Edited version of private advice

Authorisation Number: 1051737649567

Date of advice: 13 August 2020

Ruling

Subject: Exemption from withholding tax for superannuation funds for foreign residents

Question 1

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

Answer

Yes

Question 2

Is interest and/or dividend income derived from Australia by the Fund not assessable income of the Fund under section 128D of the ITAA 1936?

Answer

Yes

This ruling applies for the following period:

1 July 2018 to 30 June 2019

The scheme commences on:

1 July 2018

Relevant facts and circumstances

1. The Fund is a pension scheme established under the legislation and regulations (the Foreign Law) of an industry in a foreign country (Country A).

2. The Fund is a registered pension scheme in accordance with the laws of Country A and is therefore exempt from income tax in respect of income derived from investments or deposits held for the purposes of a registered pension scheme.

3. The Fund is centrally managed and controlled in Country A by board members that are not Australian residents comprising of employer and employee representatives of the industry in Country A.

4. The Foreign Law that governs the Fund does not have a specified end date and there is no contemplation of the Fund being terminated.

5. The Fund operates for the benefit of its retired members and its contributing members, all of whom are previous or current employees of scheme employers based in Country A.

6. The Fund provides benefits to its members in the event of old age retirement, disability or to a member's survivors in the event of death.

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

8. The benefits provided under the scheme are funded by employee and employer contributions and investment earnings which include income from the Fund's Australian investments in entities that are residents of Australia for tax purposes.

Other relevant facts

10. The Fund 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.

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

Reasons for decision

Question 1

Summary

The Fund is excluded from liability to withholding tax on interest, dividend and non-share dividend income derived from its Australian investments in accordance with paragraph 128B(3)(jb) of the ITAA 1936.

Detailed reasoning

Section 128B of the ITAA 1936 imposes liability to withholding tax on income derived by a non-resident that consists of dividend income (subsection 128B(4) of the ITAA 1936), interest income (subsection 128B(5) of the ITAA 1936) as well as other income prescribed in that section.

Subsection 128B(3) of the ITAA 1936 notes that section 128B of the ITAA 1936 will not apply to prescribed categories of income. Relevantly, paragraph 128B(3)(jb) of the ITAA 1936 states that the liability to withholding tax under section 128B will not apply to:

(jb) income that:

(i) is derived by a non-resident that is a superannuation fund for foreign residents; and

(ii) consists of interest, or consists of dividends or non-share dividends paid by a company that is a resident; and

(iii) is exempt from income tax in the country in which the non-resident resides;

In relation to the Fund, the requirements of paragraph 128B(3)(jb) of the ITAA 1936 are considered below.

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

Is the Fund a non-resident?

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

Therefore, the Fund satisfies this requirement.

Is the Fund a superannuation fund for foreign residents?

For the Fund to be considered a superannuation fund for foreign residents for the purposes of paragraph 128B(3)(jb) of the ITAA 1936, it must satisfy the requirements set out in section 118-520 of the ITAA 1997. Section 118-520 of the ITAA 1997 states the following:

(1) A fund is a superannuation fund for foreign residents at a time if:

(a)  at that time, it is:

(i)    an indefinitely continuing fund; and

(ii)   a provident, benefit, superannuation or retirement fund; and

(b)    it was established in a foreign country; and

(b)  it was established, and is maintained at that time, only to provide benefits for individuals who are not Australian residents; and

(c)   at that time, its central management and control is carried on outside Australia by entities none of whom is an Australian resident.

(2) However, a fund is not a superannuation fund for foreign residents if:

(a) an amount paid to the fund or set aside for the fund has been or can be deducted under this Act;

(b) a tax offset has been allowed or is allowable for such an amount.

Is the Fund an indefinitely continuing fund?

Because the Foreign Law that governs the Fund does not have a specified end date and there is no contemplation of the Fund terminating in the Fund's constituent documents, it is accepted that the Fund will continue to operate in accordance with the Foreign Law for an indefinite period of time.

Therefore, the Fund satisfies this requirement.

Is the Fund a provident, benefit, superannuation or retirement fund?

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

ATO Interpretative Decision ATO ID 2009/67 Income Tax: Superannuation fund for foreign residents (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 establishes that for a fund to qualify as a provident, benefit, superannuation or retirement fund, it must have the sole purpose of providing retirement benefits or benefits in other allowable contemplated contingencies (such as death, disability or serious illness).

The circumstances in which a member of the Fund can receive the funds are consistent with those of a provident, benefit, superannuation or retirement fund as they are provided after attaining a retirement age or 'contemplated contingencies' such as death or ill-health retirement.

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

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

Therefore, the Fund will satisfy this requirement.

Was the Fund established in a foreign country?

The Fund was established in Country A, which is a foreign country

Therefore, the Fund satisfies this requirement.

The Fund was established and maintained only to provide benefits for individuals who are not Australian residents

The Fund was established and is maintained only to provide benefits to employees from scheme employers of the Fund. These scheme employers and their employees reside in Country A.

Therefore, the Fund satisfies this requirement.

Is the Fund's central management and control carried on outside Australia by entities none of whom is an Australian resident?

Paragraphs 20 and 21 of Taxation Ruling TR 2008/9 Income tax: meaning of 'Australian superannuation fund' in subsection 295-95(2) of the Income Tax Assessment Act 1997 (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, paragraph 10 and 11 of the 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.

Fund is a pension scheme established under the Foreign Law enacted in Country A. The Fund is managed and administered by board members who are not Australian residents comprising of employees and employers in an industry in Country A.

Based on the above, it is reasonable to conclude that the CM&C of the Fund occurs in the Country A by entities that are not Australian residents.

Therefore, the Fund satisfies this requirement.

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

An amount paid to the Fund or set aside for the Fund has not been and cannot be deducted under the ITAA 1936 or ITAA 1997. A tax offset has not been allowed nor would be allowable for any amount paid to the Fund or set aside for the Fund. The Fund has also confirmed that no amount paid to the Fund can be deducted under ITAA 1997 or ITAA 1936.

Therefore, the Fund satisfies these requirements.

Conclusion on subparagraph 128B(3)(jb)(i) of the ITAA 1936.

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 for the purposes of subparagraph 128B(3)(jb)(i) of the ITAA 1936.

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

Paragraph 128B(3)(jb) of the ITAA 1936 will only apply to interest, or to dividends and non-share dividends paid by Australian resident companies.

The Fund will receive interest and dividend income from companies who are residents of Australia for tax purposes.

Therefore, the Fund satisfies this requirement.

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

The Fund is a registered pension scheme in accordance with the laws of Country A and is therefore exempt from income tax in respect of income derived from investments or deposits held for the purposes of a registered pension scheme. Therefore, the Fund satisfies this requirement.

Conclusion

Having regard to the requirements of paragraph 128B(3)(jb) of the ITAA 1936, the Fund is excluded from withholding tax in relation to interest, dividend and non-share dividend income derived from its current investments (listed in Appendix 1 attached to this private ruling).

Question 2

Summary

The interest and/or dividend income derived from Australia by the Fund is not assessable income of the Fund under section 128D of the ITAA 1936.

Detailed reasoning

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 and interest income derived by the Fund would be subject to withholding tax under subsections 128B(1) and 128B(2) of the ITAA 1936 respectively, but for the operation of the withholding tax exemption under paragraph 128B(3)(jb) of the ITAA 1936.

As determined in Question 1 above, the Fund is excluded from liability to interest, dividend and non-share dividend withholding tax under paragraph 128B(3)(jb) of the ITAA 1936 as the fund is a 'superannuation fund for foreign residents' as defined in section 118-520.

As paragraph 128B(3)(jb) of the ITAA 1936 is specifically referred to in section 128D of the ITAA 1936 any interest or dividend income derived by the Fund will be considered not assessable not exempt income under section 128D of the ITAA 1936.