Edited version of private advice

Authorisation Number: 1051905798019

Date of advice: 7 October 2021

Ruling

Subject: Superannuation - withholding exemption

Question

Are the Participating Trusts, investing through the Fund, excluded from liability to withholding tax on dividend income derived from the '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 XXXX to 30 June XXXX

The scheme commences on:

1 July XXXX

Relevant facts and circumstances

Background

1.    The Retirement System ('RS') was established to provide retirement benefits for state public servants in the United States. The RS is a division of the State Treasurer (the 'Treasurer').

2. Under the Treasurer, the RS administers public pension plans (defined benefit plans).
3. Under the defined benefit plans, the amount of the benefit paid to a member upon retirement, termination, death or disability is defined by law. These contributions are paid during a public servant's career so that upon retirement, termination, death, or disability, there are funds available to pay these benefits. These amounts are determined through an actuarial valuation. Actuarial valuations are performed for each of the pension plans and the results are contained in actuarial valuation reports.

The Trust Agreement and the Fund

4.    The Treasurer, as fiduciary of the Participating Trusts, entered into a trust agreement with the trustee to establish the Group Trust. The Group Trust is an IRS Revenue Ruling 81-100 group trust. The Group Trust administers the Fund.

5.    There defined benefit plans (with authorizing statutes) (governmental plans) are the only 'Participating Trusts' in the Group Trust.

6. The Fund was established for the purpose of making equity investments for the Participating Trusts. Assets from the Participating Trusts are pooled in the Fund for the main purpose of investing public equities
7. Per the Trust Agreement, the Group Trust is operated exclusively for the collective investment of the equity investment assets of the RS which become Participating Trusts under the Trust Agreement. The RS is the sole beneficiary of the Group Trust
8. The Group Trust is a resident of the United States.

Participating Trusts/Defined Benefit Plans

9. Per the Trust Agreement, a 'Participating Trust' must meet certain criteria (per the Trust Agreement).
10. No 401(k) plans or other voluntary defined contribution plans participate in the Group Trust.
11. All of the Participating Trusts have the following attributes:

•         Defined benefit plans under Section 401(a) of the Internal Revenue Code.

•         Members, the state and the investment earnings on total contributions pay the cost of providing member's retirement benefits.

•         A member's share of the cost is x% of their compensation. Compensation includes all eligible salaries and wages, as defined by statute, paid to members from public funds, earned at a member's job while working for the state.

•         The state bases its contributions on calculations prepared by an actuary. The state contribution rate is x% of all members' salaries.

•         Contributions are invested by the State Treasurer and these funds are protected from being used for any purpose other than retirement system benefits and expenses.

•         Membership is automatic for eligible employees.

•         A member has the option to name any person as their beneficiary regardless of relationship to the member (i.e. the beneficiary does not have to be a spouse or family member).

•         A member becomes vested once they have completed a minimum of x years of creditable service.

•         Members may retire with an unreduced service retirement benefit after they reach age x and complete x years of membership service; reach age x and complete x years of creditable service, or complete x years of creditable service at any age.

•         Members may retire early with a reduced retirement benefit after they reach age x and complete x years of creditable service; or reach age x and complete x years of membership service. An early retirement benefit is calculated using the same formula as a service retirement benefit multiplied by a reduced percentage based on a member's age and/ or service at early retirement.

•         If a member leaves for any reason other than retirement or death, they can either receive a refund of contributions, plus interest, or leave their contributions in the fund and keep all the creditable service earned to that date. They may be entitled to receive a deferred benefit at a later date once meeting eligibility requirements, provided they do not withdraw contributions.

•         If a member leaves the fund before they have x years of creditable service, the only payment they can receive is a refund of contributions and interest.

•         If refunded contributions are not rolled over to an eligible IRA or eligible employer retirement plan that will accept the rollover, the Plan will withhold x percent of the taxable portion of the refund for federal income tax purposes and an additional x percent on the taxable portion of a refund received before death, disability, or reaching x years of age. Members who have less than x years of retirement service credit are also subject to an additional four percent withheld from the taxable portion of a refund for income tax.

•         In most cases, the Plan is required to pay benefits to non-retired members with open accounts by the year following the year in which the member reaches age x or ceases to be an employee, whichever is later.

•         A member's annual benefit in retirement is calculated as x% of average final compensation multiplied by the number of years and months of creditable service.

•         At retirement a member chooses from a number of options to receive their benefits.

•         A member may be eligible for State Health Plan coverage, disability and death benefits.

•         The plans are administered by a Board of Trustees.

•         The Treasurer is the custodian of Plan assets and serves as the Chief Investment Officer. Equity assets (e.g. common stock, preferred stock, and debentures convertible into common stock) are invested in conjunction with policies adopted by the Advisory Committee.

12. The Trust Agreement governs the Investment Management and Investments of the Group Trust Fund.

Wind up and insolvency

13. The Group Trust is not subject to any Act relating to the insolvency or winding-up of any corporation.
14. The rules of the Group Trust and Participating Trusts do not provide for winding up at a defined point in time.

Superfund and Tax status

15.  A statement was supplied with this private ruling application advising that:

o   The Group Trust is established as an indefinitely continuing fund and a provident, benefit, superannuation or retirement fund.

o   The Group Trust has been established in a foreign country and is maintained only to provide benefits for non-residents of Australia.

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

o   No amounts paid to or set aside for the Group Trust have been or are capable of being claimed as a tax offset, rebate or deduction under any sections of the ITAA 1997.

o   The income of the Group Trust is not 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.

16. A letter and Certificate of Residency (Form 6166) from the United States Internal Revenue Service has been provided which confirm that:

o   The Group Trust is a resident of the US for the purposes of US taxation, is exempt from US taxation, and consists exclusively of pension, retirement or similar arrangements that are themselves exempt from US taxation.

o   The Group Trust as an IRS Revenue Ruling 81-100 group trust.

o   The Participating Trusts are also exempt from United States taxation as governmental plans.

Australian Investments:

17. The Group Trust provided a list of its 'Australian Investments'.
18. Documents were provided with the private ruling application stating the following:

o   All of the Group Trust's investments in Australia are shares or debt investments for which dividends and distributions are received.

o   The Group Trust does not have influence of a kind described in subsection 128(3CD) of the ITAA 1936 in respect of these investments.

o   The Group Trust does not have capacity to influence (either directly or indirectly) the day-to-day management of the operations of their investments.

o   The Group Trust does not hold any right to appoint a person to a board, committee or similar (either directly or indirectly).

o   The Group Trust does not hold any veto rights on security holder votes.

o   The Group Trust does not hold more than 1% ownership of any of the entities listed above.

Relevant legislative provisions

Income Tax Assessment Act 1936, Paragraph 128B(3)(jb)

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) 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.

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 from 1 July 2019 onwards. These extra requirements apply only to assets which were acquired after 27 March 2018.

The superannuation fund is a non-resident

Each of the Participating Trusts is not a resident of Australia for tax purposes. Therefore, the Participating Trusts satisfy this requirement.

Superannuation fund for foreign residents

Superannuation fund for foreign residents is a defined term in the ITAA 1936. Subsection 6(1) of the ITAA 1936 states:

superannuation fund for foreign residents has the meaning given by subsection 995-1(1) of the Income Tax Assessment Act 1997.

Subsection 995-1(1) of the ITAA 1997 sets out the following:

superannuation fund for foreign residentshas the meaning given by section 118-520.

The term 'superannuation fund for foreign residents' is defined in section 118-520 of the Income Tax Assessment Act 1997 (ITAA 1997) as follows:

118-520 Meaning of superannuation fund for foreign residents

(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 Pension Plans 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 Pension Plans are indefinitely continuing funds
• the Pension Plans are provident, benefit, superannuation or retirement funds
• the Pension Plans were established in a foreign country
• the Pension Plans were established and maintained only to provide benefits for individuals who are not Australian residents
• The central management and control of the Pension Plans is carried on outside of Australia by entities none of whom are Australian residents
• 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 offsets have been allowed or would be allowable for an amount paid to the Fund or set aside for the Fund.

i.      An indefinitely continuing fund

The term 'indefinitely continuing fund' is not defined in either the ITAA 1997 or the ITAA 1936. Therefore, it should be given its ordinary meaning subject to the context in which it appears and having regard to any relevant case law authorities.

The Australian Oxford Dictionary, 2004, Oxford University Press, Melbourne defines the term 'fund' as; 1: a permanent stock of something ready to be drawn upon... 2: a stock of money, especially one set apart for a purpose.

In Scott v. FC of T (No 2) (1966) 14 ATD 333; (1966) 10 AITR 290 (Scott), Windeyer J expressed the view that 'fund' in the context of 'superannuation fund' ordinarily meant 'money (or investments) set aside and invested, the surplus income therefrom being capitalised'. Windeyer J's views in Scott were cited with approval by Hill J in Walstern Pty Ltd v. Commissioner of Taxation (2003) 138 FCR 1; 2003 ATC 5076; (2003) 54 ATR 423 who stated that 'for present purposes, the point is the need for "money" or "other property" to constitute a 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 general view is that an indefinitely continuing fund does not have to continue forever, but rather that the governing rules should not fix an express termination date.

The rules of the Group Trust and Participating Trusts do not provide for winding up at a defined point in time. There is no indication that there is an intention for the Group Trust or Participating Trusts to end at a definite point in time. Therefore, it is accepted that the Group Trust and Participating Trusts will continue to operate for an indefinite period and the Participating Trusts satisfy this requirement.

ii.     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 1936 or the ITAA 1997. However, the phrase has been subject to judicial consideration.

In Scott, the High Court examined the terms 'superannuation fund' and 'fund'. Justice Windeyer stated at ATD 351; AITR 312; ALJR at 278 that:

... I have come to the conclusion that there is no essential single attribute of a superannuation fund established for the benefit of employees except that it must be a fund bona fide devoted as its sole purpose to providing for employees who are participants money benefits (or benefits having a monetary value) upon their reaching a prescribed age. In this connexion "fund", I take it, ordinarily means money (or investments) set aside and invested, the surplus income there from being capitalised.

In a later case, Mahoney v. Commissioner of Taxation (Cth) (1967) 41 ALJR 232; 14 ATD 519; 10 AITR 463, the High Court took a similar view as in Scott, Justice Kitto expressed the view at ALJR 232; ATD 520; AITR 464 that:

... all that need be recognised is that just as 'provident' and 'superannuation' both referred to the provision of a particular kind of benefit - in the one case a provision against contemplated contingencies, and in the other case a provision, to arise on an employee's retirement or death or other cessation of employee, of a subvention for him or his estate or persons towards whom he may have stood in some kind of relation commonly giving rise to a legal or moral responsibility - so 'benefit' must have meant a benefit, not a general sense, but characterised by some specific future purpose.

The court found that the expression takes its meaning from past usage and the meaning of the several expressions must be arrived at in light of their ordinary usage. As such, the term 'benefit' requires a purpose narrower than conferring benefits in a completely general sense. The benefit must be characterised by some future purpose. Likewise, a provident fund must not refer to the provision of funds in a general sense but must relate to a provision against contemplated contingencies.

Both of the above mentioned cases emphasise that the benefits must be provided for a specific purpose and require that there is a connection between the benefit received and the provision by the fund for retirement or death of a member or against 'contemplated contingencies', such as a sickness or accident.

It is accepted that the Participating Trusts are a "provident, benefit, superannuation or retirement fund" on the basis that:

• The Participating Trusts sole purpose is to provide the relevant participant employees money benefits upon their reaching a prescribed age (i.e. immediate annuities, deferred annuities, etc as explained above);
• The Participating Trusts can be described as "provident" on the basis that they provide money benefits upon particular contingencies (e.g. death, ill-health and retirement);

• The Participating Trusts provide benefits upon an employee's retirement or death or other cessation of employment, including to survivors and children of the employee;
• The terms of the Group Trust (i.e. the Trust Agreement) and rules of each Participating Trust are consistent with a superannuation fund and the terms are strictly adhered to (evidenced by the fact that the terms of the Group Trust are enacted in law and violation of them could lead to criminal or civil sanctions);
• The amounts collected by the Group Trust via the Participating Trusts are not used for any purposes other than providing benefits to members of the Participating Trusts, former members and their beneficiaries under the Participating Trust plans.

Therefore, the Participating Trusts satisfy this requirement.

iii.    Established in a foreign country:

The Group Trust and Participating Trusts were established as a tax-exempt Public Retirement Fund under section 401(a) of the U.S. Internal Revenue Code in the United States.

Therefore, the Participating Trusts satisfy this requirement.

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

The Group Trust and Participating Trusts were established to provide benefits to members who are/were public service/state employees in the United States. The Participating Trusts do not provide benefits to Australian residents. Accordingly, the Commissioner accepts that the Participating Trusts were established and are maintained only to provide benefits for individuals who are not Australian residents.

v.     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.

Furthermore, paragraphs 10 and 11 of 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 central management and control of the Group Trust and the Participating Trusts is carried out by the Treasurer in line with the Trust Agreement; in conjunction with the Boards who govern and administer the plans. The Trust Agreement is the official plan document governing the Group Trust. Furthermore, the central management and control of the Group Trust (and plans) is carried on outside Australia.

The Commissioner is satisfied in these circumstances that the central management and control of the Group Trust (and the Participating Trusts) is in the United States and is carried out by individuals who are not Australian residents. Therefore, this requirement is satisfied.

vi.   Subsection 118-520(2):

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 the Act; or

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

No amount paid to the Group Trust or set aside for the Group Trust has been or can be deducted (and no tax offset has been allowed or is allowable for such an amount) under the ITAA 1936 or ITAA 1997.

Therefore, the Group Trust satisfies these requirements.

Conclusion:

As all of the above requirements are satisfied, the Participating Trusts meet the requirements of being a superannuation fund for foreign residents as defined by section 118-520 of the ITAA 1997 for the purposes of subparagraph 128B(3)(jb)(i) of the ITAA 1936.

The income, consisting of interest, dividend or non-share dividend income, is derived by the Group Trust

In order to be excluded from withholding tax under paragraph 128B(3)(jb) of the ITAA 1936, the Pension Plans must derive the relevant interest and dividend income. This requires consideration of the relationship between the Group Trust and the Participating Trusts, and what type of relationship this is for Australian tax purposes.

It is considered the relationship between the Group Trust and the Participating Trusts constitutes a trust relationship. Income received by the Group Trust is income of a trust estate. It must then be determined whether the Pension Plans derive the relevant 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.

The Commissioner has accepted that subsection 128A(3) of the ITAA 1936 can apply to deem beneficiaries of non-resident trust estates to have derived the relevant income in limited circumstances.

ATO Interpretative Decision ATO ID 2008/61 Withholding Tax Exemption: interest and dividends paid by an Australian resident and received by a Dutch Stichting as unitholder in an Irish Common Contractual Fund (ATOID 2008/61)is an example of this. In this ATOID, an Irish CCF was found to be a trust for Australian income tax purposes. The terms of the deed stated that income of the CCF accrued to unitholders as it arose. As such, the unitholder would have a present legal right to demand and receive payment of the income, and therefore was presently entitled to the dividend and interest income received by the CCF. The requirements in subsection 128A(3) were therefore satisfied, and the unitholder was deemed to have derived the income at the time when it became presently entitled. Being an entity entitled to be excluded from withholding tax under paragraph 128B(3)(jb) of the ITAA 1936, the unitholder was subsequently exempt from withholding tax.

As such, the critical factor is to determine whether the Participating Trusts are 'presently entitled' to the income of the Fund.

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 Group Trust, the Participating Trusts, and the Trust Arrangement, the Commissioner accepts that the Participating Trusts are presently entitled to the interest and dividend income as it arises to the Group Trust. As such, for the purposes of Division 11A of the ITAA 1936 these amounts retain their character when the Participating Trusts become presently entitled.

Therefore, the Participating Trusts are deemed to have derived the relevant dividend and interest income for the purposes of Division 11A of the ITAA 1936. As such, the Participating Trusts are 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 Australian resident companies to the Group Trust to which the Participating Trusts are presently entitled.

The Group Trust, with its presently entitled Participating Trust beneficiaries, will receive dividend income from the Australian investments, that are companies who are residents of Australia for tax purposes.

Therefore, the Participating Trusts will satisfy this requirement.

The Fund is exempt from income tax in the country in which the non-resident resides (subparagraph 128B(3)(jb)(iii):

As per the facts provided, including a letter and Certificate of Residency (Form 6166) from the United States Internal Revenue Service from the US Internal Revenue Service, The Group Trust is:

• a resident of the US for the purposes of US taxation,
• exempt from US taxation, and

•         consists exclusively of pension, retirement or similar arrangements that are themselves exempt from US taxation.

The Participating Trusts are also exempt from United States taxation as governmental plans.

Therefore, the Participating Trusts satisfy 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) to apply. Generally, these extra requirements apply from 1 July 2019 to assets acquired after 27 March 2018.

Relevantly:

•                     The Participating Trusts must satisfy the 'portfolio interest test' in relation to the test entity (subsection 128B(3CC)

•                     The Participating Trusts must satisfy the 'influence test' (subsection 128B(3CD) in relation to the test entity, and

•                     The income cannot otherwise be non-assessable non-exempt income of the Participating Trusts because of:

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

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

i.      The Participating Trusts satisfy the 'portfolio interest test'

Subsection 128B(3CC) 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.

In the case of the Participating Trusts, the relevant 'test entities' are the Australian companies that the Fund holds investments in.

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 Fund 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.

As per the facts, the Group Trust does not hold more than 10% of the total participation of any of the Australian companies that the Fund holds investments in.

All of the underlying Participating Trusts therefore have an indirect participation interest in the Australian assets as defined in subsection 960-185(1) of the ITAA 1997 (as they hold the assets through their interest in the Group Trust). This means that the total participation interest of each of the underlying Participating Trusts will be the Group Trust's participation interest in the Australian company multiplied by the Participating Trusts' proportional interest in the Group Trust.

The Participating Trusts currently do not hold more than 10% ownership of any of the Australian companies that the Fund holds investments in. Further, the Participating Trusts would hold less than 10% of the total participation interests in each Australian company that the Fund holds investments in, in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936.

In these circumstances, the Commissioner is satisfied that the total participation interest the Group Trust holds in the test entities:

•         is less than 10% pursuant to paragraph 128B(3CC)(a) of the ITAA 1936 at all relevant times; and

•         would be less than 10% in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936 at all relevant times.

The Participating Trusts therefore satisfy the 'portfolio interest test' in respect of the Australian Investments.

ii.     The Participating Trusts do not have the influence of a kind described in subsection 128B(3CD) of the ITAA 1936 in relation to the test entity at the time the income was derived

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 Participating Trusts are 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 Participating Trusts are 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 Participating Trusts, in their own right, hold 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 Participating Trusts.

Relevantly, in respect of the Australian investments that the Fund holds investments in:

• Neither the Fund, Participating Trusts, nor any related party, are involved in the day to day management of the business of any of the Australian companies.
• Neither the Fund, Participating Trusts, nor any related party, have the right to appoint a director to the Board of Directors of the Australian company.
• Neither the Fund, Participating Trusts, nor any related party, hold the right to representation on any investor representative or advisory committee (or similar) of the Australian companies.
• Neither the Fund, Participating Trusts, nor any related party, have the ability to direct or influence the operation of the Australian companies outside of the ordinary rights conferred by the equity interest held.
• The Fund only holds rights to vote in proportion to its equity interest in each of the Australian companies.

Accordingly, the Participating Trusts do not have influence of a kind described in subsection 128B(3CD) of the ITAA 1936 in respect of the Australian investments. The Participating Trusts does not have capacity to influence (either directly or indirectly) the day-to-day management of the operations of their investments held via the Fund.

Consequently, the Commissioner accepts that the Participating Trusts do not have influence of a kind described in subsection 128B(3CD) of the ITAA 1936.

iii.    Otherwise non-assessable non-exempt

The income received by the Participating Trusts 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 Participating Trusts therefore satisfy this condition in respect of the current investments that the Fund holds investments in l.

Conclusion

The Participating Trusts are excluded from withholding tax in relation to dividend income derived from the current Australian investments that the Fund holds investments in.