds, assets, securities and moneys of any pension fund provided in the Act, or education fund provided by law and to perform other duties as may from time to time be authorised by the Foreign Government.

10.   The Act also states:

·   The CIF shall manage the investments of any pension fund, retirement system, or education fund for the purpose of obtaining a total return on investments for the long term.

·   The authority of the CIF to manage pension fund investments and the liability shall begin when there has been a physical transfer of the pension fund investments to the CIF and placed in the custody of the CIF's custodian.

The Fund's Plans

11.  The Fund is comprised of three different plans. Members are guaranteed the return of their contributions either in the form of a pension, death benefit, or refund.

12.  Upon retiring, a member is eligible for a monthly pension which is payable for the rest of the member's life.

13.  None of the abovementioned plans are classified as a 'cash or deferred arrangement.'

14.  The Fund claims in its annual report that the Act does not provide for termination of the plans under any circumstances.

Refund of member contributions

15.  Non-vested members who stop working for an employer in the Fund can receive a lump sum refund of their member contributions. Vested members can receive a lump sum refund of their member contributions if they stop working for an employer of the Fund prior to age 55, or age 62 for Tier 2 members. Vested members age 55 or older (62 or older for Tier 2 members) may receive separation refunds if the member rolls over the refund into another defined benefit retirement plan for the purpose of purchasing service credit.

16.  Members are eligible for a 50% payment of their monthly earnings if they have 12 months or more service, are disabled for more than 30 days, are unable to perform their duties either through illness or injury, and are not receiving any earnings from any employer in the Fund.

17.  Members who have at least one year of service and meet the disability medical requirements will receive a benefit of up to 50% of the average monthly earnings in the 12 months preceding disability. Members receive a disability benefit equal to the benefit they would receive upon retirement.

18.  Members are eligible for death benefits. These benefits are determined on the length of service of the Member.

19.  Members can take refunds as either lump sums or as a pension. The options for these refunds are based on the length of service as follows:

a.    Where there is less than eight years of service the Member is refunded their contributions in full.

b.    Where there are eight or more years of service but under the age of 55 the Member is refunded their contributions in full but they give up their right to a future pension.

c.    Where there are eight or more years of service and older than 55 if their monthly pension exceeds $100 per month the Member cannot receive a refund of their contributions they can only receive it via the pension payments.

20.  Member contributions are tax deferred and will be subject to income tax by the Foreign Government if they are received as a refund. Members can avoid taxation by rolling over their contributions to another retirement fund or pension plan.

Investment

21.  Investment is controlled by an Investment Committee. The Committee consists of at least six members of the Fund's board.

22.  The Committee is responsible for the following investment related activities:

a.    Setting policies, objectives and guidelines for the investment of the Fund's assets and oversee compliance with investment policy and the laws of the Foreign Government.

b.    Study each issue affecting the Fund's investments.

c.    Select qualified professionals to assist in implementing investment policies and evaluate their services.

d.    Consider staff recommendations for selecting or terminating investment managers.

e.    Consider investment actions recommended by staff.

f.     Evaluate total fund performance including performance of all investment managers.

23.  Investment in international equities is limited to 25% or two times the benchmark weighting at fair value. The equities are directly held by the Fund.

24.  The Fund does not receive, accept or pool funds from the other pension funds under the Act in order to invest.

Other relevant facts

25.   The Fund's investment Officer, stated to the ATO the following:

a.      The Fund is qualified as a foreign superannuation fund.

b.      The Fund is an indefinitely continuing fund and a provident, benefit, superannuation or retirement Fund.

c.      The Fund was established in a foreign country.

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

e.      The central management and control of the entity is carried on outside Australia by entities none of whom are Australian residents.

f.       An amount paid to The Fund or set aside for The Fund has not been or cannot be deducted under the Income Tax Assessment Act 1997 (ITAA 1997).

g.      A tax offset has not been allowed or is not allowable for an amount paid to the Fund.

26.   The Fund has submitted a certificate from the Foreign Governments Taxation Authority. It states that the Fund is a state, or political subdivision of a state, or an agency, instrumentality or public educational organisation of a state or political subdivision, which is exempt from tax in the Foreign Country and is a resident of the Foreign Country for tax purposes.

Relevant legislative provisions

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

Income Tax Assessment Act 1936 section 128D

Income Tax Assessment Act 1997 section 118-520

Reasons for decision

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 ITAA 1936?

Detailed reasoning

Section 128B of the ITAA 1936 imposes liability to withholding tax on income derived by a non-resident that consists of dividend income (subsection 128B(1) of the ITAA 1936), interest income (subsection 128B(2) of the ITAA 1936) as well as other income prescribed in that section.

Subsection 128B(3) of the ITAA 1936 notes that section 128B of the ITAA 1936 will not apply to prescribed categories of income. Relevantly, paragraph 128B(3)(jb) of the ITAA 1936 states:

(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;

The Fund is a non-resident

The Fund is not a resident of Australia for taxation purposes. Therefore, the Fund satisfies this requirement.

The Fund is a superannuation fund for foreign residents

Superannuation fund for foreign residents is a defined term in the ITAA 1936. Subsection 6(1) of the ITAA 1936 states:

superannuation fund for foreign residents has the meaning given by subsection 995-1(1) of the Income Tax Assessment Act 1997.

Subsection 995-1(1) of the ITAA 1997 sets out the following:

superannuation fund for foreign residentshas the meaning given by section 118-520.

Section 118-520 of the ITAA 1997 states the following:

(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 is 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.

Consequently, for the Fund to be considered a superannuation fund for foreign residents for the purposes of paragraph 128B(3)(jb) of the ITAA 1936, it must be established that:

·   the Fund is an indefinitely continuing fund

·   the Fund is a provident, benefit, superannuation or retirement fund

·   the Fund was established in a foreign country

·   the Fund was established and maintained only to provide benefits for individuals who are not Australian residents

·   the central management and control of the Fund is carried on outside of Australia by entities none of whom are 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 offsets have been allowed or would be allowable for an amount paid to the Fund or set aside for the Fund.

The Fund is an indefinite continuing Fund

The legislation provides no guidance on the meaning of 'indefinitely continuing'. It is not a technical legal expression, and the ordinary meanings of indefinitely and continuing involve little ambiguity or controversy.

The Macquarie Dictionary, [Online], viewed on 1 February 2018, www.macquariedictionary.com.au defines 'indefinitely' and 'continuing' as follows:

Indefinite:

adjective 1. not definite; without fixed or specified limit; unlimited: an indefinite

number

2. not clearly defined or determined; not precise.

-  indefinitely, adverb

Continue:

verb (Continued, continuing)

1.    to go forwards or onwards in any course or action; keep on.

2.    to go on after suspension or interruption.

3.    to last or endure.

4.    to remain in a place; abide; stay.

5.    to remain in a particular state or capacity.

The Fund is a fund created by the Act. Under the Act, the Fund has the option to transfer all its investments along with the ability to make investment decisions to the CIF. The Fund has stated that it has no intention to exercise this option.

According to the Fund's Annual Financial Report, it states that there is no section under the Act which can terminate the Plans that the Fund offers.

Therefore, the Fund is considered an indefinite continuing fund.

The Fund is a provident, benefit, superannuation or retirement fund

In Scott v. FCT (No. 2) (1966) 40 ALJR 265; 14 ATD 333, Windeyer J stated (40 ALJR 265 at 278; 14 ATD 333 at 351):

There is no definition in the Act of a superannuation fund. The meaning of the term must therefore depend upon ordinary usage, the attributes of a thing thus denominated being those which things ordinarily so described have...the connotation of the phrase in the Act must be determined by one's general knowledge of the extent of the denotation of the phrase in common parlance...I have come to the conclusion 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 Mahony v Commissioner of Taxation (1967) 41 ALJR 232; (1967) 14 ATD 519, Kitto J stated:

There was no definition in the Act of 'a provident, benefit or superannuation fund', and the meaning of the several expressions must therefore be arrived at in light of ordinary usage and with only one piece of assistance to be gathered from the immediate context. Since a fund, if its income was to be exempt under the provision, was separately required to be one established for the benefit of employees, each of the three descriptive words 'provident', 'benefit' and 'superannuation' must be taken to have connoted a purpose narrower than the purpose of conferring benefits, in a completely general sense, upon employees. Precise definition may be difficult, and in any case is unnecessary for present purposes. All that need be recognized 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 employment, 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 in a general sense, but characterized by some specific future purpose. A funeral benefit is a familiar example.

In Cameron Brae Pty Limited v FCT (2007) 161 FCR 468; [2007] FCAFC 135; 2007 ATC 4936, the Full Federal Court held that the relevant fund was a superannuation fund for the purposes of former section 82AAE of the ITAA 1936. Jessup J at [106] stated:

In answering the question whether the fund was a "superannuation fund" as the term is ordinarily understood, it is, in my view, critical that payments could not have been made out of the fund (other than by way of administration expenses, taxation, etc) save to members of the relevant discretionary class, and save in circumstances which fell within the ordinary understanding of superannuation. A proper characterisation of the fund should, in my view, depend upon the purposes for which the assets and moneys of the fund might have been used rather than upon the quality of the rights of individual members of the fund. If the fund could have been used only to achieve what might be described as a superannuation purpose, I would describe the fund as a "superannuation fund". That a particular member of a discretionary class might not, ultimately, have received any payment, was not, in my view, disqualifying.

ATO Interpretative Decision ATO ID 2009/67 Income Tax: Superannuation fund for foreign residents (ATO ID 2009/67) refers to these authorities to provide guidance on the meaning of the phrase 'provident, benefit, superannuation or retirement fund':

None of the four descriptors 'provident', 'benefit', 'superannuation' or 'retirement fund' in subparagraph (a)(ii) of the definition of 'superannuation fund for foreign residents' in section 118-520 of the ITAA 1997 are defined. The terms have, however, been the subject of 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 deed of the Plan, it is considered that the Plan is a 'provident, benefit, superannuation or retirement fund' as that phrase has been interpreted by the relevant authorities. The sole purpose of the Plan is the provision of benefits to, or in respect of, participating employees who:

·   cease their employment upon or after reaching retirement age (age 60)

·   cease their employment after the satisfaction of certain service requirements

·   cease their employment because of death or total and permanent disability, or

·   reach age 70, whether or not they have ceased employment.

Therefore, the Plan satisfies subparagraph (a)(ii) of the definition of 'superannuation fund for foreign residents' in section 118-520 of the ITAA 1997.

The above establish that for a fund to qualify as a provident, benefit, superannuation or retirement fund, it must have the sole purpose of providing retirement benefits or benefits in other allowable contemplated contingencies (such as death, disability or serious illness).

The Fund is described in the Act as a retirement and benefit fund with the purpose of providing a 'sound and efficient system for the payment of annuities and other benefits'. The Fund collects payments from eligible employees and invests the money in order to facilitate the payment of the annuities.

Employees are only eligible for an annuity when they have reached the retirement age of 55 and have at least 8 years of service. Early retirement options are available for those with 20 years of service (retire at age 50). Employees also have access to other benefits such as temporary and/or permanent physical or mental disability benefits, surviving spouse annuities, annuities to surviving children, and death benefits.

Therefore, the Fund's sole purpose is to provide retirement benefits to eligible employees or benefits in other allowable contemplated contingencies (such as death, disability, or serious physical or mental illness). As such, the Fund satisfies this requirement.

The Fund was established in a foreign country

The Fund and its associated plans were established in a Foreign Country. The relevant taxation authority has also confirmed the Fund is a resident of the Foreign Country. Therefore, the Fund satisfies this requirement.

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

The Act lists the participating members of the Fund. These members are limited to employees within the Foreign Country.

Additionally, 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.

Therefore, the Fund satisfies this requirement.

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 (TR 2008/9) 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 (TR 2018/5) 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 Fund was created by a Foreign Government and its central management and control is located within the Foreign Country. The Fund has an eight-member board of trustees which govern it. The Board consists of four employee trustees, three executive trustees, and one annuitant (retirees) trustee. The Board meetings are held outside of Australia. Additionally all of the Board reside in the Foreign Country.

The Fund's central management and control is outside of Australia by entities that are not considered Australian residents.

Therefore, the Fund satisfies this requirement.

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

A statement has been provided by the Fund confirming that no amounts have been paid to the Fund, nor set aside to be paid to the Fund, that can be deducted under this Act. 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 this Act.

Consequently, based on the statements provided by the Fund, this requirement is satisfied. 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.

Therefore, the Fund is considered a non-resident that is a superannuation fund for foreign residents for the purposes of subparagraph 128B(3)(jb)(i) of the ITAA 1936.

Consists of interest or dividend and/or non-share dividends paid by a company that is a resident

Paragraph 128B(3)(jb) of the ITAA 1936 will only apply to interest, or to dividends and non-share dividends paid by Australian resident companies.

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

Therefore, the Fund satisfies this requirement.

Is exempt from income tax in the country in which the non-resident resides

The foreign Taxation Authority confirmed that the Fund is exempt from U.S. tax under the Internal Revenue Code.

Therefore, the Fund satisfies this requirement.

Conclusion

In accordance with the documentation supplied, the relevant provisions of the Act demonstrate that the Fund has been established as a genuine pension, superannuation and/or retirement fund solely providing superannuation benefits for non-residents of Australia. It has been set up and maintained outside of Australia by non-residents of Australia. Furthermore, no contributions to the Fund are capable of being claimed as a rebate or deduction under any section of the ITAA 1936 or ITAA 1997.

Therefore, all the requirements of paragraph 128B(3)(jb) of the ITAA 1936 are satisfied. The Fund is excluded from liability to withholding tax on its interest and/or dividend income under paragraph 128B(3)(jb) of the ITAA 1936.

Question 2

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

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.

Section 128D of the ITAA 1936 provides that, inter alia, where withholding tax would be payable but for the operation of paragraph 128B(3)(jb) of the ITAA 1936, the income is not assessable income and is not exempt income.

The interest, dividend and non-share dividend income derived by the Fund from its Australian investments will not be assessable income or exempt income under section 128D of the ITAA 1936 because the aforementioned income:

·   would have been subject to withholding tax, and

·   is not exempt from withholding tax under any provision other than paragraph 128B(3)(jb) of the ITAA 1936.

Conclusion

The interest, dividend and non-share dividend income derived in Australia by the Fund is not assessable and not exempt income of the Fund under section 128D of the ITAA 1936.