Edited version of private advice

Authorisation Number: 1052011685380

Date of advice: 27 July 2022

Ruling

Subject: Superannuation fund for foreign residents - withholding tax exemption

Question 1

For the period DDMMYYYY to DDMMYYYY, 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

Question 2

For the period DDMMYYYY to DDMMYYYY, 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?

Answer

Yes

This ruling applies for the following periods:

DDMMYYYY to DDMMYYYY

DDMMYYYY to DDMMYYYY

The scheme commenced' on:

DDMMYYYY

Relevant facts and circumstances

Background to the Fund

1.    The Fund was created by the Original Trust Agreement.

2.    The Fund was created on behalf of the entities named in the Original Trust Agreement, their employees and constituent members to fund the provision of retirement benefits to employees of the Employers.

3.    The Fund is headquartered outside of Australia.

4.    The Fund is considered a trust forming part of a pension, profit sharing or stock bonus plan qualified under Foreign Legislation.

The Fund's Trust Agreement 2

5.    The Fund is now governed by the Trust Agreement, an updated version of the Original Trust Agreement.

6.    A summary of the relevant sections of the Trust Agreement is as follows:

a.    The Trust Agreement establishes the Board of Trustees (the Board).

b.    Employers make contributions to the Fund.

c.     The Board's powers and duties are as follows:

                                i.    Receive payments of contributions and other property of trust.

                               ii.    Appoint an executive director to collect and enforce payments of contributions.

                              iii.    Obtain reports from employers to ensure compliance under the Trust Agreement.

                             iv.    Authority to control and manage the operation and administration of the Fund.

                              v.    Hold, manage, care for, and protect the Fund.

                             vi.    Collect the income from employer contributions and investments.

                            vii.    Manage all accounting and reporting requirements.

                           viii.    Formulate and promulgate all rules and regulations to administer the Fund.

                             ix.    Create rules related to the payment of employer contributions to employees for the purposes illness or disability and related matters.

                              x.    Enter into contracts and agreements on behalf of the Fund.

d.    The Board has appointed Investment Manager as a 'Named Fiduciary' of the Fund. The Fund signed an agreement with Investment Manager which outlines its rights, powers, and duties (Investment Manager Agreement or IMA).

e.    Investment Manager appoints investment managers which manage the investment of the assets of the Fund. Investment Manager has the power to invest and reinvest any of the assets of the Fund it is responsible for.

f.      The Fund's overall investment policy is to invest and manage the assets of the Fund in a prudent and conservative yet productive manner in order to meet its obligations to provide retirement funds to its members.

g.    The Fund's Trustees are to establish a pension plan which provides retirement benefits to the Fund's member employees. Other benefits that can be provided by the Fund are:

                                          i.    Death benefits,

                                         ii.    Disability benefits

                                        iii.    And related benefits.

h.    The Fund is terminated when:

                                          i.    The Fund is, in the opinion of the Board, unable to carry out the intent and purposes of the Trust Agreement or meet the payments due to members of the Fund under the Agreement, or

                                         ii.    Where there are no individuals living who can qualify as a member of the Fund.

7.    Members of the Fund do not have the option to withdraw funds or apply for loans from their accrued accounts prior to reaching retirement age. The Fund does not allow members to rollover or transfer their benefits into an individual investment vehicle. There are no provisions within the Fund rules that would allow members to receive funds or borrow funds from the Fund to meet education expenses, housing expenses or in cases of financial hardship.

8.    When a member leaves the Fund or has their employment with an eligible Employer terminated, members may choose, if they have reached the minimum retirement age and are vested in the plan, to draw their retirement pension which is payable in the form of a lifetime monthly annuity. The amount of the retirement pension is defined by the terms of the Fund Rules. Beyond the retirement pension there are no additional rights to any amounts from the Fund, there are no individual accounts, no rights to a refund of contributions, and no rights to a transfer or rollover of contributions into another retirement plan.

Investment Manager

9.      Investment Manager has been elected as an investment manager for the Fund that has invested in Australian securities.

10.   Investment Manager does not invest any of the Fund's other assets in Australian investments.

11.   Investment Manager does not receive any income in its own right from the Australian investments.

12.   The Fund entered into an agreement with the Investment Manager, the IMA. The relevant articles of the IMA are outlined below:

a.    The Fund appoints Investment Manager as the 'named fiduciary'.

b.    The Named Fiduciary's responsibilities and authority include but are not limited to:

                                   i.    control and manage the Assets of the Fund;

                                  ii.    manage, acquire or dispose of Assets to one or more investment managers;

                                 iii.    allocate the Fund's assets among different investment and investment managers;

                                iv.    monitor the performance of the investment of the Fund's assets;

                                 v.     manage all present and future investments of assets of the fund and to develop investment objectives and policies of the Fund;

                                vi.    keep accurate and detailed accounts and records of its services and of the assets of the Fund as required under US Law.

c.     The Trustees of the Fund have the following rights and responsibilities:

                                   i.    Monitoring the performance of Investment Manager;

                                  ii.    The trustees retain all rights, powers and prerogatives over the management of the Fund (i.e. establishment of benefit levels, determining eligibility of payments etc).

Other relevant facts

13.  The Fund is not a resident of Australia.

14.  The Fund is exempt from taxation in the Foreign Country in which it resides.

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

16.  The members of the Fund are located outside of Australia.

17.  The Fund is the beneficial owner of the Australian Investments.

18.  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.

19.  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).

20.  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.

21.  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.

The Fund's Australian Investments

22.  The Fund has invested in Australian equity investments. These equity investments have the following characteristics:

a.    All investments are in widely held entities listed on the Australian Securities Exchange (ASX).

b.    The Fund holds substantially less than 10% of the total equity interests on issue of each Australian company or trust in which it invests.

c.     The Fund has no involvement in the day-to-day management of the business of any of the Australian entities.

d.    The Fund has no right to appoint a director to the Board of Directors of the Australian company, or the equivalent position in respect of a trust.

e.    The Fund has no right to representation on any investor representative or advisory committee (or similar) of the Australian company or trust.

f.      The Fund has no ability to direct or influence the operation of the Australian company or trust outside of the ordinary rights conferred by the equity interest held.

g.    The Fund only holds rights to vote in proportion to its equity interest in each Australian company or trust.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 section 118-520

Reasons for decision

Issue 1

Question 1

For the period DDMMYYYY to DDMMYYYY, 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)?

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 20XX, 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 non-resident.

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 created by the Original Trust Agreement and is governed by the Trust Agreement. The Trust Agreement notes that the Fund can only be terminated if

•         in the opinion of the Board, the Fund can no longer carry out the intent or purposes of the Trust Agreement or

•         meet its obligations to make payments due to members of the Fund or

•         if there are no living individuals who qualify as members by being employees of the Employers.

As none of these events has occurred, the Fund will continue to operate and will not be terminated.

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).

Broadly, the Fund provides benefits to members as follows:

a.    Retirement pension benefits;

b.    Disability benefits;

c.     Death benefits;

d.    And limited other related benefits.

There are no benefits provided by the Fund to members and their beneficiaries beyond those as prescribed above and the Commissioner accepts that the alternate circumstances of access to the funds, being incapacity, and death align to the contemplated contingencies of a provident, benefit, superannuation or retirement fund.

All monies managed by the Fund are used solely for the purposes of administering and paying out benefits under the Fund.

Therefore, the Fund satisfies this requirement.

3. Established in a foreign country

The Fund was established in a 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 the benefit of its members, who are employees of the Employers listed in the Original Trust Agreement. 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.

Under the Trust Agreement, the Board has been appointed to manage and administer the Fund. It has the following powers and duties:

•         Receive payments of contributions and other property of trust.

•         Appoint an executive director to collect and enforce payments of contributions.

•         Obtain reports from employers to ensure compliance under the Trust Agreement 2.

•         Authority to control and manage the operation an administration of the Fund.

•         Hold, manage, care for, and protect the Fund.

•         Collect the income from employer contributions and investments.

•         Manage all accounting and reporting requirements.

•         Formulate and promulgate all rules and regulations to administer the Fund.

•         Create rules related to the payment of employer contributions to employees for the purposes of illness or disability and related matters.

•         Enter into contracts and agreements on behalf of the Fund.

In accordance with the Trust Agreement the Board has appointed Trust Manager as a 'Named Fiduciary' of the Fund. Trust Manager as the Named Fiduciary acts as an investment manager of the Fund's assets. Trust Manager does not legally own the Fund's investments nor is it entitled to the income from the investments.

The CM&C of the Fund is exercised by the Board. The Board does not comprise of any Australian resident members, and does not meet in Australia to exercise its functions as a Board.

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

The Fund is a Foreign Country tax resident. The Fund is exempt from Foreign Country income tax.

Therefore, the Fund satisfies this requirement.

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 via the Trust Manager has invested the assets of the Fund in Australian equities. The Fund is the beneficial owner of its Australian investments and derives dividend and interest income from those Australian investments.

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 20XX.

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 for the period DDMMYYYY to DDMMYYYY.

Question 2

For the period DDMMYYYY to DDMMYYYY, 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 on its Australian investments under paragraph 128B(3)(jb) of the ITAA 1936 for the period DDMMYYYY to DDMMYYYY.

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.

As explained in Question 1;

•         the Fund is a superannuation fund for foreign residents as defined in section 118-520 of the ITAA 1997,

•         it derives income from its Australian investments, and

•         is exempt from Foreign Country taxation.

Thus in order to obtain the withholding tax exemption in paragraph 128B(3)(jb) of the ITAA 1936 for income derived after 1 July 20XX, the Fund must satisfy the extra requirements in subsection 128B(3CA) of the ITAA 1936.

Subsection 128(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 20XX.

Relevantly:

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

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

iii.            The income cannot otherwise be 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.

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 substantially less than 10% of the total participation interests in each Australian entity listed in Appendix 1. Further, the Fund holds less than 10% of the total participation interests in each Australian company or trust 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 Australian investments for the period DDMMYYYY to DDMMYYYY.

2. The Fund satisfies 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 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, the Funds Australian equity investments have the following characteristics:

a.    All investments are in widely held entities listed on the Australian Securities Exchange (ASX).

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

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

d.    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.

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

f.      The Fund only holds rights to vote in proportion to its equity interest in each Australian company or trust.

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 in relation to interest, dividend and non-share dividend income derived from its Australian investments for the period DDMMYYYY to DDMMYYYY.