Edited version of your private ruling

Authorisation Number: 1051806968053

Date of advice: 18 February 2021

Ruling

Subject: Exemption from withholding tax for a foreign superannuation fund

Question

Is the Fund ('the Fund') excluded from liability to withhold tax on interest, dividend and non-share dividend income derived from its 'Australian Investments' as listed in the facts 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:

The relevant ruling period.

The scheme commences on:

The commencement date.

Relevant facts and circumstances

Plan management:

The key decision making of the Fund is managed through a Board of Directors ("The Board"). The Board is charged with the management of the Fund and setting out the fund's general policies.

The Board acts as the competent authority to set out the Fund's general policy and generally:

•         approve the draft budget and final accounts;

•         propose drafts of laws related to pensions;

•         lay down the general plan for the investment of the fund's monies; and

•         appoint an auditor for the fund's accounts.

The Board delegates the day to day running and investment activities of the Fund to the General Manager.

Upon the Board of Director's approval, a committee of experience personnel responsible for investing the monies of Fund is formed by decision of the Chairman. The committee is presided by the Chairman and the General Manager is a member of the committee.

The General Manager is responsible for establishing the administration of the Fund and representing the Fund in its relations with third parties and before courts.

The General Manager has responsibilities for:

•         Execution of the general policy that the Fund Board of Directors have decided upon;

•         Execution of the resolutions of the Board of Directors, and is directly responsible before the Fund Board of Directors;

•         Managing the Fund and developing its work system;

•         Studying and approving the financial, administrative, and technical affairs that the law, resolutions and regulations designate as within the competence of the General Manager;

•         Presenting the draft budget and final account of the Fund to the Board of Directors within three months from the end of the financial year, attached to it detailed statements on the items of assets and deductions and a general account of the revenue and expenses, a general report on the Fund's work, its financial situation, and the investment aspects of its reserves; and

•         The General Manager may authorise one of its deputies to exercise its powers. The Chairman is responsible for issuing decisions on the appointment of any deputies and to determine their allocations for five years, subject to renewal.

Eligibility:

The Fund is open to eligible employees.

Contributions:

Participants are liable to pay a monthly contribution to the Fund from the period of joining until reaching the retirement age. The employer deducts the contribution from the Participant's salary and pays the contribution to the Fund on behalf of the Participant ("Participant's Contribution").

Benefits:

The fund provides the following benefits:

•         Retirement pension

•         Retirement benefit

•         Disability benefits

•         Death benefits.

Participants are able to take a monthly pension from the Fund once the Participant reaches the retirement age.

If a Participant ends their salary before the Pension Age, they are not entitled to the retirement pension but may be entitled to a reduced retirement benefit.

If a Participant retires because of disability, illness or incapacity they may receive a disability pension, regardless of age.

Upon the death of a Participant in service or retirement their partner, children, parents, siblings or grandchildren can be entitled to the Participant's pension, regardless of the Participant's age.

Central management and control:

The Fund was established in a foreign country and its head offices are in the foreign country.

Wind up and insolvency:

The Fund is an indefinitely continuing fund.

Tax status:

The Fund is exempt from corporate tax in the foreign jurisdiction.

Australian investments:

The Fund provided a list of its Australian investments.

Equity Characteristics

The Fund has invested in Australian equity investments (as detailed in Fact 30). These equity investments have the following characteristics:

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

b.    The Fund holds less than 10% of the total equity interests on issue of each Australian company or trust.

c.     The Fund has no involvement in the day to day management of the business of any of the Australian companies or trusts.

d.    The Fund has no right to appoint a director to the Board of Directors of the Australian company or equivalent role in a trust.

e.    The Fund has no right to representation on any investor representative or advisory committee (or similar) of the Australian company, or equivalent role in a trust.

f.      The Fund has no ability to direct or influence the operation of the Australian company or trust outside of the ordinary rights conferred by the equity interest held.

g.    The Fund only holds rights to vote in proportion to its equity interest in each Australian company or trust.

Reasons for decision

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.

Subsection 128B(3) of the ITAA 1936 notes that section 128B of the ITAA 1936 will not apply to prescribed categories of income. Relevantly, paragraph 128B(3)(jb) 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) must also be met.

Superannuation fund for foreign residents

The Fund is not a resident of Australia for tax purposes. Therefore, the Fund satisfies this requirement.

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 Income Tax Assessment Act 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.

The term 'superannuation fund for foreign residents' is defined in section 118-520 of the Income Tax Assessment Act 1997 (ITAA 1997) as follows:

118-520 Meaning of superannuation fund for foreign residents

(1) A fund is a superannuation fund for foreign residents at a time if:

(a) at that time, it is:

(i) an indefinitely continuing fund; and

(ii) a provident, benefit, superannuation or retirement fund; and

(b) it was established in a foreign country; and

(c) it was established, and is maintained at that time, only to provide benefits for individuals who are not Australian residents; and

(d) at that time, its central management and control is carried on outside Australia by entities none of whom is an Australian resident.

(2) However, a fund is not a superannuation fund for foreign residents if:

(a) an amount paid to the fund or set aside for the fund has been or can be deducted under this Act; or

(b) a *tax offset has been allowed or is allowable for such an amount.

1.            An indefinitely continuing fund

The term 'indefinitely continuing fund' is not defined in either the ITAA 1997 or the ITAA 1936. Therefore, it should be given its ordinary meaning subject to the context in which it appears and having regard to any relevant case law authorities.

The Australian Oxford Dictionary, 2004, Oxford University Press, Melbourne defines the term 'fund' as; 1: a permanent stock of something ready to be drawn upon... 2: a stock of money, especially one set apart for a purpose.

In Scott v. 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'.

The general view is that an indefinitely continuing fund does not have to continue forever, but rather that the governing rules should not fix an express termination date.

The Fund is an indefinitely continuing fund. Neither the rules of the Fund nor and relevant law provides for winding up at a defined point in time. On that basis, the Fund is accepted to be indefinitely continuing.

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 1936 or the ITAA 1997.

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).

It is accepted that the Fund is a "provident, benefit, superannuation or retirement fund" on the basis that:

•         The Fund's sole purpose is to provide the relevant participant employees money benefits upon their reaching a prescribed age;

•         The Fund can be described as "provident" on the basis that it provides money benefits upon particular contingencies (e.g. death, ill-health and retirement);

•         The Fund provides benefits upon an employee's retirement or death or other cessation of employment, including to survivors and children of the employee;

•         The terms of the Fund (i.e. the Trust rules) are consistent with a superannuation fund and the terms are strictly adhered to;

•         The amounts collected by the Fund are not used for any purposes other than providing benefits to participants, former participants and their beneficiaries under the Fund and paying the reasonable expenses of administering the Fund; and

•         Contributions are made into the Fund by the participating employer.

Therefore, the Fund satisfies this requirement.

3.            Established in a foreign country:

The Fund has been 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 to provide superannuation benefits to foreign nationals.

The Fund does not provide benefits to Australian residents. Accordingly, the Commissioner accepts that the Fund was established and is maintained only to provide benefits for individuals who are not Australian residents.

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 central management and control of the Fund is carried out by a Board of Directors ("The Board"). The Board is charged with the management of the Fund and setting out the Fund's general policies.

The Commissioner is satisfied in these circumstances that the central management and control of the Fund is in a foreign country and is carried out by individuals who are not Australian residents.

Therefore, the Fund satisfies this requirement.

6.            Subsection 118-520(2):

A fund is not a superannuation fund for foreign residents if:

a.    an amount paid to the fund or set aside for the fund has been or can be deducted under the Act; or

b.    a tax offset has been allowed or is allowable for such an amount.

No amount paid to the Fund or set aside for the Fund has been or can be deducted (and no tax offset has been allowed or is allowable for such an amount) under the ITAA 1936 or ITAA 1997.

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 is exempt from income tax in the foreign country.

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) 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% of the total participation of any of the entities listed in the 'Australian Investments' section.

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 and circumstances 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 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 of the Australian companies or trusts.

Accordingly, the Fund does not have influence of a kind described in subsection 128(3CD) of the ITAA 1936 in respect of these investments. The Fund does not have capacity to influence (either directly or indirectly) the day-to-day management of the operations of their 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

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.

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 20XX in Australia as listed in the facts.