Edited version of private advice

Authorisation Number: 1051967227162

Date of advice: 7 April 2022

Ruling

Subject: Superannuation fund for foreign residents - withholding tax exemption

Question 1

Is the Fund excluded from liability to withholding tax on its dividend, interest and non-share dividend income derived in respect of its current Australian investments under paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer 1

Yes.

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commences on:

XX July XXXX

Relevant facts and circumstances

1.    The Fund is a retirement fund established in and conducted from a foreign country.

2.    The Fund's purpose is to provide a pension and other benefits to its members and their beneficiaries.

3.    Legislation in the Fund's country of residence provides the rules governing the Fund's operation (the Statute). The Statute forms a part of the scheme to which this Ruling relates.

4.    The Fund is comprised of public employee defined benefit pension plans (the Plans). Each of the separate plans are authorised by and administered according to Statute specific to each of the Plans.

5.    All powers and duties in respect of the investment management of the Fund are vested with a board (the Board). The Board has the exclusive authority to manage the assets of the Fund and select investment options that the Board considers prudent. The Board holds quarterly meetings and must establish written policies to administer and invest the funds and to transact the business of the Fund.

6.    Members of the Board are not residents of Australia.

7.    The income received by the Fund includes contributions payable in accordance with the Statute and income from the investments of the Fund.

8.    The Fund's members are residents of the foreign country and the likelihood of any eligible employees being Australian residents is extremely low.

The Plans

9.    The Plans are contributory plans with employees contributing a percentage of their base annual salary. Employers also make contributions pursuant to the actuarial basis stated in the Statute.

10.  The benefit provisions of the Plans are established by the Statute. The Plans provide for normal service retirement, conditional early service retirement and disability and death benefits. Benefits paid by the Plans are paid upon certain age and employment duration requirements.

11.  Members cannot receive a distribution until retirement or termination from employment. Members can withdraw their own contributions from the Plans upon ceasing employment with a participating employer. Where a member is not eligible for retirement and does not choose to roll-over funds to a qualified retirement account, the withdrawal is subject to taxation implications. Loans and hardship withdrawals are not permitted.

Investment management

12.  All of the Fund's assets are managed by a number of external investment managers. The Board is responsible for the prudent investment of all of the Fund's assets.

13.  Under the Statute, the Board must appoint investment managers to manage, acquire or dispose of all or some of the assets of the Fund except when investing in any pooled investment vehicle. These managers have full discretion over acquisitions and dispositions of investments and must adhere to the investment guidelines set forth by the Board.

14.  The Fund's assets shall be used for the exclusive purpose of providing benefits for the participants and their beneficiaries, and paying the Fund's administrative expenses.

Australian investments

15.  The Fund has invested in Australian equity and debt investments. These equity and debt investments all have the following characteristics:

(i)    All investments are listed on the Australian Securities Exchange (ASX).

(ii)   The Fund holds less than 10% of the total participation interests in each Australian company, trust or real estate investment trust (REIT).

(iii)  The Fund would hold less than 10% of the total participation interests in each Australian company, trust or REIT in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936.

(iv)  Neither the Fund, nor any related party of the Fund, has involvement in the day-to-day management of the business of any of the Australian companies, trusts or REITs.

(v)   Neither the Fund, nor any related party of the Fund, has the right to appoint a director to the Board of Directors of the Australian company, or equivalent role in a trust or REIT.

(vi)  Neither the Fund, nor any related party, holds the right to representation on any investor representative or advisory committee (or similar) of the Australian company, or equivalent role in a trust or REIT.

(vii)Neither the Fund, nor any related party, has the ability to direct or influence the operation of the Australian company, trust or REIT outside of the ordinary rights conferred by the equity interest held.

(viii)      The Fund only holds rights to vote in proportion to its equity interest in each Australian company, trust or REIT.

Other relevant facts

16.  The Fund has not and cannot deduct amounts under either the Income Tax Assessment Act 1997 (ITAA 1997) or the ITAA 1936 for amounts paid to it.

17.  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.

18.  The Fund submitted a certificate from the tax authority from its country of residence which states that the Fund is exempt from taxation in the Fund's country of residence.

19.  Income of the Fund is not non-assessable non-exempt income because of:

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

(ii)   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 resides.

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 as it is a pension fund established and conducted from a foreign country.

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 superannuation fund for foreign residents if:

(a)          an amount is paid to the fund or set aside for the fund has been or can be deducted under this Act; or

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

1.    An indefinitely continuing fund

The Fund was established by Statute. The Statute does not provide for a termination date of the Fund.

The Fund has provided a letter to the Commissioner which states that the Fund is an indefinitely continuing fund.

Therefore, the Fund satisfies this requirement.

2.    A provident, benefit, superannuation or retirement fund

The phrase 'provident, benefit, superannuation or retirement fund' under subparagraph 118-520(1)(a)(ii) of the ITAA 1997 is not defined in either the ITAA 1997 or the ITAA 1936.

ATO Interpretative Decision ATO ID 2009/67 Income Tax: Superannuation fund for foreign residents (ATO ID 2009/67) provides guidance on the meaning of the phrase 'provident, benefit, superannuation or retirement fund':

None of the four descriptors 'provident', 'benefit', 'superannuation' or 'retirement fund' in subparagraph (a)(ii) of the definition of 'superannuation fund for foreign residents' in section 118-520 of the ITAA 1997 are defined. The terms have, however, been the subject of judicial consideration.

The courts have held that for a fund to be a 'provident, benefit, superannuation or retirement fund', the fund 's sole purpose must be to provide superannuation benefits, that is, benefits to a member upon the member reaching a prescribed age or upon their retirement, death or other cessation of employment (Scott v. FC of T (No 2) (1966) 14 ATD 333; (1966) 10 AITR 290, per Windeyer J; Mahony v. FC of T (1967) 14 ATD 519, per Kitto J; Walstern Pty Ltd v. Commissioner of Taxation (2003) 138 FCR 1; 2003 ATC 5076; (2003) 54 ATR 423, per Hill J and Cameron Brae Pty Ltd v. Federal Commissioner of Taxation (2007) 161 FCR 468; 2007 ATC 4936; (2007) 67 ATR 178, per Stone and Allsop JJ).

The above 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).

The objective of the Fund is set out in the Statute. The objective of the Fund is to provide a pension and other benefits to its members and their beneficiaries.

Broadly, the Fund provides benefits for members as a result of retirement, disability or death through the Plans. Benefits paid by the Plans are paid upon certain age and employment duration requirements. Besides withdrawal for retirement, disability or death, members can withdraw their own contributions from the Plans upon ceasing employment with a participating employer. Where a member is not eligible for retirement and does not choose to roll-over funds to a qualified retirement account, the withdrawal is subject to taxation implications.

The Commissioner accepts that the alternate circumstances of access to the funds, being disability, death, the transfer of funds to another retirement fund, and a cash refund of contributions on leaving the Fund (subject to taxation implications) align to the contemplated contingencies of a provident, benefit, superannuation or retirement fund.

As both the key objective of the Fund and the operation of the Fund have the sole purpose of providing retirement benefits, the Commissioner accepts the Fund is considered to be a 'provident, benefit, superannuation or retirement fund'.

Therefore, the Fund satisfies this requirement.

3.    Established in a foreign country

The Fund was established in a foreign country under the Statute.

Therefore, the Fund satisfies this requirement.

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

The Fund was established and is maintained in a foreign country for eligible employees of participating employers. The Fund operates to provide retirement benefits for its members in the foreign country.

Therefore, the Fund satisfies this requirement.

5.    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 Board exercise the CM&C of the Fund as they are responsible for the Fund's administration, investment and management. The members of the Board are not Australian residents and do not make decisions in relation to the Fund in Australia.

Therefore, the Fund satisfies this requirement.

6.    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.

7.    Conclusion

As all of the above elements 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.

Consists of interest or dividend and/or non-share dividend paid by a company that is a resident

Paragraph 128B(3)(jb) of the ITAA 1936 will only apply to interest, or to dividends and non-share dividends paid by Australia resident companies.

The Fund will receive dividend and interest income from its Australian investments which are all Australian resident companies and Australian corporate bonds.

Therefore, the Fund satisfies this requirement.

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

The tax authority has confirmed that the Fund has been exempt from taxation in the Fund's country of residence.

Therefore, the Fund satisfies 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) of the ITAA 1936 to apply. Generally, these extra requirements apply to income derived from 1 July 2019.

Relevantly:

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

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

•                    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.

1.    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 holds less than 10% of the total participation interests in each Australian company, trust or real estate investment trust (REIT). Further, the Fund would hold less than 10% of the total participation interests in each Australian company, trust or REIT in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936.

The Fund therefore satisfies the 'portfolio interest test' in respect of its current investments.

2.    The Fund satisfies the 'influence test'

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

A superannuation fund has influence of a kind described in this subsection in relation to the test entity at a time if any of the following requirements are satisfied at that time:

(a) the superannuation fund:

(i) is directly or indirectly able to determine; or

(ii) in acting in concert with others, is directly or indirectly able to determine;

the identity of at least one of the persons who, individually or together with others, make (or might reasonably be expected to make) the decisions that comprise the control and direction of the test entity's operations;

(b) at least one of those persons is accustomed or obliged to act, or might reasonably be expected to act, in accordance with the directions, instructions or wishes of the superannuation fund (whether those directions, instructions or wishes are expressed directly or indirectly, or through the superannuation fund acting in concert with others).

As such, there are two distinct sub-tests within the influence test.

Sub-test 1 of the influence test, as contained in paragraph 128B(3CD)(a) of the ITAA 1936, assesses whether the 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.

Relevantly, in respect of the investment listed in Appendix 1 of the relevant facts and circumstances to this Ruling:

(i)    Neither the Fund, nor any related party of the Fund, has involvement in the day-to-day management of the business of any of the Australian companies, trusts or REITs.

(ii)   Neither the Fund, nor any related party of the Fund, has the right to appoint a director to the Board of Directors of the Australian company or equivalent role in a trust or REIT.

(iii)  Neither the Fund, nor any related party, holds the right to representation on any investor representative or advisory committee (or similar) of the Australian company, or equivalent role in a trust or REIT.

(iv)  Neither the Fund, nor any related party, has the ability to direct or influence the operation of the Australian company, trust or REIT 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 Australian company, trust or REIT. Based upon the above, the Commissioner accepts that the Fund does not have influence of a kind described in subsection 128B(3CD) of the ITAA 1936.

3.    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 under paragraph 128B(3)(jb) of the ITAA 1936 in relation to interest, dividend and non-share dividend income derived from its current Australian equity investments.