Edited version of private advice

Authorisation Number: 1052170396311

Date of advice: 21 September 2023

Ruling

Subject: Withholding taxes

Question

Are the Pension Plans, investing through the Fund, excluded from liability to withholding tax on 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

This ruling applies for the following period:

1 January 20XX to 30 June 20XX

The scheme commenced on:

1 January 20XX

Relevant facts and circumstances

1.    The Fund is a public employee retirement system established outside of Australia.

2.    The Fund is administered by Entity A to provide service retirement, disability and death/survivor benefits for numerous employing bodies.

3.    Entity A administers and manages the Fund's investment strategy.

4.    All board meetings are held outside of Australia.

5.    The Fund is governed by legislation and internal policies.

6.    The Fund offers a number of Pension Plans (including both defined benefit and defined contribution plans).

Retirement Benefit

7.    The retirement age and benefit are dependent on the Pension Plan.

Disability Retirement

8.    The disability retirement benefit is dependent on the Pension Plan.

Survivor Benefit

9.    The survivor benefit is dependent on the Pension Plan.

Other Information

10.  The Fund provided a letter to the Commissioner stating:

a.    The Fund is an indefinitely continuing fund and a provident, benefit, superannuation or retirement fund;

b.    The Fund was established in a foreign country;

c.     The Fund was established, and is maintained, only to provide benefits for individuals who are not Australian residents;

d.    The control management and control of the Fund is carried on outside Australia by entities none of whom is an Australian resident;

e.    An amount paid to the entity or set aside for the Fund has not been or cannot be deducted under the ITAA 1997;

f.      A tax offset has not been allowed or is not allowable for such an amount;

g.    The income of the Fund is not non-assessable non-exempt income of the Fund because of:

i.      Subdivision 880-C of the ITAA 1997; or

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

11.  The Fund is a resident of a country other than Australia.

Investments in Australia

12.  The Fund has investments in Australian equity and debt interests. The Australian equity investments of the Fund have the following characteristics:

a.    The equity investments are listed on the ASX.

b.    The Fund holds less than 1% of the total equity interests on issue of the Australian companies in which it invests.

c.     The Fund has no involvement in the day-to-day management of the business of the Australian companies.

d.    The Fund has no right to appoint a director to the Board of Directors of the Australian companies.

e.    The Fund has no right to representation on any investor representative or advisory committee (or similar) of the Australian companies.

f.      The Fund has no ability to direct or influence the operation of the Australian company outside of the ordinary rights conferred by the equity interests held.

g.    The Fund does not have the ability to direct or influence the operation of the company, or otherwise provide the Fund with anything that would constitute influence under subsection 128B(3CD) of the ITAA 1936.

13.  The Fund will receive dividend income from companies who are residents of Australia for tax purposes.

Relevant legislative provisions

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

Income Tax Assessment Act 1936 Section 128D

Income Tax Assessment Act 1936 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) 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 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 this private ruling, which only considers the Fund's Australian investments which were acquired before 27 March 2018, these extra requirements are not applicable.

The Fund is a non-resident

The Fund is not a resident of Australia for tax purposes. The Fund was established outside of Australia, and its management is also based outside of Australia.

Therefore, the Fund satisfies this requirement.

The Pension Plans are 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 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 Pension Plans 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 Pension Plans are indefinitely continuing funds

•         the Pension Plans are provident, benefit, superannuation or retirement funds

•         the Pension Plans were established in a foreign country

•         the Pension Plans were established and maintained only to provide benefits for individuals who are not Australian residents

•         The central management and control of the Pension Plans 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 Pension Plans are indefinitely continuing funds

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

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

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

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

The Fund is governed by legislation, the Fund's governance policy and investment strategy. There is no indication that the Fund is to be wound up in the near future.

The Fund's annual report shows that it is still in a position to meet its ongoing obligations to members and their beneficiaries.

There is sufficient evidence to accept that the Pension Plans will continue to operate in accordance with the relevant governing legislation and Fund policies. Further, the Fund provided a letter to the Commissioner dated XX which states that the Fund is an indefinitely continuing fund.

Therefore, the Pension Plans satisfy this requirement.

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

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.

The conventional meaning adopted by courts was expressed by Justice Jessup in Cameron Brae Pty Ltd v Federal Commissioner of Taxation [2006] FCA 918; ATC 4433; 63 ATR 488, as follows:

as a matter of common understanding, it would seem that a superannuation fund is a fund which has as its sole purpose the provision of benefits to participating employees upon their reaching a prescribed age or upon their retirement, death or other cessation of employment.

In 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.

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.

The Fund comprises a number of Pension Plans. The plans can be grouped into three categories - defined benefit plans, defined contribution plans, and other plans.

The Defined Benefit Plans sole purpose is to provide the relevant participant employees monetary benefits upon reaching either the prescribed age, the employee's retirement, their death or other cessation of employment, including to survivors and children of the employee. These benefits are consistent with the ordinary meaning of 'superannuation fund' as explained in Cameron Brae. Therefore, the Defined Benefit Plans satisfy this requirement.

Withdrawals from the Defined Contribution Plans can only take place in limited circumstances. These benefits are consistent with the ordinary meaning of 'superannuation fund' as explained in Cameron Brae. Therefore, the Defined Contribution Plans satisfy this requirement.

The Pension Plans were established in a foreign country

The Pension Plans were established outside of Australia. Therefore, the Pension Plans were established in a foreign country and satisfies this requirement.

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

The Fund and its participating Pension Plans was established outside of Australia to provide service retirement, illness, death and survivor benefits for employees of participants of the Fund.

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

Therefore, the Pension Plans satisfies this requirement.

The Pension Plans 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 ITAA 1997 (TR 2008/9) states in respect of the central management and control (CM&C) of a superannuation fund:

20. The CM&C of a superannuation fund involves a focus on the who, when and where of the strategic and high level decision making processes and activities of the fund. In the context of the operations of a superannuation fund, the strategic and high level decision making processes includes:

•         formulating the investment strategy for the fund;

•         reviewing and updating or varying the fund's investment strategy as well as monitoring and reviewing the performance of the fund's investments;

•         if the fund has reserves - the formulation of a strategy for their prudential management; and

•         determining how the assets of the fund are to be used to fund member benefits.

21. The other principal areas of operation of a superannuation fund that form part of the day-to-day or operational side of the fund's activities will not constitute CM&C. These activities do not form part of the CM&C of the fund because they are not of a strategic or high level nature. Rather, these activities are of a more formalistic or administrative nature. Examples of such activities include the acceptance of contributions that are made on a regular basis, the actual investment of the fund's assets, the fulfilment of administrative duties and the preservation, payment and portability of benefits.

Furthermore, paragraphs 10 and 11 of Taxation Ruling TR 2018/5 Income tax: central management and control test of residency (TR 2018/5) states:

10. Central management and control refers to the control and direction of a company's operations. It does not refer to a physical location in which the control and direction of a company is located and may ultimately be exercised in more than one location.

11. The key element in the control and direction of a company's operations is the making of high-level decisions that set the company's general policies and determine the direction of its operations and the type of transactions it will enter.

The Fund is administered by Entity A, in line with the legislation and internal policy.

Entity A is composed of non-residents of Australia and all of the decisions are undertaken outside of Australia. This is supported by the fact that:

•         Members of Entity A are all non-residents.

•         All board meetings are held outside of Australia and significant management and investment decisions are undertaken outside of Australia.

Based on these facts, it is reasonable to conclude that the central management and control of the Pension Plans is exercised outside of Australia by entities that are not Australian residents.

Therefore, the Pension Plans satisfy this requirement.

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

Pursuant to subsection 118-520(2) of the ITAA 1997, a fund is not a superannuation fund for foreign residents if:

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

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

As the contributors to the Pension Plans are based outside of Australia and make contributions in respect of the employment undertaken outside of Australia, the contributions to the Pension Plans are neither eligible for deductions nor allowed as offsets under the ITAA 1936 or ITAA 1997. The Fund has also confirmed no amount paid to the Fund can be deducted under the ITAA 1936 or ITAA 1997.

Therefore, the Pension Plans satisfy this requirement

Conclusion

As all of the above requirements are satisfied, the Pension Plans meet the requirements of being 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.

The income, consisting of dividend income, is derived by the Fund

Subsection 128B(3CA) of the ITAA 1936, along with paragraph 128B(3)(jb) of the ITAA 1936 requires the superannuation fund for foreign residents to derive the dividends paid by Australian resident companies. This requires consideration of the relationship between the Fund and the Pension Plans, and what type of relationship this is for Australian tax purposes.

It is considered the relationship between the Fund and Pension Plans constitutes a trust relationship. Income received by the Fund is income of a trust estate. It must then be determined whether the Pension Plans 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 Pension Plans 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, the Pension Plans, and the Trust Arrangement, the Commissioner accepts that the Pension Plans are presently entitled to the 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 Pension Plans become presently entitled.

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

The Fund, with its presently entitled Pension Plan beneficiaries, will receive dividend income from its Australian investments, from companies who are residents of Australia for tax purposes.

Therefore, the Pension Plans will satisfy this requirement.

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

The Fund is exempt from income tax in a foreign county under legislation in the foreign country. The Fund provided a letter to the Commissioner confirming that it is a resident of a foreign country.

Therefore, the Fund satisfies this requirement.

Conclusion

As the Fund and the Pension Plans have met the requirements of paragraph 128B(3)(jb) of the ITAA 1936 in relation to assets acquired on or before 27 March 2018, the Fund is excluded from withholding tax in relation to dividend income derived from its Australian investments.