Edited version of private advice

Authorisation Number: 1052060410068

Date of advice: 22 November 2022

Ruling

Subject: Dividend income

Question

Is the Fund exempt from liability to withholding tax on dividend income derived in respect of Australian investments acquired after 27 March 2018 under paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

This private ruling applies for the following periods:

Years ending XX Month XXXX to XX Month XXXX

The scheme commences on:

XX Month XXXX

Relevant facts and circumstances

The Fund is a non-resident retirement fund established outside Australia to provide retirement benefits to its employees none of whom are Australian resident.

The Fund is a tax exempt entity in the country it resides.

The Fund is governed by the Fund's rules which apply to members employed on or after XX Month XXXX.

The Fund is administered by the governing Board which consisted of board members none of whom are Australian resident.

Minutes of meeting of the Board members confirmed high level and strategic decisions were made outside Australia.

A person becomes a member of the Fund on the date of hire subject to eligibility requirements.

A person is not eligible to become a member of the Fund if the person is hired as a temporary employee.

The membership in the Fund ceases upon a person ceased to be an employee, retirement and death.

Benefits paid by the Fund are funded by contributions made by the employer, employees and income from the investments.

The Fund's rule does not permit loans or withdrawals from contributions which can only be made upon termination of employment.

The normal retirement date is the date when members attaining certain age and service requirements.

The Fund provides retirement benefits as well as survivor and disability benefits.

The Fund provides a various retirement payout options (single, lump sum, survivor, etc)

The Fund's investment policy stipulates types of investment and investment restrictions including prohibition from making loans to individuals.

The Fund's Australian investments include shares in Australian companies from which dividend income is derived and paid.

The Fund provided the statement confirming that the Fund:

•         does not hold the total participation interest more than 10% in the Australian companies;

•         does not hold any right to appoint a person to a board of the Australian companies either directly or indirectly;

•         neither received any side letters nor entered into any arrangement or agreements with the Australian companies;

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

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

Relevant legislative provisions

Income Tax Assessment Act 1936 Paragraph 128A(3)

Income Tax Assessment Act 1936 Section 128B

Income Tax Assessment Act 1936 Paragraph 128B(3CA)

Income Tax Assessment Act 1936 Paragraph 128B(3CB)

Income Tax Assessment Act 1936 Paragraph 128B(3CC)

Income Tax Assessment Act 1936 Paragraph 128B(3CD)

Income Tax Assessment Act 1936 Paragraph 128B(3CE)

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

Income Tax Assessment Act 1936 Section 128D

Income Tax Assessment Act 1997 Section 118-520

Income Tax Assessment Act 1997 Subdivision 880-C

Income Tax Assessment (Transitional Provisions) Act 1997 Division 880

Reasons for decision

Question

Summary

The Fund is exempted from liability to withholding tax on its dividend income derived from Australian investments acquired after 27 March 2018 because it satisfies all the requirements under 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.

Subsection 128B(3) of the ITAA 1936 notes that section 128B of the ITAA 1936 will not apply to prescribed categories of income.

Relevantly, paragraph 128B(3)(jb) provides an exemption 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).

Primary requirements - paragraph 128 (3)(jb) of the ITAA 1936

For the exemption under paragraph 128B(3)(jb) to apply, the interest, dividend and/or non-share dividend income must meet the following requirements:

•         derived by a non-resident that is a superannuation fund for foreign residents - subparagraph 128(3)(jb)(i),

•         paid by an Australian company - subparagraph 128(3)(jb)(ii), and

•         exempt from income tax in the country in which the non-resident resides - subparagraph 128(3)(jb)(iii).

Additional requirements - 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 in subsection 128(3CA) of the ITAA 1936 that must be met for paragraph 128B(3)(jb) to apply from 1 July 2019 onwards.

These extra requirements in subsection 128(3CA) apply only to assets which were acquired after 27 March 2018. Relevantly:

•         The fund must satisfy the 'portfolio interest test' in relation to the test entity - subsection 128B(3CC)

•         The fund must satisfy the 'influence test' in relation to the test entity - subsection 128B(3CD), and

•         The income cannot otherwise be 'non-assessable non-exempt income' of the fund because of:

o   Subdivision 880-C of the ITAA 1997, or

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

Each of these requirements is considered as set out below.

Income derived by a non-resident that is a superannuation fund for foreign residents

Fund is a non-resident

The Fund is a non-resident for Australian tax purposes.

Therefore, the Fund satisfies this requirement.

Superannuation fund for foreign residents

Superannuation fund for foreign residents is a defined term in the ITAA 1936.

Subsection 6(1) of the ITAA 1936 states:

superannuation fund for foreign residents has the meaning given by subsection 995-1(1) of the Income Tax Assessment Act 1997.

Subsection 995-1(1) of the ITAA 1997 sets out the following:

superannuation fund for foreign residentshas the meaning given by section 118-520.

Section 118-520 of the ITAA 1997 defines the term 'superannuation fund for foreign residents' 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;

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

Consequently, for the Fund to be considered a superannuation fund for foreign residents for the purposes of paragraph 128B(3)(jb) of the ITAA 1936, it must be established that:

•         the fund is an indefinitely continuing fund

•         the fund is a provident, benefit, superannuation or retirement fund

•         the fund was established in a foreign country

•         the fund was established and maintained only to provide benefits for individuals who are not Australian residents

•         The central management and control of the fund is carried on outside of Australia by entities none of whom are Australian residents

•         No amount paid to the fund or set aside for the fund has been or can be deducted under the ITAA 1997, and

•         No tax offsets have been allowed or would be allowable for an amount paid to the fund or set aside for the fund.

Fund is an indefinitely continuing fund

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

The Fund was established and is maintained by the employer for the exclusive benefit of participating employees. The benefit is funded by employer and employee contributions and income from investments. The Fund's assets are set aside in the Trust and invested in the manner directed by the governing Board in accordance with the Fund's investment policy.

The Fund was established in XXXX with no specific termination date. It is expected to be continued indefinitely as confirmed by the Fund.

Therefore, the Fund satisfies this requirement.

Fund is a provident, benefit, superannuation or retirement fund

The phrase 'a provident, benefit, superannuation or retirement fund' under subparagraph 118-520(1)(a)(ii) is not defined in either the ITAA 1997 or the ITAA 1936. However, the phrase has been subject to judicial consideration.

In Scott, the High Court examined the terms 'superannuation fund' and 'fund'. Justice Windeyer stated at ATD 351; AITR 312; ALJR 278 that:

... I have come to the conclusion that there is no essential single attribute of a superannuation fund established for the benefit of employees except that it must be a fund bona fide devoted as its sole purpose to providing for employees who are participants money benefits (or benefits having a monetary value) upon their reaching a prescribed age. In this connexion "fund", I take it, ordinarily means money (or investments) set aside and invested, the surplus income there from being capitalised.

In a later case, Mahoney v. Commissioner of Taxation (Cth) (1967) 41 ALJR 232; (1967); 14 ATD 519; 10 AITR 463 (Mahoney case), the High Court took a similar view as in Scott, Justice Kitto expressed the view at ALJR 232; (1967); ATD 520; AITR 464 that:

All that need be recognised is that just as 'provident' and 'superannuation' both referred to the provision of a particular kind of benefit - in the one case a provision against contemplated contingencies, and in the other case a provision, to arise on an employee's retirement or death or other cessation of employee, of a subvention for him or his estate or persons towards whom he may have stood in some kind of relation commonly giving rise to a legal or moral responsibility - so 'benefit' must have meant a benefit, not a general sense, but characterised by some specific future purpose.

The court found that the expression takes its meaning from past usage and the meaning of the several expressions must be arrived at in light of their ordinary usage. As such, the term 'benefit' requires a purpose narrower than conferring benefits in a completely general sense. The benefit must be characterised by some future purpose. Likewise, a provident fund must not refer to the provision of funds in a general sense but must relate to a provision against contemplated contingencies.

Both of the above mentioned cases emphasise that the benefits must be provided for a specific purpose and require that there is a connection between the benefit received and the provision by the fund for retirement or death of a member or against 'contemplated contingencies', such as death, disability or serious illness.

Having regard to the Fund's governing rules, it is considered that the Fund is a 'provident, benefit, superannuation or retirement fund' as that phase has been interpreted by the relevant authorities. The purpose of the Fund is to provide employees with retirement benefits as well as survivor and disability benefits. Participating employees are eligible for a retirement benefit upon attaining certain age and service period criteria, becoming disabled or upon death.

Therefore, the Fund will satisfy this requirement.

Fund was established outside Australia

The Fund provides a statement confirming that the Fund is established outside Australia and is a non- resident for Australian tax purposes.

Therefore, the Fund satisfies this requirement.

Fund was established and is maintained only to provide benefits for individuals who are not Australian residents

The Fund provides a statement confirming that the Fund was established and is maintained only to provide retirement benefits for participating employees who are not Australian residents.

It is considered that the possibility of a very small number of members being returned residents or becoming Australian residents after ceasing eligible employment is incidental and should not be taken to conclude that the Fund, 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 Fund.

Therefore, the Fund satisfies this requirement.

Funds' central management and control is carried on outside Australia by entities none of whom is an Australian resident

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 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.

Furthermore, paragraphs 10 and 11 of 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 Fund provides a statement confirming that the central management and control of the Fund is carried on outside Australia by entities none of whom are Australian resident.

The Fund's governing Board consists of members none of whom are Australian resident. The minutes of meeting of Board members confirm high level and strategic decisions were made outside Australia.

Therefore, the Fund satisfies this requirement.

No amount paid to the fund or set aside for the fund has been or can be deducted under the ITAA 1936 or ITAA 1997 and no tax offset has been allowed or is allowable for such an amount

Pursuant to 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.

The Fund provides a statement confirming that no amounts have been paid to the Fund, nor set aside to be paid to the Fund, that can be deducted under the ITAA 1936 or ITAA 1997. Further, no amounts have been paid to the Fund, nor set aside or be paid to the Fund, for which a tax offset has been allowed, or would be allowable, under the ITAA 1936 or ITAA 1997.

Therefore, the Fund will satisfy this requirement.

Conclusion

As all of the requirements in section 118-520 of the ITAA 1997 are met, the Fund is considered to be a non-resident that is a 'superannuation fund for foreign residents' for the purposes of subparagraph 128B(3)(jb)(i) of the ITAA 1936.

Income consists of interest, dividends or non-share dividends paid by an Australian resident company

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 Fund provides a statement confirming Australian investments consisting of shares from which dividend income was derived and paid by Australian companies. It will, therefore, derive the relevant income for the purposes of subsection 128B(3CA) of the ITAA 1936.

Therefore, the Fund satisfies the requirement in subparagraph 128B(3)(jb)(ii) of the ITAA 1936.

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

The letter issued by the relevant authority in the foreign country where the Fund resides confirms that the Fund is a tax-exempt retirement fund in that country.

Therefore, the Fund satisfies the requirement in subparagraph 128B(3)(jb)(iii) of the ITAA 1936.

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 was 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 128B(3CB) defines the test entity to be either the entity that paid the interest, dividends or non-share dividends or, if subsection 128A(3) of the ITAA 1936 applies in relation to a resident trust estate, that trust estate.

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 (b) above, the highest of those percentages applies in establishing the direct control interest.

Subsection 960-185(1) of the ITAA 1997 provides that an entity's indirect participation interest in a test entity is established by multiplying its direct participation interest in an intermediate entity by the sum of the intermediate entity's direct and indirect participation interests in the test entity.

The Fund's Australian investments comprise only ordinary shares where the dividend income was paid by Australian companies (the test entities). The total value of each of Australian investment portfolio demonstrates that the Fund will not hold more than 10% of the total participation interest in each of the test entities.

In these circumstances, the Commissioner is satisfied that the total participation interest the Fund holds in the test entities:

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

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

Therefore, the Fund satisfies the 'portfolio interest test' in respect of its Australian Investments listed in the relevant facts of this ruling.

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.

The first sub-test of the influence test, as contained in paragraph 128B(3CD)(a) of the ITAA 1936, assesses whether the relevant entity is 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) decisions that comprise the control and direction of the test entity's operations (paragraph 10 of LCR 2020/3).

This sub-test also extends to situations where the relevant entity has the indirect capacity to determine the identity of the relevant decision makers. This may occur, for example, where the relevant entity controls another entity and that other entity hold the right to determine the decision-maker's entity (paragraph 13 of LCR 2020/3).

The requisite level of influence will also exist where the relevant entity 'acting in concert with others' is directly or indirectly able to determine one of those persons (paragraph 18 of LCR 2020/3).

In the context of a company, the key element in the control and direction of the 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. This could include setting the investment or operational policy, appointing key management personnel, matters of finance or entering into of key business contracts (paragraph 25 of LCR 2020/3).

The second sub-test of the influence test, as contained in paragraph 128B(3CD)(b) of the ITAA 1936, assesses whether at least one of the relevant decision makers is accustomed or obliged to act, or might reasonably be expected to act, in accordance with the directions, instructions or wishes of the relevant entity (paragraph 28 of LCR 2020/3).

The three matters ('accustomed', 'obliged' or 'might reasonably be expected to') are not a composite phrase denoting a single test; they comprise different considerations each of which is sufficient to establish influence:

•         Whether a person is 'accustomed' to act in accordance with the directions, instructions or wishes of the relevant entity requires an analysis of past facts. This necessitates an examination of any discernible pattern of the person following the directions, instructions or wishes given by the relevant entity.

•         Whether a person is 'obliged' to act in accordance with the directions, instructions or wishes of the relevant entity depends upon a formal or informal obligation existing at the relevant time.

•         Whether a person 'might reasonably be expected' to act in accordance with the directions, instructions or wishes of the relevant entity requires a prediction as to future events and a consideration as to the objective likelihood of those future events occurring. This requires a consideration of all of the facts and circumstances impacting upon the relationship between the two parties (paragraph 29 of LCR 2020/3).

The Fund provided a statement confirming the Fund does not hold any right to appoint any members of the Board/Committee of the Australian companies either directly or indirectly; neither received any side letters nor entered into any arrangement with the Australian companies; and does not have any influence of a kind described in subsection 128(3CD) of the ITAA 1936.

In respect of the investments listed in the relevant facts and circumstances of this Ruling:

•         Neither the Fund, nor any related party, is involved in the day to day management of the business of any of the Australian companies.

•         Neither the Fund, nor any related party, has the right to appoint a director to the Board of Directors of the Australian companies.

•         Neither the Fund, nor any related party, holds the right to representation on any investor representative or advisory committee (or similar) of the Australian companies.

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

•         The Fund has not received any side letters from or entered into arrangements or agreements with the Australian companies.

•         The Fund only holds rights to vote in proportion to its equity interest in each of the Australian companies.

Accordingly, the Fund does not have influence of a kind described in subsection 128B(3CD) of the ITAA 1936 in respect of its Australian investments. the System.

Non-Assessable Non-Exempt Income

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.

Income derived by the Fund would not be otherwise treated as not assessable and not exempt income by virtue of the above provisions. Accordingly, the above exclusion should not apply to deny the Fund from entitlement to the withholding tax exemption for superannuation funds for foreign residents.

The Fund therefore satisfies this condition in respect of its Australian investments acquired after 27 March 2018.

As all requirements in relation to Australian Investments acquired after 27 March 2018 are met, the Fund will be exempted from withholding tax on dividend income derived from the Australian investments acquired after 27 March 2018 for the purposes of subsection 128(3CA) of the ITAA 1936.

Conclusion

As all requirements of paragraph 128B(3)(jb) of the ITAA 1936 in relation to the Australian Investments acquired after 27 March 2018, the Fund will be exempt from withholding tax on dividend income derived from the Australian investments acquired after 27 March 2018.