Edited version of private advice

Authorisation Number: 1051639791835

Date of advice: 31 March 2020

Ruling

Subject: Superannuation fund for foreign residents - withholding tax exemption

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

Background to Foreign Co.

1.    Foreign Co. is a foreign government owned organisation that generates, transmits and distributes electricity to communities within Foreign Country.

2.    Foreign Co. was established by Foreign Law.

3.    The head office of Foreign Co. is outside of Australia.

4.    Foreign Co. is authorised under Foreign Law to establish a retirement plan for its members appointed after DDMMYYYY and its employees including benefits in the case of disability and death.

5.    Foreign Co. provides all of its employees with a defined-benefit pension plan based on final pay through the Fund.

6.    Foreign Co. manages the investments of the Fund as the Fund's trustee.

7.    The Fund was constituted and is maintained through contributions of employer and employees.

8.    The administration of the Fund is entrusted to a committee called the Committee.

9.    Where the Fund becomes unable to meet its pension and benefit obligations, Foreign Co. is required guarantee those obligations by one or more special contributions.

10. The Assets of the Fund are invested in accordance with Foreign Law.

The Fund

11.  The Fund is governed by Foreign Law. The Foreign Law in its entirety forms part of the scheme to which this Ruling relates.

12.  The Committee is made up of members who reside outside Australia.

13.  The Committee's duties include:

·         registering the Fund

·         informing members of plans to register or amend the Fund

·         applying the provisions of the Fund

·         authorising payment of benefits

·         adopting internal by-laws consistent with Foreign law

·         holding monthly meetings, and

·         providing recommendations to Foreign Co. on the improvement of the Fund.

14.  The Fund consists of funds for contributions made to the Fund by Foreign Co. and its employees.

15.  In accordance with Foreign Law, anyone who is an employee of Foreign Co. or a subsidiary of Foreign Co. is required to be a member of the Fund. Foreign Co. and its participants must fund the Fund to accrue the defined benefits.

16.  The fund provides the following benefits to its participants:

a.    Pension benefits - normal retirement age is 65

b.    Disability benefits

c.    Death benefits

d.    Termination benefits

e.    Transfer benefits between spouses

f.     Buyback pension credits for leaves of absence

g.    Transfer funds to another pension fund.

17.  The Fund also provides benefits to the merged plans of its subsidiaries. These include:

a.    Pension benefits

b.    Disability benefits

c.    Death benefits

d.    Termination benefits

e.    Deferred pension

18.  Funds received by members are invested by the Fund in accordance with Foreign Law.

19.  In accordance with Foreign Law at any time, if the plan is not 100% solvent, benefits will only be paid to members in the proportion in which the Fund is solvent. However, Foreign Co. under Foreign Law may decide to pay the required amounts.

20.  Under Foreign Law members, following termination of their employment can transfer their pension into other government corporations for the purposes of retirement.

21.  The Fund's rules apply to companies that Foreign Co. holds at least 90% of shares and where it has drawn up a plan membership agreement.

Other relevant facts

22.  The Fund is established by Foreign Law and cannot be discontinued until the Foreign Government repeals any of the above.

23.  The Fund's resides outside of Australia.

24.  The Fund is exempt from income tax under from income tax in Foreign Country.

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

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

27.  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.

28.  The Fund's income from its Australian investments is not non-assessable non-exempt income because of:

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

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

The Funds Australian investments

29.  The Fund has invested in Australian equity investments. These equity investments have the following characteristics:

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

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

c.    The Fund has no involvement in the day to day management of the business of any of the Australian companies or trusts.

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

e.    The Fund has no right to representation on any investor representative or advisory committee (or similar) of the Australian company, or equivalent role in a trust.

f.     The Fund has no ability to direct or influence the operation of the Australian company or trust outside of the ordinary rights conferred by the equity interest held.

g.    The Fund only holds rights to vote in proportion to its equity interest in each Australian company or trust.

Relevant legislative provisions

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

Reasons for decision

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)?

Detailed reasoning

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

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

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

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

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

The Fund is a non-resident

The Fund is not a resident of Australia.

Therefore, the Fund satisfies this requirement.

Superannuation fund for foreign residents

Section 118-520 of the ITAA 1997 provides:

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

(a)          at that time, it is:

(i)            an indefinitely continuing fund; and

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

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

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

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

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

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

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

1. An indefinitely continuing fund

The Fund is a fund created by Foreign Law. The Fund provides defined benefit pensions to employees of Foreign Co. for their retirement. There is no indication that the Fund is to be wound up in the near future. Its annual reports have commitments of the Fund for the foreseeable future.

The rules above have been established through statute. The relevant plans and entities will only be dissolved on a law change at the behest of the Foreign Government.

There is sufficient evidence to accept that the Fund will continue to operate in accordance with the By-Law for an indefinite period of time.

Therefore, the Fund satisfies this requirement.

2. A provident, benefit, superannuation or retirement fund

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

ATO Interpretative Decision ATO ID 2009/67 Income Tax: Superannuation fund for foreign residents (ATO ID 2009/67) refers to these authorities to provide guidance on the meaning of the phrase 'provident, benefit, superannuation or retirement fund':

None of the four descriptors 'provident', 'benefit', 'superannuation' or 'retirement fund' in subparagraph (a)(ii) of the definition of 'superannuation fund for foreign residents' in section 118-520 of the ITAA 1997 are defined. The terms have, however, been the subject of judicial consideration.

The courts have held that for a fund to be a 'provident, benefit, superannuation or retirement fund', the fund 's sole purpose must be to provide superannuation benefits, that is, benefits to a member upon the member reaching a prescribed age or upon their retirement, death or other cessation of employment (Scott v. FC of T (No 2) (1966) 14 ATD 333; (1966) 10 AITR 290, per Windeyer J; Mahony v. FC of T (1967) 14 ATD 519, per Kitto J; Walstern Pty Ltd v. Commissioner of Taxation (2003) 138 FCR 1; 2003 ATC 5076; (2003) 54 ATR 423, per Hill J and Cameron Brae Pty Ltd v. Federal Commissioner of Taxation (2007) 161 FCR 468; 2007 ATC 4936; (2007) 67 ATR 178, per Stone and Allsop JJ).

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

Broadly, the Fund provides benefits to members as follows:

a.    Pension benefits;

b.    Disability benefits;

c.    Death benefits;

d.    Termination benefits

e.    Transfer benefits between spouses;

f.     Buyback pension credits for leaves of absence;

g.    Transfer funds to another pension fund.

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

All monies managed by the Fund are used solely for the purposes of administering and paying out benefits under the Fund.

Therefore, the Fund satisfies this requirement.

3.    Established in a foreign country

The Fund was established outside of Australia.

Therefore, the Fund satisfies this requirement.

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

The Fund was established outside of Australia for its members, being employees of the Foreign Co. These employees reside outside Australia.

Therefore, the Fund satisfies this requirement.

5.    Central management and control (CM&C)

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

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

·         formulating the investment strategy for the fund;

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

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

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

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

The CM&C of the Fund is exercised by the Committee. Meetings of the Committee are held outside of Australia.

None of these entities are Australian residents.

Therefore, the Fund satisfies this requirement.

6. Subsection 118-520(2)

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 this requirement.

7. Conclusion

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

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

The Fund is resident in a Foreign Country and is a registered pension plan in accordance with the Foreign Country's law. The Fund is exempt from income tax under Foreign Law.

Therefore, the Fund satisfies 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 because of:

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

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

1. 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.

The Fund holds less than 10% of the total participation interests in each Australian company it is invested in. Further, the Fund holds less than 10% of the total participation interests in each Australian company in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936.

The Fund therefore satisfies the 'portfolio interest test' in respect of its current investments.

2. 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 the Fund 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 the Fund 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 the Fund, 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 the Fund.

Relevantly, in respect of the Funds Australian investments:

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

b.    Neither the Fund, nor any related party, has the right to appoint a director to the Board of Directors of the Australian company.

c.    Neither the Fund, nor any related party, holds the right to representation on any investor representative or advisory committee (or similar) of the Australian company.

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

e.    The Fund only holds rights to vote in proportion to its equity interest in each Australian company.

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.

3. 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 Australian investments.

Further issues for you to consider:

We understand that the Fund intends to acquire additional Australian investments from the Ruling issue date to the end of the period to which this Ruling applies ('New Investments').

This Ruling will apply to income derived in respect of New Investments that are acquired by the Fund so long as:

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

·         The Fund satisfies the 'portfolio interest test' referred to in paragraph 128B(3CA)(a) of the ITAA 1936 in relation to the New Investments

·         The Fund does not have influence of a kind described in subsection 128B(3CD) of the ITAA 1936 in relation to the New Investments, and

·         The New Investments satisfy all of the characteristics that are listed in fact 29 of this Ruling.