Edited version of private advice

Authorisation Number: 1051794647187

Date of advice: 03 February 2021

Ruling

Subject: Withholding tax - exemptions - superannuation fund 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 under 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

1.    The Fund was established to benefit Company employees, and their dependents, including those acquired from other entities.

2.    The Fund is governed by a plan (the Plan Rules). The Plan Rules form part of the scheme to which this Ruling relates.

3.    The Plan Rules are administered by the Committee, as appointed by the Company CEO and is the named fiduciary with respect to control or management of the operation and administration of the Plan Rules.

4.    The Company CEO shall appoint persons to serve on the Committee.

5.    The Committee administers the Plan Rules from Country X.

6.    The Fund is made up of multiple defined benefit and defined contribution plans. All defined benefit plans are treated as one defined benefit plan, while all defined contribution plans are treated as one. Defined contribution plans have similar conditions except Plan B.

Management of Investments

7.    The named fiduciary with respect to control or management of the assets of the Fund is the Investment Committee, as appointed by the Company CEO.

8.    The Fund has a number of investment managers appointed by the Investment Committee.

9.    The Company CEO of the Principal shall appoint persons to serve on the Investment Committee.

10.  The Trustee holds funds and property under a trust agreement for the exclusive benefit of the Fund's members and beneficiaries.

11.  The Trustee shall hold the Fund's plans as a commingled fund or commingled funds in which each separate plan shall be deemed to have a proportionate undivided interest in the fund or funds. The Trustee shall make distributions from the Fund.

12.  The powers of the Investment Committee include:

• to establish the funding policy for the Fund consistent with the Fund's objectives
• to establish the Fund's overall investment policy
• to appoint and remove a Trustee
• to direct such Trustee with respect to the investment and management of the Fund's assets.

13.  The Investment Committee has the sole responsibility for the decision to maintain the custody of foreign investments abroad, including that the custody of foreign investments shall be maintained with foreign custodians selected by the Trustee.

14.  The Trustee holds the assets as custodian. All returns are paid directly into the appropriate Trustee's Fund account. The Trustee may lend securities under the instructions of the appointed investment managers.

15.  The Trustee may only use its powers to benefit the Fund. The Committee directs the Trustee to pay benefits to members and pay Fund expenses.

Termination of the Fund

16.  The Fund has provided a statement that it is an indefinitely continuing fund.

17.  While the Fund is expected to continue indefinitely, continuation of the Fund is not assumed as a contractual obligation of a company party to the agreement and the right is reserved by the Company (or another specified company) to terminate its participation in the Fund.

18.  The Fund's assets shall not be diverted from its purposes nor shall Company contributions revert back but excessive or mistaken amounts may be paid back in certain circumstances.

Benefits provided

Defined Benefit Rules (other than Plan B)

•         Normal retirement: a member's Normal Retirement Date shall be the day on which he shall attain age x to receive their benefits, including their accrued benefits.

•         Early retirement: a member may elect to retire at his own option on the first day of any month following his attainment of age x and completion of at least x years of service.

•         Disability benefits: a member who has completed at least x years of service and who becomes totally and permanently disabled prior to his Normal Retirement Date shall be retired on the earlier of:

-       the first day of the month following his completion of x months of continuous disability, if on the date on which the Member became disabled he had attained age x; or

-       the first day of the month following the month in which he becomes eligible for and receives a social security disability benefit.

•         Death and Survivor benefits.

Defined Benefit Rules (Plan B)

1.    A Plan B Member is eligible to receive benefits as determined under the Plan Rules for periods of service on and after a set date.

2.    An Account shall be established and maintained for each Plan B Member. The opening balance of the Account shall be $0. The Account shall be credited with pay and interest.

3.    A Plan B Member who is disabled shall continue to receive pay and interest to his Account until his or her Normal Retirement Date. Such disabled Plan B Member may elect to receive an immediate distribution of his Account upon becoming disabled.

4.    Death benefits on the death of a Plan B Member are provided for under the Plan Rules.

5.    A Plan B Member shall be fully vested in his or her Account on his attainment of Normal Retirement Age. A Plan B Member with x or more years of service shall be fully vested in his or her Account.

6.    A vested Plan B Member can elect to commence to receive his or her Account as of the first day of any month after his or her termination of employment in accordance with the applicable provision of the Plan Rules.

General withdrawal rules

7.    If a member's employment is terminated following their completion of at least x years of service (x years for Plan B members) and before their Normal Retirement Date, their benefits are fully vested and will be received when they meet the Normal Retirement Date or Early Retirement Date.

8.    If a member has not otherwise completed the required years of service, they are not entitled to any benefits under the Plan Rules. The value of the unvested accrued benefit (including their member account) shall be deemed to be cashed out upon termination of employment. If such a member resumes employment, they will be deemed to have repaid the amount cashed out.

9.    Defined contribution members whose employment is terminated before completing x years of service and prior to their Normal Retirement Date, will only be refunded of their contributions, including credited interest, and their withdrawal forfeits future rights under the Plan Rules.

10.  If the amount of the nonforfeitable accrued benefit attributable to Company contributions is low, it may be paid out as a single lump, to the member or paid into an eligible retirement fund, depending on the amount.

11. Such members' early withdrawals may also be subject to penalties and other tax implications.

Other relevant facts

12. 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.

13. 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.

14. The Fund has submitted a notice from the Country X Tax Authority which states that the Fund is registered and that tax relief and exemptions are available.

15. Income of the Fund is not 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 and future Australian investments

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

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

•         The Fund holds less than 10% of the total participation interests in each Australian company, trust or real estate investment trust (REIT).

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

•         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, trusts or REITs.

•         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 a trust or REIT.

•         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, or equivalent role in a trust or REIT.

•         Neither the Fund, nor any related party, has the ability to direct or influence the operation of the Australian company, trust or REIT 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, trust or REIT.

Relevant legislative provisions

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

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.

The Fund is 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.

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 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.

1. An indefinitely continuing fund

The Fund was established to benefit Company employees, and their dependents, including those acquired from other entities.

While the Fund is expected to continue indefinitely, continuation of the Fund is not assumed as a contractual obligation of a 'Company' and the right is reserved by the Company (or another specified company) to terminate its participation in the Fund.

The Fund's assets shall not be diverted from its purposes nor shall Company contributions revert back but excessive or mistaken amounts may be paid back in certain circumstances.

The Fund has provided a statement that it is an indefinitely continuing fund.

Therefore, the Fund satisfies this requirement.

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 (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 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).

Broadly, the Fund provides benefits to members as follows:

Benefits provided

Defined Benefit Rules (other than Plan B)

a.    Normal retirement: a member's Normal Retirement Date shall be the day on which he shall attain age 65 to receive their benefits, including their accrued benefits.

b.    Early retirement: a member may elect to retire at his own option on the first day of any month following his attainment of age x and completion of at least x years of service.

c.     Disability benefits: a member who has completed at least x years of service and who becomes totally and permanently disabled prior to his Normal Retirement Date shall be retired on the earlier of:

§ the first day of the month following his completion of x months of continuous disability, if on the date on which the Member became disabled he had attained age x; or

§ the first day of the month following the month in which he becomes eligible for and receives a social security disability benefit.

d.    Death and Survivor benefits.

Defined Benefit Rules (Plan B)

A Plan B Member is eligible to receive benefits as determined under the Plan Rules for periods of service on and after a set date.

An Account shall be established and maintained for each Plan B Member. The opening balance of the Account shall be $0. The Account shall be credited with pay and interest.

A Plan B Member who is disabled shall continue to receive pay and interest to their Account until his or her Normal Retirement Date. Such disabled Plan B Member may elect to receive an immediate distribution of their Account upon becoming disabled.

Death benefits on the death of a Plan B Member are provided for under the Plan Rules.

A Plan B Member shall be fully vested in his or her Account on his attainment of Normal Retirement Age. A Plan B Member with x or more years of service shall be fully vested in his or her Account.

A vested Plan B Member can elect to commence to receive his or her Account as of the first day of any month after his or her termination of employment in accordance with the applicable provision of the Plan Rules.

General withdrawal rules

If a member's employment is terminated following their completion of at least x years of service (x years for Plan B members) and before their Normal Retirement Date, their benefits are fully vested and will be received when they meet the Normal Retirement Date or Early Retirement Date.

If a member has not otherwise completed the required years of service, they are not entitled to any benefits under the Plan Rules. The value of the unvested accrued benefit (including their member account) shall be deemed to be cashed out upon termination of employment. If such a member resumes employment, they will be deemed to have repaid the amount cashed out.

Defined contribution members whose employment is terminated before completing x years of service and prior to their Normal Retirement Date, will only be refunded of their contributions, including credited interest, and their withdrawal forfeits future rights under the Plan Rules.

If the amount of the nonforfeitable accrued benefit attributable to Company contributions is low, it may be paid out as a single lump, to the member or paid into an eligible retirement fund, depending on the amount.

Such members' early withdrawals may also be subject to penalties and other tax implications.

The Commissioner accepts 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 Country X.

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 benefits to those employed by the Fund's various comprised universities and colleges. The employers and their employees reside in Country X.

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 Committee exercises the CM&C of the Fund. The Committee are not Australian residents.

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. 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.

Therefore, the Fund satisfies these requirements.

7. 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 Country X Tax Authority has confirmed that the Fund has been registered by them and that tax relief and exemptions are available.

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.

Relevantly:

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

•   The Fund must satisfy the 'influence test' (subsection 128B(3CD) of the ITAA 1936) 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) 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 holds less than 10% of the total participation interests in each Australian company, trust or real estate investment trust (REIT). Further, the Fund would hold less than 10% of the total participation interests in each Australian company, trust or REIT 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 to the relevant facts and circumstances of this Ruling).

2. 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, 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) 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.

Relevantly, in respect of the investment listed in the relevant facts and circumstances to this Ruling:

•         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, trusts or REITs.

•         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 a trust or REIT.

•         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, or equivalent role in a trust or REIT.

•         Neither the Fund, nor any related party, has the ability to direct or influence the operation of the Australian company, trust or REIT 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, trust or REIT.

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.

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.

Conclusion

The Fund is excluded from withholding tax in relation to interest, dividend and non-share dividend income derived from its current investments.