Edited version of private advice

Authorisation Number: 1051555198307

Date of advice: 8 August 2019

Ruling

Subject: Withholding tax exemption - paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936

Question 1

Is the Fund excluded from liability to withholding tax on its on its interest, dividend and 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 non-share 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:

Year ended 30 June 2019

The scheme commences on:

1 July 2018

Relevant facts and circumstances

The Authority

1.    The Authority is located in a foreign country. The Authority is responsible for administering the Fund in accordance with the Foreign Act.

2.    The Authority is required to undertake the duties as prescribed by the Foreign Regulations.

3.    The Authority has outsourced the administrative responsibilities of their respective funds to a third party.

The Pension Scheme

4.    The Scheme is a pension scheme primarily for the Authority employees or those employed by companies working for or with the Authority.

5.    The pension scheme is a funded scheme, meaning that the contributions received are invested to provide each fund with assets which are used to pay retirement and death benefits to government employees. These assets are held and invested at the fund level and each individual employer is given a notional asset allocation.

6.    The scheme covers eligible employees of the Authority. The employees of these eligible employers automatically join the pension scheme.

7.    The pension scheme is also open to public sector employers providing some form of service to the local community.

8.    Membership is voluntary and employees are free to choose to remain in the Fund or switch to their own preference.

9.    Employers and employees pay contributions into member's accounts. The scheme is flexible as members can choose to pay more or less.

The Fund

10.  The Fund is a fund which provides retirement and death benefits for the Authority's employees within the Authority's area in accordance with the Foreign Regulations.

11.  The Fund was created by the Foreign Act which allows for the creation of regulations which establish the local funds.

12.  The Fund is a foreign resident in accordance with the relevant Double Taxation Agreement.

13.  Schemes can only be created by the responsible authorities listed in the Foreign Act. All of the responsible authorities that can create funds are located in a Foreign Country.

14.  Historically the pension scheme was intended for the Authority's employees only. However, this has been relaxed over the years and many more types and numbers of employers can now participate in the Fund.

15.  There is only one plan under the Fund, the pension scheme.

16.  Participants cannot request loans from their account nor can they withdraw money prior to retirement or termination of employment.

Management

17.  The Fund is governed by the Foreign Regulations.

18.  The Fund is the responsibility of the Authority as designated by the Foreign Regulations.

19.  The responsibility of the Fund has been delegated to a Committee which is supported by a Sub-Committee.

20.  The Committee's responsibilities cover all matters relating to the Fund with the exception of non-strategic investment issues, which are delegated to the Sub-committee. All members of the Committee are not considered residents of Australia for tax purposes.

21.  The Sub-committee undertakes the day to day management of the Fund's investments. This involves implementing the investment strategy, reviewing and monitoring the asset allocation and appointing and reviewing the performance of investment managers outside of the asset pool.

Funding Strategy

22.  The funding strategy determines the amount of contributions that need to be provided by both employer and employee. The funding strategy is formulated to ensure the Fund can meet all benefit payments when they fall due.

23.  From time to time, with the advice of an appointed actuary, the administering authority may set up 'pools' for employers with similar or complementary characteristics to pool their contributions to the fund. This will always be in line with its broader funding strategy.

24.  These pools have the same contribution rates and the beneficiaries are entitled to the standard benefits set out in the Foreign Regulations.

Investment strategy

25.  The Fund has agreements between intself and its fund managers.

26.  The Fund appoints mulitple fund managers to provide diversification of assets.

27.  The fund managers are required to bias their portfolios towards stocks.

28.  The Fund monitors its asset allocation on an annual basis and conducts a comprehensive review following each triennial valuation.

29.  The Fund engages a third party, to select individual stocks. The Fund is the beneficial owner of these stocks. All income and gains accrue to the Fund as a whole.

30.  The Fund also invests in global equities by holding units in pooled investment vehicles where the beneficial owner of the individual stocks will be the investment manager or their nominee. Any income derived by the Fund will arise on the distributions calculated by the investment manager based upon the aggregate net income from all sources within the pooled fund.

31.  The fund has confirmed that the investments through pooled investment vehicles are not part of the private ruling. That is, the private ruling relates only to investments directly held in Australia by the Fund.

Other relevant facts

32.  The Fund has not and cannot deduct amounts under the Income Tax Assessment Act 1997 (ITAA 1997)for amounts paid to it.

33.  The Fund has not been allowed a tax offset or a tax offset is not allowable for an amount that has been paid to it.

34.  The Foreign Government, confirmed that the Fund is generally exempt from tax within the Foreign Country.

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

Detailed reasoning

Question 1

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

Reasons for decision

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 indefinitely 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, 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 statutory fund. It was created under the Foreign Act and is guided by the Foreign Regulations. There are no provisions under the regulations that indicate the fund has an expiry date.

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

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 a pension scheme. The Fund is a funded scheme in which it invests the funds of its members to increase the value of its assets in order to pay death and retirement benefits.

The Fund has outsourced its administrative functions. However, under the relevant legislation and regulations the Fund still maintains overall responsibility for these functions. The Fund has confirmed that the outsourced administrative functions only provide corporate services to the Fund. It does not own or control the investment assets of the Fund.

Therefore, the Fund satisfies this requirement.

The Fund was established in a foreign country

The Fund was established under the Foreign Act to operate in a Foreign Country. It is controlled by the Authority who administers the Fund in accordance with the relevant regulations.

Therefore, the Fund satisfies this requirement.

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

A person is eligible under Foreign Regulations to become a member of the Fund when they are employed by a body listed in the Foreign Regulations. This includes the Authority located within the Foreign Country. Thus members of the Fund must come from employers within the Authority's remit.

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) provides the following 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 Authority has delegated the responsibility for managing the Fund to the Committee. The Committee controls most matters of the Fund. The Authority and the Committee are located in the Foreign Country and none of the members are residents of Australia.

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

No amounts have been paid to the Fund, nor set aside to be paid to the Fund, that can be deducted under the 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.

Therefore, the Fund satisfies this requirement.

Conclusion

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.

The Fund satisfies this requirement.

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

The Fund is generally exempt from taxation within the Foreign Country.

Therefore, the Fund satisfies this requirement.

Conclusion

All the requirements of paragraph 128B(3)(jb) of the ITAA 1936 are satisfied. Therefore, the Fund will be 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 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 128Bapplies 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.