Edited version of private advice

Authorisation Number: 1051601989647

Date of advice: 19 December 2019

Ruling

Subject: Exemption from withholding tax for a superannuation fund for foreign residents

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 Australian Investments, listed in the relevant facts and circumstances of this Ruling, under paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 20xx

Year ending 30 June 20xx

Year ending 30 June 20xx

Year ending 30 June 20xx

Year ending 30 June 20xx

The scheme commences on:

1 July 20xx

Relevant facts and circumstances

The Fund

The Fund is an indefinitely continuing fund that was created in 19xx by foreign legislation to provide retirement benefits for certain employees in that jurisdiction.

The Fund is a defined benefit plan. This means that retirement benefits are determined using a set formula rather than being directly related to contributions to the Fund.

The Fund is administered by a board. Management of the Fund is the responsibility of the executive director who is appointed by the board. The executive director is responsible for the proper operation of the Fund, engaging professional services and paying expenses necessary for operations.

The Fund is exempt from taxation under the relevant foreign legislation and is a resident of the Foreign Jurisdiction for the purposes of that jurisdictions tax laws.

For the purposes of the ITAA 1936 and the Income Tax Assessment Act 1997 (ITAA 1997):

·         The central management and control of the Fund is in the Foreign Jurisdiction and is carried out by individuals who are not Australian residents.

·         The Fund has been established and maintained only to provide benefits for individuals who are not Australian residents.

·         An amount paid to, or set aside for, the Fund has not been and cannot be deducted.

·         A tax offset has not been allowed, nor would be allowable, for any amount paid to the Fund or set aside for the Fund.

·         The Fund's income from its Australian Investments is not 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.

Membership of the Fund

In order to be eligible to retirement benefits from the Fund, a person must be a member of the Fund. All personnel employed in a permanent position, not less than half-time, with certain employers in the jurisdiction are required to be members as a condition of employment.

As 30 June 20xx, there were hundreds of thousands of members and dozens of employers participating in the Fund.

Contributions

Contributions to the Fund are predominately made by members and employers. The payment of benefits is also partly funded by investment income received by the Fund.

All members contribute a percentage of the compensation from their employment to the Fund by deduction on a pre-tax basis.

Employers also contribute a percentage of the employee's compensation to the Fund. The employer contribution rate varies over time and was x% in the 20xx year. The employer contributions help to fund current and future retirement benefits and do not form part of any individual member's account.

Refunds

A member may be eligible for a lump-sum refund of contributions and interest if that member terminates their employment. However, a refund may not be available if the member is moving to another employer covered by the Fund. Government taxes may apply to a portion of any amount refunded.

Refunds paid by the Fund totalled tens of millions in the year ended 30 June 20xx. The benefits paid out by the Fund totalled billions over the same period.

Partial withdrawals and loans are not allowed under the Fund.

Credit

Members receive credit from their employment. The conditions under which a member receives credit depend on the nature of their employment contract but members will accumulate a maximum of one year of credit for each year of employment.

Members can receive additional credit in some circumstances.

The maximum amount of credit that can be obtained by a member is 40 years.

Membership Status

A member's account with the Fund will remain active provided they are a contributing member at least 1 out of any 5 consecutive years.

The following consequences arise for an inactive account:

·         The account will not be credited with any additional interest;

·         The member will not be eligible to establish any additional credit;

·         The member will not be eligible to repay any withdrawn accounts;

·         The member will not be eligible to apply for disability retirement or leave a benefit to a surviving beneficiary.

Vesting

Members become fully vested after 10 years of service. Vested members are entitled to a service retirement benefit upon attaining age 60 if they do not withdraw their contributions from the Fund.

Survivor's Benefits (on a member's death prior to retirement)

If a member holding an active account with the Fund dies prior to retirement, their beneficiaries will receive payments and/or benefits from the Fund.

If the member dies with less than 10 years of credits, that member's beneficiaries will receive a lump-sum refund of the member's contributions and interest.

If the member dies with more than 10 years of credits, that member's beneficiaries will be able to choose between a monthly benefit for life and a lump-sum refund of the member's contributions and interest.

Disability Retirement Benefits

A member is eligible to apply for monthly disability retirement benefits if they are an active member, have at least 10 years of credits and are permanently disabled.

Disability retirement benefits are calculated in the same way as service retirement benefits however there is no age requirement for disability retirement.

Service Retirement Benefits

Members are eligible for monthly service retirement benefits when one of the following criteria is satisfied:

1.    Attainment of 30 years of credits (regardless of age);

2.    Attainment of at least 10 years of credits and attainment of age 60; or

3.    Attainment of at least 25 years of credits (at a reduced rate).

A member's service retirement benefits are calculated by a fixed formula but there are some legislative limits that apply.

Members covered by one of the first two criteria above can elect to receive a partial lump-sum distribution at the time their retirement benefits commence in exchange for a permanently reduced lifetime benefit.

If a member retires under the third option listed above then their benefits will be permanently reduced by another set formula.

Members must choose between several plans of retirement when they apply for retirement benefits. The key differences are to the entitlements of beneficiaries after the member's death. The more entitlements a beneficiary will have under a retirement plan, the less the member will generally receive in monthly retirement benefits under that plan.

Australian Investments

The Fund has invested in Australian equity investments ('Australian Investments'). A list of these investments was provided to the ATO and included in this section of the Ruling.

The equity investments of the Fund have the following characteristics ('Equity Characteristics'):

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

(b)  The Fund holds less than 10% of the total equity interests on issue of each Australian company or trust.

(c)  The Fund has no involvement in the day to day management of the business of any of the Australian companies or trusts.

(d)  The Fund has no right to appoint a director to the Board of Directors of the Australian company or equivalent role in a trust.

(e)  The Fund has no right to representation on any investor representative or advisory committee (or similar) of the Australian company, or equivalent role in a trust.

(f)   The Fund has no ability to direct or influence the operation of the Australian company or trust outside of the ordinary rights conferred by the equity interest held.

(g)  The Fund only holds rights to vote in proportion to its equity interest in each Australian company or trust.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 6

Income Tax Assessment Act 1936 Division 6

Income Tax Assessment Act 1936 Section 128B

Income Tax Assessment Act 1936 subsection 128B(1)

Income Tax Assessment Act 1936 subsection 128B(2)

Income Tax Assessment Act 1936 subsection 128B(3)

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

Income Tax Assessment Act 1936 subsection 128B(3CA)

Income Tax Assessment Act 1936 subsection 128B(3CB)

Income Tax Assessment Act 1936 subsection 128B(3CC)

Income Tax Assessment Act 1936 subsection 128B(3CD)

Income Tax Assessment Act 1936 Section 128D

Income Tax Assessment Act 1997 Section 118-520

Income Tax Assessment Act 1997 subsection 118-520(1)

Income Tax Assessment Act 1997 subsection 118-520(2)

Income Tax Assessment Act 1997 Subdivision 880-C

Income Tax Assessment Act 1997 Subdivision 960-GP

Income Tax Assessment Act 1997 Section 995-1

Income Tax (Transitional Provisions) Act 1997 Division 880

Reasons for decision

Question 1

Summary

The Fund is excluded from liability to withholding tax on its interest, dividend and non-share dividend income derived in respect of its Australian Investments, listed in the relevant facts and circumstances of the Ruling, under paragraph 128B(3)(jb).

Detailed reasoning

A non-resident that derives income consisting of a dividend or interest may be liable to pay income tax upon that income under section 128B (Withholding Tax).

However, subsection 128B(3) contains a list of income to which section 128B will not apply. To the extent that it is relevant, subsection 128B(3) states:

(3) This section does not apply to: ...

(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; ...

Note: See subsection (3CA) for extra requirements relating to this paragraph.

As referred to in the note to paragraph 128B(3)(jb) above, subsection 128B(3CA) contains additional requirements that must be satisfied in relation to certain income that would otherwise meet the criteria in paragraph 128B(3)(jb).

Therefore, an entity will not be liable to withholding tax on income pursuant to paragraph 128B(3)(jb) if:

·         the criteria in subparagraph 128B(3)(jb)(i), subparagraph 128B(3)(jb)(ii) and subparagraph 128B(3)(jb)(iii) are satisfied; and

·         the additional requirements in subsection 128B(3CA) either do not apply to the income or are satisfied in relation to that income.

Subparagraph 128B(3)(jb)(i)

The term 'superannuation fund for foreign residents' is defined in section 118-520 of the Income Tax Assessment Act 1997 (ITAA 1997) as follows:

118-520 Meaning of superannuation fund for foreign residents

(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 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.

As such, the Fund must be a 'fund' that satisfies all of the conditions in subsection 118-520(1) of the ITAA 1997 (and none of the paragraphs in subsection 118-520(2) of the ITAA 1997) to be a 'superannuation fund for foreign residents'.

Is the Fund a 'fund' and does it satisfy paragraph 118-520(1)(a) of the ITAA 1997?

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 phrase 'a provident, benefit, superannuation or retirement fund' under subparagraph 118-520(1)(a)(ii) is not defined in either the ITAA 1997 or the ITAA 1936. However, the phrase has been subject to judicial consideration.

In Scott, the High Court examined the terms 'superannuation fund' and 'fund'. Justice Windeyer stated at ATD 351; AITR 312; ALJR 278 that:

... I have come to the conclusion that there is no essential single attribute of a superannuation fund established for the benefit of employees except that it must be a fund bona fide devoted as its sole purpose to providing for employees who are participants money benefits (or benefits having a monetary value) upon their reaching a prescribed age. In this connexion "fund", I take it, ordinarily means money (or investments) set aside and invested, the surplus income there from being capitalised.

In a later case, Mahoney v. Commissioner of Taxation (Cth) (1967) 41 ALJR 232; (1967); 14 ATD 519; 10 AITR 463 (Mahoney case), the High Court took a similar view as in Scott, Justice Kitto expressed the view at ALJR 232; (1967); ATD 520; AITR 464 that:

...all that need be recognised is that just as 'provident' and 'superannuation' both referred to the provision of a particular kind of benefit - in the one case a provision against contemplated contingencies, and in the other case a provision, to arise on an employee's retirement or death or other cessation of employee, of a subvention for him or his estate or persons towards whom he may have stood in some kind of relation commonly giving rise to a legal or moral responsibility - so 'benefit' must have meant a benefit, not a general sense, but characterised by some specific future purpose.

The court found that the expression takes its meaning from past usage and the meaning of the several expressions must be arrived at in light of their ordinary usage.

As such the term 'benefit' requires a purpose narrower than conferring benefits in a completely general sense. The benefit must be characterised by some future purpose. Likewise, a provident fund must not refer to the provision of funds in a general sense, but must relate to a provision against contemplated contingencies.

Both of the abovementioned cases emphasise that the benefits must be provided for a specific purpose and require that there is a connection between the benefit received and the provision by the fund for retirement or death of a member or against 'contemplated contingencies', such as a sickness or accident.

In this case, the Fund is a defined benefit pension plan for employees of certain employers. A member of the Fund may only directly receive benefits or payments from the fund prior to reaching the age of 60 if the member:

a)    has at least 25 years of credits;

b)    is permanently disabled (i.e. Disability Retirement Benefits);

c)    dies (i.e. Survivor's Benefits); or

d)    receives a refund of contributions and interest after their employment has been terminated.

In the circumstances, 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 becoming permanently disabled.

The Commissioner also accepts that the ability of members to receive a refund of contributions and interest is a minor and incidental feature of the Fund in the circumstances. The factors that point to this conclusion include that:

·         the refunds paid to members by the Fund in the year ended 30 June 20xx were insignificant relative to the other benefits paid by the Fund; and

·         Substantial taxes may apply to any refund by a member (creating a disincentive to withdraw funds in this manner).

Therefore, the Fund satisfies the meaning of 'superannuation fund' as the Commissioner accepts that its sole purpose is to provide a benefit to members upon their retirement, permanent disability or death. The Commissioner also accepts that the Fund is indefinitely continuing and, as such, satisfies paragraph 118-520(1)(a) of the ITAA 1997.

Does the Fund satisfy paragraph 118-520(1)(b) of the ITAA 1997?

The Fund was established in the Foreign Jurisdiction. Therefore, this condition is satisfied.

Does the Fund satisfy paragraph 118-520(1)(c) of the ITAA 1997?

The Fund has been established, and is maintained, only to provide benefits for individuals who are not Australian residents. Therefore, this condition is satisfied.

Does the Fund satisfy paragraph 118-520(1)(d) of the ITAA 1997?

The central management and control of the Fund is in the Foreign Jurisdiction and is carried out by individuals who are not Australian residents. Therefore, this condition is satisfied.

Does subsection 118-520(2) of the ITAA 1997 apply?

No amount paid to the Fund or set aside for the Fund has been or can be deducted (and no tax offset has been allowed or is allowable for such an amount) under the ITAA 1936 or ITAA 1997. Therefore, subsection 118-520(2) of the ITAA 1997 does not apply.

Conclusion

The Fund is a 'superannuation fund for foreign residents'. The Commissioner is also satisfied that the Fund is a 'non-resident' for the purposes of subparagraph 128B(3)(jb)(i). As such, subparagraph 128B(3)(jb)(i) is satisfied.

Subparagraph 128B(3)(jb)(ii)

This ruling will only apply to income consisting of interest, dividends or non-share dividends and, as such, subparagraph 128B(3)(jb)(ii) is satisfied.

Subparagraph 128B(3)(jb)(iii)

The Fund is exempt from taxation under the Foreign Jurisdiction's tax laws.

Consequently, the relevant interest and/or dividend income of the Fund is exempt from income tax in the country in which it resides (being the Foreign Jurisdiction) and subparagraph 128B(3)(jb)(iii) is satisfied.

Subsection 128B(3CA)

Income from investments acquired after 27 March 2018 must satisfy the requirements of subsection 128B(3CA) in order for that income to be exempt from withholding tax under paragraph 128B(3)(jb). Some of the dividend income derived by the Fund from Australian Investments listed in the relevant facts and circumstances of this Ruling will fall into this category.

Subsection 128B(3CA) states:

(3CA) Paragraph (3)(jb) applies to income derived by the superannuation fund mentioned in subparagraph (3)(jb)(i) only if:

(a) the superannuation fund satisfies the portfolio interest test in subsection (3CC) in relation to the entity mentioned in subsection (3CB) (the test entity):

(i) at the time the income was derived; and

(ii) throughout any 12 month period that began no earlier than 24 months before that time and ended no later than that time; and

(b) the superannuation fund does not, at the time the income was derived, have influence of a kind described in subsection (3CD) in relation to the test entity; and

(c) the income is not non-assessable non-exempt income of the superannuation fund because of:

(i) Subdivision 880-C of the Income Tax Assessment Act 1997; or

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

Relevantly, the requirements in paragraphs 128B(3CA)(a), 128B(3CA)(b) and 128B(3CA)(c) must all be satisfied in order for paragraph 128B(3)(jb) to apply.

Paragraph 128B(3CA)(a)

Paragraph 128B(3CA)(a) requires applying the 'portfolio interest test' in subsection 128B(3CC) in relation to the relevant 'test entity' mentioned in subsection 128B(3CB) at particular times.

Subsection 128B(3CB) states:

(3CB) For the purposes of subsection (3CA), the test entity is:

(a) unless paragraph (b) applies-the entity that paid the interest, dividends or non-share dividends as mentioned in subparagraph (3)(jb)(ii); or

(b) if subsection 128A(3) applies in relation to a resident trust estate (within the meaning of Division 6)-the trust estate.

In the case of the Fund, the relevant 'test entities' are the entities listed in the 'Australian Investments' section of the relevant facts and circumstances of the Ruling.

The 'portfolio interest test' in subsection 128B(3CC) is as follows:

(3CC) 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.

Note: The terms 'total participation interest' and 'direct participation interest' are defined in Subdivision 960-GP of the ITAA 1997.

In this case, the Fund currently does not hold more than 1% ownership of any of the entities listed in the 'Australian Investments' section of the relevant facts and circumstances of the Ruling. The Fund's Australian Investments also meet certain 'Equity Characteristics' listed in the relevant facts and circumstances of the Ruling.

In the circumstances, the Commissioner is satisfied that the total participation interest the Fund holds in the test entities:

·         is less than 10% pursuant to paragraph 128B(3CC)(a) at all relevant times; and

·         would be less than 10% in the circumstances detailed in paragraph 128B(3CC)(b) at all relevant times.

The Fund therefore satisfies the 'portfolio interest test' in subsection 128B(3CC) at all relevant times in relation to the entities listed in the 'Australian Investments' section of the relevant facts and circumstances of the Ruling. Paragraph 128B(3CA)(a) is therefore satisfied.

Paragraph 128B(3CA)(b)

Paragraph 128B(3CA)(b) requires that the Fund does not have influence of a kind described in subsection 128B(3CD) in relation to the relevant 'test entity' mentioned in subsection 128B(3CB) at the time the income was derived.

Subsection 128B(3CD) states:

(3CD) 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 determined above, the 'test entities' are the entities listed in the 'Australian Investments' section of the relevant facts and circumstances of the Ruling consistent with subsection 128B(3CB).

The following points are relevant in considering whether the Fund has influence of a kind described in subsection 128B(3CD) in relation to the relevant 'test entities':

·         The Fund has no involvement in the day-to-day management of the business of those test entities;

·         The Fund has no right to appoint a director to the Board of Directors of those test entities;

·         The Fund has no right to representation on any investor representative or advisory committee (or similar) of those test entities;

·         The Fund has no ability to direct or influence the operation of those test entities outside of the ordinary rights conferred by the equity interests held; and

·         The Fund only holds rights to vote in proportion to its equity interest in each of those test entities.

Consequently, the Commissioner accepts that the Fund does not have influence of a kind described in subsection 128B(3CD).

Paragraph 128B(3CA)(c)

The Fund's income from its Australian investments is not 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.

Consequently, the requirement in paragraph 128B(3CA)(c) is satisfied.

Conclusion on subsection 128B(3CA)

All the requirements of subsection 128B(3CA) are satisfied in respect of any income that will be derived by the Fund.

Conclusion

Paragraph 128B(3)(jb) applies to interest, dividend and/or non-share dividend income derived by the Fund in respect of its Australian Investments listed in the relevant facts and circumstances of the Ruling. Consequently, the fund is excluded from liability to withholding tax on this income.