Edited version of private advice

Authorisation Number: 1052120871370

Date of advice: 23 May 2023

Ruling

Subject: Withholding tax - fund exempt from liability

Question

Is the Fund exempt from liability to withholding tax on interest, dividend and non-share dividend income derived from Australian investments under paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

This private ruling applies for the following period:

DD Month YYYY to DD Month YYYY

The scheme commenced on:

DD Month YYYY

Relevant facts and circumstances

The Fund was established to operate a pension plan.

The Fund is administered by a Retirement Board.

The letter issued by the relevant tax authority confirms that the Fund is a non-resident and tax-exempt pension plan in that country.

Employees must join the Fund if they are employed by the employer.

Pension benefits are funded by contributions from the employer, members and return on investments.

Members may be eligible to borrow against their contributions only and is subject to the certain limit. Repayments of loans are made through payroll deduction.

Failure to pay back the loan within the designated time frame, will result in a reduction from the members' pension.

The Fund provides retirement benefits to eligible members including retirement benefit,disability benefit anddeath benefit.

All investments are made for the sole benefit of the members and their beneficiaries.

External third-party investment managers and advisors are hired to manage the investments.

The Fund has held less than a 10% interest, directly or indirectly, in any of Australian investments.

The Fund did not have influence, either directly or indirectly, over decisions that comprise the control and direct the operation of the Australian investments.

The Fund provided a written statement confirming:

• the Fund is an indefinitely continuing provident, benefit, superannuation, or retirement fund;
• the Fund was established in a country other than Australia;
• the Fund was established and is maintained only to provide benefits to members who are not Australian resident;
• the Fund's central management and control is carried on outside Australia by persons that are not Australian residents;
• no amount paid to the Fund can be deducted under the ITAA 1997 or ITAA 1936;
• no tax offset would be allowable for an amount paid to or set aside for the Fund; and
• the income of the Fund is not NANE income because of either:

-       Subdivision 880-C of the ITAA 1997, or

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

The Fund is not a sovereign entity as defined in Subdivision 880-A of the ITAA 1997.

Reasons for decision

Summary

The Fund is a non-resident superannuation fund for foreign residents for the purposes of section 118-520 of the ITAA 1997 and is exempt from income tax in the relevant country. Therefore, the Fund is exempt from liability to withholding tax on its dividend, interest and non-share dividend income derived from Australian investments 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, interest income 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 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 superannuation fund for foreign residents (as defined in section 118-520 of the ITAA 1997), and
• paid by an Australian company, and
• exempt from income tax in the country in which the non-resident resides.

Each of these requirements is considered below.

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

The Fund is a resident of the relevant country and is not a resident of Australia.

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

118-520 Meaning of superannuation fund for foreign residents

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

(a)  at that time, it is:

(b)  it was established in a foreign country; and

(c)   it was established in a foreign country; and

(d)  it was established, and is maintained at that time, only to provide benefits for individuals who are not Australian residents; and

(e)  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

An indefinitely continuing fund

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, 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 funds to provide benefits under the Fund are derived from returns on Fund investments, contributions by participating employer and member contributions.

Therefore, the funds constitute a fund as they are money or investments set aside and invested.

The term an 'indefinitely continuing fund' in subparagraph 118-520(1)(a)(i) of the ITAA 1997 is not defined.

The Australian Oxford Dictionary defines 'indefinite' as: 1 vague, undefined. 2 unlimited... and 'indefinitely' as: 1 for an unlimited time... 2 in an indefinite manner.

The requirement that the fund be 'indefinitely continuing' simply means that the fund must not have a specific termination date.

The Fund has been in operation since it was established and does not have a specific termination date.

Therefore, it is considered that the Fund is an indefinity continuing fund within the meaning of subparagraph 118-520 (1)(a)(i) of the ITAA 1997.

A provident, benefit, superannuation, or retirement fund

None of the four descriptors 'provident, 'benefit', 'superannuation' or 'retirement fund' in subparagraph 118-520(1)(a)(ii) of the ITAA 1997 are defined. However, the terms have, however, 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.

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 members with retirement benefits as well as disability and death benefits.

Therefore, the Fund satisfies the definition of a 'provident, benefit, superannuation ore retirement fund in subparagraph 118-520(1)(a)(ii) of the ITAA 1997.

Fund was established outside Australia and is maintained at that time only to provide benefits for individuals who are not Australian residents

The Fund is a pension plan and is a resident of the relevant country for tax purposes and the Fundis maintained only to provide benefits for individuals who are not Australian residents

Therefore, the Fund satisfies the requirements in paragraphs 118-520(1)(b) and (c) of the ITAA 1997.

Fund's 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 Retirement Board, which is the governing body of the Fund, is vested with the responsibility of the general administration and operation of the Fund. The governance and administration and therefore the CM&C of the Fund is carried on outside Australia by entities none of whom is an Australian resident.

Therefore, the Fund satisfies the requirement in paragraph 118-520(1)(d) of the ITAA 1997.

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

The Fund has confirmed that no amounts paid to or set aside for the Fund have been, or can be, deducted under the ITAA 1936 or ITAA 1997. Further, there are no amounts paid to, or set aside for, the Fund, for which a tax offset has been allowed, or would be allowable, under the ITAA 1936 or ITAA 1997.

Therefore, paragraphs 118-520(2)(a) and (b) of the ITAA 1997 have no application.

As the above requirements are satisfied, the Fund meets the requirements of being considered a 'superannuation fund for foreign residents' as defined by section 118-520 of the ITAA 1997 for the purposes of subparagraph 128B(3)(jb)(i) of the ITAA 1936.

Income is paid by an Australian resident company

The Fund's Australian investments consist of common stock in Australian publicly listed companies and trusts from which the Fund derives dividend, interest, and non-share dividend income.

Therefore, the Fund derives income paid by the Australian companies for the purposes of 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 Fund is a pension plan and is exempt from taxation under the relevant Act in that country.

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

Extra requirements for assets acquired after 27 March 2018

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 from 1 July 2019 onwards. These extra requirements 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' (subsection 128B(3CD) in relation to the test entity, and
• The income cannot otherwise be 'non-assessable non-exempt income' of the fund because of:

-       Subdivision 880-C of the ITAA 1997, or

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

It has been established above that the Fund has satisfied all of the pre-existing conditions of paragraph 128B(3)(jb) of the ITAA 1936. As such, the below analysis concentrates only on the extra requirements outlined above.

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 System 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 the:

(a)  total paid up share capital

(b)  voting rights, or

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

or, if those percentage differ, the greater of those percentages.

Item 2 of the table in subsection 960-190(2) and subsection 960-190(2) of the ITAA 1997 provide that a direct participation interest in a trust is the 'direct control interest' (within the meaning of section 351 of the ITAA 1936 excluding the operation of subsections 351(3) and (4)) that the first entity holds in the other entity.

Subsection 351(1) of the ITAA 1936 provides that an entity that is a beneficiary in a trust holds a direct control interest in the trust at a particular time equal to the percentage of the:

(a)  income of the trust, or

(b)  corpus of the trust,

or, if those percentage differ, the greater of those percentages.

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.

Total participation interest - section 960-180 of ITAA 1997

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.

Indirect participation interest - section 960-185 of ITAA 1997

Work out the indirect participation interest that an entity (the holding entity) holds at a particular time in another entity (the test entity) by multiplying:

(a) the holding entity's direct participation interest (if any) in another entity (the intermediate entity) at that time;

by:

(b) the sum of:

(i) the intermediate entity's direct participation interest (if any) in the test entity at that time; and

(ii) the intermediate entity's indirect participation interest (if any) in the test entity at that time (as worked out under one or more other applications of this section).

The Fund's Australian investments comprise ordinary shares, units, and corporate bonds, in various Australian companies and trusts (the test entities). The Find confirms it has held less than a 10% interest, directly or indirectly, in any of Australian investments.

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 followings:

•         The Fund will hold less than 10% interest, either directly or indirectly, in any other party to which it holds a debt interest with.

•         Neither the Fund, nor any related party of the Fund, will have the right to representation on any investor representative or advisory committee (or similar) of any Australian company; or equivalent role.

•         Neither the Fund, nor any related party of the Fund, will have the ability to directly influence the operation of any Australian company or trust outside of the ordinary rights conferred by the equity interest held by the Fund, and

•         The Fund will only hold rights to vote in proportion to its equity interest in each Australian company or trust.

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 Fund does not have capacity to influence (either directly or indirectly) the day-to-day management of the operations of their investments.

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

Non-Assessable Non-Exempt Income

The Fund is not a sovereign entity as defined in Subdivision 880-A of the ITAA 1997. 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 20XX.

Conclusion

As all of the above requirements are satisfied, including those relating to assets acquired after 27 March 20XX, the Fund meets the requirements of being exempt from liability to withholding tax under paragraph 128B(3)(jb) of the ITAA 1936.