Edited version of private advice

Authorisation Number: 1051682799505

Date of advice: 19 May 2020

Ruling

Subject: Superannuation fund for foreign residents

Question 1

Is Entity A on behalf of the Pension Plan 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.

Question 2

Is interest, dividend and non-share dividend income derived by Entity A on behalf of the Pension Plan not assessable and not exempt income under section 128D of the ITAA 1936?

Answer

Yes.

This ruling applies for the following periods:

The relevant income years

The scheme commences on:

The relevant start date

Relevant facts and circumstances

1. The Pension Plan has its registered office in a country that is not Australia. The Pension Plan's central management and control is not in Australia.
2. The Pension Plan is governed by its Rules.
3. The Pension Plan operates to provide pension benefits to employees of the Employer.
4. The Pension Plan's central management and control is not in Australia. All investment decisions relating to the Pension Plan assets are made outside Australia.
5. The Rules sets out the membership requirements. The benefits the Member has accrued under the plan shall be retained until such time as the Member retires, dies or terminates employment with the Employer.
6. The pension entitlements of the Pension Plan are detailed in the Rules.
7. The Pension Plan is managed by the Entity A. Entity A was established in outside Australia, and has its central management and control outside Australia. Entity A has its costs covered by the relevant Pension Plan.
8. The Employer has not set a date for the Pension Plan or the Entity A to be terminated and their termination is not anticipated.
9. Entity A on behalf of the Pension Plan invests directly into Australia and owns a number of Australian assets.
10. Entity A's equity investments have the following characteristics:

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

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

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

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

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

11. Entity A's debt investments have the following characteristics:

a.    All investments are listed on the ASX.

b.    The investments are either corporate, securitised, index linked, and Government debt investments and treasuries from which it will ordinarily derive income in the form of interest.

c.     Entity A holds less than 10% of the total interests on issue of each Australian debt issuer.

d.    Entity A has no involvement in the day to day management of the business of any of the Australian debt issuers.

e.    Entity A has not acquired the right to appoint a director to the Board of Directors of any issuing debt issuer.

f.      Entity A has not acquired the right to representation on any investor representative or advisory committees (or similar) of any issuing Australian debt issuer.

g.    Entity A has no ability to direct or influence the operation of the Australian debt issuer outside of the ordinary right conferred by the debt interest held.

h.    Entity A has no voting rights in respect of the debt investments held.

i.      There are no special relationships or arrangements between Entity A and the issuers of any Australian debt investment to be held which affect the amount of interest income that will be paid from those investments.

12. Entity A will receive interest income along with dividend and non-share dividend income from companies who are residents of Australia for tax purposes.
13. An amount paid to the Entity A or set aside for the Entity A has not been and cannot be deducted under the Income Tax Assessment Act 1997 (ITAA 1997).
14. A tax offset has not been allowed nor would be allowable for any amount paid to the Entity A or set aside for the Entity A.
15. Entity A is not a resident of Australia for tax purposes.
16. Entity A is exempt from taxation in accordance with statute in its country of residence.

Relevant legislative provisions

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

Reasons for decision

Question 1

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 Pension Plan is a non-resident

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

Therefore, the Pension Plan satisfies this requirement.

The Pension Plan is a superannuation fund for foreign residents

Section 118-520 of the ITAA 1997 provides:

118-520(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.

118-520(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

1. An indefinitely continuing fund

There is no indication that there is an intention for the Pension Plan to end at a definite point in time.

Entity A as fund manager similarly has no termination date.

Therefore, it is acceptable the Pension Plan will continue to operate for an indefinite period and the Pension Plan is considered to satisfy this requirement.

Therefore, the Pension Plan 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).

The main purpose of the Pension Plan is to provide pensions and other benefits and awards for members on retirement.

There are no benefits provided by the Pension Plan to contributors and beneficiaries beyond those as prescribed above. The Commissioner accepts that the alternate circumstances of access to the funds, being temporary lay-offs, unemployment due to sickness and preceding the employer's bankruptcy, and the transfer of funds to another retirement fund, align to the contemplated contingencies of a provident, benefit, superannuation or retirement fund.

All monies managed by Entity A on behalf of the Pension Plan are used solely for the purposes of administering and paying out benefits under the Pension Plan.

Therefore, the Pension Plan will satisfy this requirement.

3. Established in a foreign country

The Pension Plan was established outside Australia. Therefore, the Pension Plan satisfies this requirement.

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

The Pension Plan was established outside Australia for its members. These employees reside outside Australia.

Therefore, the Pension Plan will satisfy 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 registered office of the Pension Plan and Entity A are both outside Australia.

Entity A has confirmed that its central management and control is carried outside Australia by entities none of whom is an Australian resident.

Therefore, the Pension Plan satisfies this requirement.

6. Subsection 118-520(2)

A statement has been provided by Entity A confirming that no amounts have been paid to Entity A, nor set aside to be paid to Entity A, that can be deducted under this Act. Further, no amounts have been paid to Entity A, or set aside or be paid to the Entity A for which a tax offset has been allowed, or would be allowable, under this Act.

Consequently, based on the statement provided by the applicant, this requirement is satisfied.

7. Conclusion

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

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

The assets of the Pension Plan are invested by Entity A. Entity A is a non-resident entity and is exempt from income tax in the country in which it resides. The Pension Plan is also exempt from taxation in the country in which it resides.

Therefore, the Pension Plan 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.              Entity A must satisfy the 'portfolio interest test' in relation to the test entity (subsection 128B(3CC) of the ITAA 1936)

ii.             Entity A 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. Entity A 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.

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

Entity A therefore satisfies the 'portfolio interest test' in respect of its current investments (listed in Appendix 1 to the relevant facts and circumstances of this Ruling).

2. Entity A 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 Entity A is able to determine the identity of at least one of the persons who, individually or together with others, makes or is reasonably expected to make, decisions comprising the control and direction of the test entity's operations. This includes situations where Entity A is able to act in concert with others to determine the identity of a relevant decision-maker in the test entity.

Sub-test 1 also extends to situations where Entity A, in its own right, holds the ability to approve or veto decisions which go to the control or direction of the test entity.

Sub-test 2 of the influence test, as contained in paragraph 128B(3CD)(b) of the ITAA 1936, assesses whether at least one of the relevant decision-making persons of the test entity is accustomed or obliged to act, or might reasonably be expected to act, in accordance with the directions, instructions or wishes of Institution.

Relevantly, Entity A's current investment:

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

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

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

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

e.    Entity A only holds rights to vote in proportion to its equity interest in each Australian company, trust, or Australian debt issuer.

Based upon the above, the Commissioner accepts that Entity A 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 Entity A 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

Entity A on behalf of the Pension Plan is excluded from withholding tax in relation to interest, dividend and non-share dividend income derived from its current investments.

Question 2

Section 128D of the ITAA 1936 provides:

'Income other than income to which section 128B applies by virtue of subsection (2A), (2C) or (9C) of that section upon which withholding tax is payable, or upon which withholding tax would, but for paragraph 128B(3)(ga),(jb) or (m), section 128F, section 128FA or section 128GB, be payable, is not assessable income and is not exempt income of a person.'

Dividend, non-share dividend and interest income derived by Entity A would be subject to withholding tax under subsections 128B(1) and 128B(2) of the ITAA 1936 respectively, but for the operation of the exemption in paragraph 128B(3)(jb) of the ITAA 1936. As the interest, dividend and non-share dividend income derived by Entity A is income upon which withholding tax would, but for the operation of paragraph 128B(3)(jb), be payable, it is not assessable and not exempt income under section 128D of the ITAA 1936.

Conclusion

The interest, dividend and non-share dividend income derived by Entity A is not assessable and not exempt income under Section 128D of the ITAA 1936.

Further issues for you to consider:

This Ruling will apply to income derived in respect of new investments that are acquired by Entity A on behalf of the Pension Plan so long as:

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

·         Entity A satisfies the 'portfolio interest test' referred to in paragraph 128B(3CA)(a) of the ITAA 1936 in relation to the new investments

·         Entity A 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 either of the following:

o   For equity investments - each new investment has all of the characteristics that are listed in this Ruling.

o   For debt investments - each new investment has all of the characteristics that are listed in this Ruling.