Edited version of private advice

Authorisation Number: 1051610490708

Date of advice: 19 November 2019

Ruling

Subject: International issues - Foreign entities - Foreign superannuation funds

Question

Are you a 'foreign superannuation fund' for the purposes of the managed investment trust (MIT) regime under paragraph 275-20(4)(c) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following periods:

1 July 20xx to 30 June 20xx

The scheme commences on:

1 July 20xx

Relevant facts and circumstances

1. You are a pension fund that represents various contributing bodies in a foreign country.
2. You currently manage the assets of these contributing bodies.
3. You are headquartered in a foreign country.
4. You were established with the sole purpose to provide pension benefits to relevant foreign individual residents.
5. You are governed by the rules set out in your Constitution and your contributing bodies.
6. Your management and control functions consist of three key management bodies.
7. Your key management bodies are composed of residents in the relevant foreign jurisdiction.
8. Your Constitution states that a resolution on your dissolution is a duty of one of your key management bodies. Your Constitution states that these decisions are subject to the approval of the contributing bodies. That is, your Constitution provides for a mechanism based on which you can be terminated or wound up but no such decision for a termination or windup has been made and you do not have a specified end date.

Member Benefits

9.     You determine your members' or beneficiaries' pension benefits. The beneficiaries are your contributing bodies' employees who are entitled to a pension upon fulfilment of their pension entitlement, which would usually be upon reaching retirement age.

10. The contributing bodies provide resources to you to fulfil your duties. Your resources comprise proportional contributions, reimbursements, investment income and other revenue for each person who is subject to contribution obligations, the contributing bodies are obliged to make the relevant contributions.
11. You have a duty to pay your beneficiaries under the Constitution. The contributing bodies reimburse you for pension benefits paid, less amounts you have contributed.
12. Your resources comprise proportional contributions, reimbursements, investment income and other revenue which are transferred to your assets if they are not used for current expenses or carried forward to the following financial year.
13. Contributing bodies may allow retirement earlier than the standard retirement age.
14. If a beneficiary dies in active service, their pension benefit shall be paid in the form of a surviving spouse's and/or orphan's pension.
15. As at the date of the private ruling application, thousands of your members were eligible for receiving pension benefits. This includes those currently receiving pension benefits, entitled to such benefits and will receive such benefits in the future.

Investments

16. You are seriously contemplating making investments with other investors of a foreign country (Foreign Investors) into Australian real property assets.
17. The Australian real property assets will be held by Australian unit trusts (AUTs).
18. You and the Foreign Investors will become (directly, or indirectly through interposed fund vehicles) unitholders in a yet to be established foreign wholesale fund (the Foreign Fund).
19. The Foreign Fund will establish an AUT (the Head Trust) together with the second unitholder.

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 6C

Income Tax Assessment Act 1997 section 275-20

Income Tax Assessment Act 1997 paragraph 275-20(4)(c)

Income Tax Assessment Act 1997 section 295-95

Income Tax Assessment Act 1997 subsection 295-95(2)

Income Tax Assessment Act 1997 section 960-130

Income Tax Assessment Act 1997 section 960-139

Income Tax Assessment Act 1997 section 995-1

Superannuation Industry (Supervision) Act 1993 section 10

Reasons for decision

For the purposes of determining whether a trust is a MIT, paragraph 275-20(4)(c) of the ITAA 1997 requires consideration of whether an entity with a participation interest in the proposed MIT is a 'foreign superannuation fund' with 'at least 50 members'.

Paragraph 275-20(4)(c) of the ITAA 1997 states:

(c) a *complying superannuation fund, a *complying approved deposit fund or a *foreign superannuation fund, being a fund that has at least 50 *members.

Foreign superannuation fund

The term 'foreign superannuation fund' is defined in subsection 995-1(1) of the ITAA 1997:

foreign superannuation fund:

(a) a *superannuation fund is a foreign superannuation fund at a time if the fund is not an *Australian superannuation fund at that time; and

(b) a superannuation fund is a foreign superannuation fund for an income year if the fund is not an Australian superannuation fund for the income year.

Therefore, in order for you to be considered a 'foreign superannuation fund', it needs to meet the criteria of:

(a) being a 'superannuation fund', and

(b) not being an 'Australian superannuation fund' for the ruling period.

Superannuation fund

To qualify as a 'foreign superannuation fund', you must be a 'superannuation fund'.

'Superannuation fund' is defined in subsection 995-1(1) of the ITAA 1997 as having the meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SIS Act 1993).

Section 10 of the SIS Act 1993 defines a 'superannuation fund' as:

(a) a fund that:

(i) is an indefinitely continuing fund; and

(ii) is a provident, benefit, superannuation or retirement fund; or

(b) a public sector superannuation scheme.

Section 995-1 of the ITAA 1997 uses the definition of 'public sector superannuation scheme' found under Section 10 of the SIS Act 1993. That section defines 'public sector superannuation scheme' as 'a scheme for the payment of superannuation, retirement or death benefits, where the scheme is established:

(a)   by or under a law of the Commonwealth or of a State or Territory; or

(b)   under the authority of:

(i)               the Commonwealth or the government of a State or Territory; or

(ii)              a municipal corporation, another local governing body or a public authority constituted by or under a law of the Commonwealth or of a State or Territory.

Paragraph (b) is not relevant in this case as it relates to superannuation funds established under Australian law. In this case, you were established under a law of a foreign country.

Therefore, for you to meet this definition, it needs to satisfy the three following criteria:

1) You must be a 'fund', and

2) You must be an indefinitely continuing fund, and

3) You must be a provident, benefit, superannuation or retirement fund.

Are you a 'fund' and an 'indefinitely continuing' fund?

The terms 'fund' and 'indefinitely continuing' are not defined in either the Income Tax Assessment Act 1936 (ITAA 1936) or ITAA 1997. Therefore, they should be given their ordinary meanings subject to the context in which they appear and having regard to any relevant case law authorities.

The Macquarie Dictionary, [Online], viewed on 17 October 2019, www.macquariedictionary.com.au defines the term 'fund' as:

Fund:

Noun 1. a stock of money or pecuniary resources.

2. a store or stock of something, now often of something immaterial: a fund of knowledge.

3. an organisation which manages money invested for a particular purpose, such as superannuation: *The establishment of this fund for the purpose of giving people from disadvantaged backgrounds an opportunity to participate in playing cricket will be a fitting and practical memorial to the life of Sir Donald Bradman -AAP NEWS, 2001.

4. (plural) money in hand; pecuniary resources.

5. (plural) various stocks of the national debt in which the general public may invest.

6. (usually upper case) (plural) consols and other government securities.

-verb(t) 7. to put into a fund or store.

8. to convert (a floating debt or debts) into a more or less permanent debt or loan, represented by interest-bearing bonds.

9. to arrange for (a debt or debts) to be on a long-term basis.

10. to invest (money) in a fund or funds.

11. to provide a fund to pay the interest or principal of (a debt).

12. to raise or provide money for: to fund a child's education.

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'.

You manage the contributing bodies' assets that are set aside in order to fulfil their employees' pension entitlements.

Therefore, you are a fund.

The terms 'indefinitely' and 'continuing' are defined in the Macquarie Dictionary as:

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

You are an 'indefinitely continuing' fund on the basis that there is no clause in the relevant laws which requires you to be terminated or wound up or have a specified end date. Your Constitution declares that any of the key management body's decisions regarding your dissolution are subject to the contributing bodies' approval.

Therefore, you are indefinitely continuing.

Are you a provident, benefit, superannuation or retirement fund?

The phrase 'a provident, benefit, superannuation or retirement fund' is not defined in the ITAA 1936 or the ITAA 1997. 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 the later case of 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.

Justice Kitto found that the expression 'provident, benefit or superannuation fund' takes its meaning from past usage and the meaning of the several expressions must be arrived at in light of their ordinary usage. Justice Taylor found that the fund must be established exclusively for the benefit of employees. Justice Windeyer applied his remarks from Scott. All Justices dismissed the appeal.

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. On the same note, 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. This is consistent with other Federal Court cases.

In applying your circumstances to the case law above, you meet the requirements to be a provident, benefit, superannuation or retirement fund. You were established with the sole purpose to provide pension benefits to your beneficiaries upon them reaching their retirement age.

Australian superannuation fund

The term 'Australian superannuation fund' is defined in subsection 995-1(1) of the ITAA 1997 as having the meaning given by section 295-95 of the ITAA 1997.

In particular, subsection 295-95(2) of the ITAA 1997 states:

A * superannuation fund is an Australian superannuation fund at a time, and for the income year in which that time occurs, if:

(a) the fund was established in Australia, or any asset of the fund is situated in Australia at that time; and

(b) at that time, the central management and control of the fund is ordinarily in Australia; and

(c) at that time either the fund had no member covered by subsection (3) (an active member) or at least 50% of:

(i) the total * market value of the fund's assets attributable to *superannuation interests held by active members; or

(ii) the sum of the amounts that would be payable to or in respect of active members if they voluntarily ceased to be members;

is attributable to superannuation interests held by active members who are Australian residents.

All of the conditions in subsection 295-95(2) of the ITAA 1997 must be met for a superannuation fund to be an Australian superannuation fund.

Based on the guidance found in 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)on central management and control of a superannuation fund, you do not satisfy paragraph 295-95(2)(b) as the central management and control of the fund is not ordinarily in Australia.

TR 2008/9 states that:

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.

Your key management bodies comprise of persons who are residents of a foreign country. You are also registered in that foreign country.

Based on this, your central management and control is in a foreign country, not Australia.

Therefore, you are not an Australian superannuation fund.

Conclusion

You are a superannuation fund that is not an Australian superannuation fund, it will be a foreign superannuation fund as defined by subsection 995-1(1) of the ITAA 1997 for the purposes of the MIT regime under paragraph 275-20(4)(c) of the ITAA 1997.

Question 2

Do you have at least 50 members for the purpose of paragraph 275-20(4)(c) of the ITAA 1997?

Answer

Yes.

Detailed reasoning

As outlined in the Detailed reasoning to Question 1, to satisfy 275-40(4)(c) of the ITAA 1997, you must not only be a foreign superannuation fund, but also have 'at least 50 members'.

A 'member' for the purposes of this paragraph is defined in subsection 995-1(1) of the ITAA 1997 as having the meaning given by section 960-130 of ITAA 1997.

The table in subsection 960-130(1) of the ITAA 1997 sets out the following for various entities:

You must then be established as a trust. The term 'trust' is not defined in the ITAA 1936 or ITAA 1997 and so involves the application of the common law.

ATO Interpretative Decision ATO ID 2008/2 Discount capital gains (ATO ID 2008/2) and ATO Interpretative Decision ATO ID 2008/61 Withholding Tax Exemption: interest and dividends paid by an Australian resident and received by a Dutch Stichting as unitholder in an Irish Common Contractual Fund (ATO ID 2008/61) consider the elements that constitute a trust as detailed by Justice French in Harmer v FC of T 89 ATC 5180; (1989) 20 ATR 1461:

1)     the trustee who holds a legal or equitable interest in the trust property

2)     the trust property which must be property capable of being held on trust and which includes a chose in action

3)     one or more beneficiaries other than the trustee; and

4)     a personal obligation on the trustee to deal with the trust property for the benefit of the beneficiaries, which obligation is also annexed to the property.

You, as the trustee, hold a legal or equitable interest in the property to be managed on behalf of the beneficiaries, as required in element (1) above. While the trustee has control over the trust property (see paragraph below) with regards to how it is managed and invested, the beneficiaries cannot obtain the pension benefits without satisfying certain conditions.

The trust property is properly capable of being held on trust. Your resources are provided by proportional contributions, reimbursements, investment income and other revenue. These resources are the trust's property.

There are one or more beneficiaries other than the trustee. You determine the beneficiaries' pension benefits in accordance with your Constitution. Your beneficiaries are entitled upon reaching retirement age. Beneficiaries are employees, former employees and, in the case of their death, their spouses and/or orphans. There are thousands of eligible beneficiaries.

There is a personal obligation on the trustee to deal with trust property for the benefit of the beneficiaries, which obligation is also annexed to the property. You invest assets in accordance with the objectives of this Constitution. You have a duty to pay your beneficiaries when they are entitled.

You in this case would be most akin to a trust because you hold property for the benefit of the members. You are not a public trading trust within Division 6C of the ITAA 1936.

You currently have approximately thousands of individuals in receipt of either pension benefits or entitled to such benefits who will be considered your beneficiaries.

Therefore, you satisfy the requirement of having at least 50 members for the purpose of paragraph 275-20(4)(c) of the ITAA 1997.