Edited version of private advice

Authorisation Number: 1051535706665

Date of advice: 8 October 2019

Ruling

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

Question

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

Answer

Yes.

Question

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

Answer

Yes.

This ruling applies for the following periods:

1 July 2017 to 30 June 2019

The scheme commences on:

1 July 2017

Relevant facts and circumstances

The Fund

1.     The Fund is a public sector pension plan in the foreign country.

2.     The foreign countries government provides that the purpose of the Fund is to establish a program of retirement and related disability and death benefits for public employees. Assets of the Fund are held in trust for the benefit of members and may not be diverted.

3.     The Fund administers a pension trust that is a qualified pension trust.

4.     The Fund is a defined benefit occupational pension established under the foreign government's legislature.

5.     The foreign government mandates that all industry specific employees are required by law to participate. Certain employees may, within 90 days, opt out of the defined benefit plan in favour of an optional defined contribution retirement program. The decision of the employee is irrevocable.

6.     Contributions to the Fund are solely from: mandatory state contributions; mandatory member and employer contributions, and returns on investments of the Fund.

7.     Members are not permitted to make additional contributions to their member service account through the use of post-tax contributions. The Fund is solely a defined benefit plan and members have no investment interest in the Fund.

8.     The Fund is also subject to foreign government reporting requirements.

Management and Investment

9.     The Fund has a Board of Trustees (the Board) that has responsibility for all matters relating to the management and administration of the Fund. The Board is made up of independent trustees selected and appointed by the foreign government. Trustees are officials subject to the limitations and qualification requirements for officers in the foreign government legislation.

10.  The Board is responsible for determining the Fund's investment strategy and policies. The Board administers the retirement system and invests the Fund's assets in compliance with a prudent person standard.

11.  The Board delegates authority to invest and manage the Fund's assets to a professional staff of employees.

12.  The Australian Investments are beneficially held exclusively for the participants of the Fund, however they are legally held under a nominee name by a domestic entity being the custodian in whose names the investments are registered. The foreign government permits trust assets of the retirement system to be held under a nominee name.

Benefits provided

13.  Broadly, the following benefits are available under the Fund if certain eligibility requirements are satisfied:

·        A standard service-based annuity payable at retirement throughout the retiree's lifetime.

·        A reduced service-based annuity payment option where the life annuity is reduced by a pre-determined percentage based on joint life expectancies to provide a continuing annuity to a designated beneficiary after the death of the retiree.

·        Disability benefits where a standard annuity is paid less any reductions for early age retirement or an amount per month whichever is greater.

·        Partial lump sum option where an option to reduce the standard annuity payable and have the remainder of the annuity paid in a lump sum payment as of retirement.

·        Death benefits.

·        Survivor benefits relating to service retirement options, disability benefits, and death benefits.

14.  Members with at least a number of years of service credit can retire who do not withdraw their contributions are eligible to receive payment of their benefits at any time from a certain age onwards. The annuity benefit may be reduced for early retirement.

15.  Early age retirees are determined by set criteria depending on their start date with their employer and any number of years of service credit. If a member retires prior to obtaining a certain age or the age of the member and their joint service credit is less than a certain age then they are considered early retirees.

16.  If the member has at least a number of years of service credit and they are not prevented from benefit entitlement by way of sun-setting dates, their pension benefits will be reduced to take into account that they are being paid early.

17.  Where a member's employment contract is terminated voluntarily or otherwise, that employee is entitled to cancel their membership with the Fund.

18.  Members who cancel their membership will be entitled to a refund on their contributions so long as they are absent from service except by death or retirement and may withdraw all of the accumulated contributions credited to the person plus statutory interest.

19.  A person is not entitled to withdraw contributions if the person is employed, has applied for employment, or has received a promise of employment with an employer covered by the Fund.

20.  Refunded amounts are subject to mandatory income tax withholding unless an election is made to rollover to another eligible retirement plan.

Other relevant facts

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

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

23.  The Fund is exempt from taxation in the foreign country.

24.  The Fund will receive interest income, along with dividend and non-share dividend income from companies who are residents of Australia for tax purposes.

25.  The Fund is an indefinitely continuing fund.

26.  The Fund is exempt from taxation in the foreign country.

Anti-avoidance rules

Part IVA of the ITAA 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit or imputation benefit in connection with an arrangement.

If Part IVA of the ITAA 1936 applies the tax benefit or imputation benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

Reasons for Decision

Question 1

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

Answer

Yes.

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 tax 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 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.

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 this Act, 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 indefinitely continuing fund

The foreign government provides that the Fund is an indefinitely continuing fund. There is no indication that there is any contemplation of the Fund ending at a defined point in time.

Therefore, it is accepted that the Fund will continue to operate for an indefinite period of time.

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

ATO Interpretative Decision ATO ID 2009/67 Income Tax: Superannuation fund for foreign residents (ATO ID 2009/67) provides 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 was established in accordance with statute to provide death and retirement benefits for all eligible members.

Members with at least a number of years of service credit can retire and receive payment of their benefits at any time from a certain age onwards. Early age retirees are determined by set criteria depending on their start date with their employer and any number of years of service credit. If a member retires prior to obtaining a certain age or the age of the member and their joint service credit is less than a certain number then they are considered early retirees. If the member has at least a number of years of service credit and they are not prevented from benefit entitlement by way of sun setting dates, their pension benefits will be reduced to take into account that they are being paid early.

Broadly, the following benefits are available under the Fund:

a.     A standard annuity payable at retirement throughout the retiree's lifetime.

b.     Disability benefits where a standard annuity is paid less any reductions for early age retirement or an amount per month whichever is greater.

c.      Annuity Payment Option where a retiree's entitlement is reduced by a pre-determined percentage to care for family in the event of their death.

d.     Partial Lump Sum Option where an option to reduce the standard annuity payable and have the remainder of the annuity is provided in a lump sum payment.

e.     Death Benefits.

f.       Survivor Benefits.

The ancillary healthcare plan is not linked to the operation of the Fund and legislation prevents the health care fund from using assets of the pension plan to operate. The health plan trust assets cover the cost of benefits provided to members of the ancillary healthcare plan.

The Commissioner accepts these benefits align with the sole purpose of providing retirement benefits or benefits in other allowable contemplated contingencies.

Therefore, the Fund satisfies this requirement.

The Fund was established in a foreign country

The Fund was established in a 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 Fund's establishing legislation hold that membership can only be attained by being an employee in an industry specific system other than a temporary employee at a similar rate of pay comparable to that of other persons employed in similar positions. The Fund operates to provide retirement benefits for its members in the foreign country.

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 central management and control of the Fund is carried on outside of Australia by entities none of whom are Australian residents

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, 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 registered office of the Fund is in a foreign country. The decision making and management of the Fund is undertaken by the Fund Committee.

The Fund Committee has responsibility for all matters relating to the management and administration of the Fund. The Committee is made up of independent trustees.

Based on the above, it is reasonable to conclude that the central management and control of the Fund occurs in the foreign country by entities that are not 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

An amount paid to the Fund or set aside for the Fund has not been and cannot be deducted under the ITAA 1997. A tax offset has not been allowed nor would be allowable for any amount paid to the Fund or set aside for the Fund.

Therefore, the Fund satisfies this requirement.

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

The Fund will derive interest income from Australia sources, along with dividend and non-share 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 Fund is exempt from taxation in the foreign country.

Therefore, the Fund satisfies this requirement.

Conclusion

The Fund is excluded from liability to withholding tax on its interest, dividend and non-share dividend income under paragraph 128B(3)(jb) of the ITAA 1936.

Question 2

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

Answer

Yes.

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.