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Edited version of private advice
Authorisation Number: 1052230416652
Date of advice: 12 March 2024
Ruling
Subject: Withholding tax exemption
Question
Is Fund A excluded from liability to withholding tax on dividend and non-share dividend income derived on the investments in accordance with paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)?
Answer
Yes.
This ruling applies for the following periods:
Year ended 30 June 20XX
The scheme commences on:
1 July 20XX
Relevant facts and circumstances
1. Fund A was established in Country X, which is not Australia.
2. Fund A is not a resident of Australia for tax purposes.
3. Fund A manages the portfolio of funds in Country X.
4. There is no contemplation of Fund A ending at any defined point in time and there is no expectation that the fund will be discontinued.
5. The earliest members can start to draw from their pension at age 6X.
6. Fund A also provides survivor benefits where a member dies.
7. Fund A has a board of directors which is responsible for the organisation and management of the Fund's assets. Members on this board must be citizens of Country X and are appointed by the Government on the basis of their expertise in asset management.
8. Fund A's headquarters are in Country X.
9. An amount paid to Fund A or set aside for Fund A 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 Fund A or set aside for Fund A.
10. Fund A will receive dividend and non-share dividend income, directly from companies who are residents of Australia for tax purposes.
11. Fund A has invested in Australian equity investments that have the following characteristics:
• All are listed on the Australian Securities Exchange (ASX).
• Fund A holds less than 10% of the total participation interests in each Australian company, trust, or real estate investment trust (REIT).
• Fund A 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.
• Neither Fund A, nor any related party of Fund A, has involvement in the day-to-day management of the business of any of the Australian companies, trusts or REITs.
• Neither Fund A, nor any related party of Fund A, has the right to appoint a director to the Board of Directors of any of the Australian companies or to an equivalent role in a trust or REIT.
• Neither Fund A, nor any related party, holds the right to representation on any investor representative or advisory committee (or similar) for any of the Australian companies, or a similar role for a trust or REIT.
• Neither Fund A, nor any related party, has the ability to direct or influence the operation of any of the Australian companies, trusts or REITs outside of the ordinary rights conferred by the equity interest held.
• Fund A only holds 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)
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) and 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;
Subitem 3(1) of Part 2 of Schedule 3 of Treasury Laws Amendment (Making Sure Foreign Investors Pay Their Fair Share of Tax in Australia and Other Measures) Act 2019 (2019 Act) provides (subject to subitems (2) and (3)) that for income derived from 1 July 2019, the extra requirements in subsection 128B(3CA) of the ITAA 1936 must also be met.
These requirements are considered below.
Income that is derived
For paragraph 128B(3)(jb) of the ITAA 1936 to apply, the superannuation fund for foreign residents must derive the relevant income.
Fund A is the entity which holds the relevant investments and is paid the dividend income from the Australian resident companies, trusts or REITs. The Commissioner therefore accepts that Fund A derives the relevant income.
Therefore, Fund A satisfies this requirement.
A non-resident
Fund A is not a resident of Australia for tax purposes. Therefore, Fund A satisfies this requirement.
A superannuation fund for foreign residents
The term 'superannuation fund for foreign residents' is a defined term in section 6 of the ITAA 1936 which states:
• superannuation fund for foreign residents has the meaning given by subsection 995-1(1) of the ITAA 1997.
Subsection 995-1(1) of the ITAA 197 sets out that:
• superannuation fund for foreign residents has 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 Fund A 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:
• Fund A is an indefinitely continuing fund
• Fund A is a provident, benefit, superannuation or retirement fund
• Fund A was established in a foreign country
• Fund A was established and maintained only to provide benefits for individuals who are not Australian residents
• The central management and control of Fund A is carried on outside of Australia by entities, none of whom are Australian residents
• No amount paid to Fund A or set aside for Fund A has been or can be deducted under this Act, and
• No tax offsets have been allowed or would be allowable for an amount paid to Fund A or set aside for Fund A.
These requirements are considered below.
The fund is an indefinitely continuing 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 Macquarie Dictionary, [Online], viewed 2024, www.macquariedictionary.com.au defines 'indefinitely' and 'continuing' as follows:
Indefinite:
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
There is no indication that there is any contemplation of Fund A ending at a defined point in time and there is no expectation that the fund will be discontinued.
Therefore, it is accepted that Fund A is an indefinitely continuing fund.
The fund is 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 is not defined in either the ITAA 1997 or the ITAA 1936.
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).
Having regard to the terms of the deed of the Plan, it is considered that the Plan is a 'provident, benefit, superannuation or retirement fund' as that phrase has been interpreted by the relevant authorities. The sole purpose of the Plan is the provision of benefits to, or in respect of, participating employees who:
• cease their employment upon or after reaching retirement age (age 60)
• cease their employment after the satisfaction of certain service requirements
• cease their employment because of death or total and permanent disability, or
• reach age 70, whether or not they have ceased employment.
Therefore, the Plan satisfies subparagraph (a)(ii) of the definition of 'superannuation fund for foreign residents' in section 118-520 of the ITAA 1997.
The above establishes 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).
With respect to Fund A:
• The sole purpose of Fund A is managing the fund's assets.
• The earliest members can draw from their pension is age 6X.
• Fund A also provides survivor benefits where a member dies.
The circumstances in which a member of Fund A can receive the funds are consistent with those of a provident, benefit, superannuation or retirement fund.
As both the objective of the fund and the actual operation of the fund have the sole purpose of providing retirement benefits or benefits in alignment with other contemplated contingencies, Fund A is considered to be a provident, benefit, superannuation or retirement fund.
Therefore, Fund A satisfies this requirement.
The fund was established in a foreign country
Fund A was established in Country X. Therefore, Fund A satisfies this requirement.
The fund was established and maintained only to provide benefits for individuals who are not Australian residents
Fund A was established in Country X and operates to provide retirement benefits for its members in Country X. It is possible that Australian residents, having formerly worked in Country X, may obtain a benefit from Fund A; however, these instances should not be taken to conclude that the fund has not been established and is not maintained only to provide benefits for non-residents.
Therefore, Fund A satisfies this requirement.
The fund's central management and control is carried on outside Australia by entities none of whom is an Australian resident
Paragraphs 20 and 21 of Taxation Ruling TR 2008/9 Income tax: meaning of 'Australian superannuation fund' in subsection 295-95(2) of the Income Tax Assessment Act 1997 (TR 2008/9) states:
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 the 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.
Fund A has a board of directors. The board of directors represents Fund A and is responsible for the organisation and management of Fund A's assets. Members of the board of Fund A must be citizens of Country X and are appointed by the Government of Country X based on their expertise in asset management. Fund A's head office is located in Country X.
Based on the above, it is reasonable to conclude that the central management and control of Fund A occurs in Country X by entities that are not Australian residents.
Therefore, Fund A 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
No amount paid to or set aside for Fund A has been or can be deducted under the ITAA 1997. A tax offset has not been allowed nor would be allowable for any amount paid to Fund A or set aside for Fund A.
Therefore, Fund A satisfies this requirement.
Conclusion
As all of the above requirements are satisfied, Fund A meets 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.
Income that consists of interest, or consists of dividends 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. Fund A derives dividend income from companies who are residents of Australia for tax purposes.
Therefore, Fund A satisfies this requirement.
Income that is exempt from income tax in the country in which the non-resident resides
As part of the state of Country X, Fund A is exempt from taxation in Country X.
Therefore, Fund A satisfies 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 in subsection 128B(3CA) of the ITAA 1936 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.
Subsection 128B(3CA) of the ITAA 1936 states:
(3CA) Paragraph (3)(jb) applies to income derived by the superannuation fund mentioned in subparagraph (3)(jb)(i) only if:
(a) the superannuation fund satisfies the portfolio interest test in subsection (3CC) in relation to the entity mentioned in subsection (3CB) (the test entity):
(i) at the time the income was derived; and
(ii) throughout any 12 month period that began no earlier than 24 months before that time and ended no later than that time; and
(b) the superannuation fund does not, at the time the income was derived, have influence of a kind described in subsection (3CD) in relation to the test entity; and
(c) the income is not non-assessable non-exempt income of the superannuation fund because of:
(i) Subdivision 880-C of the Income Tax Assessment Act 1997; or
(ii) Division 880 of the Income Tax (Transitional Provisions) Act 1997.
These requirements are considered below.
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.
Fund A holds less than 10% of the total participation interests in each of the Test Entities. Further, Fund A would hold less than 10% of the total participation interests in each of the Test Entities in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936.
Fund A therefore satisfies the 'portfolio interest test' in respect of its current 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 superannuation 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 superannuation 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 superannuation 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 direction, instructions or wishes of the superannuation fund.
In respect of the Australian Investments:
a) Neither Fund A, nor any related party of Fund A, has involvement in the day-to-day management of the business of any of the Australian companies, trusts or REITs.
b) Neither Fund A, nor any related party of Fund A, has the right to appoint a director to the Board of Directors of any of the Australian companies or to an equivalent role in a trust or REIT.
c) Neither Fund A, nor any related party of Fund A, holds the right to representation on any investor representative or advisory committee (or similar) for any of the Australian companies or a similar role for the trusts or REITs.
d) Neither Fund A, nor any related party of Fund A, has the ability to direct or influence the operation of any of the Australian companies, trusts or REITs outside of the ordinary rights conferred by the equity interest held.
e) Fund A has not entered into or received any side letters, arrangements or agreements.
f) Fund A only hold rights to vote in proportion to its equity interest in each Australian company, trust or REIT and does not hold any veto rights on security holder votes.
Based upon the above, the Commissioner accepts that Fund A 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 Fund A from the Australian investments will not be non-assessable non-exempt income consequent to the operation of Subdivision 880-C of the ITAA 1997 or Division 880 of the Income Tax (Transitional Provisions) Act 1997.
Therefore, Fund A satisfies this requirement.
Conclusion
Having regard to the requirements of paragraph 128B(3)(jb) of the ITAA 1936, Fund A is excluded from liability to withholding tax in relation to dividend and non-share dividend income derived from its Australian investments.