Edited version of private advice

Authorisation Number: 1051634283772

Date of advice: 11 February 2020

Ruling

Subject: Withholding taxes

Question

Is Fund A excluded from liability to withholding tax on interest, dividend and non-share dividend income derived from its current investments under paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Fund A was established in Country A, which is not Australia.

Fund A is not a resident of Australia for tax purposes.

Fund A manages the portfolio of funds of the funded contribution assets of the pension system in its country of residence.

There is no contemplation of Fund A ending at a defined point in time and there is no expectation that the fund will be discontinued.

The earliest members can start to draw from their pension is age 61.

Fund A also provides survivor benefits where a member dies.

Fund A has a board of directors. The board of directors represents Fund A and is responsible for the organisation of each of the Funds and the management of each of the Funds' assets. Members of the board of Fund A must be citizens of Country A and shall be appointed by the Government on the basis of their expertise in furthering asset management.

Fund A's head office is located in Country A.

An amount paid to Fund A or set aside for Fund A has not been and cannot be deducted under the ITAA 1997. A tax offset has not been allowed nor would be allowable for any amount paid to Fund A or set aside for Fund A.

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

Fund A has invested in Australian equity investments that have the following characteristics:

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

b.            Fund A holds less than 10% of the total participation interests in each Australian company, trust or real estate investment trust (REIT).

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

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

e.            Neither Fund A, nor any related party of Fund A, has the right to appoint a director to the Board of Directors of the Australian company or equivalent role in a trust or REIT.

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

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

h.            Fund A only holds rights to vote in proportion to its equity interest in each Australian company, trust or REIT.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1)

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

Income Tax Assessment Act 1936 section 128D

Income Tax Assessment Act 1997 section 118-520

Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision

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(1) of the ITAA 1936), interest income (subsection 128B(2) 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

Fund A is not a resident of Australia for tax purposes. Therefore, Fund A will satisfy this requirement.

The Fund is a superannuation fund for foreign residents

Superannuation fund for foreign residents is a defined term in the ITAA 1936. Section 6 of the ITAA 1936 states:

superannuation fund for foreign residents has the meaning given by subsection 995-1(1) of the Income Tax Assessment Act 1997.

Subsection 995-1 of the ITAA 1997 sets out the following:

superannuation fund for foreign residentshas the meaning given by section 118-520.

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

(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 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 Fund A 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:

·         Fund A is an indefinitely continuing fund

·         Fund A is a provident, benefit, superannuation or retirement fund

·         Fund A was established in a foreign country

·         Fund A was established and maintained only to provide benefits for individuals who are not Australian residents

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

·         No amount paid to Fund A or set aside for Fund A 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 Fund A or set aside for Fund A.

The Fund is an indefinitely continuing fund

Fund A manages the portfolio of funds of the funded contribution assets of the pension system in its country of residence. There is no contemplation of Fund A ending at a defined point in time and there is no expectation that the fund will be discontinued.

Therefore, it is accepted that Fund A is an indefinitely continuing fund.

The Fund is a provident, benefit, superannuation or retirement fund

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).

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 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). With respect to Fund A;

·         Fund A has the sole task of managing the funded assets of the Country A's pension system.

·         The earliest members can start to draw from their pension is age 61.

·         Fund A also provides survivor benefits where a member dies.

The circumstances in which a member of Fund A can receive the funds are consistent with those of a provident, benefit, superannuation or retirement fund.

As both the objective of the fund and the actual operation of the fund have the sole purpose of providing retirement benefits or benefits in alignment with other contemplated contingencies, Fund A is considered to be a provident, benefit, superannuation or retirement fund.

Therefore, Fund A will satisfy this requirement.

The Fund was established in a foreign country

Fund A was established in Country A. Therefore, Fund A will satisfy this requirement.

The Fund was established and maintained only to provide benefits for individuals who are not Australian residents

Fund A was established in Country A and operates to provide retirement benefits for its members in Country A.

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 and should not be taken to conclude that Fund A, in this case, has not been established and is not maintained only to provide benefits for non-residents, based on the rules and operation of Fund A.

Therefore, Fund A will satisfy this requirement.

The Fund's central management and control is carried on outside Australia by entities none of whom is an Australian resident

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, 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.

Fund A has a board of directors. The board of directors represents Fund A and is responsible for the organisation of each of the Funds and the management of each of the Funds' assets. Members of the board of Fund A must be citizens of Country A and shall be appointed by the Government on the basis of their expertise in furthering asset management. Fund A's head office is located in Country A.

Based on the above, it is reasonable to conclude that the central management and control of Fund A occurs in Country A by entities that are not Australian residents.

Therefore, Fund A will satisfy 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

An amount paid to Fund A or set aside for Fund A has not been and cannot be deducted under the ITAA 1997. A tax offset has not been allowed nor would be allowable for any amount paid to Fund A or set aside for Fund A.

Therefore, Fund A will satisfy this requirement.

As all of the above requirements are satisfied, the Fund A meets the requirements of being a superannuation fund for foreign residents as defined by section 118-520 of the ITAA 1997 for the purposes of subparagraph 128B(3)(jb)(i) of the ITAA 1936.

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

Paragraph 128B(3)(jb) of the ITAA 1936 will only apply to interest, or to dividends and non-share dividends paid by Australian resident companies.

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

Therefore, Fund A will satisfy this requirement.

Is exempt from income tax in the country in which the non-resident resides

As part of the state of Country A, Fund A is exempt from taxation in Country A. Therefore, Fund A will satisfy this requirement

Subsection 128(3CA) of the ITAA 1936

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

ii.             The Fund 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 of the Fund because of:

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

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

The Fund 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.

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

Fund A therefore satisfies the 'portfolio interest test' in respect of its current investments (listed in Appendix 1).

The Fund 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 Fund 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 Fund 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 Fund 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 Fund A.

Relevantly, in respect of the investment listed in Appendix 1 of the relevant facts and circumstances to this Ruling:

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

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

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

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

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

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

Otherwise non-assessable non-exempt

The income received by the Fund 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

The Fund is excluded from withholding tax in relation to interest, dividend and non-share dividend income derived from its current investments.