Edited version of private advice

Authorisation Number: 1051584912328

Date of advice: 3 October 2019

Ruling

Subject: Withholding tax exemption - Section 128B ITAA 1936

Question 1

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

Answer

Yes.

Question 2

Is the Fund excluded from liability to withholding tax under paragraph 128B(3)(jb) of the ITAA 1936 on its interest, dividend and non-share dividend income derived from its future equity investments in Australia when made within the parameters contained in paragraph 23 of the relevant facts and circumstances of this Ruling?

Answer

Yes.

This ruling applies for the following periods:

1 July 2019 to 30 June 2024

The scheme commences on:

1 July 2019

Relevant facts and circumstances

The Fund

1.     The Fund is closed to new members.

2.     There are currently a number of Trustees of the Fund, half of whom are selected by members and the other half appointed by the company.

3.     The Trustees and the single member-facing administration are based in a Foreign State.

4.     The Fund is currently governed by a trust deed. The trust deed, in its entirety, forms part of the scheme to which this Ruling relates.

5.     The main purpose of the Fund is to provide pensions and other benefits to the members of the Fund.

6.     The Fund operates as one legal entity, and is managed with one board of trustees (the Trustees), but consists of three separate sections (Sections 1, 2, and 3), each with its own assets and employer covenant support to provide for its pension liabilities.

7.     Sections 1, 2, and 3 have segregated assets and liabilities which are separate from each other.

8.     The Fund does not currently commingle the assets of each of the sections. However, nothing prevents the Trustees from comingling the assets to create a pooled or common investment fund.

9.     The Fund is predominantly a defined benefit scheme. Both members and employers contribute to the pension scheme. However, one section of the Fund also allows a 'Direct Contribution' (DC) in which members of the fund directly contribute funds.

Management of Investments

10.  The Fund has a number of investment managers.

11.  The Trustees have oversight of all investment managers. The investment managers manage the investments in accordance with the investment management agreements.

12.  The Trustees have less influence over investments in pooled investment vehicles but review their policies and statements of compliance.

Termination of the Fund

13.  The trust deed provides that the Fund will be continue up until the later of the expiry of the perpetuity period, and such other date up to which it may continue without contravening the law against perpetuities.

14.  Foreign State legislation exempts the Fund from the rule against perpetuities for registered pension schemes. Accordingly the Fund will continue until the earlier of it winding-up or it ceasing to qualify under Foreign State legislation.

15.  The Fund has provided a letter to the Commissioner stating that the Fund is an indefinitely continuing superannuation fund.

Benefits provided

16.  Broadly, the Fund provides benefits to active members as follows:

Defined Benefit Rules

1. 1. Normal retirement: a defined benefit pension upon normal retirement age.
   2. Early retirement: a defined benefit pension before normal retirement age if a member has reached age 60 or a member has reached age 55 and is retiring from service with employer consent.
   3. Incapacity pension: a defined benefit pension where a member is dismissed by their employer before normal retirement age due to ill-health or infirmity.
   4. Compulsory retirement: a defined benefit pension for a member who reaches age 50 and is required by his employer to leave employment on re-organisation or redundancy.
   5. Death benefits.

Defined Contribution Rules

1. 6. Normal retirement: a member retires from service at or after normal retirement, is entitled to a defined contribution pension and/or lump sum.
   7. Incapacity pension: a member is dismissed from service before normal retirement age is entitled to a defined contribution pension.
   8. Death benefits.

2.     Members will be refunded of contributions where they leave the fund with less than two years of service.

Other relevant facts

17.  The Fund has not and cannot deduct amounts under either the Income Tax Assessment Act 1997 (ITAA 1997) or the ITAA 1936 for amounts paid to it.

18.  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.

19.  The Fund submitted a notice from Foreign State which states that the Fund was registered in Foreign State and tax relief and exemptions are due to the Fund.

20.  Income of the Fund is not non-assessable non-exempt income because of:

a.     Subdivision 880-C of the ITAA 1997, or

b.     Division 880 of the Income Tax (Transitional Provisions) Act 1997.

The Fund and future Australian investments

21.  The Fund has invested in Australian equity investments. These equity investments have the following characteristics:

a.     All investments are listed on the Australian Securities Exchange (ASX).

b.     The Fund holds less than 10% of the total participation interests in each Australian company, trust or real estate investment trust (REIT).

c.      The Fund would hold less than 10% of the total participation interests in each Australian company, trust or REIT in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936.

d.     Neither the Fund, nor any related party of the Fund, has involvement in the day to day management of the business of any of the Australian companies, trusts or REITs.

e.     Neither the Fund, nor any related party of the Fund, has the right to appoint a director to the Board of Directors of the Australian company or equivalent role in a trust or REIT.

f.       Neither the Fund, nor any related party, holds the right to representation on any investor representative or advisory committee (or similar) of the Australian company, or equivalent role in a trust or REIT.

g.     Neither the Fund, nor any related party, has the ability to direct or influence the operation of the Australian company, trust or REIT outside of the ordinary rights conferred by the equity interest held.

h.     The Fund only holds rights to vote in proportion to its equity interest in each Australian company, trust or REIT.

22. The Fund will invest directly in Australian equity investments in the future subject to the following parameters:

a.     All investments will be listed on the ASX.

b.     The Fund will hold less than 10% of the total participation interests in each Australian company, trust or REIT.

c.      The Fund will hold less than 10% of the total participation interests in each Australian company, trust or REIT in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936.

d.     Neither the Fund, nor any related party, will have involvement in the day to day management of the business of any of the Australian companies, trusts or REITs.

e.     Neither the Fund, nor any related party, will have the right to appoint a director to the Board of Directors of the Australian company or equivalent role in a trust or REIT.

f.       Neither the Fund, nor any related party, will have the right to representation on any investor representative or advisory committee (or similar) of the Australian company, or equivalent role in a trust or REIT.

g.     Neither the Fund, nor any related party, will have the ability to direct or influence the operation of the Australian company, trust or REIT outside of the ordinary rights conferred by the equity interest held.

h.     The Fund will only hold rights to vote in proportion to its equity interest in each Australian company, trust or REIT.

Relevant legislative provisions

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

Reasons for Decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Question 1

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

Detailed reasoning

Broadly, paragraph 128B(3)(jb) of the ITAA 1936 provides an exclusion from withholding tax for interest, dividends and non-share dividends derived by a superannuation fund for foreign residents (subject to the satisfaction of certain conditions).

For the exclusion to apply, the interest, dividend and/or non-share dividend income must be:

·        derived by a superannuation fund for foreign residents (as defined in section 118-520 of the ITAA 1997), and

·        exempt from income tax in the country in which the superannuation fund for foreign residents arise.

Further, from 1 July 2019, the extra requirements in subsection 128B(3CA) of the ITAA 1936 must also be met.

The Fund is a non-resident

The Commissioner has determined from the facts and circumstances that the Fund is not a resident of Australia.

Therefore, the Fund satisfies this requirement.

Superannuation fund for foreign residents

Section 118-520 of the ITAA 1997 provides:

(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.

1. An indefinitely continuing fund

The Fund was created as a trust with the main purpose to provide pensions and other benefits to the members of the Fund.

Under its trust deed, The Fund will continue until the later of the expiry of the perpetuity period and such other date up to which it may continue without contravening the law against perpetuities.

However, the Fund is exempt from the rules against perpetuities in accordance with Foreign State legislation. Consequently the Fund will continue until the earlier of a winding-up or it ceasing to qualify under Foreign State law as exempt from perpetuities, or, if later, the expiry of the perpetuity period.

Therefore, the Fund satisfies this requirement.

2. A provident, benefit, superannuation or retirement fund

The phrase 'provident, benefit, superannuation or retirement fund' under subparagraph 118-520(1)(a)(ii) of the ITAA 1997 is not defined in either the ITAA 1997 or the ITAA 1936.

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).

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).

Broadly, the Fund provides benefits to members as follows:

Defined Benefit Rules

2. 1. Normal retirement: a defined benefit pension upon normal retirement age.
   2. Early retirement: a defined benefit pension before normal retirement age if a member has reached age 60 or a member has reached age 55 and is retiring from service with employer consent.
   3. Incapacity pension: a defined benefit pension where a member is dismissed by their employer before normal retirement age due to ill-health or infirmity
   4. Compulsory retirement: a defined benefit pension for a member who reaches age 50 and is required by his employer to leave employment on re-organisation or redundancy. Death benefits.

Defined Contribution Rules

2. 5. Normal retirement: a member retires from service at or after normal retirement, is entitled to a defined contribution pension and/or lump sum.
   6. Incapacity pension: a member is dismissed from service before normal retirement age is entitled to a defined contribution pension.
   7. Death benefits.

Members will be refunded of contributions where they leave the fund with less than two years of service.

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.

3. Established in a foreign country

The Fund was established in Foreign State.

Therefore, the Fund satisfies this requirement.

4. Was established and maintained only to provide benefits for individuals who are not Australian residents

The Fund was established and is maintained only to provide benefits to employees from companies which participate in the sections of the Fund. These companies and their employees reside in the Foreign State.

Therefore, the Fund satisfies this requirement.

5. Central management and control (CM&C)

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:

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.

The Trustees exercise the CM&C of the Fund. The Trustees are not Australian residents.

Therefore, the Fund satisfies this requirement.

6. Subsection 118-520(2)

The Fund has not and cannot deduct amounts under either the ITAA 1997 or the ITAA 1936 for amounts paid to it. 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.

Therefore, the Fund satisfies these requirements.

7. 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.

The Fund is exempt from income tax in the country in which the non-resident resides

The Foreign State Government has confirmed that the Fund has been registered by them and tax relief and exemptions are due to the Fund.

Therefore, the Fund satisfies this requirement.

Subsection 128(3CA) of the ITAA 1936

The Treasury Laws Amendment (Making Sure Foreign Investors Pay Their Fair Share of Tax in Australia and Other Measures) Act 2019 introduced extra requirements that must be met for paragraph 128B(3)(jb) of the ITAA 1936 to apply. Generally, these extra requirements apply to income derived from 1 July 2019.

Relevantly:

·        The Fund must satisfy the 'portfolio interest test' in relation to the test entity (subsection 128B(3CC) of the ITAA 1936)

·        The Fund must satisfy the 'influence test' (subsection 128B(3CD) of the ITAA 1936) in relation to the test entity, and

·        The income cannot otherwise be non-assessable non-exempt income of the Fund because of:

a.     Subdivision 880-C of the ITAA 1997, or

b.     Division 880 of the Income Tax (Transitional Provisions) Act 1997.

1.     The Fund satisfies the 'portfolio interest test'

Subsection 128B(3CC) of the ITAA 1936 states:

A superannuation fund satisfies the portfolio interest test in this subsection in relation to the test entity at a time if, at that time, the total participation interest (within the meaning of the Income Tax Assessment Act 1997) the superannuation fund holds in the test entity:

(a) is less than 10%; and

(b) would be less than 10% if, in working out the direct participation interest (within the meaning of that Act) that any entity holds in a company:

(i) an equity holder were treated as a shareholder; and

(ii) the total amount contributed to the company in respect of non-share equity interests were included in the total paid-up share capital of the company.

The Fund holds less than 10% of the total participation interests in each Australian company, trust or real estate investment trust (REIT). Further, the Fund would hold less than 10% of the total participation interests in each Australian company, trust or REIT in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936.

The Fund therefore satisfies the 'portfolio interest test' in respect of its current investments (listed in Appendix 1 to the relevant facts and circumstances of this Ruling).

1.     The Fund satisfies the 'influence test'

Subsection 128(3CD) of the ITAA 1936 states:

A superannuation fund has influence of a kind described in this subsection in relation to the test entity at a time if any of the following requirements are satisfied at that time:

(a) the superannuation fund:

(i) is directly or indirectly able to determine; or

(ii) in acting in concert with others, is directly or indirectly able to determine;

the identity of at least one of the persons who, individually or together with others, make (or might reasonably be expected to make) the decisions that comprise the control and direction of the test entity's operations;

(b) at least one of those persons is accustomed or obliged to act, or might reasonably be expected to act, in accordance with the directions, instructions or wishes of the superannuation fund (whether those directions, instructions or wishes are expressed directly or indirectly, or through the superannuation fund acting in concert with others).

As such, there are two distinct sub-tests within the influence test.

Sub-test 1 of the influence test, as contained in paragraph 128B(3CD)(a) of the ITAA 1936, assesses whether the Fund is able to determine the identity of at least one of the persons who, individually or together with others, makes or is reasonably expected to make, decisions comprising the control and direction of the test entity's operations. This includes situations where the Fund is able to act in concert with others to determine the identity of a relevant decision-maker in the test entity.

Sub-test 1 also extends to situations where the Fund, in its own right, holds the ability to approve or veto decisions which go to the control or direction of the test entity.

Sub-test 2 of the influence test, as contained in paragraph 128B(3CD)(b) of the ITAA 1936, assesses whether at least one of the relevant decision-making persons of the test entity is accustomed or obliged to act, or might reasonably be expected to act, in accordance with the directions, instructions or wishes of the Fund.

Relevantly, in respect of the investments referred to in the relevant facts and circumstances to this Ruling:

a.     Neither the Fund, nor any related party of the Fund, has involvement in the day to day management of the business of any of the Australian companies, trusts or REITs.

b.     Neither the Fund, nor any related party of the Fund, has the right to appoint a director to the Board of Directors of the Australian company or equivalent role in a trust or REIT.

c.      Neither the Fund, nor any related party, holds the right to representation on any investor representative or advisory committee (or similar) of the Australian company, or equivalent role in a trust or REIT.

d.     Neither the Fund, nor any related party, has the ability to direct or influence the operation of the Australian company, trust or REIT outside of the ordinary rights conferred by the equity interest held.

e.     The Fund only holds rights to vote in proportion to its equity interest in each Australian company, trust or REIT.

Based upon the above, the Commissioner accepts that the Fund does not have influence of a kind described in subsection 128B(3CD) of the ITAA 1936.

2.     Otherwise non-assessable non-exempt

The income received by the Fund will not be non-assessable non-exempt income because of Subdivision 880-C of the ITAA 1997 or Division 880 of the Income Tax (Transitional Provisions) Act 1997.

Conclusion

The Fund is excluded from withholding tax in relation to interest, dividend and non-share dividend income derived from its current investments (listed in Appendix 1 to the relevant facts and circumstances of this Ruling).

Question 2

Is the Fund excluded from liability to withholding tax under paragraph 128B(3)(jb) of the ITAA 1936 on its interest, dividend and non-share dividend income derived from its future equity investments in Australia when made within the parameters contained in paragraph 23 of the relevant facts and circumstances of this Ruling?

Detailed reasoning

The reasoning in respect of Question 1 applies equally to Question 2.

The only unique considerations relevant to Question 2 are whether the Fund will satisfy the 'portfolio interest test' and the 'influence test' in respect of its future investments made within the parameters contained in paragraph 23 of the relevant facts and circumstances of this Ruling.

1.     The Fund satisfies the 'portfolio interest test'

The Fund will hold less than 10% of the total participation interests in each Australian company, trust or REIT. The Fund will also hold less than 10% of the total participation interests in each Australian company, trust or REIT in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936.

The Fund will therefore satisfy the portfolio interest test.

2.     The Fund satisfies the 'influence test'

Relevantly:

a.     Neither the Fund, nor any related party, will have involvement in the day to day management of the business of any of the Australian companies, trusts or REITs.

b.     Neither the Fund, nor any related party, will have the right to appoint a director to the Board of Directors of the Australian company or equivalent role in a trust or REIT.

c.      Neither the Fund, nor any related party, will have the right to representation on any investor representative or advisory committee (or similar) of the Australian company, or equivalent role in a trust or REIT.

d.     Neither the Fund, nor any related party, will have the ability to direct or influence the operation of the Australian company, trust or REIT outside of the ordinary rights conferred by the equity interest held.

e.     The Fund will only hold rights to vote in proportion to its equity interest in each Australian company, trust or REIT.

Based upon the above, the Commissioner accepts that the Fund will not have influence of a kind described in subsection 128B(3CD) of the ITAA 1936.

Conclusion

The Fund is excluded from withholding tax in relation to interest, dividend and non-share dividend income received in respect of its future investment when made within the parameters contained in paragraph 23 of the relevant facts and circumstances of this Ruling.