Edited version of private advice

Authorisation Number: 1051855053576

Date of advice: 23 June 2021

Ruling

Subject: Superannuation fund for foreign residents withholding tax

Question 1

Is the Fund excluded from the liability to withholding tax on its dividend interest and non-share dividend income derived in respect of its current investments under paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

This ruling applies for the following periods

1 July 20XX to 20 June 20XX

The scheme commences on

1 July 20XX

Relevant facts and circumstances

The Fund

The Fund was established under the relevant applicable law of Country A.

The Fund has approval from the relevant government bodies of Country A to be a registered pension plan.

The Fund provides benefits to Country A employees, retirees and their beneficiaries.

The Fund uses a formula rather than investment income derived from pension contributions to determine benefits payable to eligible members at retirement.

Contributions to the Fund are deducted from members' pensionable earnings and are matched by the members' employers.

The Fund is a pool of assets made up of contributions from members, matching contributions from employers, and the investment earnings from those contributions.

The primary purpose of the Fund is to provide equal periodic payments to members of the Fund of their lifetime after retirement from their Employer.

The Fund also provides other benefits payable to eligible members and their beneficiaries (in accordance with its terms and conditions).

The Fund is exempt from income tax in Country A.

The Fund is governed by an independent board of trustees with equal representation from unions and employers.

Trustees act on behalf of the Fund's beneficiaries to manage the organisations and to manage and invest the assets of the plan.

Membership in the Fund is voluntary for full-time, part-time and casual employees at any time during the first two years of employment.

After two years of continuous employment, employees are legislatively required to contribute to the Fund. Once contributions are being made to the Fund, members are unable to terminate their membership until the earlier of termination of employment, retirement, death or reaching age X.

The normal retirement age under the Fund is X and no later than the age of X.

Benefits Provided

Defined Benefit Rules

Broadly, the plan provides benefits to eligible retirees as follows:

a.    Normal retirement: a defined benefit pension upon normal retirement age.

b.    Early retirement: a defined benefit pension before normal retirement date if a member has reached a fixed age.

c.     Termination of employment: terminating members will either receive i) a monthly pension benefit deferred to retirement, ii) the pension is transferred to another retirement account or iii) receive a taxable lump sum payment.

d.    Postponed retirement benefits: retirement benefits cannot be postponed beyond the end of the year in which a member turns X years.

e.    Disability retirement.

f.      Death and survivor benefits.

Australian Investments

The Fund has invested in Australian equity investments. These equity 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 Australian company, trust or real estate investment trust (REIT).

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

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, trusts or REITs.

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, or equivalent role in a trust or REIT.

f.      Neither the Fund, nor any related party, holds the right to representation on any investor representative or advisory committee (or similar) of the Australian company, or equivalent role in a trust or REIT.

g.    Neither the Fund, nor any related party, has the ability to direct or influence the operation of the Australian company, trust or REIT outside of the ordinary rights conferred by the equity interest held.

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

Other relevant facts

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.

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.

Income of the fund is 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.

Relevant Legislative Provisions

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

Reasons for decision

Question 1

Is the Fund excluded from liability to withholding tax on its dividend, interest and non-share dividend income derived in respect of its current investments under paragraph 128B(3)(jb) of ITAA 1936?

Detailed Reasoning

Broadly, paragraph 12B(3)(jb) of the ITAA 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 resides.

Further, from 1 July 2019, the extra requirements in subsection 128B(3CA) of the ITAA 1936 must also be met.

The Fund is a non-resident

The Commissioner has determined from the facts and circumstances that the Fund is not a resident of Australia. The Fund was established in Country X by statute, and its management is completely based there.

Therefore, the Fund satisfies this requirement.

Superannuation fund for foreign residents:

Section 118-520 of the ITAA 1997 provides:

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

a.    At that time, it is:

                                          i.    An indefinitely continuing fund; and

                                         ii.    A provident, benefit, superannuation or retirement fund; and

b.    It was established in a foreign country; and

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

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

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

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

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

1. An indefinitely continuing fund

The Fund has provided a letter to the Commissioner which states that the Fund is an indefinitely continuing fund. The Fund states that the trustees expect to continue the Fund indefinitely.

The Fund satisfies this requirement.

2. A provident, benefit, superannuation or retirement fund

The phrase 'provident, benefit, superannuation or retirement fund' under subparagraph 118-520(1)(a)(ii) of the ITAA 1997 is not defined in either the ITAA 1997 or the ITAA 1936.

ATO Interpretive 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 objective of the Fund is to provide retirement benefits to its members and their beneficiaries. The fund meets this objective by providing benefits to members as follows:

i.      Normal retirement: a defined benefit pension upon normal retirement age.

j.      Early retirement: a defined benefit pension before normal retirement date if a member has reached a fixed age.

k.     Termination of employment: terminating members will either receive i) a monthly pension benefit deferred to retirement, ii) the pension is transferred to another retirement account or iii) receive a taxable lump sum payment.

l.      Postponed retirement benefits: retirement benefits cannot be postponed beyond the end of the year in which a member turns X years.

m.   Disability retirement.

n.    Death and survivor benefits.

The Fund does not provide benefits to members as a result of events other than retirement, disability or death.

As the Fund has the sole purpose of providing retirement benefits, the Commissioner accepts the Fund is a 'provident, benefit, superannuation or retirement fund'.

Therefore, the Fund satisfies this requirement.

3. Established in a foreign country

The Fund was established in Country X.

Therefore, the Fund satisfies this requirement.

4. Was established and maintained only to provide benefits for individuals who are not Australian residents

The Fund was established and is maintained in Country X for eligible employees of organisations affiliated with Government X. The Fund operates to provide retirement benefits for its members in Country X.

Therefore, the Fund satisfies this requirement.

5. Central management and control (CM&C)

Paragraphs 20 and 21 of Taxation Ruling TR 2008/9 Income tax: meaning of 'Australian superannuation fund' in subsection 295-95(2) of the Income Tax Assessment Act 1997 (TR 2008/9) states:

2.    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 operation 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 fulfillment of administrative duties and the preservation, payment and portability of benefits.

The Board exercise the CM&C of the Fund. The Board members are not Australian residents, and do not make any decisions in Australia.

Therefore, the Fund satisfies this requirement.

6. Subsection 118-520(2) of the ITAA 1997

The Fund has not and cannot deduct amounts under either the ITAA 1997 or the ITAA 1936 for amounts paid to it. The Fund has not been allowed a tax offset or a tax offset is not allowable for an amount that has been paid to it.

Therefore, the fund satisfies these requirements.

7. Conclusion

As all of the above requirements are satisfied, the Fund meets the requirements of being a superannuation fund for foreign residents as defined by section 118-520 of the ITAA 1997.

Therefore, the Fund satisfies this requirement.

Subsection 128(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 '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 (Transitional Provisions Act 1997) 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 portfolio test only applies to the Fund's Australian equity interests.

The Fund holds less than 10% of the total participation interest in each Australian company, trust or real estate investment trust (REIT) as outlined in Appendix 1. Further, the Fund holds less than 10% of the total participation interest in each Australian company, trust of REIT in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936.

The Fund therefore satisfies the 'portfolio interest test' in respect of its current investments (listed in Appendix 1 to the relevant facts and circumstances of this ruling).

2.    The Fund satisfies the 'influence test'

Subsection 128(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 requirement 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 are expressed directly or indirectly, or through the superannuation fund in concert with others).

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

Sub-test 1 or the influence test, as contained in paragraph 128B(3CD)(a) of the ITAA 1936, assesses whether the Fund is able to determine the identity of at least one of the persons who, individually or together with others, makes or is reasonably expected to make, decisions comprising the control and direction of the test entity's operations. This includes situations where the Fund is able to act in concert with others to determine the identity of a relevant decision maker in the test entity.

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

Sub-test 2 of the influence test, as contained in paragraph 128B(3CD)(b) of the ITAA 1936, assesses whether at least one of the relevant decision-making persons of the test entity is accustomed or obliged to act, or might reasonably be expected to act, in accordance with the directions, instructions or wishes of the Fund.

Relevantly, in respect of the investment listed in Appendix 1 of the relevant facts and circumstances to this Ruling:

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 companies, trusts or REITs.

b.    Neither the Fund, not any related party of the Fund, has the right to appoint a director or the Board of Directors of the Australian company or equivalent role in a trust or REIT.

c.     Neither the Fund, not any related party, holds the right to representation on any investor representative or advisory committee (or similar) of the Australian company, or equivalent role in a trust or REIT.

d.    Neither the Fund, nor any related party, has the ability to direct or influence the operation of the Australian company, trust or REIT outside of the ordinary rights conferred by the equity interest held.

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

Based on the above, the Commissioner accepts that the Fund does not have influence of a kind described in subsection 128B(3CD) of the ITAA 1936.

3.    Otherwise non-assessable non-exempt

The income received by the Fund will not be non-assessable non-exempt income because of Subdivision 880-C of the ITAA 1997 or Division 880 of the Income Tax (Transitional Provisions) Act 1997.

Conclusion

The Fund is excluded from withholding tax in relation to interest, dividend and non-share dividend income derived from its current investments as listed in Appendix 1 to the relevant facts and circumstances of this Ruling.