Edited version of private advice

Authorisation Number: 1051800480492

Date of advice: 01 February 2021

Ruling

Subject: Exemption from withholding tax for a foreign superannuation fund

Question

Is the Fund excluded from liability to withholding tax on interest, dividend and non-share dividend income in respect of the Public Investments (listed in 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 periods:

1 July 2019 to 30 June 2025

The scheme commences on:

1 July 2019

Relevant facts and circumstances

The Fund

The Fund was established in a country other than Australia, being the United States of America.

1. The Fund was established and is maintained only to provide benefits for individuals who are not Australian residents.
2. The Fund's central management and control is carried on outside of Australia by entities none of whom are Australian residents.
3. The Plan Administrator or designee has full discretionary authority to interpret and construe the terms of the Plan, to decide questions related to eligibility to participate or the payment of benefits under the Plan, and to make related findings of fact.
4. The Company pays the cost of providing plan benefits. The amount of the annual Company contribution is actuarially determined. Assets are held in a master pension trust established by the Company.
5. The Company may amend, suspend or terminate the Plan in whole or in part at any time. This cannot retroactively reduce benefits already accrued except where required to comply with law or an IRS rule.
6. The Plan will not be taxable to the Trust, the Company, or participants until distributed.

Eligibility

7. The Plan covers certain active, salaried employees of the Company.

Cost

8. The Company pays the entire cost of providing the Retirement Program benefits and employees do not make any contributions.

Service

Period of Employment

9. An employee's Period of Employment is the time within which their service is counted for Vesting Service, Credited Service and Benefit Eligibility Service purposes. A Period of Employment begins on the first day of employment but does not include time spent in a business unit or classification not covered by the Plan.

Hours of Services

10. Vesting Service, Credited Service and Benefit Eligibility Service amounts are calculated based on an employee's Hours of Service.
11. No participant will be awarded any Hours of Service towards Credited Service accruals for periods of employment after December 31, 2019.

Vesting Service

12. An employee's years of Vesting Service is determined by counting the number of Hours of Service with which they are credited during each year of the Plan Year after their date of hire.
13. Employees who are participants in the Retirement Program and who are actively employed by the Company have a nonforfeitable right to a pension benefit, even if they leave the company before retirement.

Vesting

14. An employee becomes vested after:

•   They have five years of Vesting Service, or

•   They reach age 65 (normal retirement date) while employed by the Company.

15. The following absences (during the Period of Employment) were also counted toward Vesting Service:

•   Paid leaves of absence,

•   Certain service in the United States military for up to five years if they return to work following release from military service,

•   When they were paid, but did not perform any duties (e.g. holidays), and

•   Transfers to a business unit or employee classification not covered by this Plan.

Credited Service

16. Credited Service is used to determine the amount of an employee's retirement benefit. Years of Credited Service are determined by counting the number of Hours of Service with which the employee is credited during each Plan Year.

Benefit Eligibility Service

17. Benefit Eligibility Service is used to determine eligibility for Early Retirement benefits and special layoff benefits.

Benefits

Retirement Benefit

18. The Retirement Program benefit is calculated using a formula that is based on:

•   The employee's Final Average Pay through the earlier of their termination or 31 December 2015,

•   The employee's Social Security Breakpoint amount,

•   The Plan's Accrual Rate, and

•   The employee's Credited Service through the earlier of their termination or 31 December 2019.

Early Retirement benefit

19. An employee can retire from active service at or after age 55 if they have at least five years of Benefit Eligibility Service at a reduced Retirement Program benefit. There is no Benefit reduction after 60 years of age.

Special Retirement - Disability or laid off

If an employee is a Disability Eligible member or they have been laid off, they are eligible to commence their Retirement program benefit starting as early as age 55

Leaving the Company before becoming eligible to retire

20. An employee may receive a benefit from the Retirement Program if they are vested when they terminate employment.
21. If an employee terminates employment after completing five years of Vesting Service, but before retirement age, they can start to receive the normal retirement benefit they earned at the time of termination. They will receive a full benefit at age 65 or a reduced benefit at age 55 if they have at least five years of Benefit Eligibility Service at termination.

Payment method

22. A benefit will be paid as either:

•   Life only, if the employee is single; or

•   50% Joint and Survivor benefit, with the spouse as beneficiary, if the employee is married.

Lump sum benefit

23. If the actuarial value of the pension benefit when an employee terminates employment is less than $5,000, the value of the benefit will automatically be paid in accordance with administrative practices in effect on the date of their termination.

Investments in Australia

24. The Fund provided a list of its Australian investments.

Equity Characteristics

25. All investments in Australia are listed on the ASX with a total participation interest in respect of each investment being below 10%.
26. The Fund holds no rights to appoint a person to a board, committee or similar, either directly or indirectly.
27. The Fund has not entered into, or received, any side letters, arrangements or agreements.
28. The Fund holds no veto rights on security holder votes.
29. 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 its investments.
30. No amount paid to the Fund can be deducted under the Income Tax Assessment Act 1997 (ITAA 1997) or the ITAA 1936.
31. No tax offsets would be allowable for an amount paid to the Fund or set aside for the fund.
32. The income of the Fund is not non-assessable non-exempt income of the Fund because of either Subdivision 880-C of the ITAA 1997 or Division 880 of the Income Tax (Transitional Provisions) Act 1997.

Reasons for decision

Summary

The requirements of paragraph 128B(3)(jb) of the ITAA 1936 are satisfied. The Fund is excluded from liability to withholding tax on interest, dividend and non-share dividend income derived in respect of assets derived from its Australian investment under paragraph 128B(3)(jb) of the ITAA 1936.

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 2019, the extra 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 subsections 995-1(1) of the ITAA 1997.

Subsection 995-1(1) of the ITAA 1997 sets out the following:

Superannuation fund for foreign residents has the meaning given by section 118-520.

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 subsection 118-520(1) of the ITAA 1997 (and none of the paragraphs in subsection 118-520(2) of the ITAA 1997) to be a 'superannuation fund for foreign residents'.

1. An indefinitely continuing 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.

Further, the Fund does not provide for winding up at a defined point in time. On that basis, the Fund is an indefinitely continuing fund.

Therefore, the Fund will satisfy 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 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 is a fund arranged for employees of the company.

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:

a) is unable to work due to disability or being laid off;

b) dies; or

c) receives a payment on ceasing to be a member of the Fund.

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 benefits to employees of the Company. These employees reside in the foreign country.

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 Management Company is the named fiduciary who appoints investment managers and directs the Trustee with respect to all pension fund investments.

The Fund's central management and control is carried on outside Australia by entities (none of whom is an Australian resident).

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.

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

In the circumstances, the Commissioner is satisfied that the Fund 'resides' in the foreign country for the purposes of subparagraph 128B(3)(jb)(iii) of the ITAA 1936.

The Fund is also exempt from direct taxation, including income tax, in the foreign country pursuant to the relevant taxation legislation.

Therefore, the Fund satisfies this requirement.

Subsection 128B(3CA):

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

Relevantly:

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

•   The Fund must satisfy the 'influence test' (subsection 128B(3CD) in relation to the test entity, and

•   The income cannot otherwise be non-assessable non-exempt income of the Fund because of:

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

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

1. The Fund satisfies the 'portfolio interest test'

Subsection 128B(3CC) states:

A superannuation fund satisfies the portfolio interest test in this subsection in relation to the test entity at a time if, at that time, the total participation interest (within the meaning of the Income Tax Assessment Act 1997) the superannuation fund holds in the test entity:

(a) is less than 10%; and

(b) would be less than 10% if, in working out the direct participation interest (within the meaning of that Act) that any entity holds in a company:

(i) an equity holder were treated as a shareholder; and

(ii) the total amount contributed to the company in respect of non share equity interests were included in the total paid up share capital of the company.

As per the facts, the Fund does not hold more than 10% ownership of any of the entities listed in the 'Australian Investments' section. Furthermore, the Fund's Australian Investments also meet certain 'Equity Characteristics' as listed.

In these circumstances, the Commissioner is satisfied that the total participation interest the Fund holds in the test entities:

•   Is less than 10% pursuant to paragraph 128B(3CC)(a) at all relevant times; and

•   Would be less than 10% in the circumstances detailed in paragraph 128B(3CC)(b) at all relevant times.

The Fund therefore satisfies the 'portfolio interest test' in respect of its Australian investments listed in the relevant facts of this Ruling.

2. The Fund satisfies the 'influence test'

Subsection 128(3CD) states:

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

(a) the superannuation fund:

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

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

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

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

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

Sub-test 1 of the influence test, as contained in paragraph 128B(3CD)(a), assesses whether the Fund is able to determine the identity of at least one of the persons who, individually or together with others, makes or is reasonably expected to make, decisions comprising the control and direction of the test entity's operations. This includes situations where the Fund is able to act in concert with others to determine the identity of a relevant decision-maker in the test entity.

Sub-test 1 also extends to situations where the Fund, in its own right, holds the ability to approve or veto decisions which go to the control or direction of the test entity.

Sub-test 2 of the influence test, as contained in paragraph 128B(3CD)(b), assesses whether at least one of the relevant decision-making persons of the test entity is accustomed or obliged to act, or might reasonably be expected to act, in accordance with the directions, instructions or wishes of the Fund.

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

•   Neither the Fund, nor any related party, is involved in the day to day management of the business of any of the Australian companies or trusts;

•   Neither the Fund, nor any related party, has the right to appoint a director to the Board of Directors of the Australian company, Australian debt issuer or equivalent role in a trust;

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

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

•   The Trust 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).

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 acquired after 27 March 2018 in Australia as listed in the facts.