Edited version of private advice

Authorisation Number: 1051624851288

Date of advice: 9 January 2020

Ruling

Subject: Withholding tax - interest and dividends - Double Tax Convention

Question 1

Are you exempt from withholding tax on interest paid on your Australian debt investments held in your own name and legal holding under Article 11 of the Double Tax Convention?

Answer

Yes.

Question 2

Are you exempt from withholding tax on dividends paid by Australian resident companies from the equity investments that you will acquire in your own name and legal holding under Article 10 of the Double Tax Convention?

Answer

Yes.

Question 3

Are you exempt from withholding tax on dividends paid by Australian resident companies from the investments held through the main fund and its sub-funds under Article 10 of the Double Tax Convention?

Answer

Yes.

Question 4

Are you exempt from withholding tax on interest paid on your Australian debt investments held through the main fund and its sub-funds under Article 11 of the Double Tax Convention?

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

Pension fund

1.     You are a pension fund that represents various contributing bodies in a foreign country, Country X.

2.     You are entered on the register of occupational pension schemes in Country X.

3.     You provide your insured members with occupational pension insurance in accordance with the laws of Country X.

4.     You were established and are domiciled in in Country X.

5.     You hold investment interests in numerous countries.

6.     Your object is to protect employees against the economic consequences of old age.

7.     All your management and investment decisions are undertaken in Country X by these bodies.

8.     The members of your key management bodies are all non-residents of Australia. Additionally, your executive managers are all non-residents of Australia.

9.     You do not carry on a business through a permanent establishment situated in Australia and do not perform independent personal services from a fixed base in Australia.

10.  You are treated as a company for Country X tax purposes.

11.  You are exempt from tax in Country X.

12.  The tax authority of Country X states that you are exempt from tax on the basis that you are a regulated pension fund in Country X.

Main fund and its sub-funds

13.  You hold investment interests in numerous countries, including Australia in your own name and legal holding.

14.  You also hold investment interests in numerous countries, including Australia, through the main fund and its sub-funds.

15.  The Fund Contract for the main fund (Fund Contract) embodies the main fund and the rights and duties of the fund management company (FMC), the custodian bank and the sole investor, which is you, by way of contractual arrangement. The FMC drafted the Fund Contract and, with the consent of the custodian bank, had it approved by the relevant Country X authority. The FMC's investment objective is to achieve an appropriate return of each particular sub-fund by investing in the various instruments listed in the Fund Contract.

16.  The FMC's role is to issue you, as the sole investor, with the number and type of units in the investment fund and manage the fund's assets.

17.  FMC holds legal title to the assets.

18.  You hold the units of the sub-funds for your members (beneficiaries) and represent their interests.

19.  The main fund and its sub-funds are not subject to income tax and are fiscally transparent in the Country X.

20.  The FMC manages the sub-funds on your account independently. It decides in particular about the issue of units, the investments and their valuation. It calculates the net asset value (NAV) and fixes the issue and redemption prices and profit distributions, as well as notifying you of the NAV. The FMC exercises all the rights belonging to the main fund and to the sub-funds.

21.  The FMC and its agents are subject to the duties of loyalty, care and information, or, in other words, they do not hold the assets for their own benefit. They act independently and safeguard only your interests.

22.  The custodian bank safeguards the assets of the sub-funds, deals with the issue and redemption of fund units and the payment transactions for the sub-funds. The custodian bank and its agents are subject to the duties of loyalty, care and information.

23.  You can terminate the Fund Contract at any time by requiring payment of your share in the sub-funds in cash. The Fund Contract does not otherwise interfere with this right. The fund manager can consent to a transfer of part of the portfolio at market value.

24.  You are beneficially entitled to the assets and income only of the sub-funds, in which you hold an interest. Only the relevant sub-funds are liable for the obligations relating to individual sub-funds.

Your Australian investments

Your investments in your own name and legal holding

25.  You invest in Australian debt instruments in Australia in your own name and legal holding upon which you derive interest income.

26.  These holdings include corporate bonds in Australian dollars and Country X currency, with gilt bonds in Australian dollars.

27.  You do not participate in the management, control or decision-making of any of the issuers of the debt instruments upon which you derive interest income.

28.  You do not have a special relationship with those payers who pay the interest on the debt instruments that you have invested in.

29.  Interest income arising from the Australian investments is paid by Australian residents for the purposes of Australian tax, and all such income is not connected to a permanent establishment or a fixed base situated outside Australia.

30.  You intend to purchase equity investments in Australian resident companies listed on the Australian Securities Exchange (ASX) from which you will derive dividends. These equity investments will be made in your own name and legal holding. You will hold no more than 10% of the voting power in the Australian resident companies paying dividends from these investments.

Your investments via the main fund and its sub-funds

31.  The main fund holds corporate bonds and common stock investments in various entities.

32.  The main fund's investments are held under sub-funds with their own respective asset managers to whom the investment decisions have been delegated. The Australian investments include shares, bonds and securities, which are respectively held under certain sub-funds.

33.  A sub-fund holds shares in Australian resident, ASX-listed companies which pay dividends in relation to those shares. The sub-fund holds no more than 10% of the voting power in the Australian resident companies paying dividends from the investments.

Assumptions

1.     The Australian resident companies that pay dividends from the investments held through the main fund and its sub-funds are not dual residents of both Australia and Country X, for the purposes of Article 4 of the applicable Double Tax Convention.

2.     The Australian resident companies that will pay dividends from the investments that you acquire in your own name and legal holding will not be dual residents of both Australia and the Country X, for the purposes of Article 4 of the applicable Double Tax Convention.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 128B

International Tax Agreements Act 1953 subsection 3AAA(1)

International Tax Agreements Act 1953 subsection 5(1)

Double Tax Convention Article 1

Double Tax Convention Article 2

Double Tax Convention Article 3

Double Tax Convention Article 4

Double Tax Convention Article 10

Double Tax Convention Article 11

Reasons for decision

Question 1

Are you exempt from withholding tax on interest paid on your Australian debt investments held in your own name and legal holding under Article 11 of the Double Tax Convention?

Summary

You are considered to be a person who is a resident of a Contracting State, and are therefore subject to the Double Tax Convention.

Interest income arising from the Australian investments held by you in your own name and legal holding meets the requirements of Article 11 of the Double Tax Convention and as such is exempt from withholding tax under the Double Tax Convention.

Detailed reasoning

A non-resident is liable to pay withholding tax under subsection 128B(5) of the Income Tax Assessment Act 1936 (ITAA 1936) if the 'non-resident' derives income that consists of interest and the requirements of subsection 128B(2) of the ITAA 1936 are satisfied in relation to that income. Subsection 128B(2) of the ITAA 1936 provides that:

Subject to subsection (3), this section... applies to income that:

(a) is derived... by a non-resident; and

(b) consists of interest that:

(i) is paid to the non-resident....

However, in determining liability to Australian tax on Australian source income derived by a non-resident, it is necessary to consider not only the income tax laws but also any applicable Convention or Double Taxation Agreement contained in the International Tax Agreements Act 1953 (the Agreements Act).

Section 4 of the Agreements Act incorporates that Act with the ITAA 1936 and the Income Tax Assessment Act 1997 (ITAA 1997) so that those Acts are read as one. The Agreements Act effectively overrides the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except for some limited provisions).

Double Tax Convention - application to your circumstances

In order for the Double Tax Convention to apply, Article 1 of the Double Tax Convention states:

This Convention shall apply to persons who are residents of one or both of the Contracting States.

You must therefore be considered both a 'person' and a 'resident of a Contracting State' for the Double Tax Convention to apply.

Person

Article 3 of the Double Tax Convention defines 'person' to include:

... an individual, a company, a trust and any other body of persons.

Article 3 of the Double Tax Convention defines a 'company' to mean:

... any body corporate or any entity which is treated as a company or body corporate for tax purposes.

You are treated as a company for tax purposes in the Country X. Therefore, you satisfy the definition of a 'company' pursuant to Article 3 of the Double Tax Convention. You are, therefore, considered to be a 'person' in accordance with Article 3 of the Double Tax Convention for the purposes of applying the Double Tax Convention.

Resident of a Contracting State

Paragraph 1 of Article 4 of the Double Tax Convention provides the following:

For the purposes of this Convention, the term "resident of a Contracting State" means any person who, under the laws of that State, is liable to tax as a resident of that State, and also includes the Government of that State and any political subdivision or local authority thereof. This term, however, does not include any person who is liable to tax in that State in respect only of income from sources in that State.

In addition, the Protocol to the Double Tax Convention states that, in relation to paragraph 1 of Article 4, it is understood that the term 'resident of a Contracting State' includes, in particular, a person that is a pension scheme established in that State.

Accordingly, you must be a pension scheme established in the Country X to satisfy the definition of a 'resident of a Contracting State' for the purposes of the Double Tax Convention.

You were established in the Country X and exist as a pension scheme. You are entered in the register of occupational pension schemes. You provide your insured members with occupational pension insurance. You are a 'pension scheme' under the Double Tax Convention.

This view is supported by the Country X tax authority.

For completeness, you are exempt from tax in Country X. As a result, due to you being not liable to pay tax in that place, prima facie, you do not satisfy paragraph 1 of Article 4 of the Double Tax Convention to be defined as a 'resident of a Contracting State'. However, as determined above, you are deemed to be a person and a pension scheme established in Country X.

You are, therefore, a resident of a Contracting State.

Conclusion

You meet the requirements of Article 1 of the Double Tax Convention and are therefore subject to its application.

Double Tax Convention - application to taxes

According to Article 2 of the Double Tax Convention, it applies to all taxes imposed on income and in particular applies to Australian income tax.

Section 128B of the ITAA 1936imposes liability to withholding tax on dividend, interest and royalty income derived by non-residents. As such, withholding tax payable in respect to interest to non-residents is considered to be an Australian income tax and is covered by the Double Tax Convention.

Interest income

Article 11 of the Double Tax Convention is the relevant provision in relation to interest income. The provision states the following:

1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.
2. However, such interest may also be taxed in the Contracting State in which it arises and according to the laws of that State, but if the beneficial owner of the interest is a resident of the other Contracting State, the tax so charged shall not exceed 10 per cent of the gross amount of the interest.

Under Article 11 of the Double Tax Convention, interest arising in a Contracting State and beneficially owned by a resident of the other Contracting State shall not be taxed in the first-mentioned State if the interest is derived by in the case of Country X, a pension scheme whose investment income is exempt from Country X tax.

For the withholding tax exemption under Article 11 of the Double Tax Convention to apply to you, in respect of an exemption from withholding tax on interest income, you must satisfy the following:

·                  there is interest that arises in Australia

·                  you are the beneficial owner of the interest and derive the interest

·                  you are a resident of Country X, and

·                  you are a pension scheme and your investment income is exempt from tax in Country X.

Interest that arises in Australia

Interest income arises from the Australian debt investments held by you in your own name and legal holding.

Additionally, all interest income arising from the Australian investments is paid by Australian residents for the purposes of Australian tax, and all such income is not connected to a permanent establishment or a fixed base situated outside Australia. Accordingly, interest income arises in Australia.

Therefore, interest arises in Australia from the Australian investments held by you in accordance with Article 11 of the Double Tax Convention.

The beneficial owner of the interest and derives the interest

You are the beneficial owner of the income which you derive from the Australian debt investments held in your own name and legal holding. As such, you are the beneficial owner of the interest.

Resident of the Country X

As determined above, you are a resident of the Country X as you satisfy the definition of a 'resident of a Contracting State' and were established in the Country X.

Pension scheme and investment income is exempt from tax in Country X

As determined above, you are a pension scheme, pursuant to the Double Tax Convention, and are exempt from tax in the Country X.

Other provisions of Article 11 of the Double Tax Convention

You do not meet any of the restrictions on the availability of the exemptions regarding your debt investments held in your own name and legal holding listed under Article 11 as:

a)     you do not operate through or have any permanent establishments, within the meaning of Article 5 of the Double Tax Convention, in Australia through which your investments are made or managed

b)     you do not and will not participate in the management, control or decision-making of any of the issuers of the debt instruments upon which you derive interest income

c)     no special relationship exists between the payer and you which results in the amount being paid exceeding the amount that would otherwise have been expected to have been paid had such a special relationship not been in existence.

Consequently, the restrictions, prescribed in the Double Tax Convention, to the availability of the exemptions from income and withholding tax on interest income will not be applicable in respect of the interest income derived by you on your Australian debt instrument investments.

Conclusion

You are a pension scheme whose investment income is exempt from tax in the Country X. In addition, you derive interest income from Australian debt investments held in your own name and legal holding.

As none of the restrictions prescribed in the Double Tax Convention regarding the availability of the exemptions from tax on interest income apply, Article 11 of the Double Tax Convention will operate to exempt you from withholding tax on interest paid to you from the Australian debt investments held in your own name and legal holding.

Question 2

Are you exempt from withholding tax on dividends paid by Australian resident companies from the equity investments that you will acquire in your own name and legal holding under Article 10 of the Double Tax Convention?

Summary

You are considered to be a person who is a resident of a Contracting State, and are therefore subject to the Double Tax Convention.

Dividends paid by Australian resident companies in which you will hold shares in your own name and legal holding meet the requirements of Article 10 of the Double Tax Convention and as such are exempt from withholding tax under the Double Tax Convention.

Detailed reasoning

Subsection 128B(1) of the ITAA 1936 provides that, subject to certain exclusions, section 128B of the ITAA 1936 will apply to income derived by a non-resident that consists of a dividend paid by an Australian resident company (franked dividends are specifically excluded from the operation of section 128B by paragraph 128B(3)(ga) of the ITAA 1936).

Subsection 128B(4) of the ITAA 1936 provides that a person who derives dividend income to which section 128B of the ITAA 1936 applies, is liable to pay withholding tax on that dividend income. The withholding tax rate applicable is generally 30% of the dividend amount (section 7 of the Income Tax (Dividends, Interest and Royalties Withholding Tax) Act 1974).

Unfranked dividends derived by the taxpayer from Australian resident companies are therefore subject to withholding tax.

However, in determining liability to Australian tax on Australian source income derived by a non-resident, it is necessary to consider not only the income tax laws but also any applicable Convention or Double Taxation Agreement contained in the Agreements Act.

Double Tax Convention - application to your circumstances

As determined above, you are deemed to be a person and a pension scheme established in the Country X. You are a resident of a Contracting State.

Furthermore, you meet the requirements of Article 1 of the Double Tax Convention and are therefore subject to its application.

Double Tax Convention - application to taxes

Article 2 of the Double Tax Convention provides that it applies to all taxes imposed on income and in particular applies to Australian income tax.

Section 128B of the ITAA 1936imposes liability to withholding tax on dividend, interest and royalty income derived by non-residents. As such, withholding tax payable in respect to interest to non-residents is considered to be an Australian income tax and is covered by the Double Tax Convention.

Dividend income

Article 10 of the Double Tax Convention is the relevant provision in relation to dividend income. The provision states relevantly:

1.     Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State.

2.     However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that State, but if the beneficial owner of the dividends is a resident of the other Contracting State, the tax so charged shall not exceed:

a)     ....

b)     15 per cent of the gross amount of the dividends in all other cases.

Notwithstanding the provisions of subparagraph 2b), dividends shall not be taxed in the Contracting State of which the company paying the dividends is a resident if the beneficial owner of the dividends holds, in the case of Australia, directly no more than 10 per cent of the voting power in the company paying the dividends and the beneficial owner is a pension scheme whose investment income is exempt from Country X tax.

For the Article 10 withholding tax exemption to apply to you, you must satisfy the following:

·                 there are dividends that are paid by companies that are residents of Australia,

·                 you derive and are the beneficial owner of the dividends,

·                 you hold directly no more than 10 per cent of the voting power in the companies paying the dividends, and

·                 you are a pension scheme and its investment income is exempt from tax in the Country X.

There are dividends that are paid by companies that are residents of Australia

You will hold shares in Australian resident companies which will pay dividends in relation to those shares.

Therefore, there will be dividends that are paid by companies that are residents of Australia from the investments held by you.

The beneficial owner of the dividends

You will be the beneficial owner of the dividend income which you will derive from the Australian equity investments to be held in your own name and legal holding.

You hold directly no more than 10 per cent of the voting power in the companies paying the dividends

You will hold directly no more than 10 per cent of the voting power in the Australian resident companies paying dividends from the equity investments you will hold.

Pension scheme and investment income is exempt from tax in the Country X

You are a pension scheme, pursuant to the Double Tax Convention, and are exempt from tax in the Country X.

Other provisions of Article 10 of the Double Tax Convention

Other provisions of Article 10 of the Double Tax Convention affect the exemption to withholding tax on dividends under the Double Tax Convention. These provisions do not apply to you, pursuant to the following:

·                 You do not carry on a business through a permanent establishment situated in Australia and do not perform independent personal services from a fixed base in Australia.

·                 The Australian resident companies that will pay dividends from the investments to be held in your own name and legal holding will not be not dual residents of both Australia and the Country X, pursuant to paragraph 1 of Article 4 of the Double Tax Convention.

Conclusion

You are a pension scheme whose investment income is exempt from tax in the Country X. In addition, you are the beneficial owner of dividends paid by companies that are Australian residents. Furthermore, you hold directly no more than 10 per cent of the voting power in the Australian resident companies paying dividends.

Therefore, Article 10 of the Double Tax Convention will operate to exempt you from withholding tax on dividends paid by Australian resident companies in respect of shares held in its own name and legal holding.

Question 3

Are you exempt from withholding tax on dividends paid by Australian resident companies from the investments held through the main fund and its sub-funds under Article 10 of the Double Tax Convention?

Summary

You are considered to be a person who is a resident of a Contracting State, and are therefore subject to the Double Tax Convention.

Dividends paid by Australian resident companies held through the main fund and its sub-funds meet the requirements of the withholding tax exemption under Article 10 of the Double Tax Convention and, as such, are exempt from withholding tax under the Double Tax Convention.

Detailed reasoning

Subsection 128B(1) of the ITAA 1936 provides that, subject to certain exclusions, section 128B of the ITAA 1936 will apply to income derived by a non-resident that consists of a dividend paid by an Australian resident company (franked dividends are specifically excluded from the operation of section 128B by paragraph 128B(3)(ga) of the ITAA 1936).

Subsection 128B(4) of the ITAA 1936 provides that a person who derives dividend income to which section 128B of the ITAA 1936 applies, is liable to pay withholding tax on that dividend income. The withholding tax rate applicable is generally 30% of the dividend amount (section 7 of the Income Tax (Dividends, Interest and Royalties Withholding Tax) Act 1974).

Unfranked dividends derived by you from Australian resident companies are, therefore, subject to withholding tax.

However, in determining liability to Australian tax on Australian source income derived by a non-resident, it is necessary to consider not only the income tax laws but also any applicable Convention or Double Taxation Agreement contained in the Agreements Act.

Double Tax Convention - application to your circumstances

As determined above, you are deemed to be a person and a pension scheme established in the Country X.

Furthermore, you meet the requirements of Article 1 of the Double Tax Convention and are therefore subject to its application.

Double Tax Convention - application to taxes

Paragraphs 1 and 2 of Article 2 of the Double Tax Convention, in respect to taxes covered, provides the following:

1.     This Convention shall apply to taxes on income imposed on behalf of a Contracting State and, in the case of [Country X], on behalf of its political subdivisions or local authorities, irrespective of the manner in which they are levied.

2.     There shall be regarded as taxes on income all taxes imposed on total income or on elements of income, including taxes on gains from the alienation of movable or immovable property, taxes on the total amounts of wages or salaries paid by enterprises, as well as taxes on capital appreciation.

In addition, subparagraph 3a) of Article 2 of the Double Tax Convention provides the following:

The existing taxes to which this Convention shall apply are in particular:

a)     in Australia:

the income tax, the fringe benefits tax and resource rent taxes imposed under the federal law of Australia;

(hereinafter referred to as "Australian tax");

Based upon the above, the Swiss Convention applies to all taxes imposed on income and in particular applies to Australian income tax.

Section 128B of the ITAA 1936imposes liability to withholding tax on dividend, interest and royalty income derived by non-residents. As such, withholding tax payable in respect to interest to non-residents is considered to be an Australian income tax and is covered by the Double Tax Convention.

Dividend income

Article 10 of the Double Tax Convention is the relevant provision in relation to dividend income. The provision is relevantly outlined above in the Detailed Reasoning to Question 2.

Notwithstanding the provisions of subparagraph 2b, dividends shall not be taxed in the Contracting State of which the company paying the dividends is a resident if the beneficial owner of the dividends holds, in the case of Australia, directly no more than 10 per cent of the voting power in the company paying the dividends and the beneficial owner is a pension scheme whose investment income is exempt from Country X tax.

For the Article 10 exemption to apply to you, to provide an exemption from withholding tax on dividends, you must satisfy the following:

·                 there are dividends that are paid by companies that are residents of Australia

·                 you derive and are the beneficial owner of the dividends

·                 you hold directly no more than 10 per cent of the voting power in the companies paying the dividends, and

·                 you are a pension scheme and its investment income is exempt from tax in the Country X.

There are dividends that are paid by companies that are residents of Australia

The sub-funds hold shares in Australian resident companies which pay dividends in relation to those shares.

Therefore, there are dividends that are paid by companies that are residents of Australia from the investments held by you through the main fund and its sub-funds.

The beneficial owner of the dividends

The term 'beneficial owner' is not defined under the Double Tax Convention.

Article 3 of the Double Tax Convention provides the following:

As regards the application of the Convention at any time by a Contracting State, any term not defined therein shall, unless the context otherwise requires, have the meaning that it has at that time under the law of that State for the purposes of the taxes to which the Convention applies, any meaning under the applicable tax laws of that State prevailing over a meaning given to the term under other laws of that State.

As such, the definition of the term 'beneficial owner' in relation to interest derived from an Australian source shall be guided by the context of its use in the Double Tax Convention or, without such context, by the laws of Australia for the purposes of taxation.

ATO Interpretive Decision ATO ID 2011/13 Income Tax Interest withholding tax: interest arising in Australia paid to a New Zealand Limited Partnership - 'beneficially owned' (ATO ID 2011/13)provides guidance in relation to the use of relevant context for interpreting Australian tax treaties and is therefore instructive in considering the application of paragraph 2 of Article 3 of the Double Tax Convention. It further provides guidance in relation to the definition of 'beneficial owner'.

ATO ID 2011/13 states the following:

Relevant context for the purposes of interpreting an Australian tax treaty includes the Commentaries on the OECD Model Tax Convention on Income and on Capital (the OECD Commentary). Paragraph 104 of Taxation Ruling TR 2001 / 13 states that the OECD Commentary provides important guidance on interpretation and application of the OECD Model Tax Convention and will often need to be considered as a matter of practice, in interpreting tax treaties, at least where the wording is ambiguous.

Paragraph 9 of the 2010 OECD Commentary on Article 11 of the Model Tax Convention states:

... The term 'beneficial owner' is not used in a narrow technical sense, rather, it should be understood in its context and in light of the object and purposes of the Convention, including avoiding double taxation and the prevention of fiscal evasion and avoidance.

Therefore, the term 'beneficial owner' should be used in a purposive sense in light of the operation of the Double Tax Convention.

In terms of Australian tax, ATO Interpretive Decision ATO ID 2008/61 Income Tax: 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) is relevant. ATO ID 2008/61 provides that, in respect of the particular arrangement in that decision, the relationship between the manager, custodian and the unitholder constitutes a trust relationship.

ATO ID 2008/61 refers to French J in Harmer & Ors v. FC of T 89 ATC 5180; (1989) 20 ATR 1461 who stated that a trust 'is notably a definition of a relationship by reference to obligations'.

Further, ATO ID 2008/61 provides the following:

His Honour went on to state that the four essential elements of a trust are:

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.

ATO ID 2008/61 states the following:

All four elements of a trust are present in the relationship between the manager, custodian and the unitholder of the CCF. The manager of the CCF, and in some cases the custodian, holds legal title to the assets of the CCF. The assets are not held by the manager and the custodian for their own benefit, but rather the deed obliges the manager and custodian to deal with the assets of the CCF on behalf of and in the best interests of the unitholder in the CCF. Accordingly, both the manager and the custodian are acting in a trustee capacity with respect to the assets of the CCF, being the trust property which initially arose from the unitholder's contributions to the CCF. A unitholder is beneficially entitled to a proportion of the underlying assets of the CCF in accordance with their unit holding and receives income from the investment of the CCF assets by the manager and/or custodian as it arises.

ATO ID 2008/61 concludes that where a trust relationship exists and the income accrues to the unitholder as it arises, the unitholder has a present legal entitlement to the income received by the fund.

Based upon your specific circumstances, you will be the beneficial owner of the dividends and will be considered to derive the dividends.

You hold directly no more than 10 per cent of the voting power in the companies paying the dividends

You hold directly no more than 10 per cent of the voting power in the Australian resident companies paying dividends from the investments held through main fund and its sub-funds.

Pension scheme and investment income is exempt from Country X tax

You are a pension scheme, pursuant to the Double Tax Convention, and are exempt from tax in Country X.

Other provisions of Article 10 of the Double Tax Convention

Other provisions of Article 10 of the Double Tax Convention affect the exemption to withholding tax on dividends under the Double Tax Convention. These provisions do not apply to you, pursuant to the following:

·                 You do not carry on a business through a permanent establishment situated in Australia and do not perform independent personal services from a fixed base in Australia.

·                 The Australian resident companies that pay dividends from the investments held through the main fund and its sub-funds are not dual residents of both Australia and the Country X, pursuant to paragraph 1 of Article 4 of the Double Tax Convention.

Conclusion

You are a Country X pension scheme whose investment income is exempt from Country X tax. In addition, you are the beneficial owner of dividends paid by Australian resident companies, held through the main fund and its sub-funds. Furthermore, you hold directly no more than 10 per cent of the voting power in the Australian resident companies paying dividends.

Therefore, Article 10 of Double Tax Convention will operate to exempt you from withholding tax on dividends paid by Australian resident companies from the investments held through the main fund and its sub-funds.

Question 4

Are you exempt from withholding tax on interest paid on your Australian debt investments held through the main fund and its sub-funds under of Article 11 of the Double Tax Convention?

Summary

Interest paid by Australian resident companies held through the main fund and its sub-funds meet the requirements of Article 11 of the Double Tax Convention and, as such, are exempt from withholding tax under the Double Tax Convention.

Detailed reasoning

A non-resident is liable to pay withholding tax under subsection 128B(5) of the Income Tax Assessment Act 1936 (ITAA 1936) if the 'non-resident' derives income that consists of interest and the requirements of subsection 128B(2) of the ITAA 1936 are satisfied in relation to that income. Subsection 128B(2) of the ITAA 1936 provides that:

Subject to subsection (3), this section... applies to income that:

(a) is derived... by a non-resident; and

(b) consists of interest that:

(i) is paid to the non-resident....

However, in determining liability to Australian tax on Australian source income derived by a non-resident, it is necessary to consider not only the income tax laws but also any applicable Convention or Double Taxation Agreement contained in the International Tax Agreements Act 1953 (the Agreements Act).

Section 4 of the Agreements Act incorporates that Act with the ITAA 1936 and the Income Tax Assessment Act 1997 (ITAA 1997) so that those Acts are read as one. The Agreements Act effectively overrides the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except for some limited provisions).

Double Tax Convention - application to your circumstances

As determined above, you are deemed to be a person and a pension scheme established in Country X.

Furthermore, you meet the requirements of Article 1 of the Double Tax Convention and are therefore subject to its application.

Double Tax Convention - application to taxes

Paragraphs 1 and 2 of Article 2 of the Double Tax Convention, in respect to taxes covered, provides the following:

1.     This Convention shall apply to taxes on income imposed on behalf of a Contracting State and, in the case of Country X, on behalf of its political subdivisions or local authorities, irrespective of the manner in which they are levied.

2.     There shall be regarded as taxes on income all taxes imposed on total income or on elements of income, including taxes on gains from the alienation of movable or immovable property, taxes on the total amounts of wages or salaries paid by enterprises, as well as taxes on capital appreciation.

In addition, subparagraph 3a) of Article 2 of the Double Tax Convention provides the following:

The existing taxes to which this Convention shall apply are in particular:

a)     in Australia:

the income tax, the fringe benefits tax and resource rent taxes imposed under the federal law of Australia;

(hereinafter referred to as "Australian tax");

Based upon the above, the Double Tax Convention applies to all taxes imposed on income and in particular applies to Australian income tax.

Section 128B of the ITAA 1936imposes liability to withholding tax on dividend, interest and royalty income derived by non-residents. As such, withholding tax payable in respect to interest to non-residents is considered to be an Australian income tax and is covered by the Double Tax Convention.

Interest income

Article 11 of the Double Tax Convention is the relevant provision in relation to interest income. The provision states the following:

1.     Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.

2.     However, such interest may also be taxed in the Contracting State in which it arises and according to the laws of that State, but if the beneficial owner of the interest is a resident of the other Contracting State, the tax so charged shall not exceed 10 per cent of the gross amount of the interest.

Further under Article 11 of the Double Tax Convention, interest arising in a Contracting State and beneficially owned by a resident of the other Contracting State shall not be taxed in the first-mentioned State if the interest is derived by in the case of Country X, a pension scheme whose investment income is exempt from Country X tax.

For the withholding tax exemption under Article 11 of the Double Tax Convention to apply to you, in respect of an exemption from withholding tax on interest income, you must satisfy the following:

·                 there is interest that arises in Australia

·                 you are the beneficial owner of the interest

·                 you are a resident of Country X, and

·                 you are a pension scheme and you investment income is exempt from Country X tax.

Interest that arises in Australia

Interest income arises from the Australian investments held by you through the main fund and its sub-funds.

Additionally, all interest income arising from the Australian investments is paid by Australian residents for the purposes of Australian tax, and all such income is not connected to a permanent establishment or a fixed base situated outside Australia. Accordingly, interest income arises in Australia.

Therefore, interest arises in Australia from the Australian investments held by you through main fund and its sub-funds in accordance with subparagraph Article 11 of the Double Tax Convention.

The beneficial owner of the interest

For the purposes of the Double Tax Convention, you are the beneficial owner of the income which you receive via the main fund and its sub-funds, which are not entities for the purposes of Country X law or the Double Tax Convention, but contractual relationships which are fiscally transparent. Based upon your specific circumstances, you will be the beneficial owner of the interest and will be considered to derive the interest.

Resident of Country X

As determined above, you are a resident of Country X as satisfy the definition of a 'resident of a Contracting State'.

Pension scheme and investment income is exempt from Country X tax

As determined above, you are a pension scheme, pursuant to the Double Tax Convention, and are exempt from tax in Country X.

Other provisions of Article 11 of the Double Tax Convention

You do not meet any of the restrictions on the availability of the exemptions regarding your debt investments held via the main fund and its sub-funds listed under Article 11 as:

a)     you do not operate through or have any permanent establishments, within the meaning of Article 5 of the Double Tax Convention, in Australia through which your investments are made or managed.

b)     you do not and will not participate in the management, control or decision-making of any of the issuers of the debt instruments upon which you derive interest income.

c)     no special relationship exists between the payer and you which results in the amount being paid exceeding the amount that would otherwise have been expected to have been paid had such a special relationship not been in existence.

Consequently, the restrictions, prescribed in the Double Tax Convention, to the availability of the exemptions from income and withholding tax on interest income discussed above will not be applicable in respect of the interest income derived by you on your Australian debt instrument investments held via the main fund and its sub-funds.

Conclusion

You are a Country X pension scheme whose investment income is exempt from Country X tax. In addition, you derive interest income from Australian debt investments held via the main fund and its sub-funds.

As none of the restrictions prescribed in the Double Tax Convention regarding the availability of the exemptions from tax on interest income apply, Article 11 of the Double Tax Convention will operate to exempt you from withholding tax on interest paid to you from the Australian debt investments via the main fund and its sub-funds.