Edited version of private advice

Authorisation Number: 1051898542158

Date of advice: 15 September 2021

Ruling

Subject: Exemption from withholding tax for a superannuation fund for foreign residents

Question 1

Is the Pension Plan excluded from liability to withholding tax on interest, dividend and non-share dividend income derived from its investment in AusCo in accordance with paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

Question 2

Is the interest, dividend and non-share dividend income derived by the Pension Plan from its investment in AusCo not assessable and not exempt income of the Pension Plan under section 128D of the 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 Pension Plan was established in a country outside of Australia (Country A) to administer the payment of pension benefits of employees of certain employers in Country A.

The Pension Plan is managed by a Management Committee which is made up of nominated individuals none of whom are Australian residents. All of the key functions of the Pension Plan are exercised in Country A including the control and direction of the Pension Plan's investments, strategies, administration, and operations.

The incomes receive by the Pension Plan include members' contributions and income from investments made on behalf of the Pension Plan and these are not used for any purpose other than providing pension benefits of employees and their beneficiaries and paying the reasonable expenses of administering the Pension Plan.

The Pension Plan provides benefits as a result of retirement, death and termination of employment. Benefits provided to a member on termination of employment include a deferred pension and lump sum payment. Eligible lump sum must be transferred to another registered retirement plan.

The Pension Plan has processes in place if it is terminated. However, the Pension Plan intends to be an indefinitely continuing fund with no pre-determined end date.

Investment of the Pension Plan in AusCo

The Pension Plan invests in Australia through a bare trust arrangement with a trust which was established in Country A (the Trust). In accordance with this arrangement:

• the trustee of the Trust has agreed to acquire and hold legal title to the investment in AusCo in its name as a bare trustee for the sole benefit and account of the Pension Plan,

• the trustee of the Trust has no beneficial interest whatsoever in the trust assets which include the investment in AusCo,
• contributions paid by the Pension Plan were to be used to fund its investment in AusCo,
• the trustee is not authorised to make any other investments,
• distributions of the income derived from the investment in AusCo are made by the trustee as soon as practicable, and
• the trustee is restricted from engaging in any activities other than those directly connected with the investment in AusCo.

The Australian investment relevant to this Ruling is comprised of shares and Loan Notes issued by AusCo. AusCo is a resident of Australia for tax purposes.

The investment of the Pension Plan in AusCo through the Trust has the following characteristics:

(a)  The Pension Plan holds less than 10% of the total participation interests in AusCo and has never held more than a 10% participation interest.

(b)  The Pension Plan will hold less than 10% of the total participation interests in AusCo in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936.

(c)   Neither the Pension Plan, the Trust, nor any related party of these entities have involvement in the day to day management of the business of AusCo.

(d)  Neither the Pension Plan, the Trust, nor any related party of these entities hold any right to appoint a person to a board, committee or similar, either directly or indirectly, of AusCo.

(e)  Neither the Pension Plan, the Trust, nor any related party of these entities hold the right to representation on any investor representative or advisory committee (or similar) of AusCo.

(f)    Neither the Pension Plan, the Trust, nor any related party of these entities have the ability to direct or influence the operation of AusCo outside of the ordinary rights conferred by the equity interest held.

(g)  Neither the Pension Plan, the Trust, nor any related party of these entities have entered into or received any side letters, arrangements or agreements.

(h)  Neither the Pension Plan, the Trust, nor any related party of these entities hold any veto rights on security holder votes.

Additional facts

The Pension Plan is considered resident of Country A for income tax purposes.

The Pension Plan is exempt from tax in Country A.

The Pension Plan 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 Pension Plan 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 Pension Plan is not non-assessable non-exempt income of the Pension Plan because of either:

(a)  Subdivision 880-C of the ITAA 1997, or

(b)  Division 880 of the Income Tax (Transitional Provisions) Act 1997.

Reasons for decision

Question 1

Summary

The Pension Plan is excluded from liability to withholding tax on interest, dividend and non-share dividend income derived from its investment in AusCo 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(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.

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 Pension Plan a non-resident?

The Pension Plan is not a resident of Australia for income tax purposes. The Pension Plan was established in Country A and its administrator is also based in Country A.

Therefore, the Pension Plan satisfies this requirement.

Is the Pension Plan a 'superannuation fund for foreign residents'?

For the Pension Plan 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.

Is the Pension Plan 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 10 February 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

Although the Pension Plan has processes in place if it is terminated, the Pension Plan has confirmed that it is an indefinitely continuing fund with no pre-determined end date.

There is sufficient evidence to accept that the Pension Plan will continue to operate for an indefinite period of time.

Therefore, the Pension Plan satisfies this requirement.

Is the Pension Plan 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 circumstances in which a member of the Pension Plan can receive the funds are consistent with those of a provident, benefit, superannuation or retirement fund as they are provided after attaining a retirement age or 'contemplated contingencies' such as death or ill-health retirement.

The Commissioner accepts that the benefits provided by the Pension Plan align with the sole purpose of providing retirement benefits or benefits in other allowable contemplated contingencies.

Therefore, the Pension Plan satisfies this requirement.

Established in a foreign country

The Pension Plan was established in and is a tax resident of Country A.

Therefore, the Pension Plan satisfies this requirement.

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

The Pension Plan was established and is maintained in Country A for eligible employees of certain employers in Country A. The Pension Plan operates to provide retirement benefits for its members in Country A.

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 Pension Plan, 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 Pension Plan.

Therefore, the Pension Plan satisfies this requirement.

Central management and control (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, paragraphs 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 Pension Plan is managed by a Management Committee which is made up of nominated individuals none of whom are Australian residents.

All of the key functions of the Pension Plan are exercised in Country A including the control and direction of the Pension Plan's investments, strategies, administration, and operations. As such it is reasonable to conclude that the central management and control of the Pension Plan is exercised in Country A by entities that are not Australian residents.

Therefore, the Pension Plan 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 Pension Plan or set aside for the Pension Plan has not been and cannot 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 Pension Plan or set aside for the Pension Plan.

Therefore, the Pension Plan satisfies this requirement.

Conclusion

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

The Pension Plan derives the relevant income

In order to be excluded from withholding tax under paragraph 128B(3)(jb) of the ITAA 1936, the Pension Plan must derive the relevant interest and dividend income.

Relevant to this analysis is subsection 128A(3) of the ITAA 1936 which provides:

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.

Present entitlement

The requirement in subsection 128A(3) of the ITAA 1936 of present entitlement to a share of the income of the trust estate refers to a present vested right to demand and receive payment of the whole or part of what has been received by the trustee as income and, retaining that character in the trustee's hands, is legally available to be distributed to those entitled to it as beneficiaries under the trusts.

Having considered the circumstances of the of the bare trust arrangement as described above, the Commissioner accepts that the Pension Plan is presently entitled to the interest and dividend income as it arises to the Trust. As such, for the purposes of Division 11A of the ITAA 1936 these amounts retain their character when the Pension Plan becomes presently entitled.

Therefore, the Pension Plan is deemed to have derived the relevant dividend and interest income for the purposes of Division 11A of the ITAA 1936. As such, the Pension Plan is considered to have derived dividend and interest income for the purposes of determining a withholding tax liability.

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 AusCo and to which the Pension Plan is presently entitled.

The Trust, with its presently entitled beneficiaries, will receive interest, dividend and non-share dividend income from AusCo, a resident of Australia for tax purposes.

Therefore, the Pension Plan will satisfy this requirement.

Subparagraph 128B(3)(jb)(iii) of the ITAA 1936

The Pension Plan is exempt from income tax in Country A.

Therefore, this requirement is satisfied.

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 Pension Plan must satisfy the 'portfolio interest test' in relation to the test entity (subsection 128B(3CC) of the ITAA 1936),

(ii)   The Pension Plan 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 Pension Plan because of:

a.    Subdivision 880-C of the ITAA 1997, or

b.    Division 880 of the Income Tax (Transitional Provisions) Act 1997.

The Pension Plan 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.

Under the arrangement covered by this Ruling, the relevant 'test entity' is AusCo.

Subsection 128B(3CB) defines the test entity to be either the entity that paid the interest, dividends or non-share dividends or, if subsection 128A(3) of the ITAA 1936 applies in relation to a resident trust estate, that trust estate.

Subsection 995-1(1) of the ITAA 1997 defines total participation interest to have the meaning given by section 960-180 of the ITAA 1997, which states:

An entity's total participation interest at a particular time in another entity is the sum of:

(a) the entity's *direct participation interest in the other entity at that time; and

(b) the entity's *indirect participation interest in the other entity at that time.

A 'direct participation interest' that the Pension Plan will have in a test entity is defined in the table in subsection 960-190(1) of ITAA 1997 and depends on what type of entity the other entity is. It is not relevant in this particular case as the Pension Plan has invested in AusCo through the Trust.

Subsection 960-185(1) of the ITAA 1997 provides that an entity's indirect participation interest in a test entity is established by multiplying its direct participation interest in an intermediate entity by the sum of the intermediate entity's direct and indirect participation interests in the test entity.

The Pension Plan therefore has an indirect participation interest in the test entity as defined in subsection 960-185(1) of the ITAA 1997 (as it holds the interest through its interest in the Trust). This means that the total participation interest of the Pension Plan will be the Trust's direct participation interest in AusCo multiplied by the Pension Plan's proportional interest in the Trust.

The Pension Plan currently holds less than 10% ownership in AusCo and has never held more than a 10% participation interest. Further, the Pension Plan would hold less than 10% of the total participation interests in AusCo in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936.

The Pension Plan therefore satisfies the 'portfolio interest test' in respect of its current investments in AusCo.

The Pension Plan 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 Pension Plan 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 Pension Plan 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 Pension Plan, 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 Pension Plan.

In respect of the investments in AusCo, neither the Pension Plan, the Trust nor any related party of these entities:

(a)  have involvement in the day to day management of the business of AusCo.

(b)  hold any right to appoint a person to a board, committee or similar, either directly or indirectly, of AusCo.

(c)   hold the right to representation on any investor representative or advisory committee (or similar) of AusCo.

(d)  have the ability to direct or influence the operation of AusCo outside of the ordinary rights conferred by the equity interest held.

(e)  have entered into or received any side letters, arrangements or agreements.

(f)    hold any veto rights on security holder votes.

Based upon the above, the Commissioner accepts that neither the Pension Plan, the Trust nor any related party of these entities have influence of a kind described in subsection 128B(3CD) of the ITAA 1936.

Otherwise non-assessable non-exempt

The income received by the Pension Plan 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.

The Pension Plan therefore satisfies this condition in respect of its current investments in AusCo.

Conclusion

Having regard to the requirements of paragraph 128B(3)(jb) of the ITAA 1936, the Pension Plan is excluded from withholding tax in relation to interest, dividend and non-share dividend income derived from its current investment in AusCo.

Question 2

Summary

Interest, dividend and non-share dividend income derived by the Pension Plan is not assessable and not exempt income of the Pension Plan under section 128D of the ITAA 1936.

Detailed reasoning

Section 128D of the ITAA 1936 provides as follows:

Income other than income to which section 128B applies by virtue of subsection (2A), (2C) or (9C) of that section upon which withholding tax is payable, or upon which withholding tax would, but for paragraph 128B(3)(ga),(jb) or (m), section 128F, section 128FA or section 128GB, be payable, is not assessable income and is not exempt income of a person.

Dividend and interest income derived by the Pension Plan would be subject to withholding tax under subsections 128B(1) and 128B(2) of the ITAA 1936 respectively, but for the operation of the withholding tax exemption under paragraph 128B(3)(jb) of the ITAA 1936. As paragraph 128B(3)(jb) of the ITAA 1936 is specifically referred to in section 128D of the ITAA 1936 any interest, dividend or non-share dividend income derived by the Pension Plan will be not assessable and not exempt income under section 128D of the ITAA 1936.