Edited version of private advice

Authorisation Number: 1052177967583

Date of advice: 12 October 2023

Ruling

Subject: Exemption from withholding tax for superannuation fund for foreign residents

Question

Is the Fund excluded from liability to withholding tax on interest, dividend and non-share dividend income under 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 commences on:

1 July 20XX

Relevant facts and circumstances

The Fund

1.    The Fund is a public sector pension plan in the foreign country.

2.    The foreign countries government provides that the purpose of the Fund is to establish a program of retirement and related disability and death benefits for public employees. Assets of the Fund are held in trust for the benefit of members and may not be diverted.

3.    The Fund administers a pension trust that is a qualified pension trust.

4.    The Fund is a defined benefit occupational pension established under the foreign government's legislature.

5.    The foreign government mandates that all industry specific employees are required by law to participate. Certain employees may, within 90 days, opt out of the defined benefit plan in favour of an optional defined contribution retirement program. The decision of the employee is irrevocable.

6.    Contributions to the Fund are solely from: mandatory state contributions; mandatory member and employer contributions,and returns on investments of the Fund.

7.    Members are not permitted to make additional contributions to their member service account through the use of post-tax contributions. The Fund is solely a defined benefit plan and members have no investment interest in the Fund.

8.    The Fund is also subject to foreign government reporting requirements.

Management and Investment

9.    The Fund has a Board of Trustees (the Board) that has responsibility for all matters relating to the management and administration of the Fund. The Board is made up of independent trustees selected and appointed by the foreign government. Trustees are officials subject to the limitations and qualification requirements for officers in the foreign government legislation.

10.  The Board is responsible for determining the Fund's investment strategy and policies. The Board administers the retirement system and invests the Fund's assets in compliance with a prudent person standard.

11.  The Board delegates authority to invest and manage the Fund's assets to a professional staff of employees.

12.  The Australian Investments are beneficially held exclusively for the participants of the Fund however, they are legally held under a nominee name by a domestic entity being the custodian in whose names the investments are registered. The foreign government permits trust assets of the retirement system to be held under a nominee name.

Benefits provided

13.  Broadly, the following benefits are available under the Fund if certain eligibility requirements are satisfied:

•         A standard service-based annuity payable at retirement throughout the retiree's lifetime.

•         A reduced service-based annuity payment option where the life annuity is reduced by a pre-determined percentage based on joint life expectancies to provide a continuing annuity to a designated beneficiary after the death of the retiree.

•         Disability benefits where a standard annuity is paid less any reductions for early age retirement or an amount per month whichever is greater.

•         Partial lump sum option where an option to reduce the standard annuity payable and have the remainder of the annuity paid in a lump sum payment as of retirement.

•         Death benefits.

•         Survivor benefits relating to service retirement options, disability benefits, and death benefits.

14.  Members with at least a number of years of service credit can retire who do not withdraw their contributions are eligible to receive payment of their benefits at any time from a certain age onwards. The annuity benefit may be reduced for early retirement.

15.  Early age retirees are determined by set criteria depending on their start date with their employer and any number of years of service credit. If a member retires prior to obtaining a certain age or the age of the member and their joint service credit is less than a certain age then they are considered early retirees.

16.  If the member has at least a number of years of service credit and they are not prevented from benefit entitlement by way of sun-setting dates, their pension benefits will be reduced to take into account that they are being paid early.

17.  Where a member's employment contract is terminated voluntarily or otherwise, that employee is entitled to cancel their membership with the Fund.

18.  Members who cancel their membership will be entitled to a refund on their contributions so long as they are absent from service except by death or retirement and may withdraw all of the accumulated contributions credited to the person plus statutory interest.

19.  A person is not entitled to withdraw contributions if the person is employed, has applied for employment, or has received a promise of employment with an employer covered by the Fund.

20.  Refunded amounts are subject to mandatory income tax withholding unless an election is made to rollover to another eligible retirement plan.

Other relevant facts

21.  An amount paid to the Fund or set aside for the Fund has not been and cannot be deducted under the Income Tax Assessment Act 1997 (ITAA 1997).

22.  A tax offset has not been allowed nor would be allowable for any amount paid to the Fund or set aside for the Fund.

23.  The Fund is exempt from taxation in the foreign country.

24.  The Fund will receive interest income, along with dividend and non-share dividend income from companies who are residents of Australia for tax purposes.

25.  The Fund is an indefinitely continuing fund.

26.  The Fund is exempt from taxation in the foreign country.

27.  In relation to investments, the Fund confirms that they do not own more than 10% of the total participation interest of an investment. The Fund does not own or control any Australian investment vehicles or entities.

Relevant legislative provisions

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

Does IVA apply to this private ruling?

Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement.

If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidance rule for income tax'.

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 states:

(jb) income that:

(i) is derived by a non-resident that is a superannuation fund for foreign residents; and

(ii) consists of interest, or consists of dividends or non-share dividends paid by a company that is a resident; and

(iii) is exempt from income tax in the country in which the non-resident resides;

The Fund is a non-resident

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

Therefore, the Fund satisfies this requirement.

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.

Section 118-520 of the ITAA 1997 states the following:

(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;

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

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

              i.        is indefinitely continuing fund

             ii.        is a provident, benefit, superannuation or retirement fund

           iii.        were established in a foreign country

           iv.        were established and maintained only to provide benefits for individuals who are not Australian residents

            v.        have their central management and control carried on outside of Australia by entities none of whom are Australian residents

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

          vii.        do not receive or have amounts set aside for them that give rise to a tax offset

         viii.        receive income that consists of interest, dividends or non-share dividends paid by a company that is an Australian resident, and are exempt from income tax in the country in which the non-resident resides.

These requirements are considered below.

The Fund is an indefinitely continuing fund

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

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

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

The Australian Oxford Dictionary defines the term 'fund' as:

1. a permanent stock of something ready to be drawn upon...

2. a stock of money, especially one set apart for a purpose.

3. ...money resources.

The foreign government provides that the Fund is an indefinitely continuing fund. There is no indication that there is any contemplation of the Fund ending at a defined point in time.

Therefore, it is accepted that the Fund will continue to operate for an indefinite period of time.

The Fund is a provident benefit, superannuation or retirement fund

ATO Interpretative Decision ATO ID 2009/67 Income Tax: Superannuation fund for foreign residents (ATO ID 2009/67) provides guidance on the meaning of the phrase 'provident, benefit, superannuation or retirement fund':

None of the four descriptors 'provident', 'benefit', 'superannuation' or 'retirement fund' in subparagraph (a)(ii) of the definition of 'superannuation fund for foreign residents' in section 118-520 of the ITAA 1997 are defined. The terms have, however, been the subject of judicial consideration.

The courts have held that for a fund to be a 'provident, benefit, superannuation or retirement fund', the fund's sole purpose must be to provide superannuation benefits, that is, benefits to a member upon the member reaching a prescribed age or upon their retirement, death or other cessation of employment ( Scott v. FC of T (No 2) (1966) 14 ATD 333; (1966) 10 AITR 290, per Windeyer J; Mahony v. FC of T (1967) 14 ATD 519, per Kitto J; Walstern Pty Ltd v. Commissioner of Taxation (2003) 138 FCR 1; 2003 ATC 5076; (2003) 54 ATR 423, per Hill J and Cameron Brae Pty Ltd v. Federal Commissioner of Taxation (2007) 161 FCR 468; 2007 ATC 4936; (2007) 67 ATR 178, per Stone and Allsop JJ).

The above establish that for a fund to qualify as a provident, benefit, superannuation or retirement fund, it must have the sole purpose of providing retirement benefits or benefits in other allowable contemplated contingencies (such as death, disability or serious illness).

The Fund was established in accordance with statute to provide death and retirement benefits for all eligible members.

Members with at least a number of years of service credit can retire and receive payment of their benefits at any time from a certain age onwards. Early age retirees are determined by set criteria depending on their start date with their employer and any number of years of service credit. If a member retires prior to obtaining a certain age or the age of the member and their joint service credit is less than a certain number then they are considered early retirees. If the member has at least a number of years of service credit and they are not prevented from benefit entitlement by way of sun setting dates, their pension benefits will be reduced to take into account that they are being paid early.

Broadly, the following benefits are available under the Fund:

a.    A standard annuity payable at retirement throughout the retiree's lifetime.

b.    Disability benefits where a standard annuity is paid less any reductions for early age retirement or an amount per month whichever is greater.

c.     Annuity Payment Option where a retiree's entitlement is reduced by a pre-determined percentage to care for family in the event of their death.

d.    Partial Lump Sum Option where an option to reduce the standard annuity payable and have the remainder of the annuity is provided in a lump sum payment.

e.    Death Benefits.

f.      Survivor Benefits.

The Commissioner accepts these benefits align with the sole purpose of providing retirement benefits or benefits in other allowable contemplated contingencies.

Therefore, the Fund satisfies this requirement.

The Fund was established in a foreign country

The Fund was established in a foreign country.

Therefore, the Fund satisfies this requirement.

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

The Fund's establishing legislation hold that membership can only be attained by being an employee in an industry specific system other than a temporary employee at a similar rate of pay comparable to that of other persons employed in similar positions. The Fund operates to provide retirement benefits for its members in the foreign country.

Therefore, the Fund satisfies this requirement.

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

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, 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 registered office of the Fund is in a foreign country. The decision making and management of the Fund is undertaken by the Fund Committee.

The Fund Committee has responsibility for all matters relating to the management and administration of the Fund. The Committee is made up of independent trustees, each trustee is a resident of the foreign country.

Based on the above, it is reasonable to conclude that the central management and control of the Fund occurs in the foreign country by entities that are not Australian residents.

Therefore, the Fund satisfies this requirement.

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 offset has been allowed or is allowable for such an amount

An amount paid to the Fund or set aside for the Fund 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 Fund or set aside for the Fund.

Therefore, the Fund satisfies this requirement.

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

The Fund will derive interest income from Australia sources, along with dividend and non-share dividend income from companies who are residents of Australia for tax purposes.

Therefore, the Fund satisfies this requirement.

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

The Fund is exempt from taxation in the foreign country.

Therefore, the Fund satisfies this requirement.

Subsection 128(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:

1.            The Fund must satisfy the 'portfolio interest test' in relation to the test entity (subsection 128B(3CC) of the ITAA 1936)

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

3.            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.

The Fund satisfies 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.

In relation to investments, the Fund confirms that they do not own more than 10% of the total participation interest of an investment.

Therefore, the Fund satisfies the 'portfolio interest test' in respect of its investments.

The Fund satisfies 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 Fund is able to determine the identity of at least one of the persons who, individually or together with others, makes or is reasonably expected to make, decisions comprising the control and direction of the test entity's operations. This includes situations where the Fund is 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, 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 Fund.

Relevantly, in respect of the investment and the relevant facts and circumstances of this Ruling:

a.    The Fund does not own more than 10% of the total equity of an investment.

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

c.     The Fund has not entered into or received any side letters, arrangements or agreements.

d.    The Fund does not hold any veto rights on security holders votes.

e.    The fund does not hold any other influence potentially of a kind described in subsection 128B(3CD) of the ITAA 1936.

Based on the above, the Commissioner accepts that the Fund does not 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 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.

Therefore, the Fund satisfies this requirement.

Conclusion

The Fund is excluded from liability to withholding tax on its interest, dividend and non-share dividend income under paragraph 128B(3)(jb) of the ITAA 1936.