Edited version of private advice

Authorisation Number: 1051621403417

Date of advice: 19 December 2019

Ruling

Subject: Foreign superannuation fund withholding tax exemption

Question 1

Is the Fund excluded from liability to withholding tax on its interest and/or dividend income under paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

Question 2

Is interest and/or dividend income derived by the Fund not assessable and not exempt income of the Fund under section 128D of the ITAA 1936?

Answer

Yes

This ruling applies for the following periods:

·   1 January 20XX - 31 December 20XX

·   1 January 20XX - 31 December 20XX

·   1 January 20XX - 31 December 20XX

·   1 January 20XX - 31 December 20XX

·   1 January 20XX - 31 December 20XX

·   1 January 20XX - 31 December 20XX

·   1 January 20XX - 30 June 20XX

Due to amended legislation a ruling can only be issued up until 30 June 2019.

The scheme commences on:

1 January 20XX

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

1.    The Fund was established in and is a resident of Country A, a foreign jurisdiction.

2.    Management and administration of the Fund is undertaken by a Board of Trustees (The Board). The Board consists of employer and member sponsored trustee directors. The Board is responsible for the decision making in relation to the Fund which is carried on in Country A. None of the Board member is a resident of Australia.

3.    The Fund was established to provide benefits for members of the Fund, none of which are Australian residents.

4.    The Fund's central management and control is carried on outside Australia by persons none of whom is a resident of Australia.

5.    In Country A, the Fund is exempt from income tax on the Australian income derived from the Australian investments.

6.    The Fund offers a defined benefit scheme where the employee member will receive a pension (based on years of service and a calculation of their final average salary) on retirement and a defined contribution scheme where the benefits are directly related to the contributions or investment returns on the contributions.

7.    Benefits received by members of the Fund include a pension for life after retirement, tax-free withdrawals at retirement age and death and disability benefits.

8.    A member may not borrow against, sell, give-away or in any other way dispose of Fund benefits.

9.    The Fund is an indefinitely continuing fund.

10.  The income derived by the Fund includes interest and dividends paid by Australian companies listed on the Australian Securities Exchange (ASX).

11.  No amounts have been paid to the Fund or set aside to be paid to the Fund can be deducted under the Income Tax Assessment Act 1997 (ITAA 1997) or the ITAA 1936. Further, no amounts have been paid to the Fund or set aside or be paid to the Fund, for which a tax offset has been allowed, or would be allowable, under this Act.

Relevant legislative provisions

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

Income Tax Assessment Act 1936 Section 128D

Income Tax Assessment Act 1997 Section 118-520

Reasons for decision

Question 1

Summary

The Fund is excluded from liability to withholding tax on its interest and/or dividend income under paragraph 128B(3)(jb) of the ITAA 1936.

Detailed reasoning

Paragraph 128B(3)(jb) of the ITAA 1936 excludes interest and dividend income from withholding tax where that income:

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 term 'superannuation fund for foreign residents' is defined in section 118-520 of the ITAA 1997 as follows:

118-520(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.

118-520(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 excluded from withholding tax on interest and dividend income that it derives for investments into Australia under paragraph 128B(3)(jb) of the ITAA 1936, it must be established that it:

1. is a non-resident
2. is an indefinitely continuing fund
3. is a provident, benefit, superannuation or retirement fund
4. was established in a foreign country
5. was established and maintained only to provide benefits for individuals who are not Australian residents
6. has its central management and control carried on outside of Australia by entities none of whom are Australian residents
7. does not receive or have amounts set aside for it that have been or can be deducted under the ITAA 1997 or ITAA 1936.
8. does not receive or have amounts set aside for it that give rise to a tax offset
9. receives income that consists of interest, or consists of dividends or non-share dividends paid by a company that is an Australian resident, and
10. is exempt from income tax in the country in which the non-resident resides.

Non-resident

The Fund is a resident of the Country A, a foreign jurisdiction. As such, it will meet this requirement.

Indefinitely continuing fund

The Fund is an indefinitely continuing fund. The Fund was established to provide benefits for members of the Fund, none of which are Australian residents.

Provident, benefit, superannuation or retirement fund

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

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.

Therefore, the Plan satisfies subparagraph (a)(ii) of the definition of 'superannuation fund for foreign residents' in section 118-520 of the ITAA 1997.

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 Fund provides retirement benefits to its members upon the satisfaction of eligibility requirements based upon their age and years of service which are paid upon and following retirement. It also provides disability benefit and death benefits to member's dependents. A member can transfer the value of the Fund benefits to another pension scheme subject to Trustee consent and the new plan accepting the transfer. However, a member may not borrow against, sell, give-away or in any other way dispose of the Fund benefits. The alternate circumstances of access in this case, being death and disability, align to the contemplated contingencies of a provident, benefit, superannuation or retirement fund. As such, element 3 above is satisfied.

Established in a foreign country

The Fund was established in Country A. As such, this element is satisfied.

Established and is maintained only to provide benefits for individuals who are not Australian residents

The Fund is established to provide benefits to the members of the Fund all of whom are not Australian residents. 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 was not established for individuals who are not Australian residents. As such, element 5 above is satisfied.

Central management and control is carried on outside Australia by entities none of whom is an Australian resident

The Fund's central management and control is carried on outside Australia by persons none of whom is a resident of Australia.

Does not receive, or have amounts set aside for it, that have been or can be deducted under the ITAA 1936 or ITAA 1997 or that give rise to a tax offset

As stated in the relevant facts and circumstances no amount paid to the Fund or set aside for the Fund has been and cannot be deducted under the ITAA 1936 or 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.

As such, elements 7 and 8 above are satisfied.

Receives income that consists of interest, or consists of dividends or non-share dividends paid by a company that is an Australian resident

The Fund receives Australian sourced income in the form of interest and dividends from Australian ASX listed companies.

Is exempt from income tax in the country in which it resides

The Fund has provided certification that it is exempt from taxation in Country A and that it is considered a resident of that country for its taxation purposes. As such, element 10 above is satisfied.

Accordingly, as all of the above elements are satisfied, the Fund will be excluded from liability to interest, dividend and non-share dividend withholding tax under paragraph 128B(3)(jb) of the ITAA 1936.

Question 2

Summary

The interest and/or dividend income derived by the Fund from Australia is not assessable and not exempt income of the Fund under section 128D of the ITAA 1936.

Detailed reasoning

Section 128D of the ITAA 1936 provides:

'Income other than income to which section 128B applies by virtue of subsection (2A), (2C) or (9C) of that section upon which withholding tax is payable, or upon which withholding tax would, but for paragraph 128B(3)(ga),(jb) or (m), section 128F, section 128FA or section 128GB, be payable, is not assessable income and is not exempt income of a person.'

Dividend and interest income derived by the Fund would be subject to withholding tax under subsections 128B(1) and 128B(2) of the ITAA 1936 respectively, but for the operation of the withholding tax exemption under paragraph 128B(3)(jb) of the ITAA 1936.

As determined in Question 1 above, the Fund is excluded from liability to interest, dividend and non-share dividend withholding tax under paragraph 128B(3)(jb) of the ITAA 1936 as the Fund is a 'superannuation fund for foreign residents' as defined in section 118-520.

As paragraph 128B(3)(jb) of the ITAA 1936 is specifically referred to in section 128D of the ITAA 1936 any interest or dividend income derived by the Fund will be considered not assessable not exempt income under section 128D of the ITAA 1936.