Edited version of private advice

Authorisation Number: 1051667512613

Date of advice: 30 April 2020

Ruling

Subject: Exemption from withholding tax for superannuation funds for foreign residents

Question

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

Answer

Yes

This ruling applies for the following periods:

30 June 2021 to 30 June 2025

The scheme commences on:

1 July 2020

Relevant facts and circumstances

1. The Fund is a defined benefit occupational pension scheme established in a foreign country (Country A) to provide benefits to employees of the employer company and associated companies that participate as scheme employers of the Fund (Scheme Employers). These bodies and entities and their employees reside in Country A.

2. The Fund established as a trust with corporate trustee (Trustee). The Trustee holds all the contributions and investments on behalf of the members.

3. The Fund has a board of Trustee Directors (the Board) who are all based in Country A and were appointed by the sponsoring employer in accordance with the Memorandum and Articles of Association.

4. No members of the Board are residents of Australia.

5 The Fund is governed by the trust deed and rules (Trust Rules).The Trustee's investment powers are set out within the Trust Rules. The Trustee has ultimate power and responsibility for investment arrangements.

6. The Fund is an exempt approved scheme under foreign laws of Country A.

7. The Fund is exempt from income tax on income received and from capital gains tax on the proceeds of investments sold.

8. The Fund provides benefits to its members in the event of ill-health retirement or to a member's survivors in the event of death.

9. The Fund does not provide benefits as a result of events other than old age retirement, disability or death.

10. It is possible that a very small number of members being returned residents or becoming Australian residents after ceasing eligible employment.

11. The foreign laws of Country A and the Trust Rules that govern the Fund do not have a specified end date and there is no contemplation of the Fund being terminated.

12. The benefits provided under the scheme are funded by employee and employer contributions and investment earnings which include income from the Fund's Australian investment in Ausco being an entity that is a resident of Australia for tax purposes.

13. In respect of the above-named Australian entity to which the Fund has invested:

(a)  the Fund holds less than 10% of the total participation interests in the Australian entity and has never held more than a 10% participation interest.

(b)  the Fund will hold less than 10% of the total participation interests in the Australian entity in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936.

(c)  neither the Fund, nor any related party of Fund, has involvement in the day to day management of the business of any of the Australian investment.

(d)  neither the Fund, nor any related party of Fund, holds any right to appoint a person to a board, committee or similar, either directly or indirectly, of any of the Australian investment.

(e)  neither the Fund, nor any related party, holds the right to representation on any investor representative or advisory committee (or similar) of any of the Australian investment.

(f)   neither the Fund, nor any related party, has the ability to direct or influence the operation of any of the Australian investment outside of the ordinary rights conferred by the equity interest held.

(g)  the Fund has not entered into or received any side letters, arrangements or agreements, and

(h)  The Fund does not hold any veto rights on security holder votes.

Other relevant facts

14. The Fund has not and cannot deduct amounts under either the Income Tax Assessment Act 1997 (ITAA 1997) or the ITAA 1936 for amounts paid to it.

15. 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.

16. The income of the Fund 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.

Reasons for decision

Summary

The Fund is excluded from liability to withholding tax on interest, dividend and non-share dividend income derived from its current investment under paragraph 128B(3)(jb) of the ITAA 1936.

Detailed reasoning

Section 128B of the ITAA 1936 imposes liability to withholding tax on income derived by a non-resident that consists of dividend income (subsection 128B(4) of the ITAA 1936), interest income (subsection 128B(5) of the ITAA 1936) as well as other income prescribed in that section.

Subsection 128B(3) of the ITAA 1936 notes that section 128B of the ITAA 1936 will not apply to prescribed categories of income. Relevantly, paragraph 128B(3)(jb) of the ITAA 1936 states:

(jb) income that:

(i) is derived by a non-resident that is a superannuation fund for foreign residents; and

(ii) consists of interest, or consists of dividends or non-share dividends paid by a company that is a resident; and

(iii) is exempt from income tax in the country in which the non-resident resides;

Note:

See subsection (3CA) for extra requirements relating to this paragraph.

These requirements of paragraph 128B(3)(jb) of the ITAA 1936 are considered below.

Subparagraph 128B(3)(jb)(i) of the ITAA 1936

Is the Fund a non-resident?

The Commissioner has determined from the facts and circumstances that the Fund is not a resident of Australia.

Therefore, the Fund satisfies this requirement.

Is the Fund a superannuation fund for foreign residents?

For the Fund to be considered a superannuation fund for foreign residents for the purposes of paragraph 128B(3)(jb) of the ITAA 1936, it must satisfy the requirements set out in section 118-520 of the ITAA 1997. Section 118-520 of the ITAA 1997 states the following:

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

(a)  at that time, it is:

(i)    an indefinitely continuing fund; and

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

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

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

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

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

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

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

Is the Fund an indefinitely continuing fund?

The legislation provides no guidance on the meaning of 'indefinitely continuing'. It is not a technical legal expression, and the ordinary meanings of indefinitely and continuing involve little ambiguity or controversy.

The Macquarie Dictionary, [Online], viewed 23 October 2017, macquariedictionary.com.au defines 'indefinitely' and 'continuing' as follows:

Indefinite:

1.    not definite; without fixed or specified limit; unlimited: an indefinite number.

2.    not clearly defined or determined; not precise.

indefinitely, adverb

Continue: (verb (Continued, continuing))

1.    to go forwards or onwards in any course or action; keep on.

2.    to go on after suspension or interruption.

3.    to last or endure.

4.    to remain in a place; abide; stay.

5.    to remain in a particular state or capacity

Because the foreign laws of Country A and the Trust Rules that govern the Fund do not have a specified end date and there is no contemplation of Fund terminating, it is accepted that the Fund will continue to operate in accordance with these laws and the Trust Deed and Rules for an indefinite period of time.

Therefore, the Fund satisfies this requirement.

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

The Fund does not provide benefits as a result of events other than old age retirement, disability or death.

The Commissioner accepts these benefits align with the sole purpose of providing retirement benefits or benefits in other allowable contemplated contingencies.

Therefore, the Fund will satisfy this requirement.

Was the Fund established in a foreign country?

The Fund was established in Country A, which is a foreign country.

Therefore, the Fund will satisfy this requirement.

Was the Fund established and maintained only to provide benefits for individuals who are not Australian residents?

The Fund was established to provide benefits to employees of the Scheme Employers. These bodies and entities and their employees reside in Country A. It continues to be maintained for this purpose.

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 the Fund, 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 the fund.

Therefore, the Fund will satisfy this requirement.

Is the Fund's central management and control 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, paragraph 10 and 11 of the Taxation Ruling TR 2018/5 Income tax: Central Management and Control test of residency (TR 2018/5) states:

10. Central management and control refers to the control and direction of a company's operations. It does not refer to a physical location in which the control and direction of a company is located, and may ultimately be exercised in more than one location.

11. The key element in the control and direction of a company's operations is the making of high-level decisions that set the company's general policies, and determine the direction of its operations and the type of transactions it will enter.

The Fund is a pension scheme established under the foreign laws enacted in Country A. No members of the Fund's Board are residents of Australia. The bodies and entities and their employees associated with the Fund reside in Country A and there is no suggestion that any of the control or direction of the Fund takes place in Australia.

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

Therefore, the Fund 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 1936 or ITAA 1997 and no tax offset has been allowed or is allowable for such an amount

An amount paid to the Fund or set aside for the Fund has not 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.

Therefore, the will satisfy this requirement.

Subparagraph 128B(3)(jb)(ii) of the ITAA 1936

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.

The Fund will receive dividends from a company that is a resident of Australia for tax purposes.

Therefore, the Fund will satisfy this requirement.

F Subparagraph 128B(3)(jb)(iii) of the ITAA 1936

The Fund is a registered public service scheme in accordance with the laws of Country A and as such is exempt from income tax of Country A.

Therefore, the Fund 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:

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

·         the Fund must satisfy the 'influence test' (subsection 128B(3CD) of the ITAA 1936) in relation to the test entity, and

·         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.

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 the Australian entity (the test entity) in which the Fund has invested. Further, the Fund would hold less than 10% of the total participation interests in the Australian entity 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 Australian investment.

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 Australian entity in which the Fund has invested:

(a)  the Fund holds less than 10% of the total participation interests in the Australian entity and has never held more than a 10% participation interest

(b)  the Fund will hold less than 10% of the total participation interests in each entity in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936

(c)  neither the Fund, nor any related party of the Fund, has involvement in the day to day management of the business of any of the Australian investment.

(d)  neither the Fund, nor any related party of the Fund, holds any right to appoint a person to a board, committee or similar, either directly or indirectly, of any of the Australian investment.

(e)  neither the Fund, nor any related party, holds the right to representation on any investor representative or advisory committee (or similar) of any of the Australian investment.

(f)   neither the Fund, nor any related party, has the ability to direct or influence the operation of any of the Australian investment. outside of the ordinary rights conferred by the equity interest held

(g)  the Fund has not entered into or received any side letters, arrangements or agreements, and

(h)  the Fund does not hold any veto rights on security holder votes.

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.

2.    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

Having regard to the requirements of paragraph 128B(3)(jb) of the ITAA 1936, the Fund is excluded from withholding tax in relation to interest, dividend and non-share dividend income derived from its current Australian investment.