Edited version of private advice

Authorisation Number: 1051999320054

Date of advice: 8 July 2022

Ruling

Subject: Superannuation fund for foreign residents - withholding tax exemption

Question

Is the Pension Plan excluded from liability to withholding tax on interest, dividend and non-share dividend income derived from Australian Investment in accordance with 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 commenced on:

1 January 20XX

Relevant facts and circumstances

Company A

1.            Company A was established in in a country outside of Australia (Country A).

2.            Company A operates the Pension Plan for the benefit of its employees and employees of affiliated companies.

The Pension Plan

3.            The assets of the Pension Plan are held, administered, and invested by the Trustee of the Pension Plan exclusively for the benefit of Participants and their beneficiaries and consists of all contributions by employers and earnings from investment of such contributions. All expenses of administration of the Plan and Trust are paid out of the assets of the Pension Plan.

4.            The Pension Plan provides benefits as a result of retirement, disability, termination of employment and death. Benefits provided to a member upon termination of employment include a deferred pension and, lump sum payment in limited circumstances.

5.            The Pension Plan does not provide benefits as a result of events other than old age retirement, disability, termination of employment or death.

6.            The Pension Plan has processes in place if it is terminated. However, the Pension Plan intends to be an indefinitely continuing fund with no pre-determined end date.

7.            The Pension Plan is administered by the Pension Plan's Administrative Committee. Members of the Administrative Committee are appointed by the Board of Directors of Company A. Members of the Administrative Committee are not residents of Australia.

8.            The Pension Plan's Investment Committee is responsible for the maintenance and investment of the Pension Plan's assets and provides oversight on the funding and investment management of the Plan. The members of the Investment Committee are also appointed by the Board of Directors of Company A and are not residents of Australia.

Australian Investment

9.            The Pension Plan invests directly in units in Fund A (Australian Investment). Fund A is an Australian resident for tax purposes. The Pension Plan derives Australian sourced interest income from this investment.

10.          The Pension Plan holds less than 10% of the participation interests in Australian Investment.

11.          The Pension Plan would hold less than 10% of the total participation interests in Australian Investment in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936.

12.          The Pension Plan does not hold any right to appoint a person to a board, committee or similar, either directly or indirectly, in respect of Australian Investment.

13.          The Pension Plan has not entered into or received any side letters, arrangements or agreements in relation to Australian Investment.

14.          The Pension Plan does not hold any veto rights on security holder votes in relation to Australian Investment.

15.          The Pension Plan does not hold any other influence of a kind described in subsection 128B(3CD) of the ITAA 1936 in respect to Australian Investment.

Other relevant facts

16.          The Pension Plan is a resident of Country A for income tax purposes.

17.          The Pension Plan is exempt from tax in Country A.

18.          No amounts paid to the Pension Plan can be deducted under either the Income Tax Assessment Act 1997 (ITAA 1997) or ITAA 1936.

19.          No tax offsets would be allowable for an amount paid to the Pension Plan or set aside for the Pension Plan.

20.          The income of the Pension Plan is not non-assessable non-exempt income of the Plan because of either:

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

Question 1

Is the Pension Plan excluded from liability to withholding tax on interest, dividend and non-share dividend income derived from Australian Investment listed in accordance with paragraph 128B(3)(jb) of the ITAA 1936?

Summary

The Plan is excluded from liability to withholding tax on dividend income derived from Australian Investment in accordance with paragraph 128B(3)(jb) of the ITAA 1936.

Detailed reasoning

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.

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:

a.    derived by a superannuation fund for foreign residents (as defined in section 118-520 of the ITAA 1997), and

b.      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.

These requirements are considered below.

1.            The Pension Plan is a non-resident

The Pension Plan is not a resident of Australia for tax purposes. Therefore, the Pension Plan satisfies this requirement.

2.         The Pension Plan is a superannuation fund for foreign residents

The term 'superannuation fund for foreign residents' is defined in section 118-520 of the ITAA 1997 as follows:

(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.

i.          An indefinitely continuing fund

The term 'fund' is not defined in either the ITAA 1936 or the ITAA 1997. 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.

In this case, Company A and its affiliated companies make contributions to the Pension Plan as employers of Participants. These contributions and the income from investing these contributions are held, administered and invested exclusively for providing the Pension Plan benefits and paying the expenses of the Pension Plan.

Although the Pension Plan set out the processes to be followed in case of termination of the Pension Plan, there is no express termination date in the Pension Plan's governing documents or any indication of an intention for the Pension Plan to end at a definite point in time.

Therefore, it is accepted that the Pension Plan satisfies the requirement of being an indefinitely continuing fund.

ii.         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 1936 or the ITAA 1997.

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 extract establishes 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 circumstances in which a Participant of the Pension Plan can receive benefits are consistent with those of a provident, benefit, superannuation or retirement fund as they are provided after attaining a retirement age or 'contemplated contingencies' such as death or ill-health retirement.

The Commissioner accepts that the benefits provided by the Pension Plan align with the sole purpose of providing retirement benefits or benefits in other allowable contemplated contingencies.

Therefore, the Pension Plan satisfies this requirement.

iii.        Established in a foreign country

The Pension Plan was established in Country A, a foreign country. Therefore, the Pension Plan satisfies this requirement.

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

The Pension Plan was established to provide the benefits to certain employees of Company A and its affiliates companies. These employees are not Australian residents.

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

Therefore, the Pension Plan satisfies this requirement.

v.         Central management and control

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 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 the 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 Pension Plan is carried out by the Board of Directors of Company A, the Administrative Committee and the Investment Committee. Individuals appointed to these positions are made up of nominated persons none of whom are Australian residents. The key functions of the Pension Plan are exercised in Country A, including the control and direction of the Pension Plan's investments, strategies, administration and operations.

The Commissioner is satisfied in these circumstances that the central management and control of the Pension Plan is in Country A and is carried out by individuals who are not Australian residents.

Therefore, the Pension Plan satisfies this requirement.

vi.        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.

No amount paid to the Pension Plan or set aside for the Pension Plan has been, or can be, deducted (and no tax offset has been allowed or is allowable for such an amount) under the ITAA 1936 or ITAA 1997.

Therefore, the Pension Plan satisfies these requirements.

vii.      Conclusion

As all the above requirements are satisfied, the Pension Plan meets the requirements of being a superannuation fund for foreign residents as defined by section 118-520 of the ITAA 1997.

3.         The income, consisting of interest, dividend or non-share dividend income, is derived by the Pension Plan

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 Pension Plan derives interest income from its direct investment in Australian Investment. The Pension Plan therefore satisfies this requirement.

4.         The Pension Plan is exempt from income tax in the country in which it resides

The Pension Plan is a resident of Country A and is exempt from income tax in Country A.

Therefore, the Pension Plan satisfies this requirement.

5.         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:

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

b.      the fund must satisfy the 'influence test' (subsection 128B(3CD) of the ITAA 1936) in relation to the test entity, and

c.      the income cannot otherwise be non-assessable non-exempt income of the fund because of:

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

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

i. 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.

Subsection 995-1(1) of the ITAA 1997 defines 'total participation interest' to have the meaning given by section 960-180 of the ITAA 1997, which states:

An entity's total participation interest at a particular time in another entity is the sum of:

(a) the entity's *direct participation interest in the other entity at that time; and

(b) the entity's *indirect participation interest in the other entity at that time.

A 'direct participation interest' that the fund will have in a test entity is defined in the table in subsection 960-190(1) of ITAA 1997 and depends on what type of entity the other entity is. Item 1 of the table in subsection 960-190(1) and subsection 960-190(2) of the ITAA 1997 provide that a direct participation interest in a company is the 'direct control interest' (within the meaning of section 350 of the ITAA 1936 excluding the operation of subsections 350(6) and (7)) that the first entity holds in the other entity).

Subsection 350(1) of the ITAA 1936 provides that an entity holds a direct control interest in a company at a particular time equal to the percentage of:

(a)       total paid-up share capital

(b)       voting rights, or

(c)       rights to distributions of capital or profits that it holds in the company.

Where there are different percentages in each of the above, the direct control interest is the greater or greatest of those percentages. Subsection 350(2) of the ITAA 1936 provides that where an entity holds different percentages of total rights to vote for the purposes of paragraph 350(1)(b), the highest of those percentages applies in establishing the direct control interest.

The Pension Plan's total participation interests in Australian Investment is less than 10%. The Pension Plan would hold less than 10% of the total participation interests in Australian Investment in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936.

In these circumstances, the Commissioner is satisfied that the total participation interest the Pension Plan holds in Australian Investment:

a.    is less than 10% pursuant to paragraph 128B(3CC)(a) of the ITAA 1936 at all relevant times; and

b.      would be less than 10% in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936 at all relevant times.

The Pension Plan therefore satisfies the 'portfolio interest test' in respect of Australian Investment.

ii. 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 Pension Plan 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 Pension Plan 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 Pension Plan, 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 Pension Plan.

Relevantly, in respect of Australian Investment, the Pension Plan has advised that:

•         it does not hold more than 10% of the total participation interest in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936,

•         it does not hold any right to appoint a person to a board, committee, or similar, either directly or indirectly,

•         it has not entered into or received any side letters, arrangements or agreements,

•         it does not hold any veto rights on security holder votes, and

•         it does not hold any other influence potentially of a kind described in subsection 128B (3CD) of the ITAA 1936.

Accordingly, the Pension Plan does not have the influence of a kind described in subsection 128B(3CD) of the ITAA 1936 in respect of Australian Investment. The Pension Plan does not have the capacity to influence (either directly or indirectly) the day-to-day management of the operations of their investment.

Consequently, the Commissioner accepts that the Pension Plan does not have influence of a kind described in subsection 128B(3CD) of the ITAA 1936.

6.            Otherwise non-assessable non-exempt

The Pension Plan has advised that income received by the Pension Plan 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.

Accordingly, the above exclusion will not apply to exclude the Pension Plan from entitlement to the withholding tax exemption for superannuation funds for foreign residents.

Conclusion

The Pension Plan is excluded from withholding tax in relation to interest, dividend and non-share dividend income derived from Australian Investment.