Edited version of private advice

Authorisation Number: 1051911389284

Date of advice: 22 October 2021

Ruling

Subject: Superannuation fund for foreign residents - withholding tax exemption

Question 1

Is the Fund, investing through a trust established pursuant to a trust deed with Trustee Co, excluded from liability to withholding tax on its interest, dividend and non-share dividend income derived in respect of its investment in Aus Co shares and loan notes under paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

This ruling applies for the following periods:

1 July 2019 to 30 June 2026

The scheme commenced on:

1 July 2019

Relevant facts and circumstances

Background to the Fund

The Fund was created and is regulated by the Foreign Legislation.

The Fund is also regulated by the Foreign Government.

The Foreign Legislation created the Fund Board. The Fund Board consists of seven members appointed by Foreign Government.

The Fund Board is appointed as trustee of the Fund under the Foreign Legislation. The Fund Board manages and administers the Fund.

Moneys in the Fund may be invested in any investments that are permissible under the Foreign Legislation.

The Foreign Legislation constitutes the Investment Committee. The Investment Committee consists of the chair, the Deputy Minister of Finance, a member representing the teachers, and up to two individuals appointed based on their investment expertise.

Under the Foreign Legislation the duties of the Investment Committee include reviewing the investments of the Fund and directing the Fund Board as to the investments the Fund should be invested in.

Neither the Investment Committee members nor any members of the Fund Board reside in Australia or make decisions in respect of the Fund from Australia.

The Fund

The Foreign Legislation provides for the establishment of the Fund to hold the assets of its members and provide payments in accordance with the Fund rules.

The Fund is funded by members contributions by way of deductions from their salary, as well as the investment income earned from those contributions.

The Fund Board as the trustee of the Fund is required to pay benefits out of the Fund to its members, their dependents and their survivors as determined and calculated by the Foreign Legislation.

The Fund provides the following benefits to its members:

a.    a pension to a person upon retirement age,

b.    a disability allowance,

c.     death benefits to a surviving spouse or common-law partner, and

d.    a transfer of the balance of funds to a spouse upon the members death or to another retirement fund as requested.

A member of the Fund is entitled to a cash refund of the contributions they have made to the Fund in limited circumstances when leaving their employment. Under the Foreign Legislation, a cash return of pension contributions is subject to withholding tax.

The Foreign Legislation allows for the transfer of a member's contributions to another superannuation, pension or retirement fund.

There are no current provisions in the Foreign Legislation for the termination of the Fund or any intention of the Foreign Government to repeal the Foreign Legislation.

The Fund's annual report shows that the Fund has significant assets and projects the growth in these assets well into the future. The report also outlines its investment projections and strategy for the next XX years showing that the Fund has significant commitments in the future.

The Fund's investment in Aus Co

The Fund has indirectly invested in shares and debt instruments issued by Aus Co. Trustee Co, a company, holds the investment on bare trust for the Fund.

The Fund's investment in Aus Co via Trustee Co

Trustee Co has acquired X% of the shares in Aus Co and the same proportion of Loan Notes issued by Aus Co. Trustee Co holds less than 10% interest in Aus Co.

Trustee Co holds its interests in Aus Co on bare trust for the Fund and other investors (Trustee Co Investors). The Fund indirectly holds less than 10% of the total interests in Aus Co.

Background of Aus Co

Aus Co is an Australian holding company of Aus Co 2, an Australian operating business. Aus Co was incorporated in Australia and is a resident of Australia for Australian income tax purposes and is governed by the Aus Co Constitution.

Aus Co shares allow for shareholders to receive dividends, vote on shareholder issues and vote on whether to appoint, replace or remove a director of the board to Aus Co.

In accordance with the Aus Co Constitution, shareholders of Aus Co have the following rights:

a.    To attend and vote in shareholder meetings.

b.    Each shareholder present is entitled to one vote.

c.     On a poll every shareholder present may vote. Their votes are in proportion to each fully owned share they hold. In the case of a partially owned share the vote is in proportion to that partial ownership.

Under the Aus Co Constitution and the Aus Co Shareholder Agreement, the holder/s of a relevant shareholding may appoint, replace or remove a Director.

Aus Co has also issued debt instruments to its shareholders, including Trustee Co in its capacity as bare trustee for the Trustee Co investors, in the form of loan notes which are held by the shareholders of Aus Co in the same proportion as their shareholdings.

Trustee Co Trust Deed

The Trust Deed allows Trustee Co to hold legal title of the Aus Co shares on bare trust (the Trust) for the Fund.

The Fund has contributed to the Trust the relevant funds needed to purchase the Aus Co shares.

Under the Trust Deed, Trustee Co does not have any discretion or authority to act or deal with the Aus Co Shares or any returns or any other trust asset other than expressly provided in the Trust Deed.

Under the Trust Deed, at all times the Fund has an absolute, indefeasible entitlement to the Trust assets including all returns.

Trustee Co is required to invest the contributions made by the Fund into Aus Co. It is not authorised to make any other investments outside or alter the investment in Aus Co unless it has the permission of the Fund.

The Fund will remain the beneficial owner of the Trust's assets they have contributed. Trustee Co is required to distribute all returns in relation to the Fund's investment in Aus Co to the Fund.

Trustee Co Investors Agreement

The Fund has signed the Trustee Co Investors Agreement governing how the ultimate investors want Trustee Co to manage the investment on their behalf in Aus Co.

The Trustee Co Investors have formed a Board of Representatives (the Board) which is responsible for making collective decisions in relation to the investment in Aus Co.

The Board consists of five members. Each Trustee Co Investor is entitled to select one member. The Fund therefore has a member on the Board.

The decisions of the Board will be effective if approved by 60% of the representatives at the meeting of representatives or by written resolution signed by all of the representatives. As such, the Fund will have 20% of the voting power with respect to decisions made by the Board.

Trustee Co Investors agree not to take or omit any action with respect to the Aus Co Shares beneficially owned by them except in accordance with a decision by the Board. The Trustee Co Investors also agree that the Trust Deed will not be amended without the consent of the Board of Representatives.

Aus Co Shareholder Agreement

Trustee Co has entered into the Aus Co Shareholder Agreement on behalf of the Fund and the other Trustee Co Investors.

The Aus Co Shareholder Agreement states the terms and conditions regarding the Aus Co Shares purchased by Trustee Co. Under the Aus Co Shareholder Agreement Aus Co shareholders may appoint, remove or replace a director to the Aus Co board of directors where the relevant Aus Co shareholder has a more than 10% interest in Aus Co.

Shareholders in Aus Co may also combine their interests and if their interests exceed 10% they may appoint, as a group, a director to the board of Aus Co.

Each Aus Co Shareholder holding 5% or more of total of a certain type of Aus Co shares is entitled to appoint an individual as an observer to the board of directors. This observer has a right to receive all notices and attend but not vote at all board of director meetings.

Trustee Co has not entered into any agreements with any other investor in Aus Co to pool its holdings to reach the 'relevant interest' threshold. Trustee Co therefore does not have the ability to appoint a Director on the Aus Co board of directors.

Trustee Co's voting interest in respect of its Aus Co shareholding is less than 5%, and as such, it cannot appoint an observor to the board of directors. Trustee Co only holds rights to vote in proportion to the equity interest it legally holds in Aus Co.

With respect to Aus Co, Trustee Co and the Fund;

a.    have no involvement in the day to day management of the business of Aus Co.

b.    have no ability to direct or influence the operation of the Aus Co outside of the ordinary rights conferred by the equity interest held.

Other relevant facts

As the Fund is established by the Foreign Legislation, it cannot be discontinued until Foreign Government repeals the legislation.

The Fund is a resident of Foreign Country for income tax purposes.

The Fund is exempt from income tax.

The Fund has or will receive interest income via Trustee Co from its holding of the Loan Notes and dividend and non-share dividend income from shares in Aus Co.

Amounts paid to, or set aside for, the Fund have not been and cannot be deducted under the Income Tax Assessment Act 1997 (ITAA 1997).

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.

The Fund's income from Aus Co is not non-assessable non-exempt income because of:

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

b.    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 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 superannuationfund 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.

An indefinitely continuing fund

The Fund was created by the Foreign Legislation. The Fund provides retirement pensions to its members. There is no indication that the Fund is to be wound up in the near future. Its annual reports note that the Fund has commitments to its members for the foreseeable future.

The rules that govern the Fund have been established by statute. The relevant plans and entities will only be dissolved on a law change at the behest of Foreign Government.

There is sufficient evidence to accept that the Fund will continue to operate in accordance with the Foreign Legislation for an indefinite period of time.

Therefore, the Fund satisfies this requirement.

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) refers to these 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).

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).

Broadly, the Fund provides benefits to members as follows:

a.    pension benefits;

b.    disability benefits;

c.     death benefits (including survivor pensions to dependents);

d.    a cash refund of contributions for members in the Fund in very limited circumstances, and

e.    the transfer of funds to another pension fund.

There are no benefits provided by the Fund to contributors and beneficiaries beyond those as prescribed above and the Commissioner accepts that the alternate circumstances of access to the funds, being incapacity, death, the transfer of funds to spouses or another retirement fund, and a return of contributions in very limited circumstances align to the contemplated contingencies of a provident, benefit, superannuation or retirement fund.

All monies managed by the Fund are used solely for the purposes of administering and paying out benefits under the Fund rules.

Therefore, the Fund satisfies this requirement.

Established in a foreign country

The Fund was established in Foreign Country.

Therefore, the Fund satisfies this requirement.

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

The Fund was established in Foreign Country for its members who also reside in Foreign Country.

Therefore, the Fund satisfies this requirement.

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 Fund Board is the trustee of the Fund. It is responsible for managing and administering the Fund.

In accordance with the Foreign Legislation, the Investment Committee oversees and reviews the investments of the Fund. It also advises the Fund Board as to the investments the Fund should make.

The CM&C of the Fund is exercised by the Fund Board and Investment Committee. Neither the Fund Board nor the Investment Committee contains any Australian resident members, nor persons who make decisions in respect of the Fund from Australia.

Therefore, the Fund satisfies this requirement.

Subsection 118-520(2)

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 this requirement.

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

The Fund is a Foreign Country tax resident. The Fund is exempt from taxation under Foreign Legislation.

Therefore, the Fund satisfies this requirement.

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

As noted above, Australian sourced interest, dividend, and non-share dividend income of the Fund is exempt from liability to withholding tax under paragraph 128B(3)(jb) of the ITAA 1936. In order to be excluded from withholding tax under paragraph 128B(3)(jb) of the ITAA 1936, the income must be derived by a non-resident that is a superannuation fund for foreign residents. This requires an examination of any interposed entities, including an examination of the relationship between the Fund and Trustee Co, and what type of relationship this is for Australian tax purposes.

Trustee Co, as trustee of the bare trust to which the Fund is the sole beneficiary, receives dividend and interest income from its investment in Aus Co. This income is distributed back to the Fund by Trustee Co. In order to be entitled to the withholding tax exemption on this income, it must be considered whether the Fund derives the interest or dividends from Australian sources at the time of payment by Aus Co to Trustee Co.

Subsection 128A(3)

The operation of paragraph 128B(3)(jb) of the ITAA 1936 can in limited circumstances be extended by subsection 128A(3) of the ITAA 1936 which 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 deems for the purposes of Division 11A, in circumstances where a beneficiary is presently entitled to income of a trust estate, interest, dividend and non-share dividend income paid by an Australian resident company and derived by a trust estate as retaining that character in the hands of the beneficiary. In effect, this treats the interest, dividend or non-share dividend income of a trust estate to which the beneficiary is entitled as having been derived by the beneficiary at the time the entitlement arises.

Is there income of a trust estate?

ATO Interpretative Decision ATOID 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 (ATO ID 2008/61)determined that a superannuation fund for foreign residents receiving interest and dividend income through an interposed Irish Common Contractual Fund (CCF) was entitled to the withholding tax exemption under paragraph 128B(3)(jb) of the ITAA 1936 due partly to the operation of subsection 128A(3) of the ITAA 1936.

ATOID 2008/61 when considering the matter first examined the relationship between the parties and concluded that the relationship between the CCF and the Stichting was a trust for income tax purposes as explained below.

Is the relationship between the CCF and the Stichting a trust for the purposes of subsection 128A(3) of the ITAA 1936?

The term 'trust estate' is not defined in the ITAA 1936 or Income Tax Assessment Act 1997 (ITAA 1997). Whether the interest and dividend income forms part of a trust estate, therefore, depends on whether a trust exists in accordance with guidance provided by the Courts. Justice French in Harmer & Ors v. FC of T 89 ATC 5180; (1989) 20 ATR 1461 stated that a trust 'is notably a definition of a relationship by reference to obligations'. His Honour went on to state that the four essential elements of a trust are:

1. the trustee who holds a legal or equitable interest in the trust property

2. the trust property which must be property capable of being held on trust and which includes a chose in action

3. one or more beneficiaries other than the trustee, and

4. a personal obligation on the trustee to deal with the trust property for the benefit of the beneficiaries, which obligation is also annexed to the property.

Is the relationship between Trustee and the Fund a trust relationship for the purposes of subsection 128A(3) of the ITAA 1936?

The words of the Trust Deed explicitly state that a trust relationship exists between Trustee Co and the Fund. Additionally, all four elements of a trust are present in the relationship between Trustee Co and the Fund as described in the Trust Deed. That is;

• the trustee of the Trust, being Trustee Co, holds legal title to the Aus Co assets.
• the assets, consisting of shares and loan notes, are capable of being held in trust.
• the beneficiary of the Trust is the Fund.
• the assets are not held by Trustee Co for its own benefit, but rather the Trust Deed obliges that Trustee Co deal with the Aus Co assets on behalf of and in the best interests of the beneficiary of the Trust, being the Fund.

Accordingly, Trustee Co is acting in a trustee capacity with respect to the Aus Co assets, being the trust property, which Trustee Co purchased as directed by the Fund using the Fund's contribution to the Trust.

Therefore, the relationship between the trustee and beneficiary constitutes a trust relationship. Accordingly, the dividend and interest income received by Trustee Co from Aus Co is income of a trust estate for the purposes of subsection 128A(3) of the ITAA 1936.

The Fund derives the income

Is the Fund presently entitled to interest income at the time it is derived by the Trust?

The liability to withholding tax arises at the time of payment from Australia to a non-resident. It is at this time that the Fund must be presently entitled to the income derived by Trustee Co in order for the exemption under paragraph 128B(3)(jb) of the ITAA 1936 to be available.

Paragraph 24 of Taxation Ruling IT 2680 Income tax: withholding liability of non-resident beneficiaries of Australian trusts states that present entitlement is 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.

In ATOID 2008/61, when considering whether the Stichting was presently entitled to the income derived by the CCF trust estate, ATO ID 2008/61 stated:

Under the terms of the deed, income of the CCF accrues to the unitholder as it arises. Accordingly, the Stichting would have a present legal right to demand and receive payment of the income and therefore, would be presently entitled to the interest and dividend income received by the CCF.

The Trust operates as a bare trust and as such, the Fund is presently entitled to the assets and income derived by the Trust in relation to its investment in Aus Co. Under the Trust Deed, at all times the Fund has an absolute, indefeasible entitlement to the Trust assets including all returns.

Accordingly, the Commissioner has determined that the Fund is presently entitled to the income derived by the Trust from Aus Co as Trustee Co derives it.

Subsection 128A(3) of the ITAA 1936 would therefore apply so that the Fund is deemed to have derived dividend and interest income at the time the income is derived by the Trust. This effectively means that for the purposes of the dividend and interest withholding tax exemptions in subsection 128B(3)(jb), the Fund, a non-resident superannuation fund for foreign residents has derived dividend and interest income from an Australian resident payer.

Conclusion

Due to the operation of subsection 128A(3) of the ITAA 1936 and the nature of the relationship between Trustee Co and the Fund, the Fund will be deemed to have derived the dividend and interest income from Aus Co paid to the Trust estate. As such, the Fund will be entitled to an exemption from withholding tax for this dividend and interest income where it satisfies the other provisions under paragraph 128B(3)(jb) of the ITAA 1936.

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:

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

ii.             The Fund 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 because of:

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

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

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 via its holding in the Trust holds a less than 10% indirect participation interest in Aus Co. Further, the Fund's participation interest does not increase in the circumstances outlined in paragraph 128B(3CC)(b) of the ITAA 1936.

Therefore the Fund satisfies the 'portfolio interest test' in respect of its investment in Aus Co.

The Fund satisfies the 'influence test'

Subsection 128(3CD) of the ITAA 1936 states:

A superannuation fund has influence of a kind described in this subsection in relation to the test entity at a time if any of the following 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.

The Fund has entrusted its assets to Trustee Co in accordance with the Trust Deed. Under the Trust Deed, Trustee Co is required to purchase and hold shares in Aus Co for the benefit of the Fund. The trust between Trustee Co and the Fund is a bare trust. In accordance with the Trust Deed, the Fund has substantial influence and control over Trustee Co, including:

•         directing Trustee Co on how it invests the Fund's assets,

•         the Fund appointing a member to the board of representatives of Trustee Co,

•         directing Trustee Co on how it exercises its rights in Aus Co,

•         restricting Trustee Co's ability to re-invest the funds of the Trust without its permission,

•         directing that all returns from the investment are paid to the Fund, and

•         demanding the return of the Fund's assets upon giving directions to Trustee Co.

Given the influence the Fund has over Trustee Co, it needs to be determined whether Trustee Co has influence over Aus Co in order to determine whether the Fund satisfies the influence test.

As noted in the relevant facts and circumstances, Trustee Co has purchased shares in Aus Co with the assets provided by the Fund. The Trustee Co Investor's Agreement governs how Trustee Co exercises any rights it gains with respect to Aus Co when combining the co-owners' interests. Given the Fund has an integral role in the process as to how Trustee Co exercises its rights in Aus Co (investing through Trustee Co with a representative on the Trustee Co Board), for the purposes of the influence test, the entire holding that Trustee Co has in Aus Co and the rights that arise from that holding will need to be considered.

A holding of AusCo shares may give rise to the right to appoint, remove or replace a director on the AusCo board of directors if the shareholder has an interest greater than 10% in Aus Co or where shareholders pool their interests together above the required threshold.

Based on the facts, Trustee Co does not have influence over Aus Co of a kind described in subsection 128B(3CD) of the ITAA 1936. This is because:

• With a total interest in Aus Co of less than 5%, Trustee Co cannot appoint, remove or replace a director to the board of directors of Aus Co,
• Trustee Co has not entered into any agreement with other shareholders in Aus Co to combine its interests in Aus Co to appoint, remove, or replace a director on Aus Co's Board.
• Trustee Co with a total interest of less than 5% cannot appoint an observer to the board of directors of Aus Co (at least a 5% total interest is required), and
• Trustee Co cannot veto or block any shareholder resolutions.

In addition, Trustee Co:

•         does not have involvement in the day-to-day management of the business of Aus Co,

•         does not have rights to representation on any investor representative or advisory committee (or similar) of Aus Co,

•         does not have the ability to direct or influence the operation of Aus Co outside of the ordinary rights conferred by the equity interest they hold, and

•         only hold rights to vote in proportion to its equity interest in Aus Co.

Based upon the above, the Commissioner accepts that Trustee Co does not have influence of a kind described in subsection 128B(3CD) of the ITAA 1936. As such, it can be concluded that the Fund also does not have influence of a kind described in subsection 128B(3CD) of the ITAA 1936.

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 in Aus Co made through the Trust.