Edited version of private advice

Authorisation Number: 1052064548814

Date of advice: 2 December 2022

Ruling

Subject: Superannuation fund for foreign residents - withholding tax exemption

Question 1

Is the Fund exempt from liability to withholding tax on interest, dividend and/or non-share dividend income derived from its investments in AusCo1 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:

Year ending 30 June 20xx

The scheme commences on:

1 July 20yy

Relevant facts and circumstances

Background

1.         The Plan was established in Country X and is a pension plan.

2.         The Plan was established to meet the retirement needs of Country X workers.

3.         The Fund is the fund of the Plan and is governed by the Plan. The Plan itself is not an incorporated entity or a trust fund (or any other type of entity). The Plan is the name of the pension plan offered to relevant individuals. The Fund is the only entity in existence and pension benefits paid to members of the Plan are paid out of the Fund.

4.         The Plan's Board of Trustees is the plan administrator and are also the trustees of the Fund.

The Plan

5.         The Plan's primary purpose is to provide payments to members for their lifetime after retirement as well other benefits payable to eligible members and their beneficiaries.

6.         The Plan's head office located in Country X.

7.         The Plan's Board of Trustees' central management and control is in Country X and is carried out by individuals who are not Australian residents.

8.         The Plan was established in Country X for the sole purpose of providing pension benefits to individuals who are not Australian residents.

9.         The Board of Trustees expect and intend to maintain the Plan in force indefinitely but necessarily reserves the right to amend or terminate the Plan, either in whole or in part, or change the funding method, subject always to the requirements of law, and the Trust Agreement. If the Plan is terminated and wound up, accrued benefits will be paid out.

10.       The Plan is prohibited from borrowing funds, except as permitted under Country X law and the Trust Agreement.

The Fund

11.       The Fund is a trust settled under Country X law and the Trust Agreement.

12.       The Trust Agreement states that the Fund is created, established and maintained, and the Trustees agree to receive, hold and administer the Fund, for the purpose of providing such Benefits as may be approved in accordance with the Plan adopted from time to time by the Trustees. It also states that all payments into the Fund made from time to time, together with any income or accretions thereon, shall constitute a trust fund to be administered by the Trustees in accordance with the terms of this Agreement and the Plan.

13.       The Trust Agreement details that the trust fund shall mean all of the assets of the Fund consolidated with all funds and assets received from time to time by way of Contributions, together with all increments, earnings and profits accruing from the management and investment of the said trust fund.

14.       The trustee of the Fund is the Plan's Board of Trustees and the management and control of the Fund occurs in Country X by entities and persons that are not Australian residents.

15.       The Fund is not required to be terminated at a specified date pursuant to the Trust Agreement or any current provisions under Country X law.

16.       In accordance with the Trust Agreement, any amendment to the Trust Agreement requires unanimous written agreement of the Settlors and must not be inconsistent with the purposes of the Fund.

17.       Under the Trust Agreement, the Trust Agreement may only be terminated by unanimous agreement of the Settlors or consent of at least x of the y Trustees. Termination is neither proposed nor contemplated by the relevant parties.

18.       The Fund is a Country X resident for tax purposes and is exempt from Country X income tax. An amount paid to, or set aside for, the Fund and/or Plan, has not been and cannot be deducted under the ITAA 1936 or the Income Tax Assessment Act 1997 (ITAA 1997) and no tax offsets have been allowed or would be allowable for such amount.

Contributions

19.       The Plan is a defined benefit plan where employees and employers make contributions.

20.       Contributions of the members and employers made to the Plan are paid into the Fund and administered in accordance with the Trust Agreement.

21.       In accordance with the Trust Agreement, the Board of Trustees shall use all reasonable and prudent means to collect and receive all contributions due to the Fund, and shall, promptly after receipt, deposit such contributions in a special Fund account, established in a reputable bank, trust company other financial institution.

22.       The Fund does not permit voluntary additional contributions.

Assets

23.       The Board of Trustees, as administrator, has established and maintained two separate accounts of the Fund, being:

•                     the Pension Plan Account (PP Account), and

•                     the Compensation Account (CA Account).

24.       The CA component of the Fund does not invest alongside the PP and has no investments in Australia.

25.       The Fund invests directly into Australia. In respect of the investment in AusCo1, the first entry point into Australia is directly owned by the Fund and there are no interposed non-resident entities in the investment structure.

26.       The Fund's income from its Australian investment in AusCo1 is not 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.

Benefits

27.       The Trust Agreement lists benefits as all pension benefits, including disability, death and termination benefits, among others, provided to Plan members and/or their beneficiaries or dependants.

28.       Benefits under the Plan shall be provided from the assets of the Fund and are paid out of the Fund to individual members.

29.       A member who retires from the Plan shall receive an annual lifetime pension. The lifetime pension benefit paid to a member is determined by reference to the member's service.

30.       The normal retirement age for members is x years of age.

31.       Members can receive an unreduced pension at the earlier age of y years or as soon as they have completed w years of service, provided they have attained z years of age. Members are eligible to retire at z years of age, usually with a reduced pension.

32.       A member under z years of age may elect to transfer the commuted value of their deferred pension to another pension plan.

33.       Both the PP and CA components are subject to Country X legal requirements. All funding requirements for the Fund, which incorporates both the PP and CA, are based on the expected lifetime pension entitlement of its members and the associated benefits (e.g., survivor benefits). There is one contribution/benefit formula for both the PP and CA components and the pension is based on members' pensionable earnings, age and service in the Plan. Any portion of the contributions/benefits that exceed the Country X limits for PPs are managed through the CA.

34.       The CA applies where the Plan's provisions that govern the benefits that exceed the benefits that can be paid under the Plan's terms. If excess contributions are paid, they shall be paid into a certain account, and to the member in certain circumstances.

35.       Under Country X law, pension benefits and distributions are considered to be taxable income to members, when paid. This includes monthly pensions payable at retirement (early retirement or otherwise), as well as certain taxable lump-sum payments that may arise under the Plan provisions and Country X law, such as upon termination of employment before retirement. The Fund applies withholding tax at source in accordance with Country X law.

36.       The pension benefits (which include both PP benefits and CA benefits) form part of the member's total taxable income for the year which is ultimately subject to tax at ordinary rates. All benefit payments (whether paid from the PP component or CA component) as well as the associated withholding tax (remitted by the Fund) are reported annually to members and the Country X Tax Authority.

37.       Eligible contributions made by members and employers to the Fund are tax deductible, consistent with the Country X treatment of the CA, from a member's perspective. This is the same tax treatment as contributions allocated to the PP component.

38.       The CA itself is subject to a refundable tax in connection with both contributions and income earned on the CA assets. The tax is refunded as pension benefits are made. The CA is not subject to tax on distributions and the CA rules are structured to provide a refund of the refundable tax previously paid.

39.       Other potential benefits include:

•                     disability benefits, which result in the payment of an annual lifetime pension

•                     a death benefit to be paid to the estate of the employee, and

•                     a survivor benefit to a surviving partner of an employee and/or their beneficiary.

40.       There were only xx pension recipients of the Plan (including pensioners, surviving spouses and beneficiaries) that were listed as resident in Australia. Those xx pension recipients represent a small number of beneficiaries of the Plan. The Plan's understanding and expectation is that such retirees were not living in Australia when they actively accrued benefits, as the Plan is established for Country X employees only (i.e., these individuals accrued benefits whilst living in Country X). There are no active members of the Plan that are resident in Australia.

Investment in AusCo1

Ordinary Shares

41.       The Fund acquired ordinary shares in AusCo1 equal to <10% of the total shares issued (AusCo1 Shares) on XX date.

42.       The Fund legally owns the AusCo1 Shares.

43.       All shareholders of AusCo1 acquired shares in AusCo1 on XX date (AusCo1 Shareholders).

44.       The AusCo1 Shareholders entered into the Shareholders Agreement, which outlined the terms upon which each AusCo1 Shareholder agreed to invest in AusCo1, including the rights afforded to each shareholder.

The Board

45.       The Shareholders Agreement provides that each shareholder shall have the right to nominate one Director for appointment to the Board. However, a shareholder can unilaterally and irrevocably waive its right to appoint a Director to the Board.

46.       Only the Board can vote on Board Reserved Matters. Board Reserved Matters require a majority vote for approval.

47.       In the event there is a Board Reserved Matter that results in a deadlock (Supermajority Matter), the Supermajority Matter will be treated as a Shareholder Reserved Matter and require the approval of the shareholders (also by majority vote).

48.       The Fund irrevocably and unconditionally waived its right to appoint a Director to the Board of AusCo1. As a result, the Fund cannot appoint a Director to the Board of AusCo1 and cannot vote on the Board Reserved Matters.

49.       As a shareholder, the Fund is entitled to vote in respect of the Shareholder Reserved Matters.

Committees

50.       The Shareholders Agreement also provides that the Board may by majority vote establish committees for any purpose, however, the committees shall not be delegated any decision-making authority to bind AusCo1 but may make recommendations to the Board. The members of such committees shall be appointed by the shareholders with the right to nominate Directors to the Board.

51.       As the Fund waived its right to appoint a Director, the Fund does not have the ability to vote on any matter included as a Board Reserved Matter, nor does the Fund have the right to appoint a person to any committees.

Issuance of Securities

52.       The Shareholders Agreement contains the issue of securities terms and provides that in the event that the Board determines that AusCo1 requires additional capital, AusCo1 may undertake the capital raising through the issuance of securities. The shareholders have the right to participate in any issuance on a pro-rata basis.

53.       The Shareholders Agreement also provides that a shareholder who holds less than 10% of the issued capital of AusCo1 can provide a Securities Restriction Notice to instruct AusCo1 that, in the event that the company is required to issue additional share capital to shareholders, the Notifying Shareholder do not wish to be entitled to acquire additional share capital.

54.       Where this instruction is given by the relevant shareholder, AusCo1 is not permitted to issue, and the Notifying Shareholder is not entitled to acquire, additional securities where the issuance would result in that shareholder holding 10% or more of the issued securities in AusCo1.

55.       The Fund issued a Securities Restriction Notice to AusCo1 on YY date. The Securities Restriction Notice provides that the Fund hereby instructs AusCo1 that the Fund does not wish to be entitled to acquire 10% or more of any class or type of Equity Securities, to the extent that the acquisition of Equity Securities would result in the Fund holding 10% or more of the total issued Equity Securities of any class or type.

56.       AusCo1 did not offer shareholders additional securities between XX date and YY date.

Shareholder Loan

57.       The AusCo1 shareholders also subscribed for shareholder loans issued by AusCo1 in the same proportions as their ordinary shares.

58.       The Fund provided a shareholder loan of $XX to AusCo1 (Loan), which equates to <10% of the total shareholder loans to AusCo1.

59.       All shareholder loans provided by AusCo1 Shareholders are on identical terms and governed by the Loan Agreement between the AusCo1 as Borrower and the AusCo1 Shareholders as Lenders dated XX date (Loan Agreement).

60.       The key terms of the Loan are:

Lender: The Fund

Amount: $XX

Currency: Australian Dollar

Interest Rate: XX%

Repayment Date: XX years from the date of issue

61.       There are no other loans currently in place between the Fund and AusCo1 and there are no current plans for any future loans between the Fund and AusCo1.

62.       The relevant terms of the Loan Agreement are detailed below.

Loan Agreement

63.       The recitals to the Loan Agreement provide that the Lenders have agreed to make available the Loans to the Borrower on the terms and conditions and for the purpose set out in the agreement.

64.       The Loan Agreement states that the Borrower may borrow only one loan from each Lender.

65.       The Loan Agreement contains the repayment terms and states:

Repayment

(a) The Borrower must repay to each Lender its Principal Outstanding and all other Outstanding Moneys owing to that Lender in full on the Repayment Date.

(b) To avoid doubt, the amount payable to each Lender under this clause (being a Lender's Repayment Amount) must be repaid by the Borrower on a pari passu basis and pro rata according to each Lender's Share, and the Borrower must not pay to a Lender all or part of its Repayment Amount unless it simultaneously pays each other Lender the same proportionate amount of its Repayment Amount.

(c) Without limiting the obligation of the Borrower under this clause if the Borrower on the Repayment Date pays an amount which is less than the Principal Outstanding and all other Outstanding Amounts owing to each Lender (being a Lender's Available Amount), the amount must be repaid by the Borrower on a pari passu basis and pro rata according to each Lender's Share and the Borrower must not pay to a Lender all or part of its Available Amount unless it simultaneously pays each other Lender the same Proportionate amount of its Available Amount.

Summary of the rights afforded to the Fund:

66.       The Fund holds less than 10% of the total participation interests in, and has never held more than a 10% participation interest in, AusCo1.

67.       The Fund will hold less than 10% of the total participation interest in AusCo1 in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936.

68.       Neither the Fund, nor any related party of the Fund, is involved in the day to day management of the business of AusCo1.

69.       Neither the Fund, nor any related party of the Fund, holds any right to appoint a person to a Board, either directly or indirectly, of AusCo1 as those rights have been irrevocably and unconditionally waived in accordance with the Shareholders Agreement.

70.       Neither the Fund, nor any related party of the Fund, holds the right to representation on any investor representative or advisory committee (or similar) of AusCo1 as those rights have been irrevocably and unconditionally waived in accordance with the Shareholders Agreement. As the Fund has waived its right to appoint a Director, it does not possess the right to appoint a member to an advisory committee.

71.       Neither the Fund, nor any related party of the Fund, has the ability to influence the control or direction of the operation of AusCo1 outside of the ordinary rights conferred on investors pursuant to the Shareholder Reserved Matters. Except in such circumstances Board Reserved Matters can become Shareholder Reserved Matters following a deadlock involving the Supermajority Matter. Such matters are put to the shareholders for the purpose of protecting their investment in AusCo1.

72.       The Fund has not entered into or received any side letters, arrangements, or agreements in connection with its investment in AusCo1, other than the Shareholders Agreement and Loan Agreement. The Fund is not acting in concert with others in respect of its investment in AusCo1 and in particular with respect to the appointment of persons who make decisions that comprise the control and direction of AusCo1's operations.

73.       The Fund does not hold any veto rights on security holder votes.

Other relevant facts

74.       The income derived by the Fund from AusCo1 is expected to include interest, dividends, including unfranked dividends, and/or non-share dividends paid by AusCo1.

75.       The Fund has no formal or informal agreements or arrangements with AusCo1 (other than the Shareholders Agreement and Loan Agreement).

76.       The Fund has no formal or informal agreements or arrangements with any other AusCo1 Shareholder, any director of AusCo1 and/or any entities related to AusCo1, in connection with its investment in AusCo1.

77.       The Fund does not have any common directors with AusCo1 or any of the AusCo1 Shareholders.

Relevant legislative provisions

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

Reasons for decision

Question 1

Is the Fund exempt from liability to withholding tax on interest, dividend and/or non-share dividend income derived from its investments in Ausco1 in accordance with paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Summary

The requirements of paragraph 128B(3)(jb) of the ITAA 1936 are satisfied. Therefore, the Fund is excluded from liability to withholding tax on its interest, dividend and/or non-share dividend income derived from its AusCo1 investment 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.

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 non-resident that is 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 resides.

Except where the transitional rules in Schedule 3 to the Treasury Laws Amendment (Making Sure Foreign Investors Pay Their Fair Share of Tax in Australia and Other Measures) Act 2019 (Amendment Act) apply, from 1 July 2019, the extra requirements in subsection 128B(3CA) of the ITAA 1936 must also be met.

Schedule 3 of the Amendment Act amended the ITAA 1936 to improve the integrity of the income tax law to limit access to tax concession for foreign investors. For superannuation funds for foreign residents, this was achieved by limiting the withholding tax exemption to interest, dividend and non-share dividend income derived from an entity in which the superannuation fund has a portfolio-like interest.

The amendments to limit the withholding tax exemption apply to income that is derived by a superannuation fund on or after 1 July 2019.

Paragraph 128B(3)(jb) of the ITAA 1936

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

Meaning of superannuation fund for foreign residents

(1)       A fund is a superannuation fund for foreign residents at a time if:

(a)       at the 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 deducted under this Act; or

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

Consequently, for the Fund to be excluded from withholding tax on interest, dividend and/or non-share dividend income that it derives from its investment in AusCo1 under paragraph 128B(3)(jb) of the ITAA 1936, it must be established that the Fund:

1. is an indefinitely continuing fund
2. is a provident, benefit, superannuation or retirement fund
3. was established in a foreign country
4. was established and maintained only to provide benefits for individuals who are not Australian residents
5. has their central management and control carried on outside of Australia by entities none of whom are Australian residents
6. does not receive or have amounts set aside for them that have been or can be deducted under the ITAA 1936 or the ITAA 1997
7. does not receive or have amounts set aside for them that give rise to a tax offset
8. that receives income that consists of interest, dividends or non-share dividends paid by a company that is an Australian resident, and
9. that is exempt from income tax in the country in which the non-resident resides.

These requirements are considered below.

1. Indefinitely continuing fund

Neither the ITAA 1936 or the ITAA 1997 provide guidance on the meaning of 'indefinitely continuing', however, the ordinary meanings of 'indefinitely' and 'continuing' involve little ambiguity or controversy.

The Australian Oxford Dictionary defines the 'indefinitely' as '1. for an unlimited time...2. in an indefinite manner' and 'continuing' as '...persist in, maintain, nonstop'.

The term '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 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.

3. ...money resources.

The Plan is a pension plan with its head office located in Country X.

The Plan itself is not itself an incorporated entity or a trust fund (or any other type of entity). The Plan is the name of the plan offered to relevant individuals.

The Plan's Board of Trustees is the plan administrator and are the trustees of the Fund. The Fund is the only entity in existence.

The Board of Trustees expects and intends to maintain the Plan indefinitely but necessarily reserves the right to amend or terminate the Plan, either in whole or in part, or change the funding method, subject always to the requirements of the law, and the Trust Agreement. If the Plan is terminated and wound up, accrued benefits will be paid out.

Any amendment to the Trust Agreement requires unanimous written agreement of the Settlors. The Trust Agreement may be terminated by unanimous agreement of the Settlors or consent of at least x of the y Trustees. Termination is neither proposed nor contemplated by the relevant parties.

The Plan and the Fund are indefinitely continuing, and it is therefore accepted that this requirement is satisfied.

2. Provident, benefit, superannuation or retirement funds

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. The phrase, however, has been subject to judicial consideration.

In Scott v Commissioner of Taxation (No 2) (1966) 40 ALJR 265, Windeyer J stated 278:

There is no definition in the Act of a superannuation fund. The meaning of the term must therefore depend upon ordinary usage...I have come to the conclusion that there is no 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 Mahony v Commissioner of Taxation (1967) 41 ALJR 232, Kitto J stated at 232:

There was no definition in the Act of 'a provident, benefit or superannuation fund', and the meaning of the several expressions must therefore be arrived at in light of ordinary usage and with only one piece of assistance to be gathered from the immediate context. Since a fund, if its income was to be exempt under the provision, was separately required to be one established for the benefit of employees, each of the three descriptive words 'provident', 'benefit' and 'superannuation' must be taken to have connoted a purpose narrower than the purpose of conferring benefits, in a completely general sense, upon employees. Precise definition may be difficult, and in any case is unnecessary for present purposes. All that need be recognized 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 employment, 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 in a general sense, but characterized by some specific future purpose. A funeral benefit is a familiar example.

In Cameron Brae Pty Limited v FCT (2007) 161 FCR 468, the Full Federal Court held that the relevant fund was a superannuation fund for the purposes of former section 82AAE of the ITAA 1936. Jessup J stated at 506:

In answering the question whether the fund was a "superannuation fund" as the term is ordinarily understood, it is, in my view, critical that payments could not have been made out of the fund (other than by way of administration expenses, taxation, etc) save to members of the relevant discretionary class, and save in circumstances which fell within the ordinary understanding of superannuation. A proper characterisation of the fund should, in my view, depend upon the purposes for which the assets and moneys of the fund might have been used rather than upon the quality of the rights of individual members of the fund. If the fund could have been used only to achieve what might be described as a superannuation purpose, I would describe the fund as a "superannuation fund". That a particular member of a discretionary class might not, ultimately, have received any payment, was not, in my view, disqualifying.

ATO Interpretative Decision ATO ID 2009/67 Income Tax: Superannuation fund for foreign residents (ATO ID 2009/67) refers to these authorities and provides the following guidance on the meaning of the phrase:

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 relevant authorities therefore establish that in order 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 contemplated contingencies (such as death, disability or serious illness).

The Plan is a defined benefit plan that apply to members and provide retirement, disability, death and survivor benefits to members of the Plan and their dependents. The Fund actually pays out the designated benefit(s).

Members are eligible for a pension at the normal retirement age (being x years of age). In some circumstances, the early pension may be accessed before the participant reaches the normal retirement age, depending on their accumulated years of continuous service and their age.

There are no benefits provided by the Plan to contributors and beneficiaries beyond those as prescribed above and the Commissioner accepts that the alternate circumstances of access to the funds, being incapacity, death, the transfer of funds to another retirement fund, and a return of contributions in very limited circumstances, align to the contemplated contingencies of a 'provident, benefit, superannuation or retirement fund' as outlined in the relevant judicial decisions and ATO ID 2009/67.

The Fund is responsible for managing assets and amounts transferred to it on behalf of the Plan and all monies managed by the Fund on behalf of the Plan are amounts that are used solely for the purposes of administering and paying out benefits under the Plan.

Therefore, it is accepted that this requirement is satisfied.

3. Established in a foreign country

The Fund and the Plan were established in Country X.

Therefore, the Fund and the Plan were established in a foreign country and this requirement is satisfied.

4. Established and maintained only to provide benefits for individuals who are not Australian residents

The Plan was established in Country X for its members, being employees of the Plan's employers; all of whom are not Australian residents.

However, as at 20xx, there were only xx pension recipients of the Plan (including pensioners, surviving spouses and beneficiaries) that were listed as resident in Australia. Those xx pension recipients represent a small number of beneficiaries of the Plan. The Plan's understanding and expectation is that such retirees were not living in Australia when they actively accrued benefits, as the Plan is established for Country X employees only (i.e., these individuals accrued benefits whilst living in Country X). There are no active members of the Plan that are resident in Australia.

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 Plan, in this case, have not been established and are not maintained only to provide benefits for non-residents, based on the rules and operation of the Plan.

Therefore, this requirement is satisfied.

5. Central management and control is carried on outside Australia by entities none of whom is an Australian resident

The central management and control of the Fund and the Plan is in Country X.

The Plan's Board of Trustee's central management and control, which administers the Fund, is in Country X and is carried out by individuals who are not Australian residents.

Further, the Plan's head office is located in Country X and its central management and control is in Country X.

It is therefore reasonable to conclude that the central management and control of the Fund occurs outside of Australia by entities that are not Australian residents.

Therefore, this requirement is satisfied.

   vi.        Do not receive, or have amounts set aside for them, that have been or can be deducted under the ITAA 1936 or ITAA 1997

No amounts received by the Fund, or set aside for the Fund, in connection with the Plan have or can be deducted under the ITAA 1936 or ITAA 1997.

Therefore, this requirement is satisfied.

7. Do not receive, or have amounts set aside for them, that give rise to a tax offset.

No amounts received by the Fund, or set aside for the Fund, in connection with the Plan are amounts for which a tax offset has been allowed, or would be allowable, under the ITAA 1936 or the ITAA 1997.

Therefore, this requirement is satisfied.

8. Receives income that consists of interest, dividends or non-share dividends paid by a company that is an Australian resident

The Fund is expected to receive Australian sourced income in the form of interest, dividends and/or non-share dividends from its investment in AusCo1, which is an Australian resident company.

Therefore, this requirement is satisfied.

9. Is exempt from income tax in the country in which it resides

The Country X Tax Authority has stated that the Plan is exempt from taxation in Country X.

A trust, such as the Fund, is exempt from Country X tax.

Therefore, the Fund and the Plan are exempt from tax in the country in which they reside, and this requirement is satisfied.

Conclusion

As all of the above requirements are satisfied, it is accepted that the Fund meets the requirements of paragraph 128B(3)(jb) of the ITAA 1936.

As outlined above, due the operation of the Schedule 3 of the Amendment Act, in order to be excluded from liability to withholding tax under paragraph 128B(3)(jb) of the ITAA 1936, the additional requirements in subsection 128B(3CA) of the ITAA 1936 must also be met.

Relevantly:

i.           The Fund must satisfy the 'portfolio interest test' (subsection 128B(3CC) of the ITAA 1936) in relation to AusCo1 at the time the income was derived and throughout any 12 month period that began no earlier than 24 months before that time and ended no later than that time

ii.         The Fund must satisfy the 'influence test' (subsection 128B(3CD) of the ITAA 1936) in relation to AEHN1, and

iii.        the income received by the Fund 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.

These requirements are considered below.

i.              Portfolio interest test

Subsection 128B(3CC) of the ITAA 1936 states:

(3CC) 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.

Subsections 128B(3CA) and 128B(3CC) of the ITAA 1936 provide the portfolio interest test is satisfied if the total participation interest held by the superannuation fund in the entity is less than 10%.

Section 960-180 of the ITAA 1997 provides that an entity's total participation interest at a particular time in another entity is the sum of the direct participation interest and the indirect participation interest. As the Fund holds the investments in AusCo1 directly, there are no indirect participation interests to consider.

Section 960-190 of the ITAA 1997 provides that if the other entity is a company, then the direct participation interest that the first entity holds in the other entity is the direct control interest (within the meaning of section 350 of the ITAA 1936) 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 that the entity holds, or is entitled to acquire, at that time of:

•                     the total paid-up share capital of the company

•                     the total rights of shareholders to vote, or participate in any decision-making, concerning any of the following:

o   making distributions of capital or profit of the company to its shareholders

o   the constituent document of the company

o   any variation of the share capital of the company, or

•                     the total rights to distributions of capital or profits of the company to its shareholders on winding-up, or otherwise than on winding-up.

The AusCo1 Shares owned by the Fund represent <10% of the total shares issued in AusCo1 and is relevant for the purposes of subsection 128B(3CC) of the ITAA 1936.

However, as AusCo1 is a company, in addition to the direct control interest that the Fund holds in AusCo1, it is also necessary to consider the direct control interest that the Fund is entitled to acquire in AusCo1 in accordance with section 960-190 of the ITAA 1997 and subsection 350(1) of the ITAA 1936.

Section 322 of the ITAA 1936 considers the meaning 'entitled to acquire' in the context of the Controlled Foreign Company provisions (CFC) and provides that an entity is 'entitled to acquire' anything that the entity is absolutely or contingently entitled to acquire, whether because of any constituent document of a company, the exercise of any right or option or for any other reason.

Taxation Ruling TR 2002/3 - Income tax: whether the holding of pre-emptive rights, call options and put options constitute a contingent entitlement to acquire for controlled foreign company (CFC) purposes (TR 2002/3) considered the meaning of 'entitled to acquire' for the purposes of the CFC provisions and provides the Commissioner's view on pre-emptive rights.

Paragraphs 18 and 19 of TR 2002/3 summarise this view as:

18. A pre-emptive right can only be triggered by property being offered to the holder of the right, and in absence of that offer cannot be exercised. At the time of commencement of the agreement, the rights are latent and do not exist in practical terms until such time as the property is offered for sale or acquisition, at which point the right crystallises. This means that in the initial agreement stage of a pre-emptive right, there is no exercisable or suable right, but only a mere expectation. The Commissioner's view therefore is that a pre-emptive right at the point of commencement of the applicable agreement, and prior to any opportunity for exercise of the right, will not constitute a contingent entitlement under section 322.

19. Once activated or triggered, a pre-emptive right vests in the buyer a contingent entitlement, at the very least, in the property. The Commissioner's further view is that this contingent entitlement continues until either actual acquisition of the subject interest, or formal decline, rejection, or lapsing of the offer period under the entitlement, which extinguishes any rights of the holder.

The terms of issue of the ordinary shares in AusCo1 as set out in the AusCo1 Constitution and Shareholders Agreement, entitle the holder of AusCo1 Shares to a proportionate right to capital, voting and distribution of profits or capital (whether on winding up or otherwise).

Specifically, the Shareholders Agreement provides AusCo1 Shareholders with an entitlement to a proportionate right to acquire shares in certain situations, including when the Board determines that AusCo1 requires additional capital.

However, such right to acquire additional capital in AusCo1 is restricted under the Shareholders Agreement when a Notifying Shareholder Group provides a Securities Restriction Notice. Relevantly, where a Securities Restriction Notice is provided by an investor to AusCo1, AusCo1 is not permitted to issue, and the investor it not entitled to acquire, additional securities where the issuance would result in that investor holding 10% or more of the issued securities in AusCo1.

The Fund acquired AusCo1 Shares representing <10% of the issued capital in AusCo1 on XX date and issued a Securities Restriction Notice to AusCo1 on YY date instructing AusCo1 not to issue additional securities to the Fund if the Fund's holding would equate to 10% or more of the issued shares in AusCo1.

As a result of issuing the Securities Restriction Notice, the Fund is not entitled to acquire additional ordinary shares if it would result in the Fund's ownership interest equalling 10% or more of the issued shares in AusCo1.

Between XX and YY dates, AusCo1 did not offer the Fund additional capital. In accordance with paragraphs 18 and 19 of TR 2002/3, despite the Fund having an entitlement to acquire additional capital in the event it was offered by AusCo1 in the circumstances contemplated in the Shareholders Agreement, without an actual offer from AusCo1, the entitlement was a mere expectation. The Fund therefore did not have an 'entitlement to acquire' of the type contemplated in subsection 350(1) of the ITAA 1936 during that period.

The Loan equates to <10% of the total shareholder loans to AusCo1, all of which have been provided to AusCo1 on the identical terms contained in the Loan Agreement.

Relevantly, the Loan Agreement provides that AusCo1 may only draw one loan from each Lender. Further, the Loan Agreement provides that AusCo1 must repay principal and pay interest to each of the Lenders proportionately on a pari passu basis.

As a result of the inclusion of the terms contained in the Loan Agreement, the loans provided by each of the AusCo1 Shareholders represent, and will continue to represent, a proportion consistent with the original proportion that their respective loan represented of the total shareholder loans when they were initially made.

In other words, the Loan represented <10% of the total shareholder loans that were provided to AusCo1 and due to the practical operation of the Loan Agreement, the Loan will only ever be able to represent <10% of the total shareholder loans. When AusCo1 makes a repayment of the principal amount lent, the repayment has to be made proportionately on all shareholder loans such that all shareholder loans will be repaid proportionately and the amount outstanding on each will also therefore be proportionate.

As a result, until the shareholder loans are repaid in full, any amounts outstanding on the shareholder loans will be proportionately consistent with the original Loan Amount of each of the shareholder loans. The Loan can therefore only ever represent <10% of the total shareholder loans to AusCo1 up until the point when the Loan, and consequently all shareholder loans, are repaid.

It is therefore reasonable to conclude that holds less than 10%, and will continue to hold less than 10%, of the total participation interests in AusCo1 in the circumstances contemplated in subsection 128B(3CC) of the ITAA 1936.

As such, it is reasonable to conclude that the Fund satisfies the portfolio interest test in respect of its investment in AusCo1.

Therefore, this requirement is satisfied.

ii.            Influence test

Subsection 128B(3CD) of the ITAA 1936 states:

(3CD) 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 one:

The first sub-test as contained in paragraph 128B(3CD)(a) of the ITAA 1936 assesses whether the foreign superannuation 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 foreign superannuation fund is able to act in concert with others to determine the identity of a relevant decision-maker in any of the entities.

The first sub-test also extends to situations where the foreign superannuation fund, in its own right, holds the ability to approve or veto decisions which go to the control or direction of any of the entities.

Law Companion Ruling LCR 2020/3 - The superannuation fund for foreign residents withholding tax exemption and sovereign immunity (LCR 2020/3) provides examples and guidance on the 'influence test' and states at paragraphs 11 to 13 with respect of sub-test one:

11. Whether the relevant entity is able to determine the identity of (to settle or decide upon, to choose or appoint) one of those persons is a question of fact. The phrase 'able to' focuses on the relevant entity's capacity or power. The sub-test is therefore not limited to situations where the entity has already determined, or intends to determine, the identity of one of the relevant decision makers. A right to determine will be sufficient for the requisite level of influence to exist.

12. The relevant entity will not be 'able to' determine, as a matter of fact, where it has irrevocably and unconditionally waived its rights by way of a legally enforceable agreement.

13. The sub-test also extends to situations where the relevant entity has the indirect capacity to determine the identity of one of the relevant decision makers. This may occur, for example, where the relevant entity controls another entity and that other entity holds the right to determine the decision-maker's identity.

LCR 2020/3 further provides at paragraphs 18 and 19 that the requisite level of influence will also exist where the relevant entity 'in acting in concert with others' is directly or indirectly able to determine one of those persons. Whether the relevant entity 'in acting in concert with others' is able to determine the identity of one of the relevant decision makers requires an examination of all of the relevant facts and circumstances. There must be some form of arrangement or understanding, whether explicit or otherwise, under which they are acting (or have agreed to act) in pursuing a common objective.

LCR 2020/3 provides at paragraphs 24 to 27 that:

•                     The persons who, individually or together with others, make (or might reasonably be expected to make) the decisions that comprise the control or direction of the test entity's operations will depend on the specific facts and circumstances.

•                     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.

•                     Normally, where a company is run by its directors in accordance with its constitution and the relevant company law rules which give its directors the power to manage the company, the company's directors will control and direct its operations.

•                     However, the class of persons included within the group of relevant decision makers is not restricted to the directors of a company. Any person who has a role in the high-level decision-making processes or governance of the company may satisfy the relevant criteria. This could include, for example, a member of an advisory or investment committee where such committee is required to approve decisions in relation to the control and direction of the operation of the company.

The Shareholders Agreement provides that each AusCo1 Shareholder shall have the right to nominate a Director for appointment to the Board.

The Fund consequently has a right to nominate one Director for appointment to the Board and is therefore 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 AusCo1's operations.

However, the Shareholders Agreement provides that a shareholder can unilaterally waive its right to appoint a Director. Further, the Shareholders Agreement provides that where an investor has unilaterally waived a right under the Shareholders Agreement, such investor will be considered to no longer possess such right or entitlement. In other words, rights are irrevocably waived.

The Shareholders Agreement contains separate schedules for Board Reserved Matters and Shareholder Reserved Matters. Where an investor has waived their right to appoint a Director under the Shareholders Agreement, that shareholder will not have the ability to vote on any Board Reserved Matter.

The Fund has irrevocably and unconditionally waived its right to appoint a Director to the Board pursuant to the Shareholders Agreement. As the Fund has waived its right to appoint a Director to the Board, the Fund is no longer be able to nominate a Director to the Board and therefore cannot determine the identity of a person who, individually or together with others, make (or might reasonably be expected to make) the decisions that comprise the control and direction of AusCo1's operations.

In addition, the Fund does not have the ability to vote on any Board Reserved Matter.

As noted above, the Shareholders Agreement contains Shareholder Reserved Matters. As a shareholder, the Fund is prima facie entitled to vote on the Shareholder Reserved Matters.

Given that sub-test one also extends to situations where the foreign superannuation fund, in its own right, holds the ability to approve or veto decisions which go to the control or direction of any of the entities, it is necessary to consider whether the Shareholder Reserved Matters 'go to the control and direction' of AusCo1.

Taxation Ruling TR 2018/5 - Income tax: central management and control test of residency (TR 2018/5) sets out the Commissioner's view on how to apply the central management and control test of company residency, and contains guidance with respect to what constitutes 'control and direction'.

Relevantly, TR 2018/5 states at paragraph 11:

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 Corporations Act 2001 (Cth)contains provisions which specify that certain corporate decisions require shareholder approval, and the Australian Securities Exchange (ASX) Listing Rules require that companies afford shareholders certain rights as a prerequisite to being listed on the ASX. In addition, the OECD Principles of Corporate Governance provide that shareholders should be sufficiently informed about, and have the right to approve or participate in, decisions concerning fundamental corporate changes.

It is evident from a comparison of the Board Reserved Matters to the Shareholder Reserved Matters that the decisions concerning the 'control and direction' of AusCo1 sit with the Board.

As provided in LCR 2020/3 at paragraph 25, 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 key business contracts.

The Board Reserved Matters contained in the Shareholder Agreement include such matters as described in paragraph 25 of LCR 2020/3, which are not included as Shareholder Reserved Matters.

It is only in exceptional circumstances involving a deadlock of Supermajority Matters that Board Reserved Matters can turn into Shareholder Reserved Matters. However, as specified in the Shareholder Agreement, shareholders are only able to make a decision in respect of such matter from the perspective of protecting their investment in AusCo1 rather than actively contributing to the control and direction of AusCo1's operations.

In addition, such circumstances would result in all investors being afforded the entitlement to vote on a decision, which would require the necessary quorum prior to any decision being reached. Therefore, if the Fund was entitled to vote on a Board Reserved Matter that had become a Shareholder Reserved Matter, the Fund's vote would be in proportion to its shareholding of <10%, which is comparatively insignificant.

In accordance with the above, it is acknowledged that the Fund's rights in respect of the Shareholder Reserved Matters are consistent with the ordinary rights conferred to shareholders of ASX listed companies.

It is therefore reasonable to conclude that the Fund has no direct or indirect ability to direct or influence the operation of the entities outside the ordinary rights conferred by the interests held.

Sub-test two:

The second sub-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.

LCR 2020/3 provides the following guidance at paragraph 29 in respect of sub-test two:

29.      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.

LCR 2020/3 further provides at paragraph 36 that rights to appoint an observer to a Board or Committee, the provision of a side letter, or the existence of additional rights and/or variations specific to the relevant entity are all factors which would potentially indicate that 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.

Advisory Committees

The Shareholders Agreement provides that the Board may by majority vote establish committees and that the members of each committee shall be appointed by the shareholders with the right to nominate Directors.

The Shareholders Agreement further provides that committees shall not be delegated with any decision making authority or authority to bind AusCo1 but may make recommendations to the Board.

In accordance with the Shareholders Agreement, where a shareholder has waived their right to appoint a Director, that shareholder also waives their right to appoint a member to an advisory committee.

The Fund has irrevocably and unconditionally waived its right to appoint a Director to the Board pursuant to the Shareholders Agreement. As the Fund has waived its right to appoint a Director to the Board, the Fund is no longer able to nominate members of any committees that are established by the Board.

Therefore, the rights afforded by the Shareholders Agreement with regards to committees do not apply to the Fund, and the Fund is not able to appoint a person who may influence the Board's decisions.

Conclusion

In summary, the following is considered relevant to the Fund satisfying the 'influence test' in respect of its investment in AusCo1:

•                     the Fund has no direct or indirect involvement in the day-to-day management of the business of AusCo1

•                     the Fund has waived its right to appoint a Director and therefore has no direct or indirect right to appoint a Director to the Board of Directors, or any investor representative or advisory committee (or similar) of AusCo1

•                     the Fund has no direct or indirect ability to direct or influence the operation of AusCo1 outside the ordinary rights conferred by the interest held

•                     the Fund's interests do not provide it with an entitlement to either directly or indirectly determine the identity of any person who makes decisions that comprise the control and direction of AusCo1's operations, and

•                     no person involved in the control and direction of AusCo1's operations is accustomed or obliged to act in accordance with the direct or indirect directions, instructions or wishes of the Fund.

Based on the above, the Commissioner has determined that it is reasonable to conclude that the Fund does not have influence over AusCo1 of the kind described in subsection 128B(3CD) of the ITAA 1936.

Therefore, it is accepted that this requirement is satisfied.

iii. the income derived by the Fund cannot otherwise be non-assessable non-exempt income.

The income derived by the Fund is not non-assessable non-exempt income because of subdivision 880-C of the ITAA 1997.

Therefore, it is accepted that this requirement is satisfied.