Edited version of private advice

Authorisation Number: 1051992392949

Date of advice: 14 June 2022

Ruling

Subject: Foreign superannuation fund for foreign residents - withholding tax exemption

Question 1

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

Answer

Yes.

This ruling applies for the following period:

1 January 20XX to 31 December 20XX

The scheme commences on:

1 January 20XX

Relevant facts and circumstances

The Fund

1.     The Fund was created and governed by the Foreign Legislation.

2.     The Fund operates a defined benefit plan.

3.     The Fund is headquartered in Foreign Country.

Defined Benefit Plan

4.     Members of the Fund are employees of the Foreign Government.

5.     The Fund provides the following benefits:

a.    an annuity once a member reaches the superannuation age.

b.    a disability annuity.

c.     Death benefits.

d.    Return of total accumulated deductions upon termination of service.

e.    Transfer of funds into the Defined Benefit Plan.

6.     Members are required to make contributions to the Fund.

7.     The Plan is administered by the Board.

8.     The Fund's Trust (the Trust) is established by Foreign Legislation. The Trust is comprised of the individual accounts and all assets and money in those accounts and any assets held by the Board as part of the Plan that are not allocated to individual accounts. The members of the Board are the Trustees of the Trust.

9.     All assets and income in the Plan (including those withheld or contributed by members) are held in trust in any funding vehicle for the benefit of the members until it can be distributed to the Plan's members or their beneficiaries.

10.  The Board establishes in trust individual investment accounts for each member of the Fund. All contributions including interest and investment earnings and losses made on behalf of the member will be credited to their account.

11.  Both employers and Members of the fund make contributions to the Fund.

12.  Loans or other distributions, including hardship or unforeseeable emergency distributions from the Plan are not permitted, except as required by Law.

13.  All contributions must be invested based on the member's investment allocation choices.

14.  The Board is also required to admit new members to the Fund, terminate members and process payment claims including disability claims and death benefits.

15.  The Trustees have exclusive control and management of the Fund. They have the full power to invest the assets of the Fund.

16.  The Foreign Government guarantees the payment of annuities/pensions of members in the Fund.

Other relevant facts

17.  The Fund is a resident of Foreign Country for the purposes of taxation in the Foreign Country.

18.  The Fund is exempt from taxation in the Foreign Country.

19.  The Board of the Fund is located outside of Australia and has its meetings outside of Australia.

20.  The Fund will receive interest income from Australian investments, along with dividend and non-share dividend income from companies who are residents of Australia for tax purposes.

21.  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).

22.  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.

23.  The Fund's income from its Australian investments 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)

Income Tax Assessment Act 1997 Section 118-520

Reasons for decision

Question 1

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

Summary

The Fund is excluded from liability to withholding tax on its interest, dividend and non-share dividend income under paragraph 128B(3)(jb) of the ITAA 1936.

Detailed reasoning

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 a resident of Foreign Country.

Therefore, the Fund satisfies this requirement.

The Fund is a 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 to provide retirement benefits to its members. The Fund's plans have been created by Foreign Legislation and can only be terminated by repealing those statutes. At the present time there is no intention by Foreign Government to repeal these statutes.

The Fund continues to qualify as a pension fund in accordance with Foreign Legislation.

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

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) 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).

The Fund only provides retirement, disability and death benefits to its members.

There are no other benefits provided by the Fund to members and their beneficiaries beyond those as prescribed above.

Therefore, the Fund satisfies this requirement.

3.    Established in a foreign country

The Fund was established in Foreign Country.

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 in Foreign Country for its members to provide retirement benefits. These employees reside in 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.

None of the entities which make decisions with respect to the Fund are Australian residents. The Funds CM&C is conducted in Foreign Country.

Based on the above, 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.

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 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

In order to be excluded from withholding tax under paragraph 128B(3)(jb) of the ITAA 1936, the interest, dividend and/or non-share dividend income must be derived by a non-resident superannuation fund for foreign residents.

The Fund invested the assets of the Fund in Australian equities. As per Foreign Legislation any income earned from these investments is paid directly to the Fund and then distributed to its members.

The Fund is the legal and beneficial owner of its Australian investments and derives the dividend income from those Australian investments.

Therefore, the Fund satisfies this requirement.

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

The Internal Revenue Service has stated that the Fund is a resident of Foreign Country for Foreign Country tax purposes and is exempt from tax in the Foreign Country under Foreign Legislation.

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.

In this case, the revenue from the Australian investments was derived before 1 July 20XX. Therefore, subsection 128B(3CA) of the ITAA 1936 does not apply.

Conclusion

The Fund is excluded from withholding tax in relation to interest, dividend and non-share dividend income derived from its Australian investments.