Edited version of private advice

Authorisation Number: 1051728372246

Date of advice: 17 December 2020

Ruling

Subject: Foreign superannuation fund - exemption from withholding tax

Question

Is the Fund excluded from liability to withholding tax on interest, dividend and non-share dividend income derived from its investments listed in Appendix 1 of the 'relevant facts and circumstances' of this Ruling in accordance with paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

This ruling applies for the following periods:

1 July 2019 to 30 June 2024

The scheme commences on:

1 July 2019

Relevant facts and circumstances

The Fund is a resident of a foreign country and a public pension plan for the employees of a foreign government.

The Fund has been established as an indefinitely continuing fund through foreign legislation.

The Fund has two systems (ABC plan and XYZ plan and collectively, the System). The net position of the System is held in the Fund, which is established to hold all assets and record changes in the fiduciary net position allocated to the System.

The trustee of the Fund (Trustee) is the administrative head of the System. The Trustee is responsible for administering a number of different plans and funds that provide retirement allowances and other benefits for employees of participating public employers in non-teaching positions, police officers and firefighters who work for participating public employers, exclusively of the particular jurisdiction.

System benefits are established under the provisions of the foreign law. The relevant Constitution provides that pension membership is a contractual relationship and plan benefits cannot be diminished or impaired. Benefits can be changed for future members only by enactment of a relevant statute. Generally, members of the System are employees, other than teachers, of the relevant jurisdiction and its municipalities.

The intention of the System is to provide service and disability retirement benefits, as well as death benefits. The System's plans are cost-sharing, multiple-employer, defined benefit pension plans. The System is included in the relevant State's financial report as a pension trust fund.

The membership in the System provides many benefits, including:

•                     Service retirement benefits;

•                     Disability retirement benefits for both on-the-job and non-job-related disabilities;

•                     Death benefits;

•                     Vesting benefits;

•                     Loans for contributing members. Members are eligible to borrow from the System if they are currently working in public service, have at least one year of service credit and have sufficient contributions on deposit. Borrowing caps are applied to any loans drawn and an interest rate of between 5% and 6% per annum is payable on loans drawn. Depending on circumstances, a members' loan may also be taxable. Members are encouraged to pay off their loan prior to retirement. An outstanding loan at retirement may permanently reduce member's benefit).

•                     The ability to transfer membership to and from other public retirement systems in the relevant State; and

•                     The crediting of withdrawn service from another public retirement system in that State.

The benefits payable from the Fund are set out in the relevant publications. As the retirement benefits are based on factors such as member's tier, retirement plan, service credit, final average salary (FAS) and age at retirement, there are different publications available which explain the rights and obligations as a member. It clarifies the factors that affect the retirement benefits and provides the members with examples of how those benefits are determined. The benefit eligibility and the calculation are categorised by tiers.

Some members who leave public employment can withdraw their membership. If a member leaves public employment, depending on the member tier, the member may choose to:

•                     end their membership and withdraw the accumulated contributions and may choose to have the taxable portion of their withdrawal payment made as a direct rollover to an Individual Retirement Account (IRA), or to their new employer's plan if that plan accepts rollovers. If a termination is requested without a rollover, the taxable amount is paid directly to the terminating member. The Federal income tax will be withheld as required by law and the terminating member will be taxed on withdrawal/excess payment from the Fund if there is no rollover. If the member is under the age of 59.5 and do not rollover, they will have to pay a 10% additional income tax on early distributions (unless an exception applies); or

•                     leave the contributions in their account and qualify for a retirement benefit when they are age 55.

To ensure that there are sufficient assets in the Fund to support the benefits earned by current and future retirees, the Trustee invests employer and member contributions prudently. All member contributions currently earn five percent annual interest. However, not all members are required to contribute, and again, the requirements are dependent on member's tiers. Employers' contributions are presented net of withdrawals, refunds, advance employer payments, and credits due employers.

As a retirement system member, a service credit is earned through public employment with a participating employer. Purchasing additional service credit will increase a member's pension. Members are automatically considered "vested" when they have earned sufficient service credit to qualify for a pension. The number of years of member service to be considered "vested" is dependent on the tier. Member who joined the System prior to 1 January 2020 need five years of service to be 100% vested. Members who joined on or after 1 January 2010 (ABC plan) or 9 January 2010 (XYZ plan) require 10 years of service credit to be 100% vested.

The legally required reserves, as covered by the provisions of the relevant law, are maintained by the System and are fully funded.

The Trustee of the Fund is directly accountable for the investment of Fund assets and for the oversight and management of the Fund. The Trustee is responsible for implementing an asset allocation with an appropriate balance of risk and return. Additionally, the Trustee has adopted policies and practices to ensure that the Fund is managed with high levels of ethical conduct and transparency.

The Trustee is expressly permitted to invest the assets of the Fund pursuant to various provisions of the relevant law, which also contains limitations on the amount and quality of investments the Fund may hold in certain asset categories. Investments purchased pursuant to these provisions are so-called "legal list" investments.

The ABC plan and XYZ plan are qualified defined benefit retirement plans under the relevant foreign law. Both of the plans are exempt from federal income taxes in that country.

Other relevant facts

The Fund has confirmed that:

•                     The Fund is an indefinitely continuing fund;

•                     The Fund was established in a country other than Australia;

•                     The Fund was established an is maintained only to provide benefits for individuals who are not Australian residents;

•                     The Fund's central management and control is carried on outside of Australia by entities, none of whom are Australian residents;

•                     No amount paid to the Fund can be deducted under the ITAA 1997 or ITAA 1936;

•                     No tax offsets would be allowable for an amount paid to the Fund or set aside for the Fund;

•                     The income of the Fund is not non-assessable non-exempt income of the Fund because of:

-   Subdivision 880-C of the ITAA 1997; or

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

The equity investments of the Fund listed above have the following characteristics ('Equity Characteristics'):

(a)  All investments are listed on the Australian Securities Exchange (ASX) and form part of the Common Investment Fund described above.

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

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

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

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

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

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

Reasons for decision

Summary

The Fund is excluded from liability to withholding tax on its interest, dividend and non-share dividend income derived from its investments listed in Appendix 1 of the 'relevant facts and circumstances' of this Ruling as the requirements of paragraph 128B(3)(jb) of the ITAA 1936 are satisfied.

Detailed reasoning

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

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

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

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

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

Superannuation fund for foreign residents

The term 'superannuation fund for foreign residents' is defined in section 118-520 of the Income Tax Assessment Act 1997 (ITAA 1997) as follows:

118-520 Meaning of superannuation fund for foreign residents

(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 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.

The Fund must be a 'fund' that satisfies all of the conditions in section 118-520 of the ITAA 1997 to be a 'superannuation fund for foreign residents'.

1.    An indefinitely continuing fund

The term 'fund' is not defined in either the ITAA 1997 or the ITAA 1936. Therefore its ordinary meaning should be used 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'.

Based on the ordinary usage of the word 'fund' and the relevant case law it becomes apparent that for a fund to exist there must be money and it must be set aside for a purpose and/or invested.

In this regard, the Fund receives contributions from employee members and employers on behalf of employee members of the relevant group of companies. The Fund holds these funds on trust for the purpose of providing superannuation benefits to its members, including the payment of pensions, death, disability and termination benefits in accordance with the Constitution and Regulations.

On the basis that the money collected by the Fund from employee members and employers on behalf of employee members of the group of companies, is effectively 'set aside' for investment and for the purposes of providing pensions, death, disability and termination benefits, the Fund will constitute a 'fund'.

The term 'indefinitely continuing fund' is not defined in either the ITAA 1997 or the ITAA 1936. The general view is that this does not mean that the fund must continue forever, but rather that the governing rules should not fix an express termination date.

The Fund has been established as an indefinitely continuing fund through foreign legislation and this has been confirmed by the statement prepared by the Trustee.

Therefore, the Fund satisfies this requirement.

2.    A provident, benefit, superannuation or retirement fund

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

ATO Interpretative Decision ATO ID 2009/67 Income Tax: Superannuation fund for foreign residents (ATO ID 2009/67) provides 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 extract 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).

In this case, the Fund is responsible for administering a number of different plans and funds that provide retirement allowances and other benefits for employees of the relevant participating public employers. The Fund has two systems, collectively referred to as the System:

1      ABC; and

2      XYZ.

The net position of the System is held in the Fund, which is established to hold all assets and record changes in the fiduciary net position allocated to the System. The trustee of the Fund and is the administrative head of the System.

The intention of the System is to provide service and disability retirement benefits, as well as death benefits.

Eligibility criteria of a benefit depends on the membership tier and the member's employer selects determines specific benefits. Retirement plan publications, which outline the specific criteria and how the benefits are calculated, are available by tier. The only circumstances that a currently active member of a plan or fund administered by the Fund may directly be able to receive benefits or payments from one of the plans or funds if a member in the System:

•   meets the service and age requirements (service retirement benefits);

•   meets the age requirement for a service retirement benefit (vested retirement benefits);

•   becomes permanently disabled (disability retirement benefits); and

•   dies while working for a public employer, or, if eligible, after a member leave public

employment (death benefits).

If a member leaves public employment, depending on the member tier, the member may choose to:

•   end their membership and withdraw the accumulated contributions and may choose to have the taxable portion of their withdrawal payment made as a direct rollover to an Individual Retirement Account (IRA), or to their new employer's plan if that plan accepts rollovers. (If a termination is requested without a rollover, the taxable amount is paid directly to the terminating member. The Federal income tax will be withheld as required by law and the terminating member will be taxed on withdrawal/excess payment from the Fund if there is no rollover. If the member is under the age of 59.5 and do not rollover, they will have to pay a 10% additional income tax on early distributions (unless an exception applies)); or

•   leave the contributions in their account and qualify for a retirement benefit when they are age 55.

Therefore, the Fund satisfies this requirement.

3.    Established in a foreign country

The Fund was established in a foreign country.

Therefore, the Fund satisfies this condition.

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

The Fund has been established, and is maintained, only to provide benefits for individuals who are not Australian residents.

Therefore, the Fund satisfies this condition.

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 central management and control of the Fund is carried on outside Australia and is carried out by individuals who are not Australian residents.

Therefore, the Fund satisfies this requirement.

6.    Subsection 118-520(2)

No amount paid to the Fund or set aside for the Fund has been or can be deducted (and no tax offset has been allowed or is allowable for such an amount) under the ITAA 1936 or ITAA 1997.

Therefore, the Fund satisfies these requirements.

Conclusion

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

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

The Fund resides in a foreign country and is exempt from income tax in that country.

Therefore, the Fund satisfies this requirement.

Subsection 128B(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) 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)

•                     The Fund must satisfy the 'influence test' (subsection 128B(3CD) 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) 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.

In this case, the Fund currently holds less than 10% ownership of any of the entities listed in Appendix 1 of the relevant facts and circumstances of this Ruling. The Fund's Australian investments also meet certain 'Equity Characteristics' listed in the relevant facts and circumstances of this Ruling.

In the circumstances, the Commissioner is satisfied that the total participation interest the Fund holds in the test entities:

•                     is less than 10% pursuant to paragraph 128B(3CC)(a) at all relevant times; and

•                     would be less than 10% in the circumstances detailed in paragraph 128B(3CC)(b) at all relevant times.

The Fund therefore satisfies the 'portfolio interest test' in respect of its Australian Investments listed in Appendix 1 of the relevant facts and circumstances of this Ruling.

2.    The Fund satisfies the 'influence test'

Subsection 128(3CD) 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), 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), 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.

The following points are relevant in considering whether the Fund has influence of a kind described in subsection 128B(3CD) in relation to the 'test entities':

•                     The Fund has no involvement in the day-to-day management of the business of those test entities;

•                     The Fund has no right to appoint a director to the Board of Directors of those test entities;

•                     The Fund has no right to representation on any investor representative or advisory committee (or similar) of those test entities;

•                     The Fund has no ability to direct or influence the operation of those test entities outside of the ordinary rights conferred by the equity interests held; and

•                     The Fund only holds rights to vote in proportion to its equity interest in each of those test entities.

Consequently, the Commissioner accepts that the Fund does not have influence of a kind described in subsection 128B(3CD).

3.    Otherwise non-assessable non-exempt

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.

Conclusion

The Fund is excluded from withholding tax in relation to interest, dividend and non-share dividend income derived from its Australian Investments listed in Appendix 1 of the relevant facts and circumstances of this Ruling.