Edited version of private advice

Authorisation Number: 1051588657068

Date of advice: 4 November 2019

Ruling

Subject: Superannuation fund for foreign residents

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

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:

1 July 2018 to 30 June 2019

The scheme commences on:

1 July 2018

Relevant facts and circumstances

The Fund

1.            The Fund is a defined benefit plan created for the exclusive purpose of providing retirement benefits to full time employees within a City of a foreign country.

2.            The Fund is the only municipal retirement fund in the State of the foreign country that covers general employees, police officers and firefighters.

3.            The Fund was established by the Charter.

4.            The Fund is subject to City and State legislative oversight.

5.            The Fund is an irrevocable trust into which all assets of the Fund are deposited. No part of the corpus or income of the Fund reverts to the City or be used for, or diverted to, any purpose other than exclusively providing benefits to members and their beneficiaries in accordance with the terms of the Fund's Administrative Rules (Rules).

6.            The Fund serves active members, retirees and beneficiaries.

7.            The Fund controls the investment decisions and asset allocation, actuarial assumptions and recommends the monetary contributions needed from the City to meet these assumptions in order to fund benefits to members.

8.            The Fund collects contributions from the City and its employees and pays out benefits in accordance with the Fund provisions.

9.            The Fund has been placed under the exclusive administration and management of a Board of Trustees (the Board) for the purposes of providing retirement benefits.

10.         The custody and supervision of the Fund is vested in the Board which has sole responsibility for the administration of the Fund including the benefits; the implementation of its Rules and; the investment of assets.

11.         The Board is made up of 13 members who are referred to as Board members or Trustees. Five Board members are appointed, seven are elected by the membership and one seat is held by an officer of the City.

12.         The Fund also administers a pension plan for the employees of the Fund (Staff Plan).

13.         The assets of the Staff Plan and the Fund are commingled and are managed as a pool of funds by the Board.

The Fund Description

Participation

14.         Membership in the Fund is a condition of employment for all City employees who are eligible to be members. Eligibility excludes elected officers, non-salaried appointed members of administrative boards and commissions, part time, temporary and contract employees and employees paid partly by a country, state or other governmental agency.

15.         There are different classifications for an employee hired by the City depending on their employment and date of hire.

Contributions

16.         By accepting employment with the City, all members are deemed to consent and agree to the deduction of contributions from his or her earnings through regular payroll processes.

17.         A member, whose separation of service is before they become vested, shall be allowed to take a refund of his or her member contributions plus regular interest. The member at this time will have no further rights or benefits under the Fund.

18.         Vesting is a required amount of service credit that must be earned to be eligible for a retirement benefit. A member will be eligible to receive a pension if they have at least five years of eligible service, at which time they will be vested in the Fund.

19.         A member, whose separation of service is after the member is vested, may elect to take a refund of his or her contributions plus regular interest before the commencement of their pension. At this time, the member shall no longer be entitled to further rights or benefits from the Fund.

Benefits provided

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

(a) Member pensions

(b) Normal pensions

(c) Early pensions

(d) Vested pensions

(e) Disability benefits

(f) Death benefits.

Staff Plan Description

Participation

21.         The Staff Plan was originally established by the Board for the exclusive benefit of the staff employees of the Fund.

22.         The Board has sole and exclusive administration of, and responsibility for, the proper and effective operation of the Staff Plan. The Board shall be the final authority in all matters pertaining to the application, interpretation and administration of the provisions of the Staff Plan.

23.         Participation in the Staff Plan is mandatory and is in lieu of any other retirement plan for the employees of the Fund.

Contributions

24.         Employees shall contribute a percentage of their earnings to the Staff Plan with all contributions and investment earnings held in trust by the Board in accordance with State law.

25.         Any member who terminates employment shall be allowed to take a refund of their contributions plus interest and will forfeit all rights or be entitled to no further rights or benefits under the Staff Plan.

Benefits provided

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

(a) Standard pensions

(b) Early retirement pensions

(c) Alternate pensions

(d) Disability benefits

(e) Death benefits.

Staff Plan termination

27.         The Board retains the continuing power to amend or terminate the Staff Plan provided that no amendment may result in a reduction of benefits below that level in effect at the time the amendment is scheduled for enactment.

28.         In the event of Staff Plan termination or partial termination, or a complete discontinuance of Fund contributions to the Staff Plan, the accrued benefits of all members shall immediately be fully (100%) vested.

29.         Upon termination of the Staff Plan, any assets remaining after the payment of all liabilities and expenses shall revert to the Fund.

Other relevant facts

30.         The Fund is a resident of the foreign country for the purposes of the foreign country's taxation. The Fund is not a resident of Australia for tax purposes.

31.         The Fund was established in the foreign country and is maintained for the sole purpose of providing superannuation benefits for individuals who are not residents of Australia.

32.         The central management and control of the Fund is carried on outside of Australia by persons none of whom are residents of Australia.

33.         An amount paid to the Fund or set aside for the Fund has not been or cannot be deducted under any provision of the ITAA. Further, no tax offset has been allowed or can be allowed for any such amounts.

34.         The Fund receives interest and dividend income from investments in Australia.

35.         Income of the Fund from Australian investments is exempt from taxation in the foreign country.

Relevant legislative provisions

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

Income Tax Assessment Act 1936 section 128D

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 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 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 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 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 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 Rules do not set out procedures for the dissolution of the Fund, have a termination clause or provide any indication that there is any contemplation of the Fund ending at a defined point in time.

The Fund is subject to City and State legislative oversight. As the Rules have been established through legislation, any change to the Rules would require amendments to be legislated.

The Board retains the continuing power to amend or terminate the Staff Plan provided that any amendment will not result in a reduction of benefits below the level in effect at the time the amendment is scheduled for enactment.

In the event of the Staff Plan termination, partial termination, or a complete discontinuance of contributions to the Staff Plan, the accrued benefits of all members shall immediately be fully vested.

Therefore, it is accepted that the Fund will continue to operate in accordance with the Rules for an indefinite period of time and is an indefinitely 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 a defined benefit plan created for the exclusive purpose of providing retirement benefits to full time City employees. No part of the corpus or income of the Fund shall revert to the City or be used for, or diverted to, any purpose other than exclusively providing benefits to members and their beneficiaries.

The Fund controls the investment decisions and asset allocation, actuarial assumptions and recommends the monetary contributions needed from the City to meet these assumptions in order to fund benefits to members. The Fund collects the contributions from the City and its employees and pay out benefits in accordance with the provisions.

Further, the Commissioner accepts that the alternate circumstances of access in this case, being, disability, death and termination of employment align to the contemplated contingencies of a provident, benefit, superannuation or retirement fund.

Therefore, the Fund satisfies this requirement.

The Fund was established in a foreign country

The Fund was established in a City 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 is a defined benefit plan created for the exclusive purpose of providing retirement benefits to full time City employees.

The Fund is the only municipal retirement fund in the State of a foreign country that covers City employees. The Fund was established by the Charter.

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 and should not be taken to conclude that the Fund, in this case, has not been established and is not maintained only to provide benefits for non-residents.

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 is a defined benefit plan created for the exclusive purpose of providing retirement benefits to full time City employees. The Fund is the only municipal retirement fund in the State of the foreign country that covers City employees. The Fund was established by the Charter with City and State legislative oversight. Income of the Fund shall not revert to the City or be used for any purpose other than the exclusive use of providing benefits to members and their beneficiaries.

The Fund is under the exclusive administration and management of the Board by the State in the foreign country for the purposes of providing retirement benefits. The Board is the highest governing body of the Fund and is charged with the primary responsibility of overseeing the administration of benefits and investment of assets. The Board is made up of 13 members with five members appointed, seven members elected and one seat held by an officer of the City. All members are residents of the foreign country.

Based on this, it is reasonable to conclude that the CM&C 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 either the ITAA 1936 of 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.

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 for the purposes of paragraph 128B(3)(jb) 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.

However, the operation of paragraph 128B(3)(jb) of the ITAA 1936 is extended by subsection 128A(3) of the ITAA 1936 which states:

For the purposes of this Division, a beneficiary who is presently entitled to a dividend, to interest or to a royalty included in the income of a trust estate shall be deemed to have derived income consisting of that dividend, interest or royalty at the time when he or she became so entitled.

The operation of subsection 128A(3) of the ITAA 1936 will enable interest, dividend and non-share dividend income paid by an Australian resident company and derived by a trust estate to retain its character in the hands of a beneficiary of that trust estate.

Further, the beneficiary will be deemed to have derived the relevant income for the purposes of paragraph 128B(3)(jb) of the ITAA 1936 at the point in time that the beneficiary becomes presently entitled to that income.

The Fund will receive interest income from Australian 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

As all the requirements of paragraph 128B(3)(jb) of the ITAA 1936 are satisfied, the Fund will be entitled to an exemption 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 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.