Edited version of private advice

Authorisation Number: 1052265129562

Date of advice: 17 July 2024

Ruling

Subject: Foreign superannuation fund - withholding tax exemption

Question

Is the Fund excluded from liability to withholding tax on its interest, dividend and non-share dividend income derived in respect of its debt and equity investments (listed in Appendix A to the relevant facts and circumstances of this Ruling) under paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

This ruling applies for the following periods:

1 July 20XX to 30 June 20XX

1 July 20XX to 30 June 20XX

1 July 20XX to 30 June 20XX

1 July 20XX to 30 June 20XX

1 July 20XX to 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

1.    The Fund was established in a foreign country (Country A) by declaration of trust for the purpose of providing pension and other superannuation benefits for eligible employees.

2.    The Fund is managed by a Trustee in line with the trust deed and scheme rules.

3.    The Fund is exempt from income tax in Country A.

4.    The Trustee Board consists of independent directors, directors appointed by certain organisations and appointed by pension members.

5.    The scheme rules outline specific conditions when the pension scheme will wind up. However, the Fund intends to be an indefinitely continuing fund and the scheme rules do not specify a termination date.

6.    The members of the Fund are limited to employees of certain employers in Country A.

7.    Members contribute from their salary to the Fund during their membership of the pension scheme.

8.    Employers also contribute a percentage of the active employees' salary to the Fund.

9.    The Fund is required to provide the pension to members who retire. The normal pension age has progressively increased over time and is currently 66 years. The normal pension is paid as a regular monthly allowance and a once-off tax-free cash sum when the employee retires.

10.  A member can retire early at the age of 55 years or if made redundant in specific circumstances from the age of 50 years of age. If a member retires early, the normal pension will be reduced as the pension will be paid over a longer period of time. The pension will not be reduced where early retirement is caused by long-term sickness or incapacity.

11.  A member can also retire later and continue to contribute to the Fund (including the employer contributions). Where a member retires later, the normal pension will be increased accordingly.

12.  On the death of a member, the Fund will hold the lump sum benefits on discretionary trust to provide benefits to a deceased members' nominated survivor, dependant or child.

Other relevant facts

13.  The Trustee of the Fund has provided an updated statement stating that:

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

             ii.   The Fund has been established in a country outside Australia;

           iii.    The Fund does not receive contributions from Australian resident individuals;

           iv.   The central management and control of the Fund is carried on outside Australia by persons none of whom is a resident of Australia;

            v.    The Fund is not one for which an amount has been set aside, or to which an amount has been paid, by a taxpayer that is an amount that has been allowed or is allowable as a deduction under any provision of the Income Tax Assessment Act 1997 (Cth);

           vi.   The interest, dividend and non-share dividend income is exempt from income tax in the country in which the Fund is a resident; and

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

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

           ix.   The Fund is exempt from tax on investment income in its home country.

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

a.    Subdivision 880-C of the ITAA 1997

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

The Fund's Australian investments

14.  The Fund's Australian investments are listed in the ASX and the Fund's total participation interest is well below 10%.

15.  The Fund confirmed that for each investment, the Fund:

(i)      does not hold any right to appoint a person to a board, committee or similar, either directly or indirectly;

(ii)     has not entered into or received any side letters, arrangements or agreements;

(iii)    does not hold any veto rights on security holder votes; and

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

Relevant legislative provisions

Income Tax Assessment Act 1936 section 128B

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

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

Income Tax Assessment Act 1936 subsection 128B(3CC)

Income Tax Assessment Act 1936 paragraph 128B(3CC)(b)

Income Tax Assessment Act 1936 subsection 128B(3CD)

Income Tax Assessment Act 1936 paragraph 128B(3CD)(a)

Income Tax Assessment Act 1936 paragraph 128B(3CD)(b)

Income Tax Assessment Act 1936 section 128D

Income Tax Assessment Act 1997 section 118-520

Income Tax Assessment Act 1997 subparagraph 118-520(1)(a)(ii)

Reasons for decision

Broadly, paragraph 128B(3)(jb) of the ITAA 1936 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.

Further, from 1 July 2019, the extra requirements in subsection 128B(3CA) of the ITAA 1936 must also be met.

The Fund is a non-resident

The Fund was established in Country A by declaration of trust and is confirmed to be a tax resident in Country A.

Therefore, the Fund satisfies this requirement.

Superannuation fund for foreign residents

Section 118-520 of the ITAA 1997 provides:

(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 is 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.

1.    An indefinitely continuing fund

The Fund was established in Country A and was created as a trust with the main purpose to provide pensions and other superannuation benefits to the members of the Fund.

The scheme rules outline specific conditions when the scheme will wind up. Notwithstanding, the scheme rules do not specify a termination date.

The Fund has also provided an attestation that confirms that the Fund is an indefinitely continuing fund.

Therefore, the Fund satisfies this requirement.

2.    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 1997 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).

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).

The terms of the Fund (scheme rules) are consistent with those of a superannuation fund, and the terms are strictly adhered to accordingly.

The Fund receives contributions from its employee members and employers on behalf of employee members. The Fund holds these funds on trust for the purpose of providing superannuation benefits to its members, including the payment of pension benefits in accordance with the scheme rules. The Fund also offers benefits for contemplated contingencies such as death and incapacitation.

Therefore, it can be concluded that the sole purpose of the Fund is to provide retirement benefits or benefits in other allowable contemplated contingencies and, as such, satisfy this requirement.

3.    Established in a foreign country

The Fund was established in a foreign country (Country A).

Therefore, the Fund satisfies this requirement.

4.    Was established and maintained only to provide benefits for individuals who are not Australian residents

The Fund was established for the purpose of providing pension and other superannuation benefits for employees from entities which participate in the Fund. These entities and their employees reside in Country A.

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

Therefore, the Fund satisfies this requirement.

5.    Central management and control (CM&C)

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

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

•         formulating the investment strategy for the fund;

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

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

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

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

Furthermore, paragraph 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.

The facts and circumstances indicate that its CM&C is carried on outside of Australia by entities none of whom are Australian residents.

It is concluded that the CM&C of the Fund occurs in Country A by entities that are not Australian residents.

Therefore, the Fund satisfies this requirement.

6.    Subsection 118-520(2)

The Fund has advised that it is not one for which an amount has been set aside, or to which an amount has been paid, by a taxpayer that is an amount that has been allowed or is allowable as a deduction under any provision of the ITAA 1997. The Fund has also advised that a tax offset has not been allowed or is not allowable for such amount.

Therefore, the Fund satisfies these requirements.

Conclusion on section 118-520 of the ITAA 1997

As all of the above requirements are satisfied, the Fund meets the requirements of being a superannuation fund for foreign residents as defined by section 118-520 of the ITAA 1997.

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

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.

The Fund is in receipt of Australian sourced income which includes dividends from Australian investments.

Therefore, the Fund will satisfy this requirement.

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

The Fund has provided a letter from Country A's tax authority that the Fund is exempt of tax from Country A.

Therefore, the Fund 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 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:

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

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

•                     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.

1.         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.

The Fund holds less than 10% of the total participation interests in each of the Australian investments.

Further, the Fund would hold less than 10% of the total participation interests in each Australian investment in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936.

Therefore, the Fund satisfies the 'portfolio interest test' in respect of its investments listed in Appendix 1 of this Ruling.

2.         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 listed in Appendix 1 of this Ruling:

•         the Fund does not hold more than 10% of the total participation interests in each entity in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936

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

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

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

•         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.

3.         Otherwise non-assessable non-exempt

The Fund has advised that 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

Having regard to the requirements of paragraph 128B(3)(jb) of the ITAA 1936, the Fund is excluded from withholding tax in relation to interest, dividend and non-share dividend income derived from its investments listed in Appendix 1 of this Ruling.