Edited version of private advice

Authorisation Number: 1051946186522

Date of advice: 16 March 2022

Ruling

Subject: Superannuation fund for foreign residents

Question

Is the Fund excluded from liability to withhold tax on dividend income derived from its investments in Australia in accordance with paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

This ruling applies for the following periods:

1 July 20XX to 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Fund was established as a pension Fund to receive contributions from employee members and employers on behalf of employee members in a foreign country.

Membership in the Fund is compulsory for employees in certain industries in the foreign country.

The Fund is an independent legal entity with the purposes of providing superannuation benefits to its members, including payment of retirement pensions, disability pensions and termination benefits in accordance with its Articles of Association (Articles) and Pension Plan Rules (Rules).

The Fund is classified as a pension benefit agreement under the relevant legislation of the foreign country.

The Fund is managed through a Board of Directors (The Board). The Board is charged with the management of the Fund in line with the Articles of the Fund.

Employees or former employees of the specific industries are automatically Members of the Fund from a certain age.\

An employer is required to pay a contribution of certain percentage of the Member's pensionable earnings multiplied by their part-time percentage.

The Board may increase or decrease the amount contribution required as they see fit.

A Member is required to contribute a proportion of their Pensionable Earnings to the Fund.

A Member's contribution to the Fund is determined as a percentage of the Member's Pensionable Earnings and is dependent on which section in which the Member's employer operates.

Employees that join the Fund are also given the ability to transfer in accrued pension from another employer.

Members can take a monthly pension from the Fund at Pension Age. The amount of a retirement pension is calculated in accordance with the Rules and is dependent on the following factors:

•         The number of years of the Member participates in the Fund, and

•         The salary of the Member during their participation period in the Fund.

Upon the death of a Member in service or retirement their partner and children can become entitled to a lump sum payment.

If a Member is unable to work because of disability, illness, or incapacity the Member receives a non-contributory accrual from the moment the Member is declared incapacitated for work.

If a Participant leaves their employer before retirement, they may choose among several options including a deferred pension, a transfer value; or if the member does not have a new pension plan, they may still make contributions to the Fund provided notice is given.

The objective of the Investment Policy is to achieve the best possible return with the risk appetite commensurate of a pension Fund.

Additionally, the Board is to consider the Responsible Investment Policy, and relevant legislation and regulations of the foreign country.

The Fund is a resident of a foreign country within the meaning of the relevant double taxation agreement between Australia and the foreign country.

Neither the Fund, nor the Investment Manager are residents of Australia for tax purposes and neither have a permanent establishment in Australia.

The Fund is subject to the foreign country's Income Tax; however, the income is exempt from taxation in accordance with the relevant legislation.

The Fund is not in the process of winding up or in a state of bankruptcy and no resolution to dissolve the Foundation has been registered.

The Fund confirms that Fund:

•         is an indefinitely continuing Fund and a provident, benefit, superannuation or retirement Fund,

•         was established in a foreign country,

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

•         its central management and control is carried on outside Australia by entities none of whom is an Australian resident,

•         That an amount paid to the entity or set aside for the entity has not been or cannot be deducted under the ITAA 1997; and

•         A tax offset has not been allowed or is not allowable for such an amount.

Australian Investments

With regards to all its Australian investments, it is confirmed that the Fund holds less than 1% of the total participation of any of the entities in relation to the Australian Investments' section. Further:

a.    The Fund has direct ownership.

b.    The Fund does not hold any right to appoint a person to a board, committee, or similar, either directly or indirectly.

c.     The Fund has not read into or received any side letters, arrangements or agreements.

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

e.    The Fund does not have influence of a kind described in subsection 128B(3CD) of the ITAA 1936.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 Section 118-520

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 Fund is a non-resident

The Fund is not a resident of Australia on the basis that:

•         The Fund is established in the foreign country,

•         Its central management and control is carried out in the foreign country, and

•         The persons carrying on the central management and control of the Fund are non-resident.

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; or

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

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

• the Fund is an indefinitely continuing fund,
• the Fund is a provident, benefit, superannuation or retirement fund,
• the Fund was established in a foreign country,
• the Fund was established and maintained only to provide benefits for individuals who are not Australian residents,
• The central management and control of the Fund is carried on outside of Australia by entities none of whom are Australian residents,
• No 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.

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 Fund receives contributions from employee members and employers on behalf of employee members of specific industries in the foreign country. The Fund holds these funds on trust for the purpose of providing superannuation benefits to its members, including the payment of pensions, death, disability, and termination benefits in accordance with the Articles of Association.

On the basis that the money collected by the Fund from employee members and employers on behalf of employee members of the specified industries in the foreign country is effectively set aside for investment and for the purposes of providing pensions, death, disability and termination benefits, it is clear that the Fund will constitute a 'fund'.

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

The phrase 'a provident, benefit, superannuation or retirement fund' under paragraph 118-520(1)(a)(ii) 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; (1967); 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.

The Articles of Association of the Fund states that the Fund was established to provide superannuation benefits in perpetuity to the employees of the Member Companies. Further, the Fund confirmed that it is indefinitely continuing. On this basis, the Fund is considered to continue for an indefinite time, and it satisfies this requirement.

The Fund can be described as a 'superannuation fund' on the basis that its sole purpose is to provide to the Members money benefits upon their reaching a prescribed age (i.e., immediate annuities, deferred annuities, etc).

The Fund can be described as a 'provident' on the basis that it provides money benefits upon particular contingencies (i.e., death, disability and retirement).

The Fund can be described as 'superannuation' in nature as it provides benefits upon a Member's retirement or death or other cessation of employment, including to survivors and children of the Member. The terms of the Articles of Association are consistent with a superannuation fund and the terms are strictly adhered to; and the Investment Manager manages the Funds in line with the SIP with a view to achieving a maximum rate of return, without undue risk of loss, having regard to the factors that may affect the funding of the Fund and its ability to meet financial obligations on any given business day.

By considering the ordinary meaning of the term a 'provident, benefit, superannuation or retirement fund', in the context of relevant ATO guidance, the Fund exhibits all the qualities of a 'provident, benefit, superannuation or retirement fund'.

The Fund was established in a foreign country

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

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

The Fund has been established to provide superannuation benefits to employees of specific industries in the foreign country who are not Australian residents. The Fund confirms that it does not provide benefits to Australian residents.

The Fund's central management and control is 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 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 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 Fund is carried out by the Board of Directors outside Australia. Furthermore, the Fund confirms that the central management and control of the Fund is carried on outside Australia and is not carried on by Australia 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 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.

An amount paid to the Fund or set aside for the Fund has not been and cannot be deducted under the ITAA 1997. A tax offset has not been allowed nor would be allowable for any amount paid to the Fund or set aside for the Fund. Therefore, the Fund will satisfy 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 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 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.

The Fund invests directly into Australia and receives dividend income directly from its Australian investments. It will, therefore, derive the relevant income for the purposes of subsection 128B(3CA) of the ITAA 1936 and paragraph 128B(3)(jb) of the ITAA 1936.

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

The Fund is exempt from taxation on the dividends paid by Australian companies in the foreign country in accordance with the relevant legislation of the foreign country.

Therefore, the Fund will satisfy 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 the 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 128B(3)(jb) of the ITAA 1936 are satisfied, the Fund will be entitled to an exemption from withholding tax dividend income derived in respect of assets acquired on or before 27 March 2018 under paragraph 128B(3)(jb) of the ITAA 1936.

Additional requirements for assets acquired after 27 March 2018

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.

Relevantly:

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

ii.             The fund must satisfy the 'influence test' (subsection 128B(3CD) in relation to the test entity, and

iii.            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.

It has been established above that the Fund has satisfied all of the pre-existing conditions of paragraph 128B(3)(jb) of the ITAA 1936.

Conclusion

As the Fund has met both the pre-existing and extra requirements under paragraph 128B(3)(jb) of the ITAA 1936 in relation to its Australian Investments, it will be excluded from withholding tax in relation to dividend income received in respect of those assets.