Edited version of private advice

Authorisation Number: 1052294627131

Date of advice: 26 August 2024

Ruling

Subject: Superannuation fund for foreign residents - withholding tax exemption

Question

Is the Fund, on behalf of its Defined Benefits Scheme, excluded from liability to withholding tax on interest, dividend and non-share dividend income derived from its Australian 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 period:

XX July 20YY to XX June 20YY

The scheme commence on:

XX July 20YY

Relevant facts and circumstances

The Fund

1.    This private ruling only applies to the Fund in respect of the Australian investments of the Fund on behalf of its Defined Benefits Scheme.

2.    The Fund was incorporated in a country outside Australia (Country A). The functions of the Fund are governed by the Regulation of Country A.

3.    The income received by the Fund includes members' and employer's contributions and income from the Fund's investments.

4.    The amounts held in the Fund are not used for any purpose other than providing pension and retirement benefits to members and their beneficiaries under the Fund and paying the reasonable expenses of administering the Fund.

5.    The Fund is supervised by the Secretary. The Regulation grants the Secretary the power to make decisions regarding the investment and management activities of the Fund and the Defined Benefits Scheme.

6.    The Secretary and other officials are made up of nominated individuals none of whom are Australian residents.

7.    The Fund's central management and control is carried on outside of Australia by entities, none of whom are Australian residents.

8.    The Fund is an indefinitely continuing fund and was established and is maintained only to provide benefits for individuals who are not Australian residents.

9.    The Fund does not provide benefits as a result of events other than old age retirement, disability or death.

Australian Investments

10.  The Fund legally and beneficially owns its investments in Australian resident entities.

11.  The Fund will receive interest income from Australia, along with dividend and non-share dividend income from entities who are Australian residents for tax purposes.

12.  In respect of each of the Australian resident entities to which the Fund has invested:

a.    The Fund holds less than 10% of the total participation interest in each entity and has never held more than a 10% participation interest.

b.    The Fund will hold less than 10% of the total participation interests in each entity in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936.

c.     Neither the Fund, nor any related party of the Fund, has involvement in the day to day management of the business of any of the Australian investments.

d.    Neither the Fund, nor any related party of the Fund, holds any right to appoint a person to a board, committee or similar, either directly or indirectly, of any of the Australian investments.

e.    Neither the Fund, nor any related party, holds the right to representation on any investor representative or advisory committee (or similar) of any of the Australian investments.

f.      Neither the Fund, nor any related party, has the ability to direct or influence the operation of any of the Australian investments outside of the ordinary rights conferred by the equity interest held.

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

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

Additional Facts

13.  The Fund is exempt from taxation under the laws of Country A.

14.  The Fund has not and cannot deduct amounts under either the Income Tax Assessment Act 1997 (ITAA 1997) or the ITAA 1936 for amounts paid to it.

15.  The Fund has not been allowed a tax offset or a tax offset is not allowable for an amount that has been paid to it.

16.  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, or

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

Relevant legislative provisions

Section 128B of the Income Tax Assessment Act 1936 (ITAA 1936).

Reasons for decision

Question 1

Is the Fund, on behalf of its Defined Benefits Scheme, excluded from liability to withholding tax on interest, dividend and non-share dividend income derived from its Australian investments in accordance with paragraph 128B(3)(jb) of the ITAA 1936?

Summary

The Fund is excluded from liability to withholding tax on interest, dividend and non-share dividend income derived from the Fund's investments on behalf of its Defined Benefits Scheme in accordance with 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(4) of the ITAA 1936), interest income (subsection 128B(5) 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 requirements of paragraph 128B(3)(jb) of the ITAA 1936 are considered below.

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

A non-resident

The Fund was incorporated in Country A, and its management is completely based outside of Australia. The Commissioner has determined from the facts and circumstances provided that the Fund is not a resident of Australia.

Therefore, the Fund satisfies this requirement.

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.

For the Fund to be considered a superannuation fund for foreign residents for the purposes of paragraph 128B(3)(jb) of the ITAA 1936, it must satisfy the requirements set out in section 118-520 of the ITAA 1997, which states:

(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.

Consideration of the above requirements of section 118-520 of the ITAA 1936, is outlined below.

1. 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 31 July 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

The Regulation that governs the Fund does not have an automatic termination clause or provide any indication that there is any contemplation of the Fund ending at a specific point in time. It is the Fund's intention to be an entity that is indefinitely continuing.

It is accepted that the Fund will continue to operate in accordance with the Regulation for an indefinite period of time.

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) refers to these authorities to provide 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 Fund is responsible in paying the benefits in connection with retirement and/or death of a member of the Defined Benefits Scheme. The Fund meets this responsibility by granting benefits in case of old age and death.. Furthermore, there are no circumstances outside of these under which a member can obtain benefits from the Fund.

The circumstances in which a member of the Fund can receive the benefits provided under the Defined Benefits Scheme are clearly consistent with those of a provident, benefit, superannuation or retirement fund as they are only provided after attaining a retirement age or 'contemplated contingencies' such as death.

As both the key objective of the Defined Benefits Scheme and the true operation of this scheme by the Fund have the sole purpose of providing retirement benefits, the Fund is considered to be a provident, benefit, superannuation or retirement fund.

The Fund does not provide benefits as a result of events other than old age retirement, disability or death.

Therefore, the Fund satisfies this requirement.

3. Established in a foreign country

The Fund was established in Country A, which is separate from and located outside of Australia.

Therefore, the Fund satisfies this requirement.

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

The Fund manages the Defined Benefits Scheme which was established in Country A for its members. The Fund operates to provide retirement benefits for its members 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 membership in the Fund 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 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 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 in 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) state:

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 was established in Country A. The decision making and management of the Fund is undertaken by the Secretary who is assisted by individuals appointed to different offices within the organisational structure of the Fund. The management of the Fund is governed by the Regulation. The Secretary and the individuals appointed to these offices are made up of nominated persons none of whom are Australian residents.

The Fund is to provide pensions to members of the Defined Benefits Scheme.

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

Therefore, the Fund satisfies this requirement.

6. 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

An amount paid to the Fund or set aside for the Fund has not been and cannot be deducted under the ITAA 1936 or 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.

The Fund has also confirmed that no amount paid to the Fund can be deducted under ITAA 1997 or ITAA 1936.

Therefore, the Fund satisfies this requirement.

Conclusion

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.

Consists of interest or dividend and/or non-share dividend 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.

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

Therefore, the Fund satisfies this requirement.

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

The Fund provided a letter to the Commissioner from the Taxation Authority of Country A, certifying that under the provisions of the Regulation the Fund is exempted from taxation under the laws of 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.

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.

Subsection 128B(3CB) defines the test entity to be either the entity that paid the interest, dividends or non-share dividends or, if subsection 128A(3) of the ITAA 1936 applies in relation to a resident trust estate, that trust estate.

In the case of the Fund, the relevant 'test entities' are the Australian resident entities it has invested in.

The Fund holds less than 10% of the total participation interests in each Australian resident entity it has a legal or beneficial interest in. Further, the Fund would hold less than 10% of the total participation interests in each Australian company in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936.

The Fund therefore satisfies the 'portfolio interest test' in respect of the Fund's current Australian resident entity 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.

The Fund only has portfolio interests of less than 1% of the membership interests in the listed entities, none of which give it the power to appoint persons who may be involved in decisions comprising the control and direction of the test entity's operations.

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 each of the Australian entities to which the Fund has invested:

(a)   Neither the Fund, nor any related party of the Fund, has involvement in the day to day management of the business of any of the Australian investments.

(b)   Neither the Fund, nor any related party of the Fund, holds any right to appoint a person to a board, committee or similar, either directly or indirectly, of any of the Australian investments.

(c)   Neither the Fund, nor any related party, holds the right to representation on any investor representative or advisory committee (or similar) of any of the Australian investments.

(d)   Neither the Fund, nor any related party, has the ability to direct or influence the operation of any of the Australian investments outside of the ordinary rights conferred by the equity interest held.

(e)   The Fund has not entered into or received any side letters, arrangements or agreements.

(f)    The Fund does not hold any veto rights on security holder votes.

Based upon 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.

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 in respect of its current Australian investments.