Edited version of private advice

Authorisation Number: 1051782847153

Date of advice: 20 November 2020

Ruling

Subject: Foreign superannuation fund - exemption from withholding tax

Question

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

Answer

Yes

This ruling applies for the following periods:

1 July 20XX to 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Fund was established as a defined benefit pension fund to receive contributions from employee members and employers on behalf of employee members of a group of foreign companies.

The Fund is an independent legal entity (foundation) that holds these funds for the purposes of providing superannuation benefits to its members, including payment of retirement pensions, disability pensions, partners' and orphans' pensions (on death of a participant) and termination benefits in accordance with its Constitution, and the Regulations.

Fund management

The Fund is managed through a Board of Directors ('The Board'). The Board is charged with the management of the Fund.

Eligibility requirements

Employees or former employees who joined the relevant group of companies before a certain date accrue a pension in the Fund. The Fund formally closed to new hires.

Funding and contributions

Participants are liable to pay a monthly contribution to the Fund from the period of joining until reaching the retirement age. The current rate of contribution to be paid by the Participant is 2% of the pension up to XXX. The employer deducts the contribution from the Participants salary and pays the contribution to the Fund on behalf of the Participant ('Participant's Contribution').

Employees that join the Fund are also given the ability to transfer in accrued pension entitlements from another pension fund.

Benefits

The benefits available under the Fund are as follows

Retirement Benefits

a)     Retirement pension

Members are able to take a monthly pension from the Fund without having their pension reduced at the age of 68 ('Pension Age').

The amount of a retirement pension is calculated in accordance with the Regulations and is dependent on the following factors:

•         the number of years of the Participant participates in the Fund; and

•         the salary of the Participant during their participation period in the Fund.

A Participant may opt for a lower retirement age than the Retirement Age, provided that the chosen retirement age does not occur before the age of 55. However, lowering the retirement age before reaching the age of 50, can only take place if employment is terminated and the rules regarding early retirement are met.

b)     Lump sum

A member can request from the day on which the Participant's pension from the Fund begins to be payable a lump sum payment representing the capital value of the annuity or pension on the date of payment.

Death benefits

Upon the death of a Participant in service or retirement, their partner and children can become entitled to a partner's and/or an orphan's pension. The amount of the pension is calculated in accordance with the Regulations, as follows:

•         Partners pension: 70% of the Participants retirement pension15; and

•         Orphan's pension: 14% of the partner's pension.

Disability benefits

If a Participant retires because of disability, illness or incapacity and their employment company consents, the Participant may receive a disability pension, regardless of their age.

The amount of the disability benefit in the case of full incapacity is calculated in accordance with the Regulations as follows:

•         100% of the pensionable salary up to the second threshold (this amount is adjusted each year); and

•         70% of the part of the pensionable salary above the second threshold.

Leaving the Fund

If a Participant leaves the group of companies before retirement, they may choose among a number of options. These options are:

•         A deferred annuity - a pension benefit that is payable at the Pension Age to contributors who are not entitled to a pension at the time of their departure from the companies group; or

•         A transfer value - if a Participant leaves the Fund before reaching the Pensionable Age, the Participant may take their accrued pension as a transfer value rather than as a future pension.

In other words, the benefit the Participant is entitled to as a result of their employment with the group of companies is 'portable'. A pension transfer value is a lump sum equal to the monetary value of a person's entitlement made available to transfer.

Residence and continuity

Neither the Fund nor the Managing Company are residents of Australia for tax purposes and neither have a permanent establishment in Australia.

The central management and control of the Fund is outside Australia.

A statement prepared by the Managing Company has been provided with the ruling application confirming that:

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

•         the Fund was established in a country outside Australia;

•         the Fund has been established, and is maintained and applied, for the sole purpose of providing superannuation benefits for persons who are not residents of Australia;

•         the Fund's central management and control is carried on outside Australia by persons none of whom is a resident of Australia;

•         no amount paid to the Fund can be deducted under the ITAA 1997 or the ITAA 1936;

•         no tax offsets wold be allowable for an amount paid to or set aside for the Fund; and

•         the interest and dividend income of the Fund is exempt from income tax in the country in which the Fund is resident.

The Fund continues indefinitely unless dissolved under an Article of the Constitution. There is no express termination date in the Fund's Constitution or Regulations. At the time of this application there is no intention for the Board to exercise its discretion to dissolve the Fund.

Australian investments

The Fund holds a number of Australian investments including asset backed security investments, bonds, equity investments and foreign exchange contracts with a total participation interest in respect of each investment being below 10%.

Appendix A has been provided which lists all of the Fund's current investments in Australia.

In respect of the investments listed in Appendix A, neither the Fund nor any of its related parties:

•         are involved in the day to day management of the business of any of the Australian companies or trusts

•         have the right to appoint a director to the Board of Directors of the Australian company, Australian debt issuer or equivalent role in a rust

•         hold the right to representation on any investor representative or advisory committee (or similar) of the Australian companies or trusts, and

•         have 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 Australian companies or trusts.

Reasons for decision

Summary

The Fund is excluded from liability to withholding tax on interest, dividend and non-share dividend income in respect of its current Australian investments as listed in Appendix A as the requirements of paragraph 128B(3)(jb) of the ITAA 1936 are satisfied.

Detailed reasoning

Broadly, paragraph 128B(3)(jb) of the ITAA 1936 provides an exclusion from withholding tax for interest, dividends and non-share dividends derived by a superannuation fund for foreign residents (subject to the satisfaction of certain conditions).

For the exclusion to apply, the interest, dividend and/or non-share dividend income must be:

•         derived by a superannuation fund for foreign residents (as defined in section 118-520 of the ITAA 1997), and

•         exempt from income tax in the country in which the superannuation fund for foreign residents arise.

Further, from 1 July 20XX, the additional requirements in subsection 128B(3CA) of the ITAA 1936 must also be met.

Superannuation fund for foreign residents

Superannuation fund for foreign residents is a defined term in the ITAA 1936. Subsection 6(1) of the ITAA 1936 states:

Superannuation fund for foreign residents has the meaning given by subsection 995-1(1) of the ITAA 1997.

Subsection 995-1(1) of the ITAA 1997 states that a superannuation fund for foreign residents has the meaning given by section 118-520 of the ITAA 1997.

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 in a foreign country; 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.

The Fund must be a 'fund' that satisfies all of the conditions in section 118-520 of the ITAA 1997 to be a 'superannuation fund for foreign residents'.

1. An indefinitely continuing fund

The term 'fund' is not defined in either the ITAA 1997 or the ITAA 1936. Therefore its ordinary meaning should be used 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. FC of T (No 2) (1966) 14 ATD 333; (1966) 10 AITR 290 (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) 138 FCR 1; 2003 ATC 5076; (2003) 54 ATR 423 who stated that 'for present purposes, the point is the need for "money" or "other property" to constitute a fund'.

Based on the ordinary usage of the word 'fund' and the relevant case law it becomes apparent that for a fund to exist there must be money and it must be set aside for a purpose and/or invested.

In this regard, the Fund receives contributions from employee members and employers on behalf of employee members of the relevant group of companies. The Fund holds these funds on trust for the purpose of providing superannuation benefits to its members, including the payment of pensions, death, disability and termination benefits in accordance with the Constitution and Regulations.

On the basis that the money collected by the Fund from employee members and employers on behalf of employee members of the group of companies, is effectively 'set aside' for investment and for the purposes of providing pensions, death, disability and termination benefits, the Fund will constitute a 'fund'.

The term 'indefinitely continuing fund' is not defined in either the ITAA 1997 or the ITAA 1936. 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 Fund continues indefinitely unless dissolved under the relevant Articles of the Constitution. There is no express termination date in the Fund's Constitution or Regulations. At the time of this application there is no intention for the Board to exercise its discretion to dissolve the Fund.

Further, a statement prepared by the Investment Manager of the Fund confirms the assertion that the Fund is considered to be indefinitely continuing. On this basis, the Fund is an indefinitely continuing fund.

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 1997 or the ITAA 1936.

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

In this case, the Fund provides retirement, disability and death benefits to eligible employees of the group of companies. The Fund also pay out benefits when an employee ceases employment (either by retirement, death or disability) and the benefits vary depending on age requirements.

The only circumstances in which members of the Fund (or their relatives) may directly receive benefits or payments from the Fund prior to being at least 55 years old are where a member:

•         retires because of disability, illness or incapacity and their employer consents;

•         dies; or

•         leaves the group of companies before retirement where the member chooses to take their accrued pension as a transfer value rather than as a future pension. A transfer value is a lump sum equal to the monetary value of a person's entitlement made available to transfer.

Therefore, the Fund has a purpose of providing a pool of assets for use by employees only on their retirement, death or contemplated contingencies such as being unable to work. These benefits align with the sole purpose of providing retirement benefits or benefits in other allowable contemplated contingencies.

Therefore, the Fund satisfies this requirement.

3. Established in a foreign country.

The Fund was established in a foreign country.

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 and is maintained only to provide superannuation benefits to employees of the relevant group of companies who are not Australian residents. The Investment Manager of the Fund confirms that the Fund does not provide benefits to Australian residents.

Therefore, the Fund satisfies this requirement.

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.

The Fund is governed by the relevant country's law and is administered by a Board of Directors.

The Fund's Investment Manager confirms that the central management and control of the Fund is carried on outside Australia by entities who are not resident in Australia.

Therefore, the Fund satisfies this requirement.

6. Subsection 118-520(2)

The Fund has not and cannot deduct amounts under either the ITAA 1997 or the ITAA 1936 for amounts paid to it.

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

The Fund resides in a foreign country and is exempt from income tax in that country. Therefore, the dividend and interest income derived by the Fund will be exempt from tax in that country.

Therefore, the Fund will satisfy 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) 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 must satisfy 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 does not hold more than 10% ownership of any of the entities listed in Appendix A. 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 Appendix A.

2.      The Fund must satisfy the 'influence test'

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 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 Appendix A:

•         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 of 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 Australian company or trust.

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) of the ITAA 1936.

3.      Otherwise non-assessable non-exempt

Section 128D of the ITAA36 provides the following:

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.

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 in Australia as listed in Appendix A.