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Edited version of private advice
Authorisation Number: 1051866556593
Date of advice: 14 July 2021
Ruling
Subject: Withholding tax - exemptions - superannuation fund for foreign residents
Question
Is the Fund excluded from liability to withholding tax on its interest, dividend 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 period:
Year ending 30 June 20XX
The scheme commences on:
1 July 20XX
Relevant facts and circumstances
The Fund
1. The Fund is the pension fund of ForCo.
2. The Fund was established in Country X.
3. The Fund's registered office is in Country X.
4. The Fund's main purpose is to provide retirement benefits to its members and their beneficiaries.
5. The certified translation of the Statute provides the rules governing the Fund's operation. The Statute forms a part of the scheme to which this ruling relates.
6. The Fund's eligible members are employees and former employees of ForCo (including current and former affiliates that commissioned the Fund).
7. The Fund is administered by the Administrative Body. The Administrative Body is responsible for the Fund's decision making, management and investment.
8. The Administrative Body was formed in accordance with the Statute.
9. Members of the Administrative Body are not residents of Australia.
10. The Fund is a defined benefits scheme governed by the Statute, and its regulations, procedures and policies adopted by the Administrative Body.
11. The income received by the Fund includes contributions payable in accordance with the Statute and income from the investments of the Fund, including employee contributions.
12. The employer pays an annual contribution to the Fund.
13. The Fund's members are residents of Country X and there are no eligible employees that are Australian residents.
14. The Fund is an indefinitely continuing fund.
15. The Statute provides for the dissolution of the Fund.
Benefits provided
Defined Benefit Rules
16. The Fund provides benefits to members as follows:
(i) Normal retirement pension: a defined benefit pension upon a member attaining the statutory retirement age.
(ii) Early Retirement [with reduction]: a defined benefit pension for a member that has attained the age of zz having shown they do not carry on work from retirement date (including part-time pensions).
(iii) Deferred retirement: a defined benefit pension paid to a member that intends to retire up to ww years from the statutory retirement age.
(iv) Disability retirement.
(v) Death benefits (including pensions for member's dependents).
17. When a deferred member's employment has been terminated, they retain a non-contributory entitlement to the normal retirement pension and death benefits. The non-contributory entitlement to retirement pension is equal to the retirement pension accrued in the period between the beginning and end of membership, including the entitlements acquired as a result of value transfer.
18. When a deferred member's employment is terminated and ww years has elapsed, the Fund, if unable to perform a value transfer to another pension scheme, may commute their pension entitlements (if they are lower than a legally specified limit) and pay a lump sum.
19. A deferred member may exit the Fund by changing employers or joining an alternative occupational pension scheme. In that case, the Fund will transfer the value of that deferred member's pension entitlements to the new employer's pension fund at the deferred member's request.
20. Redemption of pension entitlements is otherwise only possible when:
• the pension provider settles claims when the payment is less than vvvv per year for pre-uuuu retirees
• death benefits may be commuted
• payments may be commuted so as not exceed the limits of Country X tax law
Investment management
21. The Fund has given power of attorney over its investment management to Company A.
22. Australian investments are held by the Custodian.
23. The Fund holds Australian equity investments.
Australian investments
24. The Fund has no Australian debt investments.
25. The Fund has invested in Australian equity and non-share equity investments listed. These equity and non-share equity investments all have the following characteristics:
a. All investments are in entities 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
26. The Fund derives investment income from its Australian investments, including dividend and interest income.
27. 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.
28. 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.
29. The Fund is not fiscally transparent for tax purposes in Country X.
30. Country X Tax Authority has stated that the Fund is exempt from taxation in Country X under Country X tax law.
31. 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
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.
The Fund is 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.
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 is an indefinitely continuing fund.
Therefore, 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 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 establish 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 set out in the Statute. The objective of the Fund is to provide retirement benefits to its members and their beneficiaries.
The Fund provides benefits to members as follows:
(i) Normal retirement pension: a defined benefit pension upon a member attaining the statutory retirement age.
(ii) Early Retirement [with reduction]: a defined benefit pension for a member that has attained the age of zz having shown they do not carry on work from retirement date (including part-time pensions).
(iii) Deferred retirement: a defined benefit pension paid to a member that intends to retire up to ww years from the statutory retirement age.
(iv) Disability retirement.
(v) Death benefits (including pensions for member's dependents).
When a deferred member's employment has been terminated, they retain a non-contributory entitlement to the normal retirement pension and death benefits. The non-contributory entitlement to retirement pension is equal to the retirement pension accrued in the period between the beginning and end of membership, including the entitlements acquired as a result of value transfer.
When a deferred member's employment is terminated and ww years has elapsed, the Fund, if unable to perform a value transfer to another pension scheme, may commute their pension entitlements (if they are lower than a legally specified limit) and pay a lump sum.
A deferred member may exit the Fund by changing employers or joining an alternative occupational pension scheme. In that case, the Fund will transfer the value of that deferred member's pension entitlements to the new employer's pension fund at the deferred member's request.
Redemption of pension entitlements is otherwise only possible when:
• the pension provider settles claims when the payment is less than vvvv per year for pre-uuuu retirees
• death benefits may be commuted
• payments may be commuted so as not exceed the limits of Country X tax law
The Fund therefore does not provide benefits as a result of events other than retirement, disability or death. The remaining benefit types involve the transfer of an exiting member to a new Fund or retirement scheme.
As both the key objective of the Fund and the operation of the Fund have 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's eligible members are employees and former employees of ForCo (including and former affiliates that commissioned the Fund). 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:
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 Administrative Body exercises the CM&C of the Fund. The members of the Administrative Body are not Australian residents, and do not conduct any of their decision-making in Australia.
Therefore, the Fund satisfies this requirement.
6. Subsection 118-520(2) requirements
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.
The Fund derives interest or consist of dividends or non-share dividends paid by an Australian resident company
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.
Subsection 128A(3) of the ITAA 1936 is also relevant. It states:
For the purposes of this Division, a beneficiary who is presently entitled to a dividend, to interest or to a royalty included in the income of a trust estate shall be deemed to have derived income consisting of that dividend, interest or royalty at the time when he or she became so entitled.
The operation of subsection 128A(3) of the ITAA 1936 will enable interest, dividend and non-share dividend income paid by an Australian resident company and derived by a trust estate to retain its character in the hands of a beneficiary of that trust estate. Further, the beneficiary will be deemed to have derived the relevant income under paragraph 128B(3)(jb) of the ITAA 1936 at the point in time that the beneficiary becomes presently entitled to that income.
In order to be excluded from withholding tax under paragraph 128B(3)(jb) of the ITAA 1936, the interest, dividend and/or non-share dividend income must be derived by a non-resident superannuation fund for foreign residents.
The income, consisting of interest, dividend or non-share dividend income, is derived by the Fund for the benefit of its members.
The Fund is the legal and beneficial owner of the Australian investments and derives the income from those Australian investments.
Therefore, the Fund satisfies this requirement.
The Fund is exempt from income tax in the country in which the non-resident resides
Country X Tax Authority has stated that the Fund is exempt from taxation in Country X under the Country X tax law.
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.
4. 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 interests in each Australian company, trust or real estate investment trust (REIT). Further, 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.
The Fund therefore satisfies the 'portfolio interest test' in respect of its current investments.
5. 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 the investments referred to in 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, 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.
c. 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.
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 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.
6. 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.