Edited version of private advice

Authorisation Number: 1051681958931

Date of advice: 26 May 2020

Ruling

Subject: Withholding tax

Question

Are the Pension Funds excluded from liability to withholding tax on their respective share of the interest, dividend and non-share dividend income derived from their debt and equity interests in AusCo that are held by ForeignCo as bare trustee under paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XX

Years ending 30 June 20XX

The scheme commenced on:

Year ended 30 June 20XX

Relevant facts and circumstances

InvestCo

1.     InvestCo is a non-resident investment manager that manages the funds of a number of different clients, including the Pension Funds.

2.     InvestCo acts as nominee and bare trustee of the Pension Funds in its capacity as an investment manager. It has the role of administering the assets and investments of the Pension Funds and is subject to the terms of the investment management agreement between itself and each of the Pension Funds.

The Pension Funds

3.     Each of the Pension Funds has broadly the same rules with respect to the payment of contributions and payment of benefits but apply to different groups of employers and employees.

4.     Each Pension Fund has a trustee and administrator, who is assisted by either a committee or board consisting of representatives of the member employees and employers. These boards and committees participate in a range of roles, including setting funding rates and developing investment strategy.

5.     In meeting its obligations as the trustee and administrator of the Pension Fund, each trustee has assigned the role of administering the relevant pension plan to a service company, and the role of investment manager to InvestCo.

6.     The Pension Fund is funded by a combination of contributions by eligible employers and employees at agreed rates, as well as investment earnings on those contributions. The Pension Fund must use its funds for the sole purpose of administering and paying out benefits prescribed by the Pension Fund.

7.     The Pension Fund provides members with a defined benefit pension upon retirement. The amount of the pension is dependent on a number of factors, including years of service, salary, and the age of retirement.

8.     Other benefits provided by the Pension Fund to members and their beneficiaries include disability pensions, death benefits, and survivor pensions.

9.     Pension Fund members upon ending their employment may receive a refund of their contributions and interest, have the commuted value of their benefit paid to a different pension plan or retirement vehicle, or be entitled to a deferred pension benefit payable on retirement. A member exits the pension fund on choosing either a return of contributions, or the transfer of the commuted value of their benefits to another pension plan or retirement vehicle.

ForeignCo bare trust

10.  ForeignCo is a company incorporated in Country A.

11.  ForeignCo itself has entered in the 'Nominee and Bare Trust Declaration' with the Pension Funds. The Trust Declarations provides:

a.     ForeignCo holds the debt and equity interests in AusCo as the legal owner for the benefit of the Pension Funds

b.     The Pension Funds have an absolute, indefeasible entitlement to the investment, and is presently entitled to any income from the investment as it arises.

The investment

12.  The Pension Funds, through ForeignCo, hold X% of the relevant debt and equity interests issued by AusCo. These interests were acquired prior to 27 March 2018.

13.  Interest and dividend income is received by ForeignCo as trustee of the bare trust from AusCo.

Other facts

14.  The central management and control of the Pension Funds is not in Australia.

15.  The Pension Funds were established and registered in Country A.

16.  The Pension Funds are indefinitely continuing and have no termination date.

17.  The Pension Funds are all exempt from income tax in Country A.

18.  No amount paid to the Pension Funds by members or employers contributing to the Pension Funds entitle the member or employer to a tax offset or deduction under Australian income tax laws.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 128A(3)

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

Income Tax Assessment Act 1997 Section 118-520

Reasons for decision

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 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 from 1 July 2019 onwards. These extra requirements apply only to assets which were acquired after 27 March 2018.

For the purposes of this ruling, which only considers the Pension Funds' investment into AusCo debt and equity interests, these extra requirements are not applicable as these assets were acquired prior to 27 March 2018.

The Pension Funds are non-resident

The Pension Funds are not residents of Australia, having been established and registered in Country A, and having their central management and control in Country A.

Therefore, the Pension Funds satisfy this requirement.

The Pension Funds are superannuation funds for foreign residents

Superannuation fund for foreign residents is a defined term in the ITAA 1936. Subsection 6(1) 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(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 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.

Consequently, for the Pension Funds to be considered superannuation funds for foreign residents for the purposes of paragraph 128B(3)(jb) of the ITAA 1936, it must be established that:

·        the Pension Funds are all indefinitely continuing funds

·        the Pension Funds are all provident, benefit, superannuation or retirement funds

·        the Pension Funds are established in a foreign country

·        the Pension Funds were established and maintained only to provide benefits for individuals who are not Australian residents

·        The central management and control of each of the Pension Funds is carried on outside of Australia by entities none of whom are Australian residents

·        No amount paid to the Pension Funds or set aside for the Pension Funds has been or can be deducted under the ITAA 1997, and

·        No tax offsets have been allowed or would be allowable for an amount paid to the Pension Funds or set aside for the Pension Funds.

The Pension Funds are an indefinitely continuing fund

The term 'fund' is not defined in either the ITAA 1997 or the ITAA 1936. Therefore, it should be given its ordinary meaning subject to the context in which it appears and having regard to any relevant case law authorities.

The Australian Oxford Dictionary, 2004, Oxford University Press, Melbourne defines the term 'fund' as 1 a permanent stock of something ready to be drawn upon... 2 a stock of money, especially one set apart for a purpose.

In Scott v. FC of T (No 2) (1966) 14 ATD 333; (1966) 10 AITR 290 (Scott), Windeyer J expressed the view that 'fund' in the context of 'superannuation fund' ordinarily meant 'money (or investments) set aside and invested, the surplus income therefrom being capitalised'. Windeyer J's views in Scott were cited with approval by Hill J in Walstern Pty Ltd v. Commissioner of Taxation (2003) 138 FCR 1; 2003 ATC 5076; (2003) 54 ATR 423 who stated that 'for present purposes, the point is the need for 'money' or 'other property' to constitute a 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 on 1 February 2018, www.macquariedictionary.com.au defines 'indefinitely' and 'continuing' as follows:

Indefinite:

adjective 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

Each of the Pension Funds consists of the money or property collected from members and their employers under the rules of each underlying pension plan, as well as investment income from the investment of those contributions.

There is no evidence to suggest that any of the Pension Funds will be wound up or will no longer continue in the near future. Each Pension Fund has no termination date.

The Commissioner accepts that in these circumstances, each of the Pension Funds is an indefinitely continuing fund.

Therefore, the Pension Funds satisfy this requirement.

The Pension Funds are provident, benefit, superannuation or retirement funds

The phrase 'a provident, benefit, superannuation or retirement fund' under paragraph 118-520(1)(a)(ii) is not defined in either the ITAA 1997 or the ITAA 1936. However, the phrase has been subject to judicial consideration.

In Scott, the High Court examined the terms 'superannuation fund' and 'fund'. Justice Windeyer stated at ATD 351; AITR 312; ALJR 278 that:

There is no definition in the Act of a superannuation fund. The meaning of the term must therefore depend upon ordinary usage, the attributes of a thing thus denominated being those which things ordinarily so described have...the connotation of the phrase in the Act must be determined by one's general knowledge of the extent of the denotation of the phrase in common parlance... I have come to the conclusion that there is no essential single attribute of a superannuation fund established for the benefit of employees except that it must be a fund bona fide devoted as its sole purpose to providing for employees who are participants money benefits (or benefits having a monetary value) upon their reaching a prescribed age. In this connexion "fund", I take it, ordinarily means money (or investments) set aside and invested, the surplus income there from being capitalised.

In a later case, Mahoney v. Commissioner of Taxation (Cth) (1967) 41 ALJR 232; (1967); 14 ATD 519; 10 AITR 463 (Mahoney case), the High Court took a similar view as in Scott, Justice Kitto expressed the view at ALJR 232; (1967); ATD 520; AITR 464 that:

There was no definition in the Act of 'a provident, benefit or superannuation fund', and the meaning of the several expressions must therefore be arrived at in light of ordinary usage and with only one piece of assistance to be gathered from the immediate context. Since a fund, if its income was to be exempt under the provision, was separately required to be one established for the benefit of employees, each of the three descriptive words 'provident', 'benefit' and 'superannuation' must be taken to have connoted a purpose narrower than the purpose of conferring benefits, in a completely general sense, upon employees. Precise definition may be difficult, and in any case is unnecessary for present purposes. All that need be recognised is that just as 'provident' and 'superannuation' both referred to the provision of a particular kind of benefit - in the one case a provision against contemplated contingencies, and in the other case a provision, to arise on an employee's retirement or death or other cessation of employee, of a subvention for him or his estate or persons towards whom he may have stood in some kind of relation commonly giving rise to a legal or moral responsibility - so 'benefit' must have meant a benefit, not a general sense, but characterised by some specific future purpose.

In Cameron Brae Pty Limited v FCT (2007) 161 FCR 468; [2007] FCAFC 135; 2007 ATC 4936, the Full Federal Court held that the relevant fund was a superannuation fund for the purposes of former section 82AAE of the ITAA 1936. Jessup J at [106] stated:

In answering the question whether the fund was a "superannuation fund" as the term is ordinarily understood, it is, in my view, critical that payments could not have been made out of the fund (other than by way of administration expenses, taxation, etc) save to members of the relevant discretionary class, and save in circumstances which fell within the ordinary understanding of superannuation. A proper characterisation of the fund should, in my view, depend upon the purposes for which the assets and moneys of the fund might have been used rather than upon the quality of the rights of individual members of the fund. If the fund could have been used only to achieve what might be described as a superannuation purpose, I would describe the fund as a "superannuation fund". That a particular member of a discretionary class might not, ultimately, have received any payment, was not, in my view, disqualifying.

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).

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.

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).

The Pension Funds provide retirement, disability, death and survivor benefits to members and their dependents. The Pension Funds also provide for the return of contributions to contributors where their membership has not vested, and the transfer of funds to other pension plans.

There are no benefits drawn from the Pension Funds to contributors and beneficiaries beyond those as prescribed above. The Commissioner accepts that the alternate circumstances of access to the funds, being incapacity, death, the transfer of funds to 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 of the Pension Funds are amounts used solely for the purposes of administering and paying out benefits.

Therefore, the Pension Funds satisfy this requirement.

The Pension Funds were established in a foreign country

The Pension Funds were established in Country A.

Therefore, the Pension Funds satisfy this requirement.

The Pension Funds were established and maintained only to provide benefits for individuals who are not Australian residents

The Pension Funds were established and are maintained only to provide benefits to the relevant classes of employees 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 any of the Pension Funds have not been established and are not maintained only to provide benefits for non-residents, based on the rules and operation of each of the Pension Funds.

Therefore, the Pension Funds satisfy this requirement.

Each Pension 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, paragraphs 10 and 11 of 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.

Each Pension Fund has its own trustee, which together with each Pension Fund's Board or Advisory Committee sets the investment strategy for each Pension Fund.

Additionally, each of the Pension Funds engages InvestCo to manage and invest their respective funds. InvestCo is located in Country A. As such, the key entities associated with the Pension Funds are all located in Country A. As such, it is clear that the high level decision-making of the Pension Funds occurs in Country A.

Based on the above, it is reasonable to conclude that the central management and control of the Pension Funds occurs outside of Australia by entities that are not Australian residents.

Therefore, the Pension Funds 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 the Pension Fund or set aside for the Fund 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 the Fund or set aside for the Fund.

Therefore, the Pension Funds will satisfy this requirement.

The income, consisting of interest, dividend or non-share dividend income, is derived by the Pension Funds

Paragraph 128B(3)(jb) of the ITAA 1936 requires the superannuation fund for foreign residents to derive the interest, dividends or non-share dividends paid by Australian resident companies.

Subsection 128A(3) of the ITAA 1936 states:

For the purposes of this Division, a beneficiary who is presently entitled to a dividend, to interest or to a royalty included in the income of a trust estate shall be deemed to have derived income consisting of that dividend, interest or royalty at the time when he or she became so entitled.

The operation of subsection 128A(3) of the ITAA 1936 will, therefore, deem interest, dividend and non-share dividend income paid by an Australian resident company and received by a trust estate where the beneficiary is always presently entitled to the income to have been derived by the beneficiary.

In ATO Interpretative Decision ATOID 2008/61, an Irish CCF was taken to be a trust for Australian income tax purposes. The relevant income received through an interposed Irish Common Contractual Fund (CCF) was derived by the participant in the CCF (the Beneficiary) as the underlying documents of the CCF stated the Beneficiary was 'entitled to the income as it arose'. Because the Beneficiary was a superannuation fund for foreign residents under section 118-520 of the ITAA 1997, the exemption applied to that income.

Under the terms of the Nominee and Bare Trust Declaration between ForeignCo and the Pension Funds;

·        ForeignCo holds all of the relevant debt and equity interests as the legal owner for the benefit of the Pension Funds.

·        The Pension Funds have an absolute, indefeasible entitlement to the investment, and is presently entitled to any income from the investment as it arises.

Having considered the circumstances of the case, the Commissioner accepts that the Pension Funds derive the relevant interest and dividend income as it arises to ForeignCo in its capacity as bare trustee, and therefore derive those amounts for the purposes of the withholding tax exemption under paragraph 128B(3)(jb) of the ITAA 1936.

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

The Pension Funds are exempt from income tax in Country A. Therefore, the Pension Funds satisfy this requirement.

Conclusion

As all the requirements of paragraph 128B(3)(jb) of the ITAA 1936 are satisfied, each of the Pension Funds are excluded from withholding tax on interest, dividend and non-share dividend income in relation to the investment they acquired before 27 March 2018 in AusCo that they hold through the ForeignCo bare trust under paragraph 128B(3)(jb) of the ITAA 1936.