Edited version of private advice

Authorisation Number: 1052164180756

Date of advice:

Ruling

Subject: Withholding tax - foreign superannuation fund for foreign residents

Question 1

Is the Fund excluded from liability to withholding tax on its interest, dividend and non-share dividend income derived in respect of assets acquired on or before 27 March 2018 under paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

Question 2

Is the Fund excluded from liability to withholding tax on its interest, dividend and non-share dividend income derived in respect of assets acquired after 27 March 2018 as well as assets from question 1 held after 30 June 2026, under paragraph 128B(3)(jb) of the ITAA 1936?

Answer

Yes

This ruling applies for the following period:

The relevant income year

The scheme commenced on:

The Commencement Date

Relevant facts and circumstances

The Fund and Participating Trusts (collectively referred to as 'the Fund' throughout)

1.    The Fund was established by Trust Deed in the relevant State of the Foreign country.

2.    The Fund invests on behalf of Participating Trust Pension Plans also established in the relevant State of the Foreign country under foreign law.

3.    The Trustees of the Participating Trusts act as Trustees of the Fund pursuant to the Trust Declaration of Trust (Trust Deed).

4.    Pursuant to the Fund's Trust Deed, the Trustees hold the legal title to the assets of the trust fund (the Group Trust Fund) for each of the Participating Trusts.

5.    The Participating Trusts in the Fund have an undivided ownership interest in the Group Trust Fund and each Participating Trust has a proportionate share in the net income, profits and losses thereof.

6.    Pursuant to the Fund's Trust Deed, the Trustees are required to maintain a bookkeeping accounting system whereby the beneficial interest of each Participating Trust in the Group Trust Fund is identifiable and recorded in a Participating Trust Account for each Participating Trust. The respective beneficial interests of the Participating Trusts in the Group Trust Fund are, from time to time, equal to the balance credited to the relevant Participating Trust Accounts.

7.    Pursuant to the Fund's Trust Deed, the Fund can only be used for the exclusive purpose of providing benefits to members and beneficiaries of the Participating Trusts.

8.    Pursuant to the Fund's Trust Deed, the Trustees are required to invest the funds of the Fund in the same way the Participating Trusts invest their funds.

9.    The Fund is exempt from income tax in the country of residence.

Participating Trusts

10.  The Participating Trusts are defined benefit plans established under the relevant Foreign Country's laws to provide service retirement income and disability benefits to its members.

11.  The Participating Trusts are exempt from income tax in the country in which they reside.

Membership

12.  Membership in the Participating Trusts is automatic for employees who meet the criteria.

13.  Membership cannot be opted out of where these criteria are met.

Contributions

14.  Retirement contributions are withheld from the member's salary while they are working in covered employment.

15.  The employer contributes an equal amount and sends both employee and employer contributions to the relevant Participating Trust.

16.  The contribution rate is set each year by the Board of Trustees.

17.  Membership is vested once the member has five years of eligible service. Vesting establishes a right to a retirement benefit without additional covered-employment.

18.  Once Vested, a member may end covered-employment at any age and hold the membership by leaving their contributions with relevant Participating Trust and receive a lifetime monthly retirement benefit once eligible.

Benefits (retirement, death, disability)

19.  Eligibility for retirement is based on a combination of the employee's years of service and age.

20.  A Member can be eligible for normal (full) benefits, early (reduced) benefits, or delayed benefits with a Partial Lump Sum Option (PLSO).

21.  Normal benefits are calculated with a higher benefit factor than are early retirement options, making those benefits larger. PLSO benefits include a lump-sum payment at retirement with reduced monthly benefits.

Types of service retirement benefits

Service Retirement Benefits

22.  A member is eligible for normal (full) benefits when they meet the relevant age and service criteria.

23.  A member is eligible for early retirement benefits if they meet the relevant age and service criteria.

24.  A member is eligible for PLSO if they meet the relevant age and service criteria.

Disability Retirement benefits

25.  A member may be eligible to receive disability retirement benefits if they meet the following requirements:

•                     End all covered employment,

•                     Have at least five years of covered employment,

•                     Be under age 60,

•                     Become permanently disabled while working in covered employment or within one year after, if the condition causing the disability began while employed,

•                     Be incapable of earning a livelihood in any gainful occupation.

Death Benefits

26.  There are three types of Death Benefits provided to beneficiaries of members who die before retirement or while receiving disability retirement benefits, these are:

•                     A lump-sum payment,

•                     Retirement-based monthly benefits, or

•                     Dependant-based monthly benefits.

27.  Specific qualifications must be met in order to receive lifetime monthly retirement-based benefits, namely, that the member had between two and five or more years of service in relevant covered employment at the time of their death, depending on the benefit.

28.  If a member dies before they retire, or while receiving disability benefits, their designated beneficiary has the right to a lump-sum refund of their contributions and interest. Employer contributions are not included in lump-sum refund.

Benefits in other circumstances (loans, early withdrawal etc)

29.  Employee contributions are refundable only if a member ends their covered employment and is not under agreement for future employment with any covered employer.

30.  In this case, a refund of the employee contributions and interest are refunded. Contributions made by the employer are non-refundable.

31.  The Foreign law does not permit partial refunds or loans.

32.  Income taxes on refunds are payable on contributions and interest that was added during membership. In addition, where a refund payment occurs before the member reaches a certain age, a tax penalty may apply in addition to the ordinary income tax owed.

Plan Management

Board of Trustees

33.  The Trustees for the Fund are the same Trustees for each Participating Trust.

34.  The Board of Trustees is made up of members of the Participating Trusts.

35.  The Trustees hold the assets of the Participating Trusts in trust and may commingle the assets of the Participating Trusts in a group trust for investment purposes.

Central Management and Control

36.  The central management and control of the Fund and the Participating Trusts are carried on outside Australia by entities none of whom are Australian residents.

37.  The office of the Participating Trusts is located in the relevant Foreign country.

38.  All Board of Trustees' meetings are held at that office.

Wind-up and insolvency

39.  The Trust Deed of the Fund states that the bankruptcy of any of the Participating Trusts will not cause the termination of the Trust.

40.  The Trust Deed of the Fund states that the Trustee shall have the right to terminate the Trust at any time.

41.  There are no other clauses which determine an end date for the Fund.

Tax status

42.  The Fund and Participating Trusts are exempt from income tax in the foreign jurisdiction.

Global Custody Agreement

43.  Pursuant to a global custody agreement the Australian Assets of the Fund are held by an Australian resident nominee on behalf of the Fund, which in turn holds the assets on trust for the benefit of the Participating Trusts.

44.  Pursuant to the Custody Agreement, the Australian resident nominee has no discretionary authority or control over the Australian Assets and does not provide investment advice, investment manager services or trustee services.

45.  In consideration of the Australian resident nominee holding the Australian Assets on behalf of the Fund, they earn custodian fees and are required to act as directed by the Fund with respect to the investment and disposition of the assets under custody, in accordance with the terms of the Custody Agreement.

46.  The Custody Agreement provides that the Australian resident nominee pays interest or dividend income earned on the invested assets, by means of an automatic crediting service, to the Fund.

47.  The Fund does not hold any right to appoint a person to a board, committee or similar, either directly or indirectly, for any of the Australian Assets. The Fund has not entered into or received any side letters, arrangements, or agreements in respect of any of the Australian Assets.

The Fund's Australian Investments

48.  All Australian investments of the Fund are dividend paying shares.

49.  All of the Australian investments had the following characteristics:

•                     All of the Fund's investments in Australia are shares or debt investments for which dividends and distributions are received.

•                     The Fund does not have influence of a kind described in subsection 128(3CD) of the ITAA 1936 in respect of these investments.

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

•                     The Fund does not hold any right to appoint a person to a board, committee or similar (either directly or indirectly).

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

•                     The Fund does not hold more than 10% ownership of any of the entities listed.

Relevant legislative provisions

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

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

Income Tax Assessment Act 1936 section 128D

Income Tax Assessment Act 1997 section 118-520

Reasons for decision

Question 1

Is the Fund excluded from liability to withholding tax on its interest, dividend and non-share dividend income derived in respect of assets acquired on or before 27 March 2018, under paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Summary

The Fund is excluded from liability to withholding tax on its interest, dividend and non-share dividend income derived in respect of assets acquired on or before 27 March 2018, under paragraph 128B(3)(jb) of the ITAA 1936. The Participating Trusts as beneficiaries of the Fund are also exempt as the derive the relevant income from the Australian investments as it arises to the Fund.

Detailed reasoning

Broadly, 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 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.

The Treasury Laws Amendment (Making Sure Foreign Investors Pay Their Fair Share of Tax in Australia and Other Measures) Act 2019 introduced extra requirements in subsection 128B(3CA) of the ITAA 1936 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 until 30 June 2026. After 30 June 2026, these extra requirements apply to all assets, no matter when they were acquired.

The Fund is a non-resident

The Fund and Participating Trusts were established in a jurisdiction outside of Australia and are centrally managed and controlled by entities none of which are Australian residents.

The Fund is not a resident of Australia for tax purposes.

Therefore, this requirement has been satisfied.

The Fund 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 residentshas 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 a foreign country; and

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

(d) at that time, its central management and control is carried on outside Australia by entities none of whom is an Australian resident.

(2) However, a fund is not a superannuation fund for foreign residents if:

(a) an amount paid to the fund or set aside for the fund has been or can be deducted under this Act; or

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

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

•                     the Fund and each Participating Trust is an indefinitely continuing fund

•                     the Fund and each Participating Trust is a provident, benefit, superannuation or retirement fund

•                     the Fund and each Participating Trust was established in a foreign country

•                     the Fund and each Participating Trust was established and maintained only to provide benefits for individuals who are not Australian residents

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

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

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

The Fund is an indefinitely continuing fund

The term 'indefinitely continuing fund' is not defined in either the ITAA 1997 or the ITAA 1936. Therefore, it should be given its ordinary meaning subject to the context in which it appears and having regard to any relevant case law authorities.

The Australian Oxford Dictionary, 2004, Oxford University Press, Melbourne defines the term 'fund' as 1 a permanent stock of something ready to be drawn upon... 2 a stock of money, especially one set apart for a purpose.

In Scott v. FC of T (No 2) (1966) 14 ATD 333; (1966) 10 AITR 290 (Scott), Windeyer J expressed the view that 'fund' in the context of 'superannuation fund' ordinarily meant 'money (or investments) set aside and invested, the surplus income therefrom being capitalised'. Windeyer J's views in Scott were cited with approval by Hill J in Walstern Pty Ltd v. Commissioner of Taxation (2003) 138 FCR 1; 2003 ATC 5076; (2003) 54 ATR 423 who stated that 'for present purposes, the point is the need for "money" or "other property" to constitute a fund'.

The 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 general view is that an indefinitely continuing fund does not have to continue forever, but rather that the governing rules should not fix an express termination date.

Each of the Participating Trusts is established to provide pensions to a certain class of employees for their retirement.

There is no indication that the Fund is to be wound up in the near future as the Participating Trusts do not have a termination date.

The Fund's Trust Deed states that the bankruptcy of any of the Participating Trusts will not cause the termination of the Trust.

The Fund's Trust Deed states that the Trustee shall have the right to terminate the Trust at any time.

The Trustees of the Fund are the same Trustees as for the Participating Trusts.

There are no other clauses which determine an end date for the Fund Trust.

There is sufficient evidence to accept that the Fund and each Participating Trust will continue to operate for an indefinite period of time.

Therefore, this requirement is satisfied.

The Fund is a provident, benefit, superannuation or retirement funds

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

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

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

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

All that need be recognised is that just as 'provident' and 'superannuation' both referred to the provision of a particular kind of benefit - in the one case a provision against contemplated contingencies, and in the other case a provision, to arise on an employee's retirement or death or other cessation of 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 a general sense, but characterized 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 cases mentioned 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 Fund and Participating Trusts only provide retirement benefits to their members. When certain conditions are met, the Fund may provide for 'contemplated contingencies', such as death, disability or serious illness as described above.

It is considered that the refund of member contributions before retirement in limited circumstances as described above, are also aligned with 'contemplated contingencies' that are necessary ordinary functions ancillary to a 'provident, benefit, superannuation or retirement fund'. No other benefits are provided by the Fund or Participating Trusts to members and their beneficiaries beyond those described above.

All monies of the Fund and each Participating Trust are amounts used solely for the purposes of administering and paying out benefits.

Therefore, this requirement is satisfied.

The Fund was established in a foreign country

The Fund and each Participating Trust was established in a Foreign country.

The Fund and each Participating Trust is a tax resident of the Foreign country.

The Fund is a Group Trust established by the Trustees of the Participating Trusts.

Therefore, this requirement is satisfied.

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

The Fund and each Participating Trust was established and is maintained only to provide benefits to members of the relevant employees.

All employers are based in the foreign jurisdiction.

It is considered that the possibility of a very small number of members being returned residents or becoming Australian residents after ceasing eligible employment is incidental and should not be taken to conclude that the Fund, in this case, has not been established and are not maintained only to provide benefits for non-residents, based on the rules and operation of the Fund.

Only the Participating trusts participate in the Group Trust.

Accordingly, the Commissioner accepts that the Fund and each Participating Trust was established and is maintained only to provide benefits for individuals who are not Australian residents.

Therefore, this requirement is satisfied.

Central management and control (CM&C)

Paragraphs 20 and 21 of Taxation Ruling TR 2008/9 Income tax: meaning of 'Australian superannuation fund' in subsection 295-95(2) of the Income Tax Assessment Act 1997 (TR 2008/9) states 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 general administration and responsibility for the operation of the Fund and each Participating Trust is vested in the Board of Trustees. The Board of Trustees reside in the foreign jurisdiction.

The Board of Trustees undertakes the management and control of the Fund and each Participating Trust, including the investment strategy.

The Board of Trustees office is located in the foreign jurisdiction. All meetings of the Board of Trustees are held at this office.

The Board of Trustees of the Participating Trusts are the Trustees of the Fund.

Based on the above, it is clear that all of the key functions of the Fund and each Participating Trust is exercised in the foreign jurisdiction, including the control and direction of investments, strategies, administration, and operations. As such, it is 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.

Subsection 118-520(2)

A fund is not a superannuation fund for foreign residents if:

a)            an amount paid to the fund or set aside for the fund has been or can be deducted under the Act; or

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

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

Therefore, these requirements are satisfied.

The income, consisting of interest, dividend or non-share dividend income, is derived by the Fund

In order to be excluded from withholding tax under paragraph 128B(3)(jb) of the ITAA 1936, the Participating Trusts must derive the relevant interest and dividend income. This requires consideration of the relationship between Fund and the Participating Trusts, and what type of relationship this is for Australian tax purposes.

It is considered the relationship between Fund and the Participating Trusts constitutes a trust relationship. Income received by the Fund is income of a trust estate. It must then be determined whether the Participating Trusts derive the relevant income.

Relevant to this analysis is subsection 128A(3) of the ITAA 1936 which provides:

For the purposes of this Division, a beneficiary who is presently entitled to a dividend, to interest or to a royalty included in the income of a trust estate shall be deemed to have derived income consisting of that dividend, interest or royalty at the time when he or she became so entitled.

The Commissioner has accepted that subsection 128A(3) of the ITAA 1936 can apply to deem beneficiaries of non-resident trust estates to have derived the relevant income in limited circumstances.

ATO Interpretative Decision ATO ID 2008/61 Withholding Tax Exemption: interest and dividends paid by an Australian resident and received by a Dutch Stichting as unitholder in an Irish Common Contractual Fund (ATOID 2008/61)is an example of this. In this ATOID, an Irish CCF was found to be a trust for Australian income tax purposes. The terms of the deed states that income of the CCF accrued to unitholders as it arose. As such, the unitholder would have a present legal right to demand and receive payment of the income, and therefore was presently entitled to the dividend and interest income received by the CCF. The requirements in subsection 128A(3) were therefore satisfied, and the unitholder was deemed to have derived the income at the time when it became presently entitled. Being an entity entitled to be excluded from withholding tax under paragraph 128B(3)(jb) of the ITAA 1936, the unitholder was subsequently exempt from withholding tax.

As such, the critical factor is to determine whether the Participating Trusts are 'presently entitled' to the income of the Fund.

Present entitlement

The requirement in subsection 128A(3) of the ITAA 1936 of present entitlement to a share of the income of the trust estate refers to a present vested right to demand and receive payment of the whole or part of what has been received by the trustee as income and, retaining that character in the trustee's hands, is legally available to be distributed to those entitled to it as beneficiaries under the trusts.

Having considered the circumstances of the Fund and the Participating Trusts, and the underlying statutory framework, the Commissioner accepts that the Participating Trusts are presently entitled to the interest and dividend income as it arises to the Fund. As such, for the purposes of Division 11A of the ITAA 1936 these amounts retain their character when the Participating Trusts become presently entitled.

Therefore, the Participating Trusts are deemed to have derived the relevant dividend and interest income for the purposes of Division 11A of the ITAA 1936. As such, the Participating Trusts are considered to have derived dividend and interest income for the purposes of determining a withholding tax liability.

Subparagraph 128B(3)(jb)(ii) of the ITAA 1936

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 to the Fund to which the Participating Trusts are presently entitled.

The Fund, with its presently entitled Participating Trust beneficiaries, will receive interest income from the Australian investments along with dividend and non-share dividend income from companies who are residents of Australia for tax purposes.

Therefore, this requirement is satisfied.

Subparagraph 128B(3)(jb)(iii) of the ITAA 1936

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

The Fund is exempt from taxation on the interest, dividend and non-share dividend paid by Australian companies in the foreign jurisdiction in accordance with the relevant tax laws of that jurisdiction.

The Participating Trusts are exempt from income tax in the foreign jurisdiction by the relevant tax laws in that jurisdiction.

Therefore, this requirement is satisfied.

Conclusion

As all the requirements of paragraph 128B(3)(jb) of the ITAA 1936 are satisfied, the Fund will be entitled to an exemption from withholding tax on interest, dividend and non-share dividend income derived in respect of assets acquired on or before 27 March 2018, as well as the assets from question 1 that are held post 1 July 2026, under paragraph 128B(3)(jb) of the ITAA 1936.

Question 2

Is the Fund excluded from liability to withholding tax on its interest, dividend and non-share dividend income derived in respect of assets acquired after 27 March 2018, as well as assets from question 1 held after 30 June 2026, under paragraph 128B(3)(jb) of the ITAA 1936?

Summary

The Fund is excluded from liability to withholding tax on its interest, dividend and non-share dividend income derived in the respect of assets acquired after 27 March 2018, and assets acquired prior to this time still held after 30 June 2026, under paragraph 128B(3)(jb) of the ITAA 1936.

Detailed reasoning

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 from 1 July 2019 onwards. These extra requirements apply only to assets which were acquired after 27 March 2018. For the purposes of Question 2, which only considers the Fund's assets acquired after 27 March 2018, and assets acquired prior to this time still being held after 30 June 2026, these extra requirements are applicable.

Relevantly:

i.              The Fund and each Participating Trust must satisfy the 'portfolio interest test' in relation to the test entity (subsection 128B(3CC)

ii.             The Fund and each Participating Trust must satisfy the 'influence test' (subsection 128B(3CD) in relation to the test entity, and

iii.            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.

It has been established in Question 1 above that the Fund and each Participating Trust 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.

The 'portfolio interest test' (subsection 128B(3CC))

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.

In the case of the Participating Trusts, the relevant 'test entities' are the Australian companies that the Funds holds investments.

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

Subsection 995-1(1) of the ITAA 1997 defines total participation interest to have the meaning given by section 960-180 of the ITAA 1997, which states:

An entity's total participation interest at a particular time in another entity is the sum of:

(a) the entity's direct participation interest in the other entity at that time; and

(b) the entity's indirect participation interest in the other entity at that time.

A 'direct participation interest' that the Fund will have in a test entity is defined in the table in subsection 960-190(1) of ITAA 1997 and depends on what type of entity the other entity is.

Investments in companies

Item 1 of the table in subsection 960-190(1) and subsection 960-190(2) of the ITAA 1997 provide that a direct participation interest in a company is the 'direct control interest' (within the meaning of section 350 of the ITAA 1936 excluding the operation of subsections 350(6) and (7)) that the first entity holds in the other entity.

Subsection 350(1) of the ITAA 1936 provides that an entity holds a direct control interest in a company at a particular time equal to the percentage of:

(a)          total paid up share capital

(b)          voting rights, or

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

Where there are different percentages in each of the above, the direct control interest is the greater or greatest of those percentages. Subsection 350(2) of the ITAA 1936 provides that where an entity holds different percentages of total rights to vote for the purposes of (b) above, the highest of those percentages applies in establishing the direct control interest.

Investments in trusts

Item 2 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 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 holds a direct control interest in a trust at a particular time equal to the percentage of:

(a)          the income of the trust to which the entity is entitled or is entitled to acquire, or

(b)          the corpus of the trust to which the entity is entitled or is entitled to acquire.

Investments in a partnerships

Item 3 of the table in subsection 960-190(1) and subsection 960-190(3) of the ITAA 1997 provide that a direct participation interest in a partnership is the 'direct control interest' that the first entity holds in the partnership, established by assuming that:

(a)          the partnership is a company,

(b)          the partners in the partnership are shareholders,

(c)           the total amount of assets or capital contributed to the partnership is paid up share capital, and

(d)          a partner's rights of distribution of capital, assets or profits (either on wind-up of the partnership or otherwise) is equivalent to that of a shareholder.

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

The Participating Trusts therefore have an indirect participation interest in the Australian assets as defined in subsection 960-185(1) of the ITAA 1997 (as they hold the assets through their interest in the Fund). This means that the total participation interest of each of them will be the Fund's participation interest in the Australian company, trust or partnership multiplied by the proportional interest in the Fund held by the Participating Trusts.

As per the facts, the Fund does not currently hold more than 10% ownership of any of the Australian companies, trusts or partnerships. Further, they would hold less than 10% of the total participation interests in each Australian company they hold shares in, in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936.

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.

The Fund therefore satisfies the 'portfolio interest test' in respect of their current investments.

The 'influence test' (subsection 128B(3CD))

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 Fund or Participating Trusts 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 Fund or Participating Trusts are able to act in concert with others to determine the identity of a relevant decision-maker in the test entity.

Sub-test 1 also extends to situations where the Fund or Participating Trusts hold the ability to approve or veto decisions which go to the control or direction of the test entity.

Sub-test 2 of the influence test, as contained in paragraph 128B(3CD)(b) of the ITAA 1936, assesses whether at least one of the relevant decision-making persons of the test entity is accustomed or obliged to act, or might reasonably be expected to act, in accordance with the directions, instructions or wishes of the Fund or Participating Trusts.

Relevantly, in respect of the Fund's Australian investments:

•                     Neither the Fund, the Participating Trusts nor any related party, are involved in the day to day management of the business of any of the Australian companies or trusts.

•                     Neither the Fund, the Participating Trusts, nor any related party, have the right to appoint a director to the Board of Directors of the Australian company, Australian debt issuer or equivalent role in a trust.

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

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

•                     Neither the Fund nor the Participating Trusts have entered into or received any side letters, arrangements or agreements.

•                     The Fund or the Participating Trusts only hold rights to vote in proportion to the equity interest in each of the Australian companies or trusts.

Accordingly, the Fund and the Participating Trusts do not have the influence of a kind described in subsection 128B(3CD) of the ITAA 1936 in respect of its Australian investments. The Participating Trusts do 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 neither the Fund nor the Participating Trusts have influence of a kind described in subsection 128B(3CD) of the ITAA 1936.

Otherwise non-assessable non-exempt

The income received by the Fund and the Participating Trusts 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.

The Fund and the Participating Trusts therefore satisfy this condition in respect of the income received from its current Australian investments.

Conclusion

As the Fund has met both the pre-existing and extra requirements under paragraph 128B(3)(jb) of the ITAA 1936 in relation to assets it acquired after 27 March 2018, as well as assets acquired prior to this time that they still hold from 1 July 2026, it will be excluded from withholding tax in relation to interest, dividend and non-share dividend income received.