Edited version of private advice

Authorisation Number: 1051870407274

Date of advice: 21 July 2021

Ruling

Subject:Superannuation fund for foreign residents - withholding tax exemption

Question

Is the Fund excluded from liability to withholding tax on its interest, dividend and non-share dividend income derived in respect of its investments (listed in Appendix 1 to the relevant facts and circumstances of this Ruling) under paragraph 128B(3)(jb) of the ITAA 1936?

Answer

Yes.

This ruling applies for the following periods:

1 July 20XX to 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Fund

1.     The Fund is the pension fund of an employer in the foreign jurisdiction.

2.     The Fund was established on XX by a deed drawn up in the foreign jurisdiction

3.     The certified translation of the establishment documents (the documents) of the Fund forms part of the scheme to which this Ruling relates.

4.     The documents indicate that the purpose of the Fund is to provide pensions.

Administration of the Fund

5.     The Fund is managed by a Management Board (The Board) which undertakes the day to day management of the Fund.

6.     The documents set out that the Fund will have a representative body that the Board will be accountable to. The documents set out the tasks and powers of the representative body.

7.     The documents set out that a committee will have the authority to internally supervise the Fund, such as review the performance and management of the fund.

8.     The Fund has confirmed that its central management and control is carried on outside Australia by entities none of whom is an Australian resident.

9.     The Fund has confirmed that it is an indefinitely continuing fund.

Benefits Provided

10.  The Fund is governed by a regulations document (the regulations).

11.  The Fund provides pension benefits to qualifying members upon service requirements being met in accordance with the regulation.

12.  The regulations set out the pension entitlements that accrue to members of the Fund. Fund members receive the following benefits:

a.     Retirement pension.

b.     Pre-retirement pension

c.      Death benefit

d.     Disability pension, and

e.     Survivorship benefits paid to dependents of the member on death.

13.  The regulations also provide for early access to pension entitlements for members joining or leaving the Fund under specific conditions set out by the regulations.

Winding-up or Liquidation of the Fund

14.  On winding up, the Board is obliged to transfer the accrued benefits and obligations to another pension insurer that is subject to the Pensions Act.

15.  The Fund is to transfer pension to other funds with at if the Fund terminates.

The Fund's investments in Australia

16.  The Fund currently has Australian equity investments. All of these investments are in entities listed on the Australian Securities Exchange (ASX).

17.  The Fund's investments have all the following characteristics:

a.     The Fund owns less than 10% of the total participation interests in each entity it invested in.

b.     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.

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, has the right to appoint a director to the Board of Directors of the Australian investments.

e.     Neither the Fund, nor any related party, holds the right to representation on any investor representative or advisory committee (or similar) of the Australian investments.

f.       Neither the Fund, nor any related party, has the ability to direct or influence the operation of the Australian investments 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 investment.

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

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

Other

18.  The Fund will receive interest income along with dividend and non-share dividend income from companies who are residents of Australia for tax purposes.

19.  An amount paid to the Fund or set aside for the Fund has not been and cannot be deducted under the Income Tax Assessment Act 1997 (ITAA 1997).

20.  A tax offset has not been allowed nor would be allowable for any amount paid to the Fund or set aside for the Fund.

21.  The Fund is not a resident of Australia for tax purposes.

22.  The Fund is exempt from taxation in the foreign jurisdiction.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1)

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

Income Tax Assessment Act 1997 section 118-520

Income Tax Assessment Act 1997 subsection 995-1(1)

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) 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;

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

Non-resident

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

Superannuation fund for foreign residents

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; or

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

Consequently, 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 be established that:

•        The Fund is an indefinitely continuing fund

•        The Fund is a provident, benefit, superannuation or retirement fund

•        The Fund was established in a foreign country

•        The Fund was established and maintained only to provide benefits for individuals who are not Australian residents

•        The central management and control of the Fund is carried on outside of Australia by entities none of whom are Australian residents

•        No amounts paid to the Fund or set aside for the Fund has been or can be deducted under this Act, and

•        No tax offsets have been allowed or would be allowable for an amount paid to the Fund or set aside for the Fund.

The Fund is 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.

-        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

While the documents provide for the dissolution of the Fund, the regulations and the documents provide no indication that there is any contemplation of the Fund ending at a defined point in time.

The Fund has advised that it is an indefinitely continuing fund.

Therefore, it is accepted the Fund will continue to operate in accordance with the Regulations for an indefinite period of time, and as such, satisfies this requirement.

The Fund is a provident, benefit, superannuation or retirement fund

This requirement considers the purpose and operation of The Fund.

ATO Interpretative Decision ATO ID 2009/67 Income Tax: Superannuation fund for foreign residents (ATO ID 2009/67) refers to a number of 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).

Having regard to the terms of the deed of the Plan, it is considered that the Plan is a 'provident, benefit, superannuation or retirement fund' as that phrase has been interpreted by the relevant authorities. The sole purpose of the Plan is the provision of benefits to, or in respect of, participating employees who:

•       cease their employment upon or after reaching retirement age (age 60)

•       cease their employment after the satisfaction of certain service requirements

•       cease their employment because of death or total and permanent disability, or

•       reach age 70, whether or not they have ceased employment.

Therefore, the Plan satisfies subparagraph (a)(ii) of the definition of 'superannuation fund for foreign residents' in section 118-520 of the ITAA 1997.

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). If a fund provides benefits in other circumstances, it will not satisfy the requirement to be a provident, benefit, superannuation or retirement fund.

The regulations sets out the pension entitlements that accrue to members of the Fund:

a.     Retirement pension,

b.     Pre-retirement pension.

c.      Disability pension,

d.     Death benefit, and

e.     Survivorship benefits for dependents on the death of a member

The circumstances in which a member of the Fund can receive the funds as provided for in the Regulations are clearly consistent with those of a provident, benefit, superannuation or retirement fund.

The alternate circumstances of access, being early release, as identified by the regulations and transfer of interest to another fund as discussed in the regulations also clearly align to the contemplated contingencies of a provident, benefit, superannuation or retirement fund.

Therefore, as both the objective of the fund and the actual operation of the fund have the sole purpose of providing retirement benefits or benefits in alignment with other contemplated contingencies, the Fund is considered to be a provident, benefit, superannuation or retirement fund.

Therefore, the Fund will satisfy this requirement.

The Fund was established in a foreign country

The Fund was established in foreign country. Therefore, the Fund will satisfy this requirement.

The Fund was established and maintained only to provide benefits for individuals who are not Australian residents

The Fund was established in a foreign country as the pension fund of the foreign employer in the its resident jurisdiction. The fund operates to provide retirement benefits for its members in its resident jurisdiction.

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 will satisfy this requirement.

The central management and control of the Fund is carried on outside of Australia by entities none of whom are Australian residents

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 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.

The registered office of the Fund is in a foreign jurisdiction. The decision making and management of the Fund is undertaken by the Board. The Board makes decisions in respect of the Fund outside of Australia.

The objective of the Fund is to provide pensions to employees and former employees of specified foreign resident entities.

Based on the above factors it is reasonable to conclude that the central management and control of the Fund occurs in the foreign jurisdiction by entities that are not Australian residents.

Therefore, the Fund will satisfy this requirement.

No amounts paid to the Fund or set aside for the Fund has been or can be deducted under this Act and no tax offsets have been allowed or would be allowable for an amount paid to the Fund or set aside for the Fund.

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 Fund has advised that it has not and cannot deduct amounts under either the ITAA 1997 or the ITAA 1936 for amounts paid to it, and in addition 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 will satisfy this requirement.

Consists of interest or consist of dividends or non-share dividends paid by a company that is resident

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 interest income, along with dividend and non-share dividend income from companies who are residents of Australia for tax purposes.

Therefore, the Fund will satisfy this requirement.

Is exempt from income tax in the country in which the non-resident resides

The Fund is exempt from taxation in its resident jurisdiction as a tax exempt pension fund.

Therefore, the Fund will satisfy this requirement

Extra Requirements under 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 '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.

The 'portfolio interest test' in relation to the test entity (subsection 128B(3CC) of the ITAA 1936)

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.

Based on the list of investments, the Fund holds significantly less than 10% of the total participation interests in each of the Australian entities.

Further, the Fund would hold less than 10% of the total participation interests in each Australian entity in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936.

Therefore, the Fund satisfies the 'portfolio interest test' in respect of its investments provided.

The 'influence test' (subsection 128B(3CD) of the ITAA 1936) in relation to the test entity

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 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 investment provided:

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, has the right to appoint a director to the Board of Directors 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 the Australian investments.

d.     Neither the Fund, nor any related party of the Fund, has the ability to direct or influence the operation of the Australian investments 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 investment.

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

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

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

Conclusion

As all the requirements of paragraph 128B(3)(jb) and subsection 128B(3CA) of the ITAA 1936 are satisfied, the Fund will be entitled to an exemption from interest and dividend withholding tax on its Australian investments under paragraph 128B(3)(jb) of the ITAA 1936.