Edited version of private advice

Authorisation Number: 1051618607056

Date of advice: 17 December 2019

Ruling

Subject: Superannuation fund for foreign residents - withholding tax exemption

Question

Is the Entity A on behalf of the Pension Plan excluded from liability to withholding tax on its interest, dividend and non-share dividend income derived in respect of its investments, listed in Appendix 1 to the relevant facts and circumstances of this Ruling, under paragraph 128B(3)(jb) of the ITAA 1936?

Answer

Yes.

This ruling applies for the following period:

1 July 2019 to 30 June 2024

The scheme commences on:

1 July 2019

Relevant facts and circumstances

Background to the Pension Plan

1.     The Pension Plan is a defined benefit pension plan.

2.     The Pension Plan was established outside of Australia pursuant to the relevant laws.

3.     The Pension Plan's legislation (the Act) provides the rules for the plan in relation to both contributions and benefits. Both the employer and employee make contributions. The Act in its entirety, forms part of the scheme to which this ruling relates.

4.     The Act requires the Government to meet all pension obligations arising from the Pension Plan.

5.     The Pension Plan is managed by Entity A.

6.     The Pension Plan's central management and control is not in Australia. All investment decisions relating to the Pension Plan assets are made outside Australia.

Entity A

7.     Entity A is established by statute to manage the Pension Plan. Its shares are held by the Government.

8.     The objects of Entity A are to manage amounts that are transferred to itin the best interests of the contributors and beneficiaries under those Pensions Plans. Entity A is also required to invest the assets with a view to achieving a maximum rate of return, without undue risk of loss, having regard to the funding policies and requirements of the Pension Plans established and the ability of those plans to meet their financial obligations.

9.     Entity A invests on behalf of a number of Pension Plans used to provide retirement benefits.

10.  Entity A maintains strictly separate accounts for each of the pension plans for which it invests.

11.  Entity A was established in outside Australia, and has its central management and control outside Australia.

12.  Entity A is exempt from income tax in the country in which it resides.

13.  Entity A cannot be wound up except by legislation.

14.  Entity A on behalf of the Pension Plans invests directly into Australia and owns a number of Australian assets in its own name. The first entry point into Australia is directly owned by Entity A on behalf of the Pension Plans and there are no interposed non-resident entities in the investment structure.

15.  Entity A also makes some investments indirectly into Australia via its wholly owned subsidiaries. For the avoidance of doubt, this ruling does not cover these investments.

16.  Entity A has its costs covered by the relevant pension plan to who the costs relate.

Benefits provided by the Pension Plan

17.  Both employees and employers contribute to the Pension Plan depending on the level of an employee's salary.

18.  Broadly, the Pension Plan provides benefits to members as follows:

a.     A defined benefit upon the age of retirement with at least two years of pensionable service or if they are 55 and have 30 years of pensionable service.

b.     If an employee leaves their employment, they may choose from a number of options based on the length of their service:

·        Under two years of service the employee is only entitled to a return of contributions.

·        Over two years of service the employee can choose from a return of contributions, an immediate annuity, a deferred annuity, an annual allowance, a transfer value, a transfer of their service to a new employer's pension plan if the new employer has an agreement in place with the Pension Plan.

c.      Disability benefits.

d.     Death and survivor benefits.

e.     A member may also receive a bridge payment, which is a monthly amount payable to members in addition to their normal monthly benefit. The additional component exists to ensure a stable retirement income is paid from the time the annuity or allowance commences and continues until the annuitant reaches age 65, or becomes entitled to a disability pension under the Pension Plan.

Other relevant facts

19.  Employees can transfer their pension benefits and/or service to another fund. A person opting for a transfer value ceases to be a member and is no longer entitled to any benefits under the Pension Plan.

20.  The Pension Plan is exempt from income tax in the country in which it resides.

21.  Entity A on behalf of the Pension Plan will receive interest income from Australian investments, along with dividend and non-share dividend income from companies who are residents of Australia for tax purposes.

22.  Amounts paid to, or set aside for, the Pension Plan have not been and cannot be deducted under the Income Tax Assessment Act 1997 (ITAA 1997).

23.  The Pension Plan has not been allowed a tax offset or a tax offset is not allowable for an amount that has been paid to it.

24.  Entity A's income from its Australian investments is not non-assessable non-exempt income because of:

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

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

Entity A's Australian investments

25.  Entity A has invested in Australian equity investments. These equity investments have the following characteristics:

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

b.     Entity A holds less than 10% of the total equity interests on issue of each Australian company or trust.

c.      Neither Entity A, nor any related party of Entity A has any involvement in the day to day management of the business of any of the Australian companies or trusts.

d.     Entity A has no right to appoint a director to the Board of Directors of the Australian company or equivalent role in a trust.

e.     Entity A 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.       Entity A 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.     Entity A only holds rights to vote in proportion to its equity interest in each Australian company or trust.

26.  Entity A has invested in Australian debt investments. These debt investments have the following characteristics:

a.     All investments are listed on the ASX.

b.     The investments are either corporate, securitised, index linked, and Government debt investments and treasuries from which it will ordinarily derive income in the form of interest.

c.      Entity A holds less than 10% of the total interests on issue of each Australian debt issuer.

d.     Entity A has no involvement in the day to day management of the business of any of the Australian debt issuers.

e.     Entity A has not acquired the right to appoint a director to the Board of Directors of any issuing debt issuer.

f.       Entity A has not acquired the right to representation on any investor representative or advisory committees (or similar) of any issuing Australian debt issuer.

g.     Entity A has no ability to direct or influence the operation of the Australian debt issuer outside of the ordinary right conferred by the debt interest held.

h.     Entity A has no voting rights in respect of the debt investments held.

i.       There are no special relationships or arrangements between Entity A and the issuers of any Australian debt investment to be held which affect the amount of interest income that will be paid from those investments.

Relevant legislative provisions

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

Question

Is Entity A on behalf of the Pension Plan excluded from liability to withholding tax on its interest, dividend and non-share dividend income derived in respect of its investments, listed in Appendix 1 to the relevant facts and circumstances of this Ruling, under paragraph 128B(3)(jb) of the ITAA 1936?

Detailed reasoning

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

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

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

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

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

The Pension Plan is a non-resident

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

Therefore, the Pension Plan satisfies this requirement.

Superannuation fund for foreign residents

Section 118-520 of the ITAA 1997 provides:

(1)             A fund is a superannuation fund for foreign residents at a time if:

(a)             at that time, it is:

(i)               an indefinitely continuing fund; and

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

(b)             it was established in a foreign country; and

(c)             it was established, and is maintained at that time, only to provide benefits for individuals who are not Australian residents; and

(d)             at that time, its central management and control is carried on outside Australia by entities none of whom is an Australian resident.

(2)             However, a fund is not a superannuation fund for foreign residents if:

(a)             an amount is paid to the fund or set aside for the fund has been or can be deducted under this Act; or

(b)             a *tax offset has been allowed or is allowable for such an amount.

1. An indefinitely continuing fund

The Pension Plan is a pension plan, created, sponsored and managed by the Government on the country in which it resides. The Pension Plan provides defined benefit pensions to employees for their retirement. There is no indication that the Pension Plan is to be wound up in the near future. Its actuary and annual reports have projections for the sustainability of the Pension Plan for the foreseeable future.

Entity A as fund manager similarly has no termination date. Entity A can, according to its legislation, only be would up by an Act of Government.

There is sufficient evidence to accept that the Pension Plan will continue to operate in accordance with the relevant statutes for an indefinite period of time.

Therefore, the Pension Plan satisfies this requirement.

2. A provident, benefit, superannuation or retirement fund

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

ATO Interpretative Decision ATO ID 2009/67 Income Tax: Superannuation fund for foreign residents (ATO ID 2009/67) 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).

The above establish that for a fund to qualify as a provident, benefit, superannuation or retirement fund, it must have the sole purpose of providing retirement benefits or benefits in other allowable contemplated contingencies (such as death, disability or serious illness).

Broadly, the Pension Plan provides benefits to members as follows:

a.     A defined benefit upon the age of retirement with at least two years of pensionable service, where the employee has 25 years of service, or if they are 55 and have 30 years of pensionable service.

b.     If an employee leaves their employment, they may choose from a number of options based of the length of their service:

·        Under two years of service the employee is only entitled to a return of contributions.

·        Over two years of service the employee can choose from a return of contributions, an immediate annuity, a deferred annuity, an annual allowance, a transfer value, a transfer of their service to a new employer's pension plan if the new employer has an agreement in place with the Pension Plan.

c.      Disability benefits.

d.     Death and survivor benefits.

a.     A member may also receive a bridge payment, which is a monthly amount payable to members in addition to their normal monthly benefit. The additional component exists to ensure a stable retirement income is paid from the time the annuity or allowance commences and continues until the annuitant reaches age 65, or becomes entitled to a disability pension under the Pension Plan.

There are no benefits provided by the Pension Plan to contributors and beneficiaries beyond those as prescribed above. The Commissioner accepts that the alternate circumstances of access to the funds, being incapacity, death, the transfer of funds to another retirement fund, and a return of contributions in very limited circumstances align to the contemplated contingencies of a provident, benefit, superannuation or retirement fund.

All monies managed by Entity A on behalf of the Pension Plan are used solely for the purposes of administering and paying out benefits under the Pension Plan.

Therefore, the Pension Plan satisfies this requirement.

3.     Established in a foreign country

The Pension Plan was established outside of Australia.

Therefore, the Pension Plan satisfies this requirement.

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

The Pension Plan was established outside Australia for its members. These employees reside outside Australia.

Therefore, the Pension Plan satisfies this requirement.

5.     Central management and control (CM&C)

Paragraphs 20 and 21 of Taxation Ruling TR 2008/9 Income tax: meaning of 'Australian superannuation fund' in subsection 295-95(2) of the Income Tax Assessment Act 1997 (TR 2008/9) states:

20. The CM&C of a superannuation fund involves a focus on the who, when and where of the strategic and high level decision making processes and activities of the fund. In the context of the operations of a superannuation fund, the strategic and high level decision making processes includes:

·        formulating the investment strategy for the fund;

·        reviewing and updating or varying the fund's investment strategy as well as monitoring and reviewing the performance of the fund's investments;

·        if the fund has reserves - the formulation of a strategy for their prudential management; and

·        determining how the assets of the fund are to be used to fund member benefits.

21. The other principal areas of operation of a superannuation fund that form part of the day-to-day or operational side of the fund's activities will not constitute CM&C. These activities do not form part of the CM&C of the fund because they are not of a strategic or high level nature. Rather, these activities are of a more formalistic or administrative nature. Examples of such activities include the acceptance of contributions that are made on a regular basis, the actual investment of the fund's assets, the fulfilment of administrative duties and the preservation, payment and portability of benefits.

The CM&C of the Pension Plan is exercised by elements of the Government and Entity A which is incorporated and with its board of directors located outside Australia.

None of these entities are Australian residents.

Therefore, the Pension Plan satisfies this requirement.

6. Subsection 118-520(2)

The Pension Plan has not and cannot deduct amounts under either the ITAA 1997 or the ITAA 1936 for amounts paid to it. The Pension Plan has not been allowed a tax offset or a tax offset is not allowable for an amount that has been paid to it.

Therefore, the Pension Plan satisfies this requirement.

7. Conclusion

As all of the above requirements are satisfied, the Pension Plan meets the requirements of being a superannuation fund for foreign residents as defined by section 118-520 of the ITAA 1997.

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

The assets of the Plan are invested by Entity A. Entity A is a non-resident entity and is exempt from income tax in the country in which it resides. The Pension Plan is also exempt from income tax in the country in which it resides as it is a registered pension plan.

Therefore, the Pension Plan satisfies this requirement.

Subsection 128(3CA) of the ITAA 1936

Please note for the purposes of this section references to Entity A are references to Entity A on behalf of the Pension Plan.

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

Relevantly:

i.         Entity A must satisfy the 'portfolio interest test' in relation to the test entity (subsection 128B(3CC) of the ITAA 1936)

ii.        Entity A must satisfy the 'influence test' (subsection 128B(3CD) of the ITAA 1936) in relation to the test entity, and

iii.       The income cannot otherwise be non-assessable non-exempt income because of:

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

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

1. Entity A satisfies the 'portfolio interest test'

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

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

(a) is less than 10%; and

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

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

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

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

Entity A therefore satisfies the 'portfolio interest test' in respect of its current investments.

2. Entity A satisfies the 'influence test'

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

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

(a) the superannuation fund:

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

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

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

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

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

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

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

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

Relevantly, Entity A's current investments:

a.     Neither Entity A, nor any related party, has involvement in the day to day management of the business of any of the Australian companies, trusts, or Australian debt issuer.

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

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

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

e.     Entity A only holds rights to vote in proportion to its equity interest in each Australian company, trust, or Australian debt issuer.

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

3. Otherwise non-assessable non-exempt

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

Conclusion

Entity A on behalf of the Pension Plan is excluded from withholding tax in relation to interest, dividend and non-share dividend income derived from its current investments.

Further issues for you to consider:

We understand that Entity A intends to acquire additional Australian investments on behalf of the Pension Plan from the Ruling issue date to the end of the period to which this Ruling applies ('New Investments').

This Ruling will apply to income derived in respect of New Investments that are acquired by Entity A on behalf of the Pension Plan so long as:

·        there are no material changes to the relevant facts of circumstances of this Ruling

·        Entity A on behalf of the Pension Plan satisfies the 'portfolio interest test' referred to in paragraph 128B(3CA)(a) of the ITAA 1936 in relation to the New Investments

·        Entity A on behalf of the Pension Plan does not have influence of a kind described in subsection 128B(3CD) of the ITAA 1936 in relation to the New Investments, and

·        The New Investments satisfy either of the following:

-        For equity investments - each New Investment has all of the characteristics that are listed in fact 25 of this Ruling.

-        For debt investments - each New Investment has all of the characteristics that are listed in fact 26 of this Ruling.