Edited version of private advice

Authorisation Number: 1051593806415

Date of advice: 16 October 2019

Ruling

Subject: Liability to withholding tax on interest and/or dividend income under paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936

Question

Is the Fund excluded from liability to withholding tax on its interest, dividend and non-share dividend income derived in respect of assets acquired on or before 27 March 2018 under paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commences on:

Scheme has commenced

Relevant facts and circumstances

The Fund is a fund arranged by the Foreign Employer.

The Fund has its own Governing Board, to oversee the Fund, and CEO, to manage the Fund.

The Fund operates a defined benefit scheme that calculates a pension using a set formula involving several factors such as a member's salary and years of membership.

A member of the Fund (or that member's relative) may receive benefits or payments from the Fund prior to the age of 50 if that member:

a)    is unable to work due to physical and/or mental impairment;

b)    dies; or

c)    Receives a 'Transfer Value' payment on ceasing to be a member of the Fund.

Depending on a former member's period of 'pensionable service' (i.e. period for which contributions have been made into the Fund), a Transfer Value payment may be paid:

-   In the case of under 5 years of pensionable service - into another pension scheme or to the member

-   In the case of 5-10 years of pensionable service - into another pension scheme or, if that option is not possible, to the member

-   In the case of more than 10 years of pensionable service - into another pension scheme or, if that option is not possible, into a private insurance scheme offering comparable guarantees.

Apart from the circumstances referred to above, benefits are only accessible after the (former) member is 50 years old in the form of either:

-   An anticipated retirement pension - only accessible after the (former) member is at least 50 years old

-   A retirement pension at the applicable retirement age - only accessible after the (former) member is at least 65 years old.

The Fund holds no rights to appoint a person to a board, committee or similar, either directly or indirectly.

The Fund has not entered into, or received, any side letters, arrangements or agreements.

The Fund holds no veto rights on security holder votes.

Reasons for decision

Legislative references in this Ruling are to provisions of the ITAA 1936 or to provisions of the ITAA 1997 unless otherwise indicated.

Summary

The requirements of paragraph 128B(3)(jb) of the ITAA 1936 are satisfied. Therefore the Fund will be entitled to an exemption from withholding tax on interest, dividend and non-share dividend income derived in respect of assets acquired on or before 27 March 2018 under paragraph 128B(3)(jb) of the ITAA 1936.

Detailed reasoning

For the financial years ended 30 June 2008 and onwards, paragraph 128B(3)(jb) of the ITAA 1936 excludes interest and dividend income from withholding tax where that income:

1. is derived by a non-resident that is a superannuation fund for foreign residents; and
2. consists of interest, or consists of dividends or non share dividends paid by a company that is a resident; and
3. is exempt from income tax in the country in which the non-resident resides.

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 from 1 July 2019 onwards. These extra requirements apply only to assets which were acquired after 27 March 2018. For the purposes of Question 1, which only considers the Fund's assets acquired on or before 27 March 2018, these extra requirements are not applicable.

The Fund is a non-resident

The Fund is not a resident of Australia.

Therefore, the Fund will satisfy 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 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 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, www.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 'fund' for the purposes of section 118-520 as money and investments are set aside for a particular purpose.

Further, the Fund is an indefinitely continuing fund as it does not have a specified end date.

Therefore, the Fund will satisfy this requirement.

The Fund is 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:

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 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:

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 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.

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.

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".

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 only circumstances in which members of the Fund (or their relatives) may directly receive benefits or payments from the fund prior to being at least 50 years old are where a member:

a)    is unable to work due to physical and/or mental impairment;

b)    dies; or

c)    receives a 'Transfer Value' payment on ceasing to be a member of the Fund.

In the circumstances, the Commissioner accepts that the Fund has a purpose of providing a pool of assets for use by current and former employees only on their retirement, death or contemplated contingencies such as being unable to work.

The Commissioner also accepts that the ability of members to receive a Transfer Value payment is a minor and incidental feature of the Fund. In coming to this conclusion, regard was had to the circumstances of the case including:

·         the restrictions on Transfer Value payments directly to a member after 5 years of pensionable service;

·         the quantum of Transfer Value payments to members as a proportion of total benefits and payments - 3.72%; and

·         the large number of members of the Fund.

We are satisfied that the Trust is a 'provident, benefit, superannuation or retirement fund.'

Therefore, the Fund will satisfy this requirement.

The Fund was established in a foreign country

The Fund was established in its home jurisdiction outside of Australia.

Therefore, we consider that 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 Fund was established, and is maintained, only to provide benefits for the employees of the company.

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, based on the rules and operation of the Fund.

Therefore, the Fund will satisfy 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 has its own Governing Board to oversee the Fund, and CEO to manage the Fund.

The Fund's central management and control is carried on outside Australia by entities (none of whom is an Australian resident). In particular, the Fund's Governing Board and CEO oversee and manage the Fund outside Australia.

Based on the above, it is clear that the central management and control of the Fund occurs outside of Australia by entities that are not Australian residents.

Therefore, the Fund will satisfy 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 will satisfy this requirement.

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 subparagraph 128B(3)(jb)(i) of the ITAA 1936.

The income, consisting of interest, dividend or non-share dividend income, is derived by the Fund

Subsection 128B(3CA) of the ITAA 1936, along with paragraph 128B(3)(jb) of the ITAA 1936 requires the superannuation fund for foreign residents to derive the interest, dividends or non-share dividends paid by Australian resident companies.

The Fund invests directly into Australia and receives interest, dividend or non-share dividend income directly from its Australian investments. It will, therefore, derive the relevant income for the purposes of subsection 128B(3CA) of the ITAA 1936 and paragraph 128B(3)(jb) of the ITAA 1936.

As such, for the purposes of subsection 128B(3CA) of the ITAA 1936 and paragraph 128B(3)(jb) of the ITAA 1936, the Fund will derive the relevant income.

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

In the circumstances, the Commissioner is satisfied that the Fund 'resides' in the foreign jurisdiction for the purposes of subparagraph 128B(3)(jb)(iii).

The Fund is also exempt from direct taxation, including income tax, in its home jurisdiction.

Therefore, the Fund will satisfy 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 from withholding tax on interest, dividend and non-share dividend income derived in respect of assets acquired on or before 27 March 2018 under paragraph 128B(3)(jb) of the ITAA 1936.