Edited version of private advice

Authorisation Number: 1051736745402

Date of advice: 12 August 2020

Ruling

Subject: Withholding tax - exemptions - superannuation fund for foreign residents

Question 1

Is the Plan excluded from liability to withholding tax on its interest, dividend and non-share dividend income derived in respect of its current 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.

This ruling applies for the following periods:

1 July 20xx to 30 June 20xx

The scheme commences on:

1 July 20xx

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The Plan

1.    The Plan was established by a Representative Body that united various bodies in that other country.

2.    The Administrator of the Plan delegates plan management functions to the Pension Board (the Board) and approves appointments to the Board and related committees.

3.    The Administrator and the Board are based in a foreign country.

4.    The Board makes recommendations to the Administrator and approves amendments to the Plan; changes to administration; communications, and; funding policy. The Board also ensures compliance with policies, legislation, governance and terms of reference.

5.    The Plan is governed by its Constitution. The Plan terms form part of the scheme to which this Ruling relates.

6.    The primary purpose of the Plan is to provide its members with a monthly income during retirement, the amount of which is determined in accordance with the provisions of the Plan.

7.    The Plan is a defined benefit pension plan. Under the Plan terms, both members and employers are required to contribute. Each member contributes a percentage of their pensionable earnings and the employer contributes a percentage of the pensionable earnings of its employees who participate in the Plan.

8.    Pensionable earnings are the portion of a member's basis of assessment that is used for the purposes of determining required contributions and pension. All member and employer contributions are pooled together and invested to generate investment returns to fund the promised defined benefits.

9.    The Plan is registered under the foreign laws.

10.  The Plan is registered with the foreign revenue agency (FRA), which administers foreign income tax legislation.

11.  The Plan is also registered with the foreign agency that administers foreign pension standards legislation.

12.  The Plan's assets are held in the Fund of the Plan (the Fund).

The Fund

13.  The Fund is a trust. The Fund is not a separate legal entity and is part and parcel of the Plan.

14.  The Fund's main purpose is to hold the assets used to generate monies and to provide pensions and other benefits to the Plan members. Members include those employed by the Representative Body who must enrol and contribute to the Fund when they become eligible to join.

15.  The Fund has a Custodian.

16.  The Fund is held by the Custodian in accordance with the terms of its agreement with the Fund.

Management of Investments

17.  The delegates of the Administrator invest the funds in accordance with the foreign laws. The Administrator is legally required to provide a constitutive policies and procedure document ('Document') for the Plan. The Board supports the Administrator by approving and periodically updating this Document.

18.  Among other things, this Document sets out permissible asset classes in which Fund assets may be invested, a target allocation to each asset class and permitted allocation ranges, and investment strategies for the Fund. The Board approves the Funding Policy. The Board is assisted by an advisory committee. The Investment Committee considers and makes recommendations to the Board on changes to the Document and other issues related to the Fund's investments.

19.  The Fund has provided a letter to the Commissioner which states that the Plan is an indefinitely continuing foreign retirement fund.

Benefits provided

20.  Broadly, the Plan provides benefits to eligible retirees as follows:

a.    Normal retirement: a defined benefit pension upon normal retirement date.

b.    Early retirement: a defined benefit pension before normal retirement date if a member has reached a fixed age (or within 10 years of the date the member was entitled to receive an unreduced pension).

c.     Deferred pension: if a member ceases continuous services for any reason other than death or retirement, such member is entitled to receive a deferred pension.

d.    Disability pension: a defined benefit pension where a member's employment terminates before his/her normal retirement date due to ill-health or infirmity.

e.    Pre-retirement death benefits: lump sum or pension paid to the spouse, beneficiary or estate of a member who dies before their pension commences.

f.      Small benefit provision: in accordance with the Plan terms, certain members will be paid in a lump sum where they retire, leave the Fund or their services are terminated with only a certain percentage of yearly maximum pension earnings.

Other relevant facts

21.  The Plan (and its associated Fund) is a resident of a foreign country and is a non-resident of Australia.

22.  Income of the Plan is exempt from tax in the foreign country in which it resides.

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

24.  The Plan has not been allowed a tax offset or a tax offset is not allowable for an amount that has been paid to it.

25.  The Plan submitted a notice from the FRA which states that the Plan was registered on x date with tax relief and exemptions due from this date.

26.  The Plan's terms provide that the Administrator reserves the right to amend or to discontinue the Plan and the Fund, in whole or in part, subject to applicable pension laws. If the Plan and the Fund are wound up, the Fund's assets will be allocated to provide benefits in accordance with the applicable pension laws and the Plan terms.

27.  Income of the Plan is not non-assessable non-exempt income because of:

a.    Subdivision 880-C of the ITAA 1997, or

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

Relevant legislative provisions

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

Question 1

Is the Plan excluded from liability to withholding tax on its interest, dividend and non-share dividend income derived in respect of its investments under paragraph 128B(3)(jb) of the ITAA 1936?

Summary

The Plan is a superannuation fund for foreign residents.

The Plan is excluded from withholding tax in relation to interest, dividend and non-share dividend income derived from its investments under paragraph 128B(3)(jb) or the ITAA 1936.

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) of the ITAA 1936 must also be met.

The Plan is a non-resident

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

Therefore, the Plan satisfies this requirement.

Superannuation fund for foreign residents

Section 118-520 of the ITAA 1997 provides:

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.

Indefinitely continuing fund

The Plan was created with the main purpose of providing members with a monthly income during retirement. There is no indication in the Constitution or other relevant documents that there is an intention for the Plan to end at a definite point in time. In addition, a statement has been provided that confirms that the Plan is indefinitely continuing.

The Fund is a trust. The Fund's main purpose is to hold the assets used to generate monies and to provide pensions and other benefits to the Plan members. The Fund is not a separate legal entity and is part and parcel of the Plan.

The Plan has provided a letter to the Commissioner which states that the Plan is an indefinitely continuing foreign retirement fund.

Therefore, the Plan satisfies this requirement.

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) 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 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).

Broadly, the Plan provides benefits to members as follows:

a.    Normal retirement: a defined benefit pension upon normal retirement date.

b.    Early retirement: a defined benefit pension before normal retirement date if a member has reached a fixed age (or within 10 years of the date the member was entitled to receive an unreduced pension).

c.     Deferred pension: if a member ceases continuous services for any reason other than death or retirement, such member is entitled to receive a deferred pension.

d.    Disability pension: a defined benefit pension where a member's employment terminates before his/her normal retirement date due to ill-health or infirmity.

e.    Pre-retirement death benefits: lump sum or pension paid to the spouse, beneficiary or estate of a member who dies before their pension commences.

f.      Small benefit provision: in accordance with the Plan terms, certain members will be paid in a lump sum where they retire, leave the Fund or their services are terminated with only a certain percentage of yearly maximum pension earnings.

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

Therefore, the Plan satisfies this requirement.

Established in a foreign country

The Plan was established in a foreign country.

The Plan is registered under foreign laws. The Plan is registered with the FRA, which administers foreign income tax legislation.

The Plan is also registered with the foreign agency that administers foreign pension standards legislation.

Therefore, the Plan satisfies this requirement.

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

The Plan was established and is maintained only to provide benefits to the Representative Body's employees that participate in the sections of the Plan. These entities and their employees reside in foreign country.

Therefore, the Plan satisfies this requirement.

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 Administrator of the Plan is based in a foreign country. It delegates plan management functions to the Board and approves appointments to the Board and related committees.

The Board makes recommendations to the Administrator and approves amendments to the Plan; changes to administration; communications, and; funding policy. The Board also ensures compliance with policies, legislation, governance and terms of reference.

Therefore, the Plan satisfies this requirement.

Subsection 118-520(2) of the ITAA 1997

The Plan has not and cannot deduct amounts under either the ITAA 1997 or the ITAA 1936 for amounts paid to it. The Plan has not been allowed a tax offset or a tax offset is not allowable for an amount that has been paid to it.

Therefore, the Plan satisfies these requirements.

Conclusion

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

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

The Plan submitted a notice from the FRA which states that the Plan was registered on x date and tax relief and exemptions are due from this date.

Therefore, the Plan 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) of the ITAA 1936 to apply. Generally, these extra requirements apply to income derived from 1 July 2019.

Relevantly:

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

·         The Plan 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 Plan because of:

(a)  Subdivision 880-C of the ITAA 1997, or

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

The Plan 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 Plan holds less than 10% of the total participation interests in each Australian entity. Further, the Plan would hold less than 10% of the total participation interests in each Australian entity in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936.

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

The Plan satisfies the 'influence test'

Subsection 128B(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 Plan 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 Plan 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 Plan, 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 Plan.

Relevantly, in respect of the investments listed in Appendix 1 of the relevant facts and circumstances to this Ruling:

a.    Neither the Plan, nor any related party of the Plan, has involvement in the day to day management of the business of any of the Australian entities.

b.    Neither the Plan, nor any related party of the Plan, has the right to appoint a director to the Board of Directors of the Australian company or equivalent role in a trust or real estate investment trust (REIT).

c.     Neither the Plan, nor any related party, holds the right to representation on any investor representative or advisory committee (or similar) of the Australian entity.

d.    Neither the Plan, nor any related party, has the ability to direct or influence the operation of the Australian entity outside of the ordinary rights conferred by the equity interest held.

e.    The Plan only holds rights to vote in proportion to its equity interest in each Australian entity.

Based upon the above, the Commissioner accepts that the Plan does not have influence of a kind described in subsection 128B(3CD) of the ITAA 1936.

Otherwise non-assessable non-exempt income

The income received by the Plan 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

The Plan is excluded from withholding tax in relation to interest, dividend and non-share dividend income derived from its investments under paragraph 128B(3)(jb) or the ITAA 1936.