Edited version of private advice

Authorisation Number: 1051928164131

Date of advice: 30 November 2021

Ruling

Subject: Superannuation fund for foreign residents - withholding tax

Question

Is the Fund excluded from liability to withholding tax on its interest income derived from its Australian investment under paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commences on:

DD MMMM 20XX

Relevant facts and circumstances

The Fund is a retirement pension fund in the United Kingdom.

The Fund is a UK Registered Pension Scheme and is generally exempt of UK tax by virtue of section 186 of the Finance Act 2004.

The Fund is a defined benefit scheme that invests on behalf of a single pension fund. It only provides benefits for old age retirement, disability, and death to the members of the scheme and to their dependants.

The scheme is under the management of the Trustees of whom there are at least six (unless there is a sole corporate trustee), one half of whom are Trustees selected by members of the Fund and one half of whom are Trustees appointed by the company. If there is a sole corporate Trustee, there will be at least six directors, one half of whom will be directors selected by the members and one half of whom will be directors appointed by the company.

Members and participating employers contribute to the Fund as stipulated by the rules of the Fund.

The Fund confirmed that:

(a)  the Scheme is an indefinitely continuing UK pension scheme;

(b)  the Scheme was established in a country other than Australia;

(c)   the Scheme was established and is maintained only to provide benefits for individuals who are not Australian residents;

(d)  the Scheme's central management and control is carried on outside of Australia by entities none of whom are Australian residents;

(e)  no amount paid to the Scheme can be deducted under the ITAA 1997 or ITAA 1936;

(f)    no tax offsets would be allowable for an amount paid to the Scheme or set aside for the fund;

(g)  the income of the Scheme is not non-assessable non-exempt income of the Scheme because of either:

                      i.        Subdivision 880-C of the ITAA 1997; or

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

The Fund currently holds one Australian debt investment.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 6(1)

Income Tax Assessment Act 1936 Section 128B

Income Tax Assessment Act 1936 Subsection 128B(1)

Income Tax Assessment Act 1936 Subsection 128B(2)

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

Income Tax Assessment Act 1936 Subsection 128B(3CA)

Income Tax Assessment Act 1936 Subsection 128B(3CC)

Income Tax Assessment Act 1936 Subsection 128B(3CD)

Income Tax Assessment Act 1936 Section 128D

Income Tax Assessment Act 1997 Section 118-520

Income Tax Assessment Act 1997 Subdivision 880-C

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

Income Tax (Transitional Provisions) Act 1997 Division 880

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. Broadly, paragraph 128B(3)(jb) of the ITAA 1936 provides an exclusion from withholding tax on interest, dividends and non-share dividends derive 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.

Each of the requirements of paragraph 128B(3)(jb) is considered below.

The Fund is a non-resident

The Fund is not a resident of Australia for tax purposes. The Fund was established in the United Kingdom, and its management is entirely based there.

Therefore, the Fund satisfies this requirement.

The Fund is a 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;

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

Consequently, for the Fund to be considered a superannuation fund for foreign residents for the purposes of paragraph 128B(3)(jb) of the ITAA 1936, it must be established that:

1. the Fund is an indefinitely continuing fund
2. the Fund is a provident, benefit, superannuation or retirement fund
3. the Fund was established in a foreign country
4. the Fund was established and maintained only to provide benefits for individuals who are not Australian residents
5. the central management and control of the Fund is carried on outside of Australia by entities none of whom are Australian residents
6. no amount paid to the Fund or set aside for the Fund has been or can be deducted under the ITAA 1997, and
7. no tax offsets have been allowed or would be allowable for an amount paid to the Fund or set aside for the Fund.

i. The Fund is 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 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 main purpose of the Fund is the provision of pensions and other benefits to its membersand to their dependants. In respect of retirement pension, the normal retirement age is 65 years. Apart from the Trust Deed providing for the winding up/dissolution of the Fund and any employer participating in the scheme, the Fund is not required to be terminated after a specified date. It is intended and expected that the Fund will be continued indefinitely.

Therefore, the Fund is an 'indefinitely continuing fund' within the meaning of subparagraph 118-520(1)(a)(i) of the ITAA 1997.

ii. The Fund is 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. 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 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; (1967) 14 ATD 519; 10 AITR 463 (Mahoney Case), 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 death, disability or serious illness.

According to the Trust Deed and Rules, the main purpose of the Fund is the provision of retirement pensions, incapacity and death benefits to its membersand their dependants. Therefore, the Fund is considered to be a 'provident, benefit, superannuation or retirement fund' as that phrase has been interpreted by the relevant authorities.

The Fund satisfies the requirements in subparagraph 118-520(1)(a)(ii) of the ITAA 1997 of the definition of 'superannuation fund for foreign residents' in section 118-520 of the ITAA 1997.

iii.The Fund was established in a foreign country

According to the Trustee's Declaration, the Fund was established in a country other than Australia. Therefore, the Fund satisfies the requirement in paragraph 118-520(1)(b) of the definition of 'superannuation fund for foreign residents' in section 118-520 of the ITAA 1997.

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

The Trustee's Declaration states that the Fund was established and is maintained only to provide benefits for individuals who are not Australian residents.

It is considered that the possibility of a very small number of members being returned residents or becoming Australian residents after ceasing eligible employment is incidental and should not be taken to conclude that the Fund has not been established and is not maintained only to provide benefits for non-residents, based on the rules and operation of the Fund.

Accordingly, the Fund satisfies the requirements in paragraph 118-520(1)(c) of the definition of 'superannuation fund for foreign residents' in section 118-520 of the ITAA 1997.

v. The Fund's central management and control is carried on outside Australia by entities none of whom is an Australian resident

Paragraph 20 and 21 of Taxation Ruling TR 2008/9 Income tax: meaning of 'Australian superannuation fund' in subsection 295-95(2) of the Income Tax Assessment Act 1997 (TR 2008/9) states in respect of the central management and control (CM&C) of a superannuation fund:

20. The CM&C of a superannuation fund involves a focus on the who, when and where of the strategic and high level decision making processes and activities of the fund. In the context of the operations of a superannuation fund, the strategic and high level decision making processes includes:

•         formulating the investment strategy for the fund;

•         reviewing and updating or varying the fund's investment strategy as well as monitoring and reviewing the performance of the fund's investments;

•         if the fund has reserves - the formulation of a strategy for their prudential management; and

•         determining how the assets of the fund are to be used to fund member benefits.

21. The other principal areas of operations 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 fulfillment of administrative duties and the preservation, payment and portability of benefits.

Furthermore, paragraph 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.

According to the Trustee's Declaration the Fund's central management and control is carried on outside of Australia by entities none of whom are Australian residents. The Trustees are charged with the responsibility of managing the business of the pension fund, and the administration of the assets held on trust in accordance with the Trust Deed and Rules.

Therefore, it is reasonable to conclude that the central management and control of the Fund occurs outside of Australia by entities that are not Australian residents. Accordingly, the Fund satisfies this requirement.

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

Pursuant to subsection 118-520(2) of the ITAA 1997, 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.

The Trustee's Declaration also confirms that no amount paid to or set aside for the Fund has been or can be deducted under the ITAA 1997 and the ITAA 1936 and that a tax offset has not been allowed or is allowable for such an amount.

Therefore, paragraphs 118-520(2)(a) and (b) of the ITAA 1997 have no application.

Conclusion

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

Subsection 128B(3CA) of the ITAA 1936, along with paragraph 128B(3)(jb) of the ITAA 1936, requires the superannuation fund for foreign residents to derive the interest, dividends or non-share dividends paid by Australian resident companies.

Generally, these extra requirements apply to income derived from 1 July 2019 on equity interests acquired after 27 March 2018:

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

2.            The Fund must satisfy the 'influence test' (subsection 128B(3CD) of the ITAA 1936) in relation to the test entity; and

3.            The income cannot otherwise be non-assessable non-exempt income of the Fund because of:

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

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

The Fund's Australian investment income is derived from a debt interest that will generate interest income. On the basis that the Fund's investment is a debt interest that will generate interest income derived by a non-resident superannuation fund for foreign residents, which is exempt from income tax in the country in which the non-resident lives, the elements of paragraph 128B(3)(jb) are satisfied. However, as the income derived is a debt interest rather than an equity interest, the extra requirements that apply to income derived from 1 July 2019, as set out in subsection 128B(3CA), subsection 128B(3CC) and subsection 128B(3CD) are not applicable.

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

The Fund is exempt from income tax in its country of residence. Therefore, the Fund satisfies this requirement.

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.

Income derived by Fund would not be otherwise treated as not assessable and not exempt income by virtue of the above provisions. Accordingly, the above exclusion should not apply to exclude the Fund from entitlement to the withholding tax exemption for superannuation funds for foreign residents.

Conclusion

As all the requirements of paragraph 128(3)(jb) of the ITAA 1936 are satisfied, the Fund is excluded from withholding tax in relation to interest income derived from its current investment pursuant to paragraph 128B(3)(jb) of the ITAA 1936.