Edited version of private advice

Authorisation Number: 1051618785877

Date of advice: 16 December 2019

Ruling

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

Question

Is the Fund 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 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:

1 July 20XX

Relevant facts and circumstances

The Fund

1.    The Fund is a 'Pension Trust Fund' for 'Participating Employers' of the foreign county.

2.    The Fund is one of the county retirement systems in the foreign country.

3.    The Fund is a defined benefit pension program governed by the foreign countries relevant state legislation.

4.    Members are current or former permanent employees of 'Participating Employers'.

Benefits Provided

5.    The Member benefits guide (the Guide) published on the Fund's website provides detailed information about the retirement plans provided to eligible permanent employees.

6.    The Guide provides that 'benefits are governed by the foreign countries relevant state legislation' and any discrepancies between the law and the information provided in the Guide 'will be resolved in accordance with the law.'

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

·         service retirement

·         disability retirement - service and non-service connected

·         death and survivor benefits

·         deferred retirement benefits, and

·         annual cost-of-living adjustment (COLA) of retirement benefits.

8.    Eligibility requirements to qualify for these benefits and the benefits paid are determined by a member's retirement plan and category of membership. An employee's plan membership is determined by the employee's date of hire for a permanent position.

9.    The Fund is not used for any purpose other than providing pension benefits to participants and former participants and their beneficiaries under the Fund and paying the reasonable expenses of administering the Fund.

10.  A member's contributions to the Fund are held in trust by the Fund and these contributions are deposited in an account created in the member's name. The member cannot borrow from this account at any time and cannot withdraw employer contributions under any circumstances.

11.  If a member leaves 'active service' and is not yet eligible for service retirement, one of the options available to the employee is to withdraw all contributions. The funds withdrawn can either be rolled over to an individual retirement account or another qualified tax-deferred plan or taken as cash less mandatory withholding tax and any applicable foreign country tax.

Management and Investment

12.  The foreign Countries State legislation provides that the Board has sole and exclusive authority for all matters relating to the management and administration of the Fund.

13.  The Board is responsible for establishing and maintaining the Fund's investment policy.

14.  The Board delegates authority to manage the Fund's assets to investment staff in accordance with the Fund's investment policy.

15.  The Fund enters into Investment Management Agreements (IMA) with independent investment managers. Upon the Fund entering into an IMA, the Fund transfers cash (which may include employee contributions, employer contributions and investment earnings) to an account held in The Fund's name with a custodian. These funds are then used to purchase equity investments on behalf of the Fund by the independent investment managers.

16.  Equity investments, along with any earnings and capital growth are held in the Fund's name with the custodian. Independent managers are prohibited from taking possession, title or ownership of any of the assets under the terms of the IMAs.

17.  The Fund holds Australian equity investments detailed in Appendix 1.

Other Relevant facts

18.  The Fund is not a resident of Australia for tax purposes.

19.  The Fund is exempt from taxation in the Country in which it resides.

20.  An amount paid to the Fund or set aside for the Fund has not been and cannot be deducted under the Income Tax Assessment Act 1997 (ITAA 1997).

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

22.  The Fund will receive interest income, along with dividend and non-share dividend income from companies who are residents of Australia for tax purposes.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 section 118-520

Reasons for decision

Is the Fund 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

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(4) of the ITAA 1936), interest income (subsection 128B(5) 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

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

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

(c)  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;

(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], www.macquariedictionary.com.au defines 'indefinitely' and 'continuing' as follows:

Indefinite:

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 was created with the main purpose of providing pension benefits to participants and former participants and their beneficiaries.

The laws that govern the Fund give no indication that it will end at a defined point in time.

Therefore, the Fund satisfies this requirement.

The Fund is 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 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) provides 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 establishes 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 laws that govern the Fund set out the pension benefits if a member retires from work and other benefits provided to their dependants if the member dies in service or in retirement. There are no circumstances outside of the benefits set out in these laws under which a member can obtain benefits from the Fund.

The circumstances in which a member of the Fund can receive the funds are consistent with those of a provident, benefit, superannuation or retirement fund as they are only provided after attaining a retirement age or 'contemplated contingencies' such as death or incapacity.

As the operation of the Fund has the sole purpose of providing retirement benefits, the Fund is considered to be 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 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 was established and maintained in the foreign country for eligible employees. The Fund operates to provide retirement benefits for its Members in the foreign country and there are no eligible employees that are Australian residents.

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.

Therefore, the Fund satisfies this requirement.

The central management and control of the Fund is carried on outside of Australia by entities none of whom are Australian residents

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, paragraph 10 and 11 of the 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 registered office of the Fund is in the foreign countries state. The decision making and management of the Fund is undertaken by the Board. The Fund is managed by the Board in accordance with the laws that govern the Fund and the regulations, procedures and policies adopted by the Board. The Board consists of members who are either appointed or elected in accordance with these laws.

Based on the above, it is reasonable to conclude that the central management and control 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

The Fund has not and cannot deduct amounts under either the ITAA 1997 or the ITAA 1936 for amounts paid to it. The Fund 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 Fund satisfies these requirements.

Conclusion

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

Consists of interest or dividend and/or non-share dividends paid by a company that is a resident

The Fund receives interest income from Australia, 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 in which it resides.

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.