| Disclaimer You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4. |
Edited version of private advice
Authorisation Number: 1051845433977
Date of advice: 18 June 2021
Ruling
Subject: Withholding tax - exemption - superannuation fund for foreign residents
Question
Is The Fund excluded from liability to withholding tax on interest, dividend and non-share dividend income derived from its Australian investments, listed in Appendix 1 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:
Year ended 31 December 20XX
Year ended 31 December 20XX
Year ended 31 December 20XX
Year ended 31 December 20XX
Year ended 31 December 20XX
The scheme commences on:
1 January 20XX
Relevant facts and circumstances
The Fund
1. The Fund was established under the laws of the State of the Foreign Country.
2. The Fund's registered office is in the Foreign Country.
3. The Fund is exempt from taxation in the Foreign Country.
4. The Fund's purpose is to hold assets of pension plans for all employees that are employed (or were previously employed) by any organisation within the Corporate Group.
5. The Fund's members are residents of the Foreign Country and there are no eligible employees that are Australian residents.
Pension Plans
6. The Fund holds the assets of multiple frozen, defined-benefit pension plans (Pension Plans).
7. The Pension Plans provide benefits payable upon retirement, death, disability and an old-age related benefit which entitles retirement-aged employees to begin receiving pension benefits while still working and before formal retirement.
8. As the Pension Plans are frozen, members will no longer accrue additional benefits. However, benefits already accrued as of the freeze date, will remain in the Pension Plans until the members are eligible for a distribution.
9. The Fund receives employer contributions payable in accordance with the plan documents and income from the invested assets of the Pension Plans.
The Trustee, Central Management and Control (CM&C)
10. The Pension Plans are administered by the Administrators which are different entities or committees, within the Corporate Group.
11. The trustee for The Fund is The Trustee.
12. The Trustee is a 'directed trustee' with respect to the operation, maintenance and investment of The Fund's assets, except to the extent that The Trustee has expressly accepted responsibility for the management of The Fund's assets under the Trust Agreement.
13. The trust agreement sets out the rules governing The Fund's operation (Trust Agreement).
14. Each of the Pension Plans is governed by a plan document and the Trust Agreement.
15. When members become entitled to receive pension payments, the Administrators direct The Trustee to make a distribution.
16. The Trustee distributes benefits directly to members of the Pension Plans.
17. The Finance Committee acts as investment advisor to The Fund.
18. The Investment Manager, as delegated by the Finance Committee, acts as an investment manager to The Fund.
19. No members of the Administrators, Finance Committee or Investment Manager are residents of Australia.
Benefits provided
20. The Fund provides death, disability and retirement benefits to members with slight age and vesting years variances between each of the Pension Plans.
Australian investments
21. As at the relevant time, The Fund holds Australian equity and debt investments as detailed in Appendix 1 of this Ruling.
22. The Australian equity and debt investments all 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 participation interests in each entity and has never held more than a 10% participation interest.
c. The Fund would hold less than 10% of the total participation interests in each entity in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936.
d. 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.
e. 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.
f. Neither The Fund, nor any related party of The Fund, holds the right to representation on any investor representative or advisory committee (or similar) of the Australian company.
g. Neither The Fund, nor any related party of The Fund, has the ability to direct or influence the operation of the Australian company outside of the ordinary rights conferred by the equity interest held.
h. The Fund only holds rights to vote in proportion to its equity interest in each Australian company.
Other relevant facts
23. 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.
24. 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.
25. Income of The Fund is not non-assessable non-exempt income because of:
(i) Subdivision 880-C of the ITAA 1997, or
(ii) Division 880 of the Income Tax (Transitional Provisions) Act 1997.
Relevant legislative provisions
Income Tax Assessment Act 1936 paragraph 128B(3)(jb)
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.
Broadly, paragraph 128B(3)(jb) of the ITAA 1936 provides an exclusion from withholding tax for interest, dividends and non-share dividends derived by a superannuation fund for foreign residents (subject to the satisfaction of certain conditions). Relevantly, paragraph 128B(3)(jb) of the ITAA 1936 applies to:
(jb) income that:
(i) is derived by a non-resident that is a superannuation fund for foreign residents; and
(ii) consists of interest, or consists of dividends or non-share dividends paid by a company that is a resident; and
(iii) is exempt from income tax in the country in which the non-resident resides;
Further, from 1 July 2019, the extra requirements in subsection 128B(3CA) of the ITAA 1936 must also be met.
Consideration of the above requirements is outlined below.
Subparagraph 128B(3)(jb)(i) of the ITAA 1936
Is The Fund a non-resident?
The Commissioner has determined from the facts and circumstances that The Fund is a resident of the Foreign Country and is not a resident of Australia.
Therefore, The Fund satisfies this requirement.
Is The Fund a superannuation fund for foreign residents?
For The Fund to be considered a superannuation fund for foreign residents for the purposes of paragraph 128B(3)(jb) of the ITAA 1936, it must satisfy the requirements set out in section 118-520 of the ITAA 1997, which states:
(1) A fund is a superannuation fund for foreign residents at a time if:
(a) at that time, it is:
(i) an indefinitely continuing fund; and
(ii) a provident, benefit, superannuation or retirement fund; and
(b) it was established in a foreign country; and
(c) it was established, and is maintained at that time, only to provide benefits for individuals who are not Australian residents; and
(d) at that time, its central management and control is carried on outside Australia by entities none of whom is an Australian resident.
(2) However, a fund is not a superannuation fund for foreign residents if:
(a) an amount is paid to the fund or set aside for the fund has been or can be deducted under this Act; or
(b) a *tax offset has been allowed or is allowable for such an amount
Consideration of the above requirements of section 118-520 of the ITAA 1936, is outlined below.
Is The Fund an indefinitely continuing fund?
The legislation provides no guidance on the meaning of 'indefinitely continuing'. It is not a technical legal expression, and the ordinary meanings of indefinitely and continuing involve little ambiguity or controversy.
The Macquarie Dictionary, [Online], viewed 29 March 2021, www.macquariedictionary.com.au defines 'indefinitely' and 'continuing' as follows:
Indefinite:
1. not definite; without fixed or specified limit; unlimited: an indefinite number.
2. not clearly defined or determined; not precise.
indefinitely, adverb
Continue: (verb (Continued, continuing))
1. to go forwards or onwards in any course or action; keep on.
2. to go on after suspension or interruption.
3. to last or endure.
4. to remain in a place; abide; stay.
5. to remain in a particular state or capacity
The Fund has provided a letter to the Commissioner which states that The Fund is an indefinitely continuing fund. As the Pension Plans are frozen, members will no longer accrue additional benefits. However, benefits already accrued as of the freeze date will remain in the Pension Plans until the members are eligible for a distribution. There is no indication that The Fund will be wound up in the near future.
Therefore, The Fund satisfies this requirement.
Is The Fund a provident, benefit, superannuation or retirement fund?
The phrase 'provident, benefit, superannuation or retirement fund' under subparagraph 118-520(1)(a)(ii) of the ITAA 1997 is not defined in either the ITAA 1997 or the ITAA 1936.
ATO Interpretative Decision ATO ID 2009/67 Income Tax: Superannuation fund for foreign residents (ATO ID 2009/67) provides guidance on the meaning of the phrase 'provident, benefit, superannuation or retirement fund':
None of the four descriptors 'provident', 'benefit', 'superannuation' or 'retirement fund' in subparagraph (a)(ii) of the definition of 'superannuation fund for foreign residents' in section 118-520 of the ITAA 1997 are defined. The terms have, however, been the subject of judicial consideration.
The courts have held that for a fund to be a 'provident, benefit, superannuation or retirement fund', the fund 's sole purpose must be to provide superannuation benefits, that is, benefits to a member upon the member reaching a prescribed age or upon their retirement, death or other cessation of employment (Scott v. FC of T (No 2) (1966) 14 ATD 333; (1966) 10 AITR 290, per Windeyer J; Mahony v. FC of T (1967) 14 ATD 519, per Kitto J; Walstern Pty Ltd v. Commissioner of Taxation (2003) 138 FCR 1; 2003 ATC 5076; (2003) 54 ATR 423, per Hill J and Cameron Brae Pty Ltd v. Federal Commissioner of Taxation (2007) 161 FCR 468; 2007 ATC 4936; (2007) 67 ATR 178, per Stone and Allsop JJ).
The above establishes that for a fund to qualify as a provident, benefit, superannuation or retirement fund, it must have the sole purpose of providing retirement benefits or benefits in other allowable contemplated contingencies (such as death, disability or serious illness).
The purpose of The Fund is to provide retirement, disability and death benefits to members, with slight variances between its multiple Pension Plans. The Fund carries out this purpose of providing benefits by holding the assets of the Pension Plans for all employees that are employed (or were previously employed) by any organisation within the Corporate Group.
The Fund has the sole purpose of providing benefits as a result of retirement, disability or death. On this basis, the Commissioner accepts that The Fund is a 'provident, benefit, superannuation or retirement fund'.
Therefore, The Fund satisfies this requirement.
Established in a foreign country
The Fund was established under the laws of the State of the Foreign Country.
Therefore, The Fund satisfies this requirement.
Was established and maintained only to provide benefits for individuals who are not Australian residents
The Fund was established and is maintained in the Foreign Country for eligible employees of any organisation within the Corporate Group. The Fund operates to provide retirement benefits for its members in the Foreign Country.
It is considered that the possibility of a very small number of members being returned residents or becoming Australian residents after ceasing eligible employment is incidental and should not be taken to conclude that The Fund, in this case, has not been established and is not maintained only to provide benefits for non-residents, based on the rules and operation of The Fund.
Therefore, The Fund satisfies this requirement.
Is The Fund's CM&C carried on outside Australia by entities none of whom is an Australian resident?
Paragraphs 20 and 21 of Taxation Ruling TR 2008/9 Income tax: meaning of 'Australian superannuation fund' in subsection 295-95(2) of the Income Tax Assessment Act 1997 (TR 2008/9) states:
20. The CM&C of a superannuation fund involves a focus on the who, when and where of the strategic and high level decision making processes and activities of the fund. In the context of the operations of a superannuation fund, the strategic and high level decision making processes includes:
• formulating the investment strategy for the fund;
• reviewing and updating or varying the fund's investment strategy as well as monitoring and reviewing the performance of the fund's investments;
• if the fund has reserves - the formulation of a strategy for their prudential management; and
• determining how the assets of the fund are to be used to fund member benefits.
21. The other principal areas of operation of a superannuation fund that form part of the day-to-day or operational side of the fund's activities will not constitute CM&C. These activities do not form part of the CM&C of the fund because they are not of a strategic or high level nature. Rather, these activities are of a more formalistic or administrative nature. Examples of such activities include the acceptance of contributions that are made on a regular basis, the actual investment of the fund's assets, the fulfilment of administrative duties and the preservation, payment and portability of benefits.
Furthermore, paragraph 10 and 11 of the Taxation Ruling TR 2018/5 Income tax: Central Management and Control test of residency (TR 2018/5) states:
10. Central management and control refers to the control and direction of a company's operations. It does not refer to a physical location in which the control and direction of a company is located and may ultimately be exercised in more than one location.
11. The key element in the control and direction of a company's operations is the making of high-level decisions that set the company's general policies and determine the direction of its operations and the type of transactions it will enter.
The Fund's registered office is in the Foreign Country.
The entities and individuals who control and direct The Fund's operations are not residents of Australia.
Based on the above, it is reasonable to conclude that the CM&C of The Fund occurs outside of Australia by entities that are not residents of Australia.
Therefore, the Fund satisfies this requirement.
No amount paid to The Fund or set aside for The Fund has been or can be deducted under the ITAA 1997 and no tax offset has been allowed or is allowable for such an amount
No amount paid to The Fund or set aside for The Fund has been or can be deducted under the ITAA 1936 or ITAA 1997. A tax offset has not been allowed nor would be allowable for any amount paid to The Fund or set aside for The Fund. The Fund has also confirmed that no amount paid to The Fund can be deducted under ITAA 1997 or ITAA 1936.
Therefore, The Fund satisfies these requirements.
Conclusion - Is The Fund a superannuation fund for foreign residents?
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.
Subparagraph 128B(3)(jb)(ii) of the ITAA 1936
Paragraph 128B(3)(jb) of the ITAA 1936 will only apply to interest, or to dividends and non-share dividends, derived by The Fund and paid by Australian resident companies.
The Fund derives interest and dividend income from the Australian investments listed in Appendix 1 of this Ruling, from companies who are residents of Australia for tax purposes.
Therefore, The Fund will satisfy this requirement.
Subparagraph 128B(3)(jb)(iii) of the ITAA 1936
Paragraph 128B(3)(jb) of the ITAA 1936 will only apply if the income from The Fund's Australian investments is exempt from income tax in the country in which it resides.
The Commissioner has determined that 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) of the ITAA 1936 to apply.
Generally, these extra requirements apply to income derived from 1 July 2019.
Accordingly:
(i) The Fund must satisfy the 'portfolio interest test' in relation to the test entity (subsection 128B(3CC) of the ITAA 1936)
(ii) The Fund must satisfy the 'influence test' (subsection 128B(3CD) of the ITAA 1936) in relation to the test entity, and
(iii) The income cannot otherwise be non-assessable non-exempt income of The Fund because of:
a. Subdivision 880-C of the ITAA 1997, or
b. Division 880 of the Income Tax (Transitional Provisions) Act 1997.
The Fund satisfies the 'portfolio interest test'
Subsection 128B(3CC) of the ITAA 1936 states:
A superannuation fund satisfies the portfolio interest test in this subsection in relation to the test entity at a time if, at that time, the total participation interest (within the meaning of the Income Tax Assessment Act 1997) the superannuation fund holds in the test entity:
(a) is less than 10%; and
(b) would be less than 10% if, in working out the direct participation interest (within the meaning of that Act) that any entity holds in a company:
(i) an equity holder were treated as a shareholder; and
(ii) the total amount contributed to the company in respect of non-share equity interests were included in the total paid-up share capital of the company.
In the case of The Fund, the relevant 'test entities' are the entities listed in Appendix 1 of the Ruling.
The Fund holds less than 10% of the total participation interests in each entity and has never held more than a 10% participation interest. Further, The Fund would hold less than 10% of the total participation interests in each entity in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936.
The Fund therefore satisfies the 'portfolio interest test' in respect of its current investments listed in Appendix 1 of this Ruling.
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, assess whether at least one of the relevant decision-making persons of the test entity is accustomed or obliged to act, or might reasonably be expected to act, in accordance with the direction, instructions or wishes of The Fund.
In respect of the investments listed in Appendix 1 of this Ruling:
(i) The Fund holds less than 10% of the total participation interests in each entity and has never held more than a 10% participation interest.
(ii) The Fund would hold less than 10% of the total participation interests in each entity in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936.
(iii) Neither The Fund, nor any related party of The Fund, has involvement in the day to day management of the business of any of the Australian companies.
(iv) Neither The Fund, nor any related party of The Fund, has the right to appoint a director to the Board of Directors of the Australian company or equivalent role in any of the Australian companies.
(v) Neither The Fund, nor any related party of The Fund, holds the right to representation on any investor representative or advisory committee (or similar) of any of the Australian companies.
(vi) Neither The Fund, nor any related party of The Fund, has the ability to direct or influence the operation of the Australian company outside of the ordinary rights conferred by the equity interest held.
(vii) The Fund has not entered into or received any side letters, arrangements or agreements.
(viii) The Fund does not hold any veto rights on security holder votes.
Based upon the above, the Commissioner accepts that The Fund does not have influence of a kind described in subsection 128B(3CD) of the ITAA 1936.
Otherwise non-assessable non-exempt
The income received by The Fund will not be non-assessable non-exempt income because of Subdivision 880-C of the ITAA 1997 or Division 880 of the Income Tax (Transitional Provisions) Act 1997.
Therefore, The Fund satisfies this requirement.
Conclusion
Having regard to the requirements of paragraph 128B(3)(jb) of the ITAA 1936, The Fund is excluded from liability to withholding tax in relation to interest, dividend and non-share dividend income derived from its current, Australian investments, listed in Appendix 1 of this Ruling.