Edited version of private advice

Authorisation Number: 1052124762212

Date of advice: 14 June 2023

Ruling

Subject: Superannuation fund for foreign residents - withholding tax exemption

Question 1

Are the Pension Funds excluded from liability to withholding tax on their interest and/or dividend income derived through Foreign Trust from its investment(s) 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:

1 July 20XX to 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

1.    Foreign Trust is a master pension trust acting solely on behalf of the Pension Funds.

2.    The Pension Funds that invest via Foreign Trust are funds for employees of the Foreign Corporate Group.

3.      The Pension Funds are all pension plans registered under Country X law.

4.      The Pension Funds are all defined benefit plans.

5.      The Pension Funds' collective assets together constitute the Foreign Trust.

6.      The Master Trust Agreement is intended to benefit only its Parties and their respective successors.

7.      ForCo is the trustee that invests the Foreign Trust.

8.      ForCo collects money payable and investment income due to the Foreign Trust.

9.      ForCo does not administer the Pension Funds and shall not be responsible for collecting contributions for Foreign Trust. Foreign Corporate Group determines who has the right to participate and be a member of the Pension Funds.

10.   ForCo allocates to each Pension Fund the amount equal to such Pension Fund's Pro Rata Share of the Net Income which is determined by their proportionate ownership of Foreign Trust.

11.   Units may be redeemed by the Pension Funds to meet pension obligations.

12.   Funds to provide pension benefits are generated through the investments in the pension funds and contributions made by the Foreign Corporate Group. There are no contributions to the Pension Funds made by employees.

13.  Foreign Trust is created and organised in Country X and is maintained at all times as a domestic trust in Country X.

14.  The Pension Funds and Foreign Trust were established and maintained only to provide benefits for individuals who are not Australian residents.

15.  The Pension Funds and Foreign Trust are indefinitely continuing funds.

16.  There is no mechanism to terminate or wind up the Foreign Trust or the Pension Funds.

17.  The Pension Funds and Foreign Trust were established in Country X.

18.  The central management and control of the Foreign Trust and the Pension Funds are carried on outside of Australia by entities none of whom are Australian residents.

19.  An amount paid to or set aside for the Foreign Trust or ultimately for the Pension Funds has not been and cannot be deducted under the ITAA 1997 or ITAA 1936, and a tax offset has not been allowed and is not allowable for such an amount.

20.  The income received by the Pension Funds and Foreign Trust 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.

21.   Foreign Trust is exempt from taxation in Country X.

Benefits available to members of the Pension Funds

22.  Members of the Pension Funds receive a monthly pension at retirement. On termination of their employment with the Foreign Corporate Group, if they are under the age of Y, they have the option of receiving a commuted value (lump sum) that can be transferred to a different registered retirement vehicle at their own financial institution.

23.  In the event of the death of a pension fund member, the member's eligible spouse or designated beneficiary is entitled to the member's pension benefit.

24.  Members at termination of their employment with the Foreign Corporate /group (and if they are under the age of Y) can transfer their pension benefits as a lump sum to a registered retirement vehicle at their own financial institution. Members yet to reach retirement age cannot take the value of their pension benefit as a cash payment.

25.  ForCo as the trustee and custodian of Foreign Trust distributes benefits directly to Pension Fund members.

26.  Each pension fund is closed with no new members.

Australian investments

27.  Foreign Trust hires Investment Managers to invest funds according to their portfolio trust agreements and investment policies on Foreign Trust's behalf.

28.  ForCo is to ensure Foreign Trust shall always be kept separate and distinct from its general assets.

29.  ForCo credits the Foreign Trust with any income and maturity proceeds on Securities or other Property in which Foreign Trust has invested on contractual payment dates.

30.  Foreign Trust has invested in Australian equity and debt investments.

31.  Foreign Trust derives dividend and interest income from the investments.

32.  These investments all have the following characteristics:

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

b.    The Pension Funds and Foreign Trust hold less than 10% of the total participation interests in each Australian company, trust or real estate investment trust (REIT).

c.     The Pension Funds and Foreign Trust would hold less than 10% of the total participation interests in each Australian company, trust or REIT in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936.

d.    Neither the Pension Funds and Foreign Trust, nor any related party of the Pension Funds and Foreign Trust, has involvement in the day to day management of the business of any of the Australian companies, trusts or REITs.

e.    Neither the Pension Funds and Foreign Trust, nor any related party of the Pension Funds and Foreign Trust, has the right to appoint a director to the Board of Directors of the Australian company, or equivalent role in a trust or REIT.

f.      Neither the Pension Funds and Foreign Trust, nor any related party, holds the right to representation on any investor representative or advisory committee (or similar) of the Australian company, or equivalent role in a trust or REIT.

g.    Neither the Pension Funds and Foreign Trust, nor any related party, has the ability to direct or influence the operation of the Australian company, trust or REIT outside of the ordinary rights conferred by the equity interest held.

h.    The Pension Funds and Foreign Trust only hold rights to vote in proportion to its equity interest in each Australian company, trust or REIT.

Relevant legislative provisions

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

Income Tax Assessment Act 1936 subsection 128B(3C)

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

Income Tax Assessment Act 1997 section 118-520

Reasons for decision

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) 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 and dividend income must be:

• derived by a superannuation fund for foreign residents (as defined in section 118-520 of the ITAA 1997), and
• exempt from income tax in the country in which the superannuation fund for foreign residents arise.

Each of the Pension Funds is a non-resident

Each of the Pension Funds is not a resident of Australia for income tax purposes. They were established in Country X, and their management is completely based there.

Therefore, the Pension Funds satisfy this requirement.

Each of the Pensions Funds is a 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 residents has the meaning given by section 118-520.

The term 'superannuation fund for foreign residents' is defined in section 118-520 of the Income Tax Assessment Act 1997 (ITAA 1997) as follows:

118-520 Meaning of superannuation fund for foreign residents

                 (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 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 Pension Funds 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:

• each Pension Fund is an indefinitely continuing fund
• each Pension Fund is a provident, benefit, superannuation or retirement fund
• each Pension Fund was established in a foreign country
• each Pension Fund was established and is maintained only to provide benefits for individuals who are not Australian residents
• the central management and control of each of the Pension Funds is carried on outside of Australia by entities none of whom are Australian residents
• no amount paid to the Pension Funds or set aside for the Pension Funds 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 Pension Funds or set aside for the Pension Funds.

The Pension Funds are indefinitely continuing funds

The legislation provides no guidance on the meaning of 'indefinitely continuing'. It is not a technical legal expression, and the ordinary meanings of indefinitely and continuing involve little ambiguity or controversy.

The Macquarie Dictionary, [Online], viewed on 1 February 2018, www.macquariedictionary.com.au defines 'indefinitely' and 'continuing' as follows:

Indefinite:

adjective 1. not definite; without fixed or specified limit; unlimited: an indefinite

number

2. not clearly defined or determined; not precise.

-       indefinitely, adverb

Continue:

verb (Continued, continuing)

1.    to go forwards or onwards in any course or action; keep on.

2.    to go on after suspension or interruption.

3.    to last or endure.

4.    to remain in a place; abide; stay.

5.    to remain in a particular state or capacity

The Pension Funds and Foreign Trust are indefinitely continuing.

There is a no mechanism for Foreign Trust to be wound up or terminated. There is sufficient evidence to accept that each of the Pension Funds will continue to operate for an indefinite period of time.

Therefore, the Pension Funds satisfy this requirement.

The Pension Funds are a provident, benefit, superannuation or retirement fund

The phrase 'provident, benefit, superannuation or retirement fund' under subparagraph 118-520(1)(a)(ii) of the ITAA 1997 is not defined in either the ITAA 1997 or the ITAA 1936. 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 from being capitalised.

In the later case, Mahoney v. Commissioner of Taxation (Cth) (1967) 41 ALJR 232; (1967) 14 ATD 419; 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.

The two cases above 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.

The Pension Funds are retirement systems established to provide retirements benefits to those who are employees of Foreign Corporate Group and are members of the respective Pension Funds. The Pension Funds are defined benefit retirement plans which provide a fixed benefit for members at retirement. Non-members can access the benefits provided they are a designated beneficiary in the event of the death of the relevant member.

As both the key objective of the Pension Funds and the operation of the Pension Funds have the sole purpose of providing retirement benefits or benefits against other contemplated contingencies, the Commissioner accepts that the Pension Funds are a 'provident, benefit, superannuation or retirement fund'.

Therefore, the Pension Funds satisfy this requirement.

The Pension Funds were established in a foreign country

The Pension Funds were established and registered in Country X for members who are employees of the Foreign Corporate group's operations and are regulated by Country X law. Therefore, the Pension Funds were established in a foreign country.

Therefore, the Pension Funds satisfy this requirement.

The Pension Funds were established and maintained only to provide benefits for individuals who are not Australian residents

The Pension Funds were established in Country X to provide service retirement for its members consisting of current and past employees of the Foreign Corporate Group.

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 Pension Funds, have not been established and are not maintained only to provide benefits for non-residents, based on the rules and operation of the Pension Funds.

Therefore, the Pension Funds satisfy this requirement.

Each of the Pension Fund's central management and control is carried on outside Australia by entities none of whom is an Australian resident

Paragraph 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 operations 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, paragraph 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.

Foreign Trust is a master pension trust that is established in Country X which is administered by ForCo, which is a trust company existing under the laws of Country X. The Pension Funds are managed by Foreign Corporate Group who is a corporation organised under Country X laws.

Based on these facts, it is reasonable to conclude that the central management and control of the Pension Funds and Foreign Trust is exercised by Country X entities that are not Australian residents.

Therefore, the Pension Funds satisfy this requirement.

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

An amount paid to the Pension Funds or set aside for the Pension Funds has not been and cannot be deducted under the ITAA 1997. A tax offset has not been allowed nor would be allowable for any amount paid to the Pension Funds or set aside for the Pension Funds.

Therefore, the Pension Funds satisfy this requirement.

Consists of interest or dividend and/or non-share dividends paid by a company that is a resident

Paragraph 128B(3)(jb) of the ITAA 1936 will only apply to interest, or to dividends and non-share dividends paid by Australian resident companies.

In order to be excluded from withholding tax under paragraph 128B(3)(jb) of the ITAA 1936, the interest, dividend and/or non-share dividend income must be derived by a non-resident superannuation fund for foreign residents.

Foreign Trust and its Pension Fund beneficiaries will receive interest and dividend income from its investments in the entities listed in Appendix 1. These entities are residents of Australia for tax purposes.

Therefore, the Pension Funds satisfy this requirement.

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

Foreign Trust and the Pension Funds are exempt from taxation in Country X.

Therefore, the Pension Funds satisfy this requirement.

Subsection 128B(3CA) of the ITAA 1936

The Treasury Laws Amendment (Making Sure Foreign Investors Pay Their Fair Share of Tax in Australia and Other Measures) Act 2019 introduced extra requirements that must be met for paragraph 128B(3)(jb) of the ITAA 1936 to apply. Generally, these extra requirements apply to income derived from 1 July 2019.

Relevantly:

•                     The Pension Funds must satisfy the 'portfolio interest test' in relation to the test entity (subsection 128B(3CC) of the ITAA 1936)

•                     The Pension Funds must satisfy the 'influence test' (subsection 128B(3CD) of the ITAA 1936) in relation to the test entity, and

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

a.    Subdivision 880-C of the ITAA 1997, or

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

1. The Pension Funds satisfy the 'portfolio interest test'

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

A superannuation fund satisfies the portfolio interest test in this subsection in relation to the test entity at a time if, at that time, the total participation interest (within the meaning of the Income Tax Assessment Act 1997) the superannuation fund holds in the test entity:

(a) is less than 10%; and

(b) would be less than 10% if, in working out the direct participation interest (within the meaning of that Act) that any entity holds in a company:

(i) an equity holder were treated as a shareholder; and

(ii) the total amount contributed to the company in respect of non-share equity interests were included in the total paid-up share capital of the company.

The portfolio test only applies to the Pension Funds' Australian equity interests.

Foreign Trust holds less than 1% of the total participation interests in each Australian company, trust or real estate investment trust (REIT) listed in Appendix 1 to the Ruling. Therefore, the Pension Funds hold less than 1% of the total participation interests in each Australian company, trust or real estate investment trust (REIT) listed in Appendix 1 to the Ruling. Further, the Pension Funds would hold less than 1% of the total participation interests in each Australian company, trust or REIT in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936.The Pension Funds therefore satisfy the 'portfolio interest test' in respect of their current investments (listed in Appendix 1 to the relevant facts and circumstances of this Ruling).

2. The Pension Funds satisfy the '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.

Sub-test 1 of the influence test, as contained in paragraph 128B(3CD)(a) of the ITAA 1936, assesses whether the Pension Funds are 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 Pension Funds are able to act in concert with others to determine the identity of a relevant decision-maker in the test entity.

Law Companion Ruling LCR 2020/3 The superannuation fund for foreign residents withholding tax exemption and sovereign immunity (LCR 2020/3) states in paragraph 18 that the phrase 'acting in concert' was considered by Finkelstein J in Papua New Guinea Dockyard Limited v Adams [2005] FCA 413 at [13]

'Many of the important cases that discuss the meaning of acting in concert are helpfully collected by Barrett J in Bateman v. Newhaven Park Stud Ltd (2004) 49 ACSR 597. These cases show that a person, A, will be acting in concert with another person B, if A engages in conduct (act or omission) in consequence of an agreement or understanding between A and B and the conduct is in pursuance of an objective or purpose which is common to both. It is not as is sometimes suggested necessary to show that the common objective or purpose "has some pejorative element [such as] to circumvent the letter, or perhaps even the spirit, of some other statutory obligation or requirement.'

Whether the relevant entity in acting in concert with others is able to appoint a relevant decision-maker requires an examination of all 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.

Example 2 in LCR 2020/3, describing a situation where two unrelated parties use a common investment manager, and Example 4.7 of the Explanatory Memorandum, demonstrate that the acting in concert requirement with respect to the influence test has a low threshold. Relevantly, both of these examples show that where investors aggregate their interests with other investors (using a common investment manager) and gain rights, and exercise said rights, to appoint decision-makers in the Test Entity, this is sufficient to find that all investors satisfy the influence test.

Given that Foreign Trust makes the investments on behalf of all the Pension Funds together, the question would be whether Foreign Trust could, either in part or in whole determine the identity of such a relevant decision-maker.

Sub-test 1 may also extend to situations where Foreign Trust, in its own right, holds the ability to approve or veto decisions which go to the control or direction of the test entity.

Sub-test 2 of the influence test, as contained in paragraph 128B(3CD)(b) of the ITAA 1936, assesses whether at least one of the relevant decision-making persons of the test entity is accustomed or obliged to act, or might reasonably be expected to act, in accordance with the directions, instructions or wishes of the Pension Funds either alone or acting in concert as represented by Foreign Trust.

Relevantly, in respect to the investments listed in Appendix 1 of the relevant facts and circumstances to this Ruling:

a.    Neither the Pension Funds and Foreign Trust, nor any related party of the Pension Funds, has involvement in the day to day management of the business of any of the Australian companies, trusts or REITs.

b.    Neither the Pension Funds and Foreign Trust, nor any related party of the Pension Funds, has the right to appoint a director to the Board of Directors of the Australian company or equivalent role in a trust or REIT.

c.     Neither the Pension Funds and Foreign Trust, nor any related party, holds the right to representation on any investor representative or advisory committee (or similar) of the Australian company, or equivalent role in a trust or REIT.

d.    The Pension Funds and Foreign Trust do not otherwise have any other influence in the Australian company, trust or REIT potentially of a kind described in subsection 128B(3CD) of the ITAA 1936.

Regarding the equity investments specifically:

a.    Neither the Pension Funds and Foreign Trust, nor any related party, has the ability to direct or influence the operation of the Australian company, trust or REIT outside of the ordinary rights conferred by the equity interest held, and,

b.    The Pension Funds and Foreign Trust only holds rights to vote in proportion to its equity interest in each Australian company, trust or REIT.

Based on the above, the Commissioner accepts that the Pension Funds do not have influence of a kind described in subsection 128B(3CD) of the ITAA 1936.

3. Otherwise non-assessable non-exempt

The income received by the Pension Funds will not be non-assessable non-exempt income because of Subdivision 880-C of the ITAA 1997 or Division 880 of the Income Tax (Transitional Provisions) Act 1997.

Conclusion

The Pension Funds are excluded from withholding tax in relation to interest, dividend and non-share dividend income derived from its current investments.