Edited version of private advice

Authorisation Number: 1051751476268

Date of advice: 16 September 2020

Ruling

Subject: Foreign super fund - exemption from income tax/withholding tax

Question

Is the Fund excluded from liability to withhold tax on dividend and interest income derived from its current investments acquired after 27 March 20XX in Australia as listed in the factsin accordance with paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Fund currently invests in several Australian projects for the benefit of the registered pension plans which it represents;

The Fund will continue to identify potential Australian projects that may be suitable for investment; and

The Fund intends to hold these investments on capital account for the receipt of relatively stable income streams (i.e. dividends and/or interest).

Background/creation:

The Fund was established as a statutory Local Government Pension Scheme in the Country A.

Plan type:

The Fund is a defined benefit plan, where both the employer and employee make contributions. Employee benefits are accrued at a % rate of pensionable pay on a career average basis. As a defined benefit plan, the benefits payable on death, ill-health, termination of service and retirement are specified in the plan regulations.

The Fund has the following salient features:

a)    Inclusion in the Fund is restricted to the type of employee to which the Fund relates (i.e. a person must be an employee of one of the employers set out in the Regulations) and is not open to the general public;

b)    Benefits accruing under the Fund are traceable (i.e. the amount contributed by an employee can be determined or the benefits accrued to an employee can be calculated); and

c)    An employee's contribution to the Fund, or accrued benefits under the Fund, are portable to another eligible pension plan (either in the form of a transfer value or a credit for a period of pensionable service performed by an employee).

Plan management:

XXX Council is the administering authority of the Fund.

XXX Council's responsibility is delegated to the Fund Committee which is the main decision-making body for the Fund. The Fund Committee is comprised of elected members of XXX Council. The Committee meets quarterly to address matters within its terms of reference. The terms of reference set out the various functions and responsibilities relating to XXX Council's role as administering authority.

The Fund Office is responsible for the day to day management of the Fund. The Fund Office oversees the payment of pension benefits, ensures that members have the necessary pension information and ensures that the pension interests of Fund members and employers are managed and protected.

The Fund Committee's mandate is to review matters on a quarterly basis related to the administration, funding, investment performance and investment strategy of the Fund. The Committee is composed of elected members of XXX Council. Committee members may also be scheme members either under the provision of Councillor membership or as a result of previous service as employee members or both.

There are various teams that assist the Fund Committee in running the Fund.

The Head of Audit and Inspection and the Internal Audit team are responsible for carrying out regular audits of the Fund's financial statements. An actuarial valuation report is commissioned every three years.

The pension liabilities of the Fund are carried on the balance sheet of the Fund.

Purpose:

The Fund is the vehicle for the delivery of scheme benefits.

The purpose of the Fund is to receive monies in respect of contributions, transfer values and investment income, invest monies in accordance with policy formulated by the administering authority and pay out monies in respect of scheme benefits, transfer values, costs, charges and expenses.

Membership:

Membership of the Fund includes:

a. Employees and pensioners of local authorities;

b. Civilian employees and pensioners of certain authorities;

c. Employees and pensioners of "other scheduled bodies"; and

d. Employees and pensioners of admitted bodies.

A member can be either an active member or a deferred member of the Fund, depending on whether the member is currently an employee of one of the employers contributing to the Fund. A person can also be a pensioner member, a pension credit member or a survivor member.

A person is eligible to become an active member where they are

employed by a body listed in the Regulations. This person can become an active member on the earliest of the following:

·         the member's automatic enrolment date

·         on the first day of the payment period following the application to become a member; or

·         on the first day of the payment period following an extension to the contract of employment to be greater than three months or more (as a member cannot be an active member where the contract of employment is less than three months).

A person stops being an active member where that person is no longer a member employed by a body listed in the regulations.

A person is a deferred member in relation to their employment with a body listed in the regulations where the person:

·         has qualifying service of at least two years;

·         is no longer an active member in relation to that employment;

·         has not started to receive any pension in relation to that

·         employment; and

·         has not yet reached the age of 75.

A person is a pensioner member where that person was:

·         an active member;

·         a deferred member; or

·         a pension credit member

and is in receipt of a benefit from the Fund relating to that membership.

A person is a pension credit member where that person has been given a pension credit in the Fund as a consequence of a pension debit as a result of a transfer.

A person is a survivor member of the Scheme if that person is entitled to benefits as a surviving partner of an active or deferred member (e.g. on death).

Eligibility:

In order for a person to be eligible for benefits under the Local Government Pension Scheme, they must be one of the types of member of the Scheme as set out above.

Contributions:

Contributions are made at the contribution rate (based on the member's pensionable pay) from that member's pensionable pay in each employment in which the member is an active member.

Benefits:

If an employee attains normal pensionable age and is not an employee in local government service at the time, the employee is entitled to immediate payment of a retirement pension without reduction.

A member who has reached normal pension age may elect to defer payment of the retirement pension up to the date the member reaches 75.

The Regulations also provide that a member can access their pension on retirement as a lump sum. The amount of the lump sum is limited to 25% of the member's accrued rights under the Scheme to date.

If an active member who has two or more years of qualifying service has their employment terminated by a Scheme employer, on grounds of ill-health or mental infirmity before the member reaches the normal pension age, they are entitled to and must take early pension where they are permanently incapable of efficiently discharging the duties of the employment they were engaged in.

If an active member dies before attaining the age of 75, the appropriate administering authority shall pay a death grant.

If the deceased active member dies leaving a surviving partner and/or eligible children, they are entitled to a pension that shall be paid on the day following the member's death.

Portability of benefits:

Multiple options exist when an employee leaves the public service to transfer their benefits, including obtaining a transfer value to be transferred and transferring their pensionable service to another pension plan.

Employees that join the public service are also given the ability to transfer their pensionable service from another employer.

Place of establishment:

The Pension Scheme was established in the Country A

Central management and control:

The offices of the Fund are the Country A. The central management and control of the Fund is carried out in the Country A.

Wind up and insolvency:

The Fund is not subject to any Act relating to the insolvency or winding-up of any corporation on the basis that it does not have its own separate legal personality.

Tax status:

The Fund is exempt from Country A income tax on interest received and from capital gains tax on the proceeds of investments sold.

Statements from the managers of the Fund indicate that:

·         the Fund is an indefinitely continuing fund and is a provident, benefit, superannuation or retirement fund;

·         the Fund was established in a country outside Australia;

·         the Fund was established, and maintained and applied, for the sole purpose of providing benefits for persons who are not residents of Australia;

·         the central management and control of the Fund is carried on outside of Australia by persons none of whom is resident in Australia;

·         the Fund is not one for which an amount has been set aside, or to which an amount has been paid, by a taxpayer that is an amount that has been allowed or is allowable as a deduction under any provision of the Income Tax Assessment Act 1997;

·         the interest and dividend income is exempt from income tax in the country in which the Fund is a resident;

·         the income of the Fund is not non-assessable non-exempt income because of Subdivision 880-C of the Income Tax Assessment Act 1997 and

·         a tax offset has not been allowed or is not allowable for such an amount.

Australian Investments:

The Fund provided a list of its Australian investments (all are shares).

All its investments in Australia are listed on the ASX and its total participation interest in respect of each investment is below 10%.

All of the investments listed were acquired after 27 March 2018.

The equity investments of the Fund all have the following characteristics ("Equity Characteristics"):

·         neither the Fund, nor any related party, has involvement in the day to day management of the business of any of the Australian companies or trusts.

·         neither the Fund, 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.

·         neither the Fund, nor any related party, holds the right to representation on any investor representative or advisory committee (or similar) of the Australian companies or trusts.

·         neither the Fund, nor any related party, has the ability to direct or influence the operation of the Australian companies or trusts outside of the ordinary rights conferred by the equity interest held.

·         the Fund only holds rights to vote in proportion to its equity interest in each of the Australian companies or trusts.

The Fund does not have influence of a kind described in subsection 128(3CD) of the ITAA 1936 in respect of these equity investments. The Fund does not have capacity to influence (either directly or indirectly) the day-to-day management of the operations of their equity investments.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 6

Income Tax Assessment Act 1936 Division 6

Income Tax Assessment Act 1936 Section 128B

Income Tax Assessment Act 1936 subsection 128B(1)

Income Tax Assessment Act 1936 subsection 128B(2)

Income Tax Assessment Act 1936 subsection 128B(3)

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

Income Tax Assessment Act 1936 subsection 128B(3CA)

Income Tax Assessment Act 1936 subsection 128B(3CB)

Income Tax Assessment Act 1936 subsection 128B(3CC)

Income Tax Assessment Act 1936 subsection 128B(3CD)

Income Tax Assessment Act 1997 Section 118-520

Income Tax Assessment Act 1997 subsection 118-520(1)

Income Tax Assessment Act 1997 subsection 118-520(2)

Income Tax Assessment Act 1997 Subdivision 880-C

Income Tax Assessment Act 1997 Subdivision 960-GP

Income Tax Assessment Act 1997 Section 995-1

Income Tax (Transitional Provisions) Act 1997 Division 880

Reasons for decision

The Fund is excluded from liability to withhold tax on dividend and interest income derived from its current investments acquired after 27 March 2018 in Australia as listed in the facts in accordance with paragraph 128B(3)(jb) of the ITAA 1936.

Detailed reasoning

Broadly, paragraph 128B(3)(jb) 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.

1.    An indefinitely continuing fund

The term 'indefinitely continuing fund' is not defined. 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 terms and regulations of the Fund do not provide for winding up at a defined point in time. On that basis, the Fund is accepted to be indefinitely continuing.

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).

It is accepted that the Fund is a "provident, benefit, superannuation or retirement fund" on the basis that:

·         the Fund's sole purpose is to provide the relevant participant employees money benefits upon their reaching a prescribed age (i.e. immediate annuities, deferred annuities, etc as explained above);

·         the Fund can be described as "provident" on the basis that it provides money benefits upon particular contingencies (e.g. death, ill-health and retirement);

·         the Fund provides benefits upon an employee's retirement or death or other cessation of employment, including to survivors and children of the employee;

·         the terms of the Fund (i.e. the Acts and Regulations) are consistent with a superannuation fund and the terms are strictly adhered to (evidenced by the fact that the terms of the Fund are enacted in law and violation of them could lead to criminal or civil sanctions);

·         the amounts collected by the Fund are not used for any purposes other than providing benefits to participants, former participants and their beneficiaries under the Fund and paying the reasonable expenses of administering the Fund; and

·         contributions are made into the Fund by the sponsoring employer (i.e. the local authority employers), but in this case not exclusively.

Therefore, the Fund satisfies this requirement.

3.    Established in a foreign country:

The Fund was established by Country A Legislation (being the Superannuation Act 1972 and the Public Service Pensions Act 2013). Furthermore, as per the facts the Investment Manager of the Fund attests that the Fund has been established in the Country A.

Therefore, the Fund satisfies this requirement.

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

The Fund was established in 19xx to provide superannuation benefits to specific employees of local authorities in the Country A. The Fund attests that it does not provide benefits to Australian residents. Accordingly, the Commissioner accepts that the Fund was established and is maintained only to provide benefits for individuals who are not Australian residents.

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.

A statement from the Investment Manager and a Statement of Investment Principles were supplied with the ruling application. These documents provide an overview of the Fund governance. XXXX Council is the administering authority for the Fund and delegates this responsibility to the Fund Committee. The Fund Committee is the decision-making body for the Fund, and is supported by in house resources, external consultants and independent expert advisers. It is made up of elected members of the XXXX Council and is broadly responsible for:

·                     maintaining the Statement of Investment Principles

·                     agreeing investment objectives, strategy and structure

·                     appointing investment managers, global custodian and consultants

·                     reviewing the performance of the fund, its investments and investment managers.

Furthermore:

·                     the Committee is supported by council officers and external advisers.

·                     the Committee may appoint a working group to develop specific initiatives.

·                     the Committee Sounding Board reviews proposals before they are considered by the Committee for decision. The Committee is also assisted by the Fund Board which is responsible for assisting the Committee in securing compliance with regulations, legislation and requirements of the Pensions Regulator.

The Commissioner is satisfied in these circumstances that the central management and control of the Fund is in the Country A and is carried out by individuals who are not Australian residents. Therefore, the Fund satisfies this requirement.

6.    Subsection 118-520(2):

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 the Act; or

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

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:

As per the facts provided the Fund is generally exempt of Country A tax by virtue of section 186 of the Finance Act 2004. Therefore, the interest and dividend income derived by the Fund will be exempt from tax in the Country A.

Therefore, the Fund satisfies this requirement.

Subsection 128B(3CA):

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.

As per the facts, the Fund does not hold more than 1% ownership of any of the entities listed in the 'Australian Investments' section. Furthermore, the Fund's Australian investments also meet certain 'Equity Characteristics' as listed.

In these 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 the relevant facts 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.

Relevantly, in respect of the investments listed in the relevant facts of this ruling:

·                     neither the Fund, nor any related party, is involved in the day to day management of the business of any of the Australian companies or trusts.

·                     neither the Fund, 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.

·                     neither the Fund, nor any related party, holds the right to representation on any investor representative or advisory committee (or similar) of the Australian companies or trusts.

·                     neither the Fund, nor any related party, has the ability to direct or influence the operation of the Australian companies or trusts outside of the ordinary rights conferred by the equity interest held.

·                     the Fund only holds rights to vote in proportion to its equity interest in each of the Australian companies or trusts.

Accordingly, the Fund does not have influence of a kind described in subsection 128(3CD) of the ITAA 1936 in respect of these equity investments. The Fund does not have capacity to influence (either directly or indirectly) the day-to-day management of the operations of their equity investments.

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 income received by the Fund 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.

Income derived by the Fund would not be otherwise treated as not assessable and not exempt income by virtue of the above provisions. Accordingly, the above exclusion should not apply to exclude the Fund from entitlement to the withholding tax exemption for superannuation funds for foreign residents.

Conclusion

The Fund is excluded from withholding tax in relation to interest, dividend and non-share dividend income derived from its current investments acquired after 27 March 2018 in Australia as listed in the facts.