Edited version of private advice

Authorisation Number: 1051758092659

Date of advice: 24 September 2020

Ruling

Subject: Withholding tax exemption for superannuation funds for foreign residents

Question

Is the Fund 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 period:

xx July 20xx to xx June 20xx

The scheme commences on:

xx July 20xx

Relevant facts and circumstances

The Fund

The Fund was established in a foreign country.

The registered office of the Fund is in a foreign country.

The main purpose of the Fund is to provide retirement benefits to members and their beneficiaries under the Fund.

The Plan Regulations of the Fund provide the rules governing the operation of the Fund.

Eligible members of the Fund are employees of the foreign city.

The Fund is administered by a commission. The commission is responsible for the decision making, management and investment of the Fund.

The Commission was formed in accordance with the requirements of the law of the foreign country.

Members of the commission are not residents of Australia.

The income received by the Fund includes contributions payable in accordance with the pension regulations and income from the investments of the Fund.

Members of the Fund are residents of the foreign country and there are no eligible employees that are Australian residents.

Benefits provided

The Fund provides benefits to members as follows:

(i)    Normal retirement pension.

(ii)   Early Retirement provisions.

(iii)  Deferred retirement.

(iv)  Disability retirement.

(v)   Death benefits.

Investment management

The Fund's investment policy was adopted in accordance with laws that govern the Fund and sets out the objectives and rules of investment for the Fund.

The Commission delegates the management of the Fund's assets to a Common Fund under local regulations.

The Common Fund's duties and delegated powers are set out in the investment policy adopted by the Fund.

The centralisation of the Fund's assets into a Common Fund is for the purpose of investment planning, maximising returns, controlling risk and lowering administration costs.

Investments in stocks, bonds and other securities are controlled by external specialist managers.

The assets of the Fund are made up of units of the Common Fund. The investment in units varies according to contributions (or withdrawals) from the Common Fund as well as according to income net of investments and the change in the fair value of the investment, including realised gains and losses and not realised, which are attributed to the Fund during the financial year.

The assets of the Common Fund are invested in accordance with the investment policy.

The relationship between the Fund and the Common Fund is fiscally transparent with all relevant income of the Common Fund (i.e. the income that is attributable to the unitholding of the Fund) being reported by the Fund.

As at xx MMMM 20xx, the Fund holds Australian equity investments.

Australian investments

The Fund has invested in Australian equity investments. These equity investments all have the following characteristics:

(i)       All investments are listed on the Australian Securities Exchange (ASX).

(ii)      The Fund holds less than 10% of the total participation interests in each Australian company.

(iii)    The Fund would hold less than 10% of the total participation interests in each Australian company in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936.

(iv)    Neither the Fund, nor any related party of the Fund, has involvement in the day to day management of the business of any of the Australian companies.

(v)     Neither the Fund, nor any related party of the Fund, has the right to appoint a director to the Board of Directors of the Australian company.

(vi)    Neither the Fund, nor any related party, holds the right to representation on any investor representative or advisory committee (or similar) of the Australian company.

(vii)   Neither the Fund, nor any related party, has the ability to direct or influence the operation of the Australian company outside of the ordinary rights conferred by the equity interest held.

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

Other relevant facts

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.

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.

The Fund submitted a certificate which states that the Fund is exempt from taxation in accordance with the laws of the foreign country in which it resides.

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

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

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

Relevant legislative provisions

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

Income Tax Assessment Act 1997 section 118-520

Reasons for decision

These reasons for decision accompany the Notice of private ruling.

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Question

Is the Fund 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 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(1) of the ITAA 1936), interest income (subsection 128B(2) of the ITAA 1936) as well as other income prescribed in that section.

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). Relevantly, paragraph 128B(3)(jb) of the ITAA 1936 applies 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;

Further, from 1 July 2019, the extra requirements in subsection 128B(3CA) of the ITAA 1936 must also be met.

Subparagraph 128B(3)(jb)(i) 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, which states:

(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

Is the Fund an indefinitely continuing 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, [Online], www.macquariedictionary.com.au defines 'indefinitely' and 'continuing' as follows:

Indefinite:

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 with the main purpose of providing pension benefits to participants and former participants and their beneficiaries.

The laws and rules that govern the Fund give no indication that it will end at a defined point in time. The Fund has provided a letter to the Commissioner which states that the Fund is an indefinitely continuing fund.

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) 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 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 objective of the Fund is set out in the Plan Regulations. The objective of the Fund is "to provide for and organise the payment of pensions to participants of the Plan". The Fund meets this objective by providing benefits to members as follows:

(i)    Normal retirement pension: a defined benefit pension upon a member attaining the age of 65.

(ii)   Early Retirement without reduction: a defined benefit pension for a member that has attained the age of 60 or having completed a minimum of 30 years of participation.

(iii)  Early Retirement with reduction: a defined benefit pension for a member that has attained the age of 55 or having completed a minimum of 28 years of participation

(iv)  Deferred retirement: a defined benefit pension paid to a member that has previously attained the age of 65 upon cessation of employment.

(v)   Disability retirement.

(vi)  Death benefits.

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

As both the key objective of the Fund and the operation of the Fund have the sole purpose of providing retirement benefits, the Commissioner accepts the Fund is considered to be a 'provident, benefit, superannuation or retirement fund'.

Therefore, the Fund satisfies this requirement.

Established in a foreign country

The Fund was established in a foreign country.

Therefore, the Fund satisfies this requirement.

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

The Fund was established and is maintained in the foreign country for eligible employees. The Fund operates to provide retirement benefits for its members.

It is considered that the possibility of a very small number of members being returned residents or becoming Australian residents after ceasing eligible employment is incidental and should not be taken to conclude that the Fund, in this case, has not been established and is not maintained only to provide benefits for non-residents, based on the rules and operation of the Fund.

Therefore, the Fund satisfies this requirement.

Is the Fund's central management and control (CM&C) 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:

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.

The Fund was established as resides in the foreign country. The decision making and management of the Fund is undertaken by the Commission. The Fund is managed in accordance with the laws that govern the Fund and the regulations, policies and procedures adopted by the Commission. The Commission is made up of persons none of whom are Australian residents.

Based on the above, it is reasonable to conclude that the CM&C of the Fund occurs in the foreign country 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 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

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 derives the relevant income

In order to be excluded from withholding tax under paragraph 128B(3)(jb) of the ITAA 1936, the Fund must derive the relevant interest and dividend income. This requires consideration of the relationship between the Common Fund and the Fund, and what type of relationship this is for Australian tax purposes.

It is considered the relationship between the Common Fund and the Fund constitutes a trust relationship. Income received by the Common Fund is income of a trust estate. It must then be determined whether the Fund derives the relevant income.

Relevant to this analysis is subsection 128A(3) of the ITAA 1936 which provides:

For the purposes of this Division, a beneficiary who is presently entitled to a dividend, to interest or to a royalty included in the income of a trust estate shall be deemed to have derived income consisting of that dividend, interest or royalty at the time when he or she became so entitled.

The Commissioner has accepted that subsection 128A(3) of the ITAA 1936 can apply to deem beneficiaries of non-resident trust estates to have derived the relevant income in limited circumstances.

ATO Interpretative Decision ATO ID 2008/61 Withholding Tax Exemption: interest and dividends paid by an Australian resident and received by a Dutch Stichting as unitholder in an Irish Common Contractual Fund (ATOID 2008/61)is an example of this. In this ATOID, an Irish CCF was found to be a trust for Australian income tax purposes. The terms of the deed states that income of the CCF accrued to unitholders as it arose. As such, the unitholder would have a present legal right to demand and receive payment of the income, and therefore was presently entitled to the dividend and interest income received by the CCF. The requirements in subsection 128A(3) were therefore satisfied, and the unitholder was deemed to have derived the income at the time when it became presently entitled. Being an entity entitled to be excluded from withholding tax under paragraph 128B(3)(jb) of the ITAA 1936, the unitholder was subsequently exempt from withholding tax.

As such, the critical factor is to determine whether the Fund is 'presently entitled' to the income of the Common Fund.

Present entitlement

The requirement in subsection 128A(3) of the ITAA 1936 of present entitlement to a share of the income of the trust estate refers to a present vested right to demand and receive payment of the whole or part of what has been received by the trustee as income and, retaining that character in the trustee's hands, is legally available to be distributed to those entitled to it as beneficiaries under the trusts.

Having considered the circumstances of the Fund, the Common Fund, and the underlying legislative framework, the Commissioner accepts that the Fund is presently entitled to the interest and dividend income as it arises to the Common Fund. As such, for the purposes of Division 11A of the ITAA 1936 these amounts retain their character when the Fund becomes presently entitled.

Therefore, the Fund is deemed to have derived the relevant dividend and interest income for the purposes of Division 11A of the ITAA 1936. As such, the Fund is considered to have derived dividend and interest income for the purposes of determining a withholding tax liability.

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 income from the Australian investments, along with dividend and non-share dividend income from companies who are residents of Australia for tax purposes.

Therefore, the Fund will satisfy this requirement.

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

The Fund is exempt from taxation in the country in which it resides in accordance with relevant local law.

Therefore, the Fund satisfies this requirement.

Subsection 128B(3CA) of the ITAA 1936

The Treasury Laws Amendment (Making Sure Foreign Investors Pay Their Fair Share of Tax in Australia and Other Measures) Act 2019 introduced extra requirements that must be met for paragraph 128B(3)(jb) of the ITAA 1936 to apply. Generally, these extra requirements apply to income derived from 1 July 2019.

Accordingly:

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

(ii)   The Fund must satisfy the 'influence test' (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 Fund 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.

The Fund currently does not hold more than 10% ownership of any of the Australian companies in which it has invested. Further, the Fund would hold less than 10% of the total participation interests in each Australian company in which it has invested in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936.

The Fund therefore satisfies the 'portfolio interest test' in respect of its current investments listed in Appendix 1.

The Fund 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, assess 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 other 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) of the ITAA 1936, assess 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 direction, instructions or wishes of the Fund.

In respect of the Australian investments which the Fund holds:

(i)    The Fund holds less than 10% of the total participation interests in each entity and has never held more than a 10% participation interest.

(ii)   The Fund will hold less than 10% of the total participation interests in each entity in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936.

(iii)  Neither the Fund, nor any related party of the Fund, has involvement in the day to day management of the business of any of the Australian companies.

(iv)  Neither the Fund, nor any related party of the Fund, has the right to appoint a director to the Board of Directors of the Australian company or equivalent role in any of the Australian companies.

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

(vi)  Neither the Fund, nor any related party, has the ability to direct or influence the operation of the Australian company outside of the ordinary rights conferred by the equity interest held.

(vii)The Fund has not everted into or received any side letters, arrangements or agreements.

(viii)       The Fund does not hold any veto rights on security holder votes.

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

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.

The Fund therefore satisfies this condition in respect of its current Australian investments.

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 of the relevant facts and circumstances of this private ruling).