Edited version of private advice

Authorisation Number: 1051679942943

Date of advice: 25 May 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 Australian investments 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 2020 to 30 June 2024

The scheme commences on:

1 July 2019

Relevant facts and circumstances

1.               The Fund is a defined benefit pension plan for the employees of a University in a foreign country (Country A) and its components.

2.               The Fund was established in Country A and is subject to the foreign laws of Country A.

3.               The Fund is exempt from income tax under the foreign law of Country A which provides income tax exemptions for a trust governed by a registered pension plan.

4.               The Fund is funded by a certain type of trust constituted with contributions payables by the employers and the employees in compliance with the limits allowed by the foreign law of Country A

5.               The Fund is centrally managed and controlled in Country A by entities and persons that are not Australian residents.

6.               The foreign laws and regulations that govern the Fund do not have a specified end date and there is no contemplation of the Fund being terminated.

7.               In relation to the management of the Fund:

a.     The Fund is administered by a Committee, the members of which act as trustees of the Fund.

b.     The role of the Committee is to ensure the sound management and administration of the Fund, in accordance with the laws and provisions of the Fund's Regulations ("Regulations").

c.      The Committee may present its recommendations regarding any changes that may be made to the provisions of the Fund, but it does not have the power to modify the Regulations. There is a group of individuals from the University who has the power to modify the Regulation.

Regulations for the Fund's members

Membership

8.               An employee who occupies a position within the University or who is hired full- time for a contract of a minimum required duration is eligible for the Fund on the date of their engagement. Any other employee who performs work similar or identical to that performed by a member belonging to a category of employees for whom the Fund is established is eligible for the Fund on the first day of the pay cycle which includes January 1, if they meet certain conditions.

9.               If membership in the Fund does not occur in the year following the reference year, the employee must qualify again, unless they request an exemption within a certain number of days of their return to the work at the University.

10.            The Fund's membership is automatic and mandatory for all eligible employees. Withholding of employee contributions will be made automatically.

Contributions

11.            Employees can make four types of contributions to the pension fund:

a.     Employee contributions (or regular).

b.     Voluntary (or additional) contributions.

c.      Contributions paid for a buy-back of service;

d.     Amounts transferred from another plan.

12.            Compulsory participation in the Fund for eligible employees results in the obligation to pay employee contributions to the pension fund. These contributions are deducted at source, from their salary, as permitted by the Act respecting labour standards. The only exceptions are periods of total disability, periods of maternity and certain leaves authorised by the employer, for which the employee is exempt from paying.

13.            The rate of employee contributions is determined by the Committee. To this end, the contribution rate for employees is calculated as a percentage of the adjusted salary. Committee must consider the recommendation of the Fund actuary contained in the last actuarial valuation of the Fund as well as its funding policy.

Benefits

14.            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.

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

Other relevant facts

16.            If a member ceases to be employed by the University before the age of 55, they can request the transfer of the present value of their rights into a locked-in retirement instrument. This includes another employer pension plan, a locked-in retirement account, a life income fund, or an insurer's contract to purchase a life annuity. A locked-in retirement instrument is a contract offered by a financial institution under which all amounts paid to the institution cannot be withdrawn before the date of your retirement indicated in the contract. On that date, a member will begin to receive their retirement capital either as annual withdrawals or as a life annuity purchased from an insurer with the money in this locked-in retirement account.

17.            In the case of an annuity whose value is less than 20% of X (a formula based on earnings) established in accordance with the foreign law, or if a member has ceased to be a resident of Country A for at least two years, a member may be entitled to the cash rebate of the value of their pension.

18.            The Fund will receive dividends from Australian investments from companies who are residents of Australia for tax purposes.

19.            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).

20.            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.

21.            The Fund's income from its Australian investments is not 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.

22.            The Fund invests on behalf of a single pension or a retirement plan.

23.            Investments in Pooled Funds are not covered by this private ruling.

The Fund's Australian investments

24.            The Fund legally and beneficially owns the Australian investments.

25.            In respect of each of the Australian entities 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.

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, www.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 and the Regulations 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 Regulations 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 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 and is maintained only to provide benefits to the employees of the University in Country A and its components. These 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 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 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 laws and regulations of Country A. The Committee and the group of individuals from the University who administer and control the Fund reside in Country A, and none of whom is an Australian resident.

The employees associated with the Fund reside in Country A and there is no suggestion that any control or direction of the Fund takes place in Australia.

Based on the above, it is reasonable to conclude that the CM&C 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.

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

The Fund is exempt from income tax in accordance with the foreign law of Country A which provides income tax exemptions for a trust governed by a registered pension plan.

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.

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 entity to which the Fund has invested. Further the Fund would 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.

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

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 each Australian entities 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.

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 investments.