Edited version of private advice

Authorisation Number: 1051853732270

Date of advice: 23 June 2021

Ruling

Subject: Exemption from withholding tax for a foreign superannuation fund

Question

Is The Fund excluded from liability to withholding tax on dividend income derived from its direct Australian investments in accordance with 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

The Fund

The Fund was established by a set of rules of the Foreign Entity (The Rules) in conjunction with The Plan under a written trust agreement in the Foreign Country (Trust Agreement).

The Trust Agreement was made between the Foreign Entity, The Board of Trustees (Trustees) and the Pension Committee of the Foreign Entity (Pension Committee).

The purpose of The Fund is to provide pension and ancillary benefits in accordance with The Rules and the Foreign Entity's Pension Plan Regulations (Pension Regulations).

The Fund income is made up of a combination of:

a)    pension contributions deducted from employee's salary

b)    employer's pension contributions, and

c)    the investment earnings.

The Fund is governed by the terms of the Trust Agreement and The Rules.

The Trustees are appointed by the Pension Committee and are responsible for The Fund and its investments, as well as the supervision of The Plan.

None of the Trustees are Australian residents.

The Pension Committee is established in accordance with The Rules and is made up of members, none of whom are Australian residents.

The Trust Agreement states that the Trustees may amend all or any of the provisions of the Trust Agreement with the written consent of the Pension Committee.

The Rules set out that no part of The Fund, other than such part as is required to pay taxes, fees, administration costs, and other reasonable expenses, shall be used or diverted to purposes other than for the exclusive benefit of the pension members, their beneficiaries or estates.

The Trust Agreement allows the Foreign Entity to terminate the Trust Agreement at any time, in which case the Trustees are required to distribute The Fund in accordance with the terms of The Plan.

The Foreign Entity is made up of chosen members, none of whom are Australian residents.

The Plan

The Plan is a registered pension plan in the Foreign Country.

The Plan is established as a multi-employer target benefit pension plan providing pension and ancillary benefits to the Foreign Entity and associated participating employers in the Foreign Country.

The Plan is governed by the Pension Regulations, The Rules and the Trust Agreement.

The Pension Committee is responsible for the regulation of The Plan. The Pension Committee may amend The Plan from time to time with the approval of the Executive Body of the Foreign Entity (Executive Body).

None of the members of the Executive Body are Australian residents.

The day-to-day administration of The Plan is the responsibility of the Executive Director of the Pension Office.

The Pension Regulations state that members of The Plan are entitled to the following benefits:

•         Retirement pension, including normal and early retirement

•         Death benefits

•         Disability benefits

•         Survivor benefits.

Members of The Plan can receive their pension as a lump sum payment on termination of employment prior to reaching retirement age if their pension benefit qualifies as a 'small pension' under the relevant pension laws of the Foreign Country. If a lump sum payment is received, the payment is liable to taxation.

The Pension Regulations state that on termination of The Plan, the assets of The Plan shall be applied to provide for all pension and other benefits accrued under The Plan prior to the effective date of its termination.

Australian Investments

The assets of The Fund are invested by the Trustees in accordance with The Plan's Investment Policy and within the applicable regulatory limits. The Investment Policy is approved by the Trustees.

The Fund is the legal and beneficial owner of the Australian investments relevant to this private ruling.

In respect of each of the entities to which The Fund has invested:

a)    The Fund holds less than 10% of the total participation interests in each entity and has never held more than a 10% interest.

b)    The Fund holds less than 10% of the total participation interests in each entity in the circumstances detailed in paragraph 128B(3CC)(c) of the ITAA 1936.

c)    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 investments.

d)    Neither The Fund, nor any related party of The Fund, holds any right to appoint a person to a board, committee or similar, either directly or indirectly, of any of the Australian investments.

e)    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 investments.

f)     Neither The Fund, nor any related part of The Fund, has the ability to direct or influence the operation of any of the Australian investments outside of the ordinary rights conferred by the equity interest held.

g)    The Fund has not entered into or received any side letters, arrangements or agreements.

h)    The Fund does not hold any veto rights on security holder votes.

Additional facts

The Fund provided a letter from the Foreign Country's revenue agency certifying The Plan is a resident of the Foreign Country.

The Pension Office provided a written statement confirming the following with regard to The Fund/The Plan:

a)    it is an indefinitely continuing fund and a provident, benefit, superannuation or retirement fund

b)    it was established in a foreign country

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

d)    the central management and control is carried on outside Australia by entities none of whom is an Australian resident.

The Fund has not and cannot deduct amounts under the Income Tax Assessment Act 1997 (ITAA 1997) 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.

The income of The Fund is not 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 is exempt from taxation in the Foreign Country.

Relevant legislative provisions

Income Tax Assessment Act 1936 paragraph 128B(3)(jb)

Reasons for decision

Summary

The Fund is excluded from liability to withholding tax on dividend income derived from its direct Australian investments in accordance with paragraph 128B(3)(jb) of the ITAA 1936.

Detailed reasoning

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(4) of the ITAA 1936).

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) of the ITAA 1936 states:

(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;

Note:

See subsection (3CA) for extra requirements relating to this paragraph.

These requirements of paragraph 128B(3)(jb) of the ITAA 1936 are considered 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 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. Section 118-520 of the ITAA 1997 states the following:

(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;

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

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 23 October 2017, 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.

n 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

Although the Pension Regulations set out a process to be followed in the event of termination of The Plan, and the Trust Agreement can be terminated at any time by the Foreign Entity, there is no automatic termination clause for The Fund.

There is no indication that there is any contemplation of The Fund ending at a defined point in time; and in circumstances where The Fund is terminated, the monies of The Fund are to be distributed in accordance with the terms of The Plan and the Plan Regulations subject to compliance with all applicable pension legislation.

Therefore, it is accepted The Fund will continue to operate in accordance with the applicable pension legislation in the Foreign Country and its governing documents for an indefinite period of time.

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) refers to these authorities to provide 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 Fund was established in conjunction with The Plan for the purposes of providing pension and ancillary benefits in accordance with The Rules and the Pension Regulations.

The Rules stipulate that no part of The Fund, other than those required to pay expenses of The Fund, shall be used or diverted to purposes other than for the exclusive benefit of the members of The Plan, their beneficiaries or estates.

The benefits provided for by the Pension Regulations include benefits in case of old age (normal and early retirement), death, and disability. The old age pension benefit is considered to align with a 'provident, benefit, superannuation' purpose.

Additionally, if a member's pension qualifies as a 'small pension' under the relevant pension laws, upon termination of employment, the member may take their pension in a lump-sum payment and be liable to tax on the amount received.

The Commissioner accepts that the alternate circumstances of access in the above cases, being disability, death and termination of employment, align to the contemplated contingencies of a provident, benefit, superannuation or retirement fund.

Therefore, The Fund is considered to be a provident, benefit, superannuation or retirement fund and satisfies this requirement.

Was the Fund established in a foreign country?

The Fund was established in the Foreign Country.

Therefore, The Fund satisfies this requirement.

Was the Fund established and maintained only to provide benefits for individuals who are not Australian residents?

The Plan is a pension plan that was established in the Foreign Country for its members. The Fund was established in conjunction with The Plan and operates to fund The Plan, providing retirement benefits for the members in the Foreign Country. Members of The Plan include employees of the Foreign Entity and associated Participating Employers.

The Pension Office has provided a statement confirming that The Fund was established, and is maintained, only to provide benefits for individuals who are not Australian residents.

It is considered that the possibility of a very small number of members being returned residents or becoming Australian residents after ceasing membership in The Plan 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 central management and control 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 in respect of the central management and control (CM&C) of a superannuation fund:

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 was established under The Rules in the Foreign Country and is a resident of the Foreign Country for tax purposes. The Fund is governed by the Trust Agreement, The Rules and the Pension Regulations.

The Trustees of The Fund are appointed by the Pension Committee and are responsible for The Fund, its investment, as well as the supervision of The Plan. The Trustees approve the investment policy and cause The Fund to be invested in conformance to regulations established under any applicable federal and/or provincial legislation. The Trustees are all non-residents of Australia.

The members of the Pension Committee are all non-residents of Australia. The Pension Committee may amend The Plan from time to time with the approval of the Executive Body. The Pension Committee is also responsible for the Plan Regulations. The members of the Executive Body are all non-residents of Australia.

Furthermore, the Pension Office (made up of The Trustees) has provided a statement confirming that the central management and control of The Fund is carried on outside Australia by entities none of whom is an Australian resident.

Based on the above, it is reasonable to conclude that the central management and control of The Fund occurs in the Foreign Country by entities that are not Australian residents.

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

An amount paid to The Fund or set aside for The Fund has not been and cannot be deducted under the 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 Pension Office has provided a statement confirming that no amount paid to The Fund can be deducted under ITAA 1997.

Therefore, The Fund satisfies this requirement.

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 paid by Australian resident companies.

The Fund will receive dividend income from companies who are residents of Australia for tax purposes.

Therefore, The Fund satisfies this requirement.

Subparagraph 128B(3)(jb)(iii) of the ITAA 1936 - Is exempt from income tax in the country in which the non-resident resides

Subparagraph 128B(3)(jb) of the ITAA 1936 will only apply if the non-resident superannuation fund for foreign residents is exempt from income tax in the country in which the entity resides.

The Fund is exempt from taxation on its Australian investment income 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.

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 interest in each Australian entity to which The Fund has invested. 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 Australian investments.

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 each of the Australian entities to which The Fund has invested:

(a)  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 investments.

(b)  Neither The Fund, nor any related party of The Fund, holds any right to appoint a person to a board, committee or similar, either directly or indirectly, of any of the Australian investments.

(c)  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 investments.

(d)  Neither The Fund, nor any related party of The Fund, has the ability to direct or influence the operation of any of the Australian investments outside of the ordinary rights conferred by the equity interest held.

(e)  The Fund has not entered into or received any side letters, arrangements or agreements.

(f)    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.

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

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 dividend income derived from its current Australian investments.