Edited version of private advice

Authorisation Number: 1052250422025

Date of advice: 24 May 2024

Ruling

Subject: Withholding taxes

Question 1

Are the Defined Benefit Plans and Hybrid Plans (excluding any Defined Contribution Plan) investing through the Fund, excluded from liability to withholding tax on interest, dividend and non-share dividend income derived in respect of assets acquired before and after 27 March 2018 under paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

Question 2

Are the Defined Contribution Plans, investing through the Fund, excluded from liability to withholding tax on interest, dividend and non-share dividend income derived in respect of assets before and after 27 March 2018 under paragraph 128B(3)(jb) of the ITAA 1936?

Answer

No.

This ruling applies for the following periods:

1 July 20XX to 30 June 20XX

The scheme commenced on:

DDMMYYYY

Relevant facts and circumstances

1.    The Fund is a public employee retirement system established in the Country A.

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 is a group trust.

7.    The Fund offers a number of Pension Plans (including defined benefit, Hybrid and defined contribution plans).

8.    The Fund may co-mingle and pool the funds and investments of any Plan, however the Fund has confirmed that separate ledgers and investment custody accounts are kept for the Defined Benefit and Defined Contribution Plans. The assets are not co-mingled between the Defined Benefit/Hybrid and Defined Contribution Plans and are held in trust in separate accounts at the Fund's custodial bank.

Retirement Benefit

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

Disability Retirement

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

Survivor Benefit

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

Other Information

12.    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

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

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

Investments in Australia

14.    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 of 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.

15.    The Fund will receive interest, dividend and non-share 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 1997 section 118-520

Reasons for decision

Question 1

Are the Defined Benefit Plans and Hybrid Plans (excluding any Defined Contribution Plan) investing through the Fund, excluded from liability to withholding tax on interest, dividend and non-share dividend income derived in respect of assets acquired before and after 27 March 2018 under paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Summary

The Defined Benefit Plans and Hybrid Plans (excluding any Defined Contribution Plans), investing through the Fund, are excluded from liability to withholding tax on interest, dividend and non-share dividend income derived from its Australian investments as they meet the pre-existing and extra requirements of paragraph 128B(3)(jb) of the ITAA 1936.

Detailed reasoning

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 on 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.

Non-resident requirement

The Defined Benefit Plans and Hybrid Plans (excluding any Defined Contribution Plans) are not a resident of Australia for tax purposes. Both the Fund and the Plans it administers were established outside of Australia and its management is completely based there.

Therefore, the Fund and the Plans satisfy this requirement.

A superannuation fund for foreign residents

Superannuation fund for foreign residents is a defined term in the ITAA 1936. Subsection 6(1) of the ITAA 1936 states:

Superannuation fund for foreign residents has the meaning given by subsection 995-1(1) of the Income Tax Assessment Act 1997.

Subsection 995-1(1) of the ITAA 1997 sets out the following:

Superannuation fund for foreign residents has the meaning given by section 118-520.

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

118-520 Meaning of superannuation fund for foreign residents

(1)  A fund is a superannuation fund for foreign residents at a time if:

(a)  at that time, it is:

       (i)    an indefinitely continuing fund; and

       (ii)    a provident, benefit, superannuation or retirement fund; and

(b)  it was established in 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 out 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 Defined Benefit Plans and Hybrid Plans (excluding any Defined Contribution 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 Plans are indefinitely continuing funds

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

•         the Plans were established in a foreign country

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

•         the central management and control of the 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.

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 and internal policies. 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 Defined Benefit Plans and Hybrid Plans (excluding any Defined Contribution 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 X, which states that the Fund is an indefinitely continuing fund.

Therefore, this requirement is satisfied.

A provident, benefit, superannuation or retirement fund

The phrase 'a provident, benefit, superannuation or retirement fund' under paragraph 118-520(1)(a)9ii) 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 of 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 provision by the fund for retirement or death of a member or against 'contemplated contingencies', such as death, disability or serious illness.

The Defined Benefit Plans and Hybrid Plans (excluding any Defined Contribution Plans) were established to provide employment security to public employees by providing a uniform system of membership with retirement requirements, benefits, contributions and funding on an actuarially sounds basis.

The Defined Benefit Plans and Hybrid Plans (excluding any Defined Contribution 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.

The amounts collected by the Fund via the Defined Benefit Plans and Hybrid Plans (excluding any Defined Contribution Plans) are not used for any purposes other than providing benefits to Plan members former members and their beneficiaries.

Therefore, this requirement is satisfied.

Established in a foreign country

The Defined Benefit Plans and Hybrid Plans (excluding any Defined Contribution Plans) were established outside of Australia.

Therefore, this requirement is satisfied.

Established and maintained only to provide benefits for individuals who are not Australian residents

The Fund and its participating Defined Benefit Plans and Hybrid Plans (excluding any Defined Contribution Plans) were established to provide benefits to members who are/were public service/state employees of a foreign country. Such Plans do not provide benefits to Australian residents. Accordingly, the Commissioner accepts that these Plans were established and are maintained only to provide benefits for individuals who are not Australian residents.

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

Therefore, this requirement is satisfied.

Central management and control is carried on outside of Australia by entities none of whom is an Australian resident

Paragraph 20 and 21 of Taxation Ruling TR 2008/9 Income tax: meaning of 'Australian superannuation fund' in subsection 295-95(2) of the Income Tax Assessment Act 1997 (TR 2008/9) states in respect of the central management and control (CM&C) of a superannuation fund:

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

•         formulating the investment strategy for the fund;

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

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

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

21. The other principal areas of 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 legislation. The decisions and meetings of Entity A take place outside of Australia.

Based on the above, it is reasonable to conclude that the central management and control of the Defined Benefit Plans and Hybrid Plans (excluding any Defined Contribution Plans) occurs outside of Australia by entities that are not Australian residents.

Therefore, this requirement is satisfied.

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.

The contributors to the Defined Benefit Plans and Hybrid Plans (excluding any Defined Contribution Plans), consisting of employees and employers, are based outside of Australia and make contributions in respect of their employment undertaken outside of Australia.

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

Therefore, this requirement is satisfied.

Conclusion

As all of the above requirements are satisfied, the Defined Benefit Plans and Hybrid Plans (excluding any Defined Contribution 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 interest, dividend and non-share dividend income, is derived by the Fund

Subsection 128(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 Defined Benefit Plans/Hybrid Plans (excluding any Defined Contribution Plans) and what type of relationship this is for Australian tax purposes.

It is considered the relationship between the Fund and the Defined Benefit Plans and Hybrid Plans (excluding any Defined Contribution Plans) constitutes a trust relationship. Income received by the Fund is income of a trust estate. It must then be determined whether the Defined Benefit Plans and Hybrid Plans (excluding any Defined Contribution 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 unit holder in an Irish Common Contractual Fund (ATO ID 2008/61) is an example of this. In this ATO ID, 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 Defined Benefit Plans and Hybrid Plans (excluding any Defined Contribution 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 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 Plans and the Trust Arrangement, the Commissioner accepts that the Defined Benefit Plans and Hybrid Plans (excluding the Defined Contribution Plan) 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 Plans become presently entitled.

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

The Fund, with its presently entitled beneficiaries, will receive investment income from companies, who are residents of Australia for tax purposes.

Therefore, this requirement is satisfied.

Exempt from income tax in the country in which the non-resident resides

The Fund is exempt from income tax in a foreign country 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, this requirement is satisfied.

Otherwise non-assessable non-exempt

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

Income derived by the Fund would not be otherwise treated as not assessable and not exempt income by virtue of the above provisions. Accordingly, the above exclusion will not apply to exclude the Fund from entitlement to the withholding tax exemption for superannuation funds for foreign residents.

Assets acquired after 27 March 2018

The Treasury Law 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.

Relevantly:

      i.        The Defined Benefit Plans and Hybrid Plans (excluding any Defined Contribution Plan) must satisfy the 'portfolio interest test' in relation to the test entity (subsection 128B(3CC)),

      ii.        The Defined Benefit Plans and Hybrid Plans (excluding any Defined Contribution Plan) 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 Defined Benefit Plans and Hybrid Plans (excluding any Defined Contribution Plan) because of:

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

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

Satisfaction of 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 the 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.

Subsection 128B(3CB) defines the test entity to be either the entity that paid the interest, dividend or non-share dividends or, if subsection 128B(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 these Plans will have in a test entity is defined in the table in subsection 960-190(1) of the ITAA 1997 and depends on what type of entity the other entity is.

Item 1 of the table in subsection 960-190(1) and subsection 960-190(2) of the ITAA 1997 provides 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 subsection 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.

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.

In these circumstances, the Commissioner is satisfied that the total participation interest that these Plans hold in the test entity:

•         are 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.

These Plans therefore satisfy the 'portfolio interest test' in respect of its current investments.

The Plans do not have influence of a kind described in subsection 128B(3CD) of the ITAA 1936 in relation to the test entity at the time the income was derived

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 these Plans 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 Plans 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 Plan, in its own rights, 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 Plans.

Relevantly, in respect of the Australian investments held by the Defined Benefit Plans and Hybrid Plans (excluding any Defined Contribution Plan):

(a)          The equity investments are listed on the ASX.

(b)          The Plans hold less than 10% of the total equity interests on issue of the Australian companies in which it invests.

(c)           The Plans have no involvement in the day-to-day management of the business of the Australian companies.

(d)          The Plans have no right to appoint a director to the Board of Directors of the Australian companies.

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

(f)          The Plans have no ability to direct or influence the operation of the Australian companies outside of the ordinary rights conferred by the equity interests held.

(g)          In addition to the above, the Plans do not have the ability to direct or influence the operation of the companies, or otherwise provide the Plans with anything that would constitute influence under subsection 128B(3CD) of the ITAA 1936.

Accordingly, the Plans do not have influence of a kind described in subsection 128B(3CD) of the ITAA 1936 in respect of its Australian investments. The Plans do not have capacity to influence (either directly or indirectly) the day-to-day management or the operations of their investments.

Consequently, the Commissioner accepts that the Plans do not have influence of a kind described in subsection 128B(3CD) of the ITAA 1936.

Conclusion

As the Fund and the Defined Benefit Plans and Hybrid Plans (excluding any Defined Contribution Plan) it administers have met both the pre-existing and extra requirements under paragraph 128B(3)(jb) of the ITAA 1936, the Fund and these Plans are excluded from withholding tax in relation to the interest, dividend and non-share dividend income derived from its current Australian investments.

Question 2

Are the Defined Contribution Plans, investing through the Fund, excluded from liability to withholding tax on its interest, dividend and non-share dividend income derived in respect of assets acquired before and after 27 March 2018 under paragraph 128B(3)(jb) of the ITAA 1936?

Summary

The Defined Contribution Plans investing through the Fund are not excluded from liability to withholding tax on dividend income derived from current Australian Investments, as the Defined Contribution Plans do not meet the requirements of a 'provident, benefit, superannuation or retirement fund' under subparagraph 118-520(1)(a)(ii) of the ITAA 1997. Therefore, they cannot satisfy the requirements of paragraph 128B(3)(jb) of the ITAA 1936.

Detailed reasoning

As detailed above, 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.

Non-resident requirement

The Fund and the Defined Contribution Plans are not a resident of Australia for tax purposes. The Fund and the Plans were established outside of Australia, and its management is completely based there.

Therefore, this requirement is satisfied.

A superannuation fund for foreign residents

Superannuation fund for foreign residents is a defined term in the ITAA 1936. Subsection 6(1) of the ITAA 1936 states:

Superannuation fund for foreign residents has the meaning given by subsection 995-1(1) of the Income Tax Assessment Act 1997.

Subsection 995-1(1) of the ITAA 1997 sets out the following:

Superannuation fund for foreign residents has the meaning given by section 118-520.

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

118-520 Meaning of superannuation fund for foreign residents

(1)  A fund is a superannuation fund for foreign residents at a time if:

(a)  at that time, it is:

             (i)    an indefinitely continuing fund; and

             (ii)    a provident, benefit, superannuation or retirement fund; and

(b)  it was established in 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 Defined Contribution 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 Defined Contribution Plans are indefinitely continuing funds

•         the Defined Contribution Plans are provident, benefit, superannuation or retirement funds

•         the Defined Contribution Plans were established in a foreign country

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

•         the central management and control of the Defined Contribution Plans are carried on outside of Australia by entities none of whom are Australian residents

•         No amount paid to the Defined Contribution Plans or set aside for the Defined Contribution Plans 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 Defined Contribution Plans or set aside for the Defined Contribution Plans.

The Defined Contribution Plans are indefinitely continuing funds

The term 'indefinitely continuing fun' 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 rules of the participating Defined Contribution Plans do not provide for winding up at a defined point in time. There is no indication that there is an intention for the Group Trust or participating Defined Contribution Plans to end at a defined point in time. Therefore, it is accepted that the Group Trust and Defined Contribution Plans will continue to operate for an indefinite period.

Therefore, the Defined Contribution Plans satisfy this requirement.

The Defined Contribution Plans are a provident, superannuation or retirement fund

The phrase 'provident, benefit, superannuation or retirement fund' under subparagraph 118-520(1)(a)(ii) of the ITAA 1997 is not defined in either the ITAA 1936 or the ITAA 1997. However, the phrase has been subject to judicial consideration as outlined in ATO Interpretative Decision ATO ID 2009/67 Income Tax: Superannuation fund for foreign residents (ATO ID 2009/67) which 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; Mahoney 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 extract 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).

Baker v FC of T 2015 ATC 10-399, [2015] AATA 469 (Baker) is a recent case that considered foreign funds and whether a US Individual Retirement Account (IRA) was a foreign superannuation fund. An IRA is a savings product which has a number of purposes, one of which is to encourage saving for retirement with favourable tax treatment.

In Baker at [16], O'Loughlin SM in considering the judgements of Kitto, Taylor and Windeyer JJ in Mahoney and Allsop, Stone and Jessup JJ in Cameron Brae stated that a trust arrangement that is not a provident fund, benefit fund or retirement fund, that allows for payment of superannuation style benefits and other benefits not permitted by the Supervision Act will not be a superannuation fund. This is a reference to the definition of a superannuation fund, under section 10 of the Superannuation Industry (Supervision) Act 1993 (Cth) (the Supervision Act), which includes, as an element to meet the definition, the need to be a 'provident, benefit, superannuation or retirement fund'.

The decision in Baker was that given the broad range of benefits that may be accessed any time and for multiple purposes that are arguably not for 'provident, benefit, superannuation or retirement' purposes, an IRA is not considered to satisfy the requirements of a 'provident, benefit, superannuation or retirement fund'.

Paragraph 29 of Baker provided:

There does appear, however, to be a fundamental difference between the Australian and USA regimes that are directed to incentivise retirement planning and saving. The USA regime does not appear to have prohibitions on activities that can be undertaken within a concessional taxed structure intended to incentivise retirement saving, or by those who control those structures, to the same degree as in Australia. ...

Importantly, under the USA regime, money can be withdrawn at any time prior to any retirement event at the complete discretion of the IRA holder. Any amount can be released or withdrawn at any time. Retirement income, or superannuation payment or payments in the nature of superannuation payments are but possibilities under the IRA structure rather than what is an essential feature of the structure by reason of limitations in or the scope of the formal terms and conditions of the structure. [emphasis added].

Paragraph 32 of Baker went on to state:

While it can readily be accepted that the USA IRA is a method that might be commonly adopted and used to plan and save for retirement income, that such planning and saving is incentivised by means that have their parallels in Australia, that these vehicles and the concessions that are afforded to them if certain behaviours are observed are part of a strategy designed by the USA government to encourage self-provision for and in retirement, the restrictive features required of trusts so as to be superannuation funds for Australian income tax purposes do not accommodate the flexible structures that appear to be promoted in the USA to achieve equivalent purposes in Australia. [emphasis added]

Paragraph 34 of Baker concluded by stating that the flexibility of monetary withdrawals from an IRA is such that payments in the nature of superannuation payments from it are but one of a number of possibilities.

The Defined Contribution Plans permit withdrawals for purposes outside those which are consistent with provident, benefit, superannuation or retirement funds.

In the circumstances of the Defined Contribution Plans that are the subject of this Ruling, the Commissioner considers that the member's opportunity to withdraw contributions prior to retirement (and for purposes outside those which are consistent with provident, benefit, superannuation or retirement funds) is analogous to the features that exhibited flexibility in the Baker decision that were determined to be inconsistent with Australian superannuation funds.

Therefore, for the purposes of subparagraph 118-520(1)(a)(ii) of the ITAA 1997, the Commissioner does not consider the benefits of the Defined Contribution Plans align with the sole purpose of providing retirement benefits or benefits in other allowable contemplated contingencies. As such, the Defined Contribution Plans are not considered to be a 'provident, benefit, superannuation or retirement fund'.

Accordingly, the other requirements under section 118-520 have not been considered.

On the basis that the Defined Contribution Plans do not meet the requirements of a 'provident, benefit, superannuation or retirement fund' under subparagraph 118-520(1)(a)(ii) of the ITAA 1997, the requirements of paragraph 128B(3)(jb) of the ITAA 1936 are not met.

Conclusion

As the Defined Contribution Plans administered by the Fund are not a superannuation fund for foreign residents for the purposes of subparagraph 118-520(1)(a)(ii) of the ITAA 1997, paragraph 128B(3)(jb) of the ITAA 1936 is not satisfied and will not apply to exclude the Defined Contribution Plans from liability to withholding tax on interest, dividend and non-share dividend income derived from investments into Australia.