Edited version of private advice

Authorisation Number: 1051752787860

Date of advice: 18 September 2020

Ruling

Subject: Withholding tax exemption

Question

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

Answer

Yes.

This ruling applies for the following periods:

Year end 30 June 20XX to 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The Fund was established in the Foreign State of Country A. It provides employees of local governments and school districts in the Foreign State for retirement, disability and death benefits.

The Fund is separate from the Foreign State government and is not included in the state's financial statements.

The Foreign State's Pension Code (Pension Code) determines how the Fund administers its benefit plans.

The Fund's board of trustees (the Board) resides outside of Australia. There are no Australian residents on the Board. The Board meetings are held outside of Australia

The Fund is comprised of three defined benefit plans: Plan A, Plan B and Plan C. Each plan contain a number of tiers.

Upon retirement, a member is eligible for a monthly pension which is payable for the rest of the member's life. The amount of the pension is dependent on a number of factors, including the relevant plan, years of service, salary, and the age of retirement.

Other benefits provided by the Fund to members and their beneficiaries include disability pensions, death benefits, and survivor pensions.

Members of the Fund upon ending their employment may receive a refund of their contributions as a lump sum or as a pension. However, the options of the refund is based on the year of service and age. Members may also roll over the refund into another defined benefit retirement plan for the purpose of purchasing service credit.

Investment

Investment is controlled by the Investment Committee (the Committee). The Committee consists of at least six members of the Board.

The Committee is responsible for the following investment related activities:

a.    Setting policies, objectives and guidelines for the investment of the Fund's assets and oversee compliance with investment policy and the laws of the Foreign State.

b.    Study each issue affecting the Fund's investments.

c.     Select qualified professionals to assist in implementing investment policies and evaluate their services.

d.    Consider staff recommendations for selecting or terminating investment managers.

e.    Consider investment actions recommended by staff.

f.      Evaluate total fund performance including performance of all investment managers.

The Fund does not receive, accept or pool funds from the other pension funds under the Foreign State in order to invest.

The Fund does not have any commingled funds with the Foreign State.

The estimated value of the Fund is $XXXX.

Almost all of the Fund's Australian investments are Australian Securities Exchange (ASX) listed stocks. The Fund also holds one treasury bond. The Fund's investments in Australia is valued at approximately $XXXX

In respect of the shares held, the following characteristics apply:

·              The Fund holds less than 1% of the total equity interests on issue of each Australian company

·              The Fund has no right to appoint a director to the Board of Directors of the Australian company

·              The Fund has not entered into or received any side letters, arrangements or agreements with the Australian company

·              The Fund holds no veto rights nor has no ability to direct or influence the operation of the Australian company outside the ordinary rights conferred by the equity interest held.

The Fund receives dividend income from the Australian resident companies.

The Fund receives interest income from the treasury bond.

Other relevant information

The central management and control of the Fund is not in Australia.

The Fund was established and registered in the Foreign State of Country A.

The Fund is indefinitely continuing and have no termination date.

The Fund is exempt from income tax in Country A.

No amount paid to the Fund by members or employers contributing to the Fund entitle the member or employer to a tax offset or deduction under Australian income tax.

The Fund does not have a private ruling in relation to sovereign immunity covering any part of a period from 27 March 2018 to 30 June 2019.

Relevant legislative provisions

Paragraph 128B(3)(jb) of the ITAA 1936

Subsection 128B(3CA) of the ITAA 1936

Subsection 128B(3CB) of the ITAA 1936

Subsection 128B(3CC) of the ITAA 1936

Subsection 128B(3CD) of the ITAA 1936

Section 118-520 of the ITAA 1997

Subsection 880-105(1) of the ITAA 1997

Section 880-125 of the ITAA 1997

Reasons for decision

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.

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 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.    The Fund is an indefinitely continuing fund

The term 'fund' is not defined in either the ITAA 1997 or the ITAA 1936. Therefore, it should be given its ordinary meaning 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 Federal Commissioner of Taxation [1966] HCA 48 (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] FCA 1428 who stated that 'for present purposes, the point is the need for 'money' or 'other property' to constitute a fund'.

The legislation provides no guidance on the meaning of 'indefinitely continuing'. It is not a technical legal expression, and the ordinary meanings of indefinitely and continuing involve little ambiguity or controversy.

The Macquarie Dictionary defines 'indefinitely' and 'continuing' as follows:

Indefinite:

adjective 1. not definite; without fixed or specified limit; unlimited: an indefinite number

2. not clearly defined or determined; not precise.

indefinitely, adverb

Continue:

verb (Continued, continuing)

1. to go forwards or onwards in any course or action; keep on.

2. to go on after suspension or interruption.

3. to last or endure.

4. to remain in a place; abide; stay.

5. to remain in a particular state or capacity.

The Fund was created in the Foreign State of Country A. The Pension Code determines how the Fund administers its retirement plans. There is no specific clause or section in the Pension Code which provides the termination of any plans under the Fund.

Therefore, the Fund satisfies this requirement.

2.    The Fund is a provident, benefit, superannuation or retirement fund

The phrase 'a provident, benefit, superannuation or retirement fund' under paragraph 118-520(1)(a)(ii) is not defined in either the ITAA 1997 or the ITAA 1936. However, the phrase has been subject to judicial consideration.

In Scott, the High Court examined the terms 'superannuation fund' and 'fund'. Justice Windeyer stated at ATD 351; AITR 312; ALJR 278 that:

There is no definition in the Act of a superannuation fund. The meaning of the term must therefore depend upon ordinary usage, the attributes of a thing thus denominated being those which things ordinarily so described have...the connotation of the phrase in the Act must be determined by one's general knowledge of the extent of the denotation of the phrase in common parlance... I have come to the conclusion that there is no essential single attribute of a superannuation fund established for the benefit of employees except that it must be a fund bona fide devoted as its sole purpose to providing for employees who are participants money benefits (or benefits having a monetary value) upon their reaching a prescribed age. In this connexion "fund", I take it, ordinarily means money (or investments) set aside and invested, the surplus income there from being capitalised.

In a later case, Mahoney v. Commissioner of Taxation (Cth) (1967) 41 ALJR 232; (1967); 14 ATD 519; 10 AITR 463 (Mahoney case), the High Court took a similar view as in Scott, Justice Kitto expressed the view at ALJR 232; (1967); ATD 520; AITR 464 that:

There was no definition in the Act of 'a provident, benefit or superannuation fund', and the meaning of the several expressions must therefore be arrived at in light of ordinary usage and with only one piece of assistance to be gathered from the immediate context. Since a fund, if its income was to be exempt under the provision, was separately required to be one established for the benefit of employees, each of the three descriptive words 'provident', 'benefit' and 'superannuation' must be taken to have connoted a purpose narrower than the purpose of conferring benefits, in a completely general sense, upon employees. Precise definition may be difficult, and in any case is unnecessary for present purposes. All that need be recognised is that just as 'provident' and 'superannuation' both referred to the provision of a particular kind of benefit - in the one case a provision against contemplated contingencies, and in the other case a provision, to arise on an employee's retirement or death or other cessation of employee, of a subvention for him or his estate or persons towards whom he may have stood in some kind of relation commonly giving rise to a legal or moral responsibility - so 'benefit' must have meant a benefit, not a general sense, but characterised by some specific future purpose.

In Cameron Brae Pty Limited v Commissioner of Taxation[2007] FCAFC 135, the Full Federal Court held that the relevant fund was a superannuation fund for the purposes of former section 82AAE of the ITAA 1936. Jessup J at [106] stated:

In answering the question whether the fund was a "superannuation fund" as the term is ordinarily understood, it is, in my view, critical that payments could not have been made out of the fund (other than by way of administration expenses, taxation, etc) save to members of the relevant discretionary class, and save in circumstances which fell within the ordinary understanding of superannuation. A proper characterisation of the fund should, in my view, depend upon the purposes for which the assets and moneys of the fund might have been used rather than upon the quality of the rights of individual members of the fund. If the fund could have been used only to achieve what might be described as a superannuation purpose, I would describe the fund as a "superannuation fund". That a particular member of a discretionary class might not, ultimately, have received any payment, was not, in my view, disqualifying.

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

Having regard to the terms of the deed of the Plan, it is considered that the Plan is a 'provident, benefit, superannuation or retirement fund' as that phrase has been interpreted by the relevant authorities. The sole purpose of the Plan is the provision of benefits to, or in respect of, participating employees who:

·                  cease their employment upon or after reaching retirement age (age 60)

·                  cease their employment after the satisfaction of certain service requirements

·                  cease their employment because of death or total and permanent disability, or

·                  reach age 70, whether or not they have ceased employment.

The above establish that for a fund to qualify as a provident, benefit, superannuation or retirement fund, it must have the sole purpose of providing retirement benefits or benefits in other allowable contemplated contingencies (such as death, disability or serious illness).

The Fund provide retirement, disability, death and survivor benefits to members and their dependents.

Upon retirement, a member of the Fund is eligible for a monthly pension which is payable for the rest of the member's life. The amount of the pension is dependent on a number of factors, including the relevant plan, years of service, salary, and the age of retirement.

The Fund also provide for the return of contributions to members where they have ended their employment either as a lump sum or as a pension. Members may also transfer the refund into other pension plans.

There are no benefits drawn from the Fund to contributors and beneficiaries beyond those as prescribed above. The Commissioner accepts that the alternate circumstances of access to the funds, being incapacity, death, the transfer of funds to another retirement fund, and a return of contributions in very limited circumstances, align to the contemplated contingencies of a provident, benefit, superannuation or retirement fund.

All monies of the Fund are amounts used solely for the purposes of administering and paying out benefits.

Therefore, the Fund satisfies this requirement.

3.    The Fund was established in a foreign country

The Fund was established in the Foreign State of Country A

Therefore, the Fund satisfies this requirement.

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

Members are limited to employees or residents within the Foreign State. It is considered that the possibility of a very small number of members being returned residents or becoming Australian residents after ceasing eligible employment or retiring is incidental and should not be taken to conclude that the Fund has not been established and maintained only to provide benefits for non-residents.

Therefore, the Fund satisfies this requirement.

5.    The Fund's central management and control (CM&C) is 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 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 Fund was created in the Foreign State and is administered by the Board where all the board members reside in the Foreign State. The Board meetings are also held outside of Australia.

Investment decisions are controlled by the Committee, which consists of at least six members from the Board.

As all the members of the Board and the majority of the Committee members are located in the Foreign State, together they administer and invest the money on behalf of the Fund. They are the key personnel that make the high level decisions in respect of the Fund.

Based on the above, it is reasonable to conclude that the central management and control of the Fund occurs outside of Australia by entities or individuals that are not Australian residents.

Therefore, the Fund satisfies this requirement.

6.    No amount paid to the Fund or set aside for the Fund has been or can be deducted under the 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 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.

Therefore, the Fund satisfies this requirement.

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.

7.    The income, consisting of interest, dividend or non-share dividend income, is derived by the Fund

The Fund directly holds shares in Australian resident companies from which it derives dividend income. It also derives interest income from its investment in the treasury bond.

Therefore, the Fund satisfies this requirement.

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

The Fund is exempt from income tax in Country A.

Therefore, the Fund satisfies this requirement.

The Fund therefore satisfies the requirements of subsection 128B(3)(jb) of the ITAA 1936, subject to the additional requirements introduced from 1 July 2019.

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 from 1 July 2019 onwards. These extra requirements apply only to assets which were acquired after 27 March 2018.

These requirements are specified in subsection 128B(3CA) of the ITAA 1936 and include:

i.              The superannuation fund for foreign residents must satisfy the 'portfolio interest test' now contained in subsection 128B(3CC) of the ITAA 1936 in relation to the test entity at certain times, and

ii.             The superannuation fund for foreign residents must not, at the time the income was derived, have influence of a kind described in subsection 128B(3CD) of the ITAA 1936 in relation to the test entity, and

iii.            The income cannot otherwise be non-assessable non-exempt income of the superannuation fund for foreign residents because of:

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

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

The Fund 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.

Subsection 128B(3CB) of the ITAA 1936 defines the test entity to be either the entity that paid the interest, dividends or non-share dividends or, if subsection 128A(3) of the ITAA 1936 applies in relation to a resident trust estate, that trust estate.

The Fund holds less than 10% of the total participation interests in each Australian company. As such, the Fund satisfies the portfolio test with respect to its Australian investments from which it derives dividend and interest income.

The Fund does not have influence of a kind described in subsection 128B(3CD) of the ITAA 1936 in relation to the test entity at the time the income was derived

Subsection 128(3CD) of the ITAA 1936 states:

A superannuation fund has influence of a kind described in this subsection in relation to the test entity at a time if any of the following requirements are satisfied at that time:

(a) the superannuation fund:

(i) is directly or indirectly able to determine; or

(ii) in acting in concert with others, is directly or indirectly able to determine;

the identity of at least one of the persons who, individually or together with others, make (or might reasonably be expected to make) the decisions that comprise the control and direction of the test entity's operations;

(b) at least one of those persons is accustomed or obliged to act, or might reasonably be expected to act, in accordance with the directions, instructions or wishes of the superannuation fund (whether those directions, instructions or wishes are expressed directly or indirectly, or through the superannuation fund acting in concert with others).

As such, there are two distinct sub-tests within the influence test.

Sub-test 1 of the influence test, as contained in subparagraph 128B(3CD)(a) of the ITAA 1936, 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.

The Fund has confirmed that it does not have the right or ability to appoint a person to a board, committee, or similar either directly or indirectly. The Fund only holds rights to vote in proportion to its equity interest in each Australian company, which is less than 1%. The Fund has also confirmed that it does not possess any veto rights for any of its Australian investments.

Sub-test 2 of the influence test, as contained in subparagraph 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 fund.

The Fund has also confirmed that it has not provided the companies it has invested in with any side letters or entered into arrangements with any of them to control or influence their decision making.

Based upon the above, the Fund does not have influence of a kind described in subsection 128B(3CD) of the ITAA 1936 in any of its Australian investments.

The income received by the Fund is not non-assessable and 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 (ITTPA 1997)

Subsection 880-105(1) of the ITAA 1997 has effect from 1 July 2019 and provides that an amount of ordinary or statutory income of a sovereign entity is not assessable and not exempt income if certain conditions are met.

The Fund is not a covered sovereign entity as defined in section 880-125 of the ITAA 1997 as it is a retirement fund in which the members are ultimately entitled to the returns on investment. The transitional provisions of Division 880 of the ITTPA 1997 are also irrelevant as the Fund does not have a private ruling with respect to sovereign immunity.

As such, the income of the Fund satisfies this requirement.

Conclusion

As the Fund has met both the pre-existing and extra requirements under paragraph 128B(3)(jb) of the ITAA 1936 in relation to its Australian investments, it will be excluded from withholding tax in relation to interest, dividend and non-share dividend income received in respect of those assets.