Edited version of private advice

Authorisation Number: 1052041638622

Date of advice: 7 October 2022

Ruling

Subject: Withholding tax - foreign superannuation fund for foreign residents

Question 1

For the period DDMMYYY 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, listed in Appendix 1 to the relevant facts and circumstances of this ruling, under paragraph 128B(3)(jb) of the ITAA 1936?

Answer

Yes.

This ruling applies for the following period:

DDMMYYYY to DDMMYYYY

The scheme commences on:

DDMMYYYY

Relevant facts and circumstances

The Fund

1.     The Fund was created for its members who are characterised as eligible employees of a municipal council in Foreign Country.

2.     The Fund administers two benefit programs for active and retired members. These are

a.    a defined benefit plan, and

b.    a deferred compensation plan (DCP).

c.     These plans are collectively known as 'the Plans'.

3.     The DCP invests separately from the Defined Benefit Plan. The Australian assets are held solely by the defined benefit plan. This Ruling does not apply to the DCP. All further references to the Fund refer only to the monies and assets of the defined benefit plan which are segregated from the DCP.

4.     Under the direction of the Board, the Executive Director leads a team of senior managers who oversee each of the functional areas in the department. The leadership team manages the day-to-day activities of the Fund.

The Board

5.     The Board is created under Foreign Legislation.

6.     In accordance with Foreign Legislation the Fund is administered by the board for the benefit of active and retired members including survivors and beneficiaries.

7.     In accordance with Foreign Legislation the Board has the full authority and fiduciary responsibility for investment of monies and administration of the Fund.

8.     The Board develops policies for the Fund.

The Fund Rules

9.     The Fund provides the following benefits:

a.    Service and disability retirement at retirement age.

b.    Refund or vesting allowance.

c.     Death benefits.

10.  The Fund is funded by contributions from employers and employees as well as income from its investments.

11.  The Fund is governed by Foreign Legislation.

12.  Under Foreign Legislation the Foreign Government is required to contribute jointly with members of the Fund.

13.  There are no sections in the Foreign Legislation which provide for the termination of the Fund. As such, the Fund would only be terminated by an Act of the Foreign Government.

14.  The Annual Report for the Fund reports that the Fund is in a strong financial position to meet its pension obligations to its members. It is currently fully funded to meet its pension obligations. The Fund has invested the assets of the Fund in both equity and debt investments with a view to long term growth.

15.  The Fund's investment strategy is to earn high long-term returns. It has an investment timeframe of 20 years or greater. For example, the Fund plans for its investments to be carbon neutral by YYYY.

16.  The Fund is intended to be indefinitely continuing.

Other relevant facts

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

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

19.  The Board 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.

The Fund's Australian Investments

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

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

b.    The Fund holds less than 10% of the total equity interests on issue of each Australian company.

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

d.    The Fund has no right to appoint a director to the Board of Directors of the Australian company.

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

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.

25.  The Australian debt investment held by the Fund is a corporate debt interest from which ordinary income is derived in the form of interest. The debt investment has the following characteristics:

a.    It is listed on the ASX.

b.    The investment is a corporate debt from which it ordinarily derives income in the form of interest.

c.     The Fund holds less than 10% of the total equity interest on issue of the Australian debt issuer.

d.    The Fund is not involved in the day-to-day management of the business of the Australian debt issuer.

e.    The Fund has not acquired the right to appoint a director to the Board of Directors of the Australian debt issuer.

f.      The Fund has not acquired the right to representation on any investor's representative or advisory committee (or similar) of the Australian Debt Issuer.

g.    The Fund has no ability to direct or influence the operation of the Australian debt issuer outside of the ordinary rights conferred by the debt interest held.

h.    The Fund has no voting rights in respect of the debt investments held.

i.      There are no special relationships or arrangements between the Fund, and the issuer of the Australian debt investment held which affect the amount of interest income that is paid from the investment.

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

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 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.

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 Foreign Legislation. The Foreign Legislation does not state how or if the Fund can be terminated. As such the Fund can only be terminated by legislation of the Foreign Government. The Fund has stated that it is indefinitely continuing and this is confirmed by the fact that the Fund is fully funded, it has reported a strong financial position and it has a long term investment timeframe (20 years or greater). As such the Commissioner has determined that the Fund is indefinitely continuing.

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 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).

Broadly, the Fund provides benefits to members as follows:

a.    Retirement pension benefits;

b.    Disability benefits;

c.     Death 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 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 the Foreign Country for the benefit of its members, who are employees of the Foreign Government. 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.

The Board was created under Foreign Legislation. The Board administers the Fund for the benefit of its members. The Board has full authority and fiduciary responsibility for investment of monies and administration of the Retirement System and develops policies for the Fund.

Under the direction of the Board, the Executive Director and senior staff team manage the day-to-day activities of the system including investments, member services, finance, actuarial services, information technology, human resources and communications.

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.

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 has invested the assets of the Fund in Australian equities and debt. 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 2019.

In this case the revenue from the Australian investments was derived before 1 July 2019. 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, listed in Appendix 1 to the relevant facts and circumstances of this ruling, 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 listed in Appendix 1 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 2019, 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 2019.

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 its Australian investments. 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, in respect of the Australian equity investments:

a.    All investments are 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.

Relevantly, in respect of the Australian debt investment:

a.    All investments are listed on the ASX.

b.    The investment is corporate bond from which it ordinarily derives income in the form of interest.

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

d.    The Fund have not acquired the right to appoint a director to the Board of Directors of the issuing Australian debt issuer.

e.    The Fund has not acquired the right to representation on the investor's representative or advisory committee (or similar) of the Australian Debt Issuer.

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

g.    The Fund has no voting rights in respect of the debt investment held.

h.    There are no special relationships or arrangements between the Fund, and the issuers of the Australian debt investment held which affect the amount of interest income that is paid from those investments.

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.