Edited version of private advice

Authorisation Number: 1051553202322

Date of advice: 25 July 2019

Ruling

Subject: International issues - foreign entities - foreign superannuation funds

Question 1

Is the Trust excluded from liability to withholding tax on its interest and/or dividend income derived from Australia 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 from Australia by the Trust not assessable and not exempt income of the entity under section 128D of the ITAA 1936?

Answer

Yes

Relevant facts and circumstances

The Trustee is established under the laws of a foreign country (Foreign Country).

The Trustee and Foreign Company (the Company), a company resident in Foreign Country, are parties to a trust agreement (the Trust Agreement) which governs the Trust.

Under the Trust Agreement, tax qualified pension plans (the Plans) sponsored by the Company and certain affiliated subsidiaries of the Company may use the Trust as the funding vehicle for the Plans.

The Trust is established to fund the pension benefits payable to participants and their beneficiaries under the Plans and to fund the medical benefits, if any, payable to retired participants and their beneficiaries under the Plans.

The Trust's central management and control is carried on outside of Australia.

The Trust was established, and is maintained and applied, for the sole purpose of providing superannuation benefits for persons who are not residents of Australia.

The Trust 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 under any provision of ITAA 1936.

All interest and dividends received in an investment account of the Trust shall be reinvested in that investment account.

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

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

Question 1

Summary

As all the requirements of paragraph 128B(3)(jb) are satisfied, the Trust is entitled to an exemption 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; 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 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

Is the Trust a 'fund' and is it an indefinite continuing fund which is a provident, benefit, superannuation or retirement 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 Trust is a 'fund' as money set aside for a specific purpose as outlined in the Trust Agreement, and it is 'indefinitely continuing' as it has not specified end date.

Is the Trust 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.

Under the Trust Agreement, tax qualified pension plans (the Plans) sponsored by the Company and certain affiliated subsidiaries of the Company may use the Trust as the funding vehicle for the Plans. We are therefore satisfied that all plans in the Trust have a purpose of providing benefits in the nature of provident, benefit, superannuation or retirement benefits.

Accordingly, we are satisfied that the Trust is a provident, benefit, superannuation or retirement fund.

Was the Trust established in a foreign country?

The Trust was established in Foreign Country.

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

The Trust was established, and is maintained and applied, for the sole purpose of providing superannuation benefits for persons who are not residents of Australia.

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

The Trust's central management and control is carried on outside of Australia.

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

The Trust 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 under any provision of ITAA 1936. Further, no contributions to the Trust are capable of being claimed as a rebate.

Consequently, this requirement is satisfied.

Conclusion

The Fund rules show 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. The Fund is exempt from income tax in the country of residence.

Therefore, the Fund is entitled to an exemption under paragraph 128B(3)(jb).

Question 2

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.'

Dividend and interest income derived by the Trust would be subject to withholding tax under 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 the Trust will be considered not assessable not exempt income under section 128D.