Edited version of private advice

Authorisation Number: 1052302717928

Date of advice: 10 September 2024

Ruling

Subject: Withholding tax - superannuation funds for foreign residents

Question

Is the Fund 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 periods:

1 July 20XX to 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Fund

The Fund is a resident of a Foreign State.

The Fund is exempt from tax in its country of residence.

The Trustee of the Fund is based in the Foreign State.

The functions of the Trustee include the receiving, investing and holding the assets of the Fund for the benefits of the Fund members and for the payment of reasonable costs of the Fund. It carries out the strategic direction in the daily financial investments and operations of the Fund.

The Fund provides for retirement benefits for eligible employees.

Management of investments

The Fund holds investments in Australian resident entities.

The Fund will receive interest income and/or dividend income from companies who are residents of Australia.

In respect of the Australian investments that are relevant to this ruling:

•                     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.

Other relevant facts

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

The Fund was established in a foreign country.

The Fund was established and is maintained, for the sole purpose of providing superannuation benefits for persons other than persons who are or would ordinarily be or become residents of Australia.

The central management and control of the Fund is carried on outside Australia by entities none of whom is an Australian resident.

No contributions to the Fund are capable of being claimed as a tax offset or as a deduction under either the Income Tax Assessment Act 1997 (ITAA 1997) or the ITAA 1936.

Income of 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.

Relevant legislative provisions

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

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

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

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

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.

Each of the requirements of paragraph 128B(3)(jb) will be considered below.

The Fund is a non-resident

The Fund is a resident of the Foreign State. Therefore, the Fund satisfies this requirement.

The Fund is a superannuation fund for foreign residents

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

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

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

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

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

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

(a)           at that time, it is:

                                           (i)                an indefinitely continuing fund; and

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

(b)           it was established in a foreign country; and

(c)           it was established, and is maintained at that time, only to provide benefits for individuals who are not Australian residents; and

(d)           at that time, its central management and control is carried on outside Australia by entities none of whom is an Australian resident.

(2)           However, a fund is not a superannuation fund for foreign residents if:

(a)           an amount paid to the fund or set aside for the fund has been or can be deducted under this Act; or

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

Consequently, 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 be established that:

•                     the Fund is an indefinitely continuing fund

•                     the Fund is a provident, benefit, superannuation or retirement fund

•                     the Fund was established in a foreign country

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

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

•                     no amounts 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.

The Fund is an indefinitely continuing fund

The legislation provides no guidance on the meaning of 'indefinitely continuing'. It is not a technical legal expression, and the ordinary meanings of 'indefinitely' and 'continuing' involve little ambiguity or controversy.

The Macquarie Dictionary, [Online], viewed 5 February 2020, www.macquariedictionary.com.au defines 'indefinitely' and 'continuing' as follows:

Indefinite:

•                     not definite; without fixed or specified limit; unlimited: an indefinite number

•                     not clearly defined or determined; not precise

•                     indefinitely, adverb.

Continue: (verb (Continued, continuing))

•                     to go forwards or onwards in any course or action; keep on

•                     to go on after suspension or interruption

•                     to last or endure

•                     to remain in a place; abide; stay

•                     to remain in a particular state or capacity.

In this case, the Fund is an indefinitely continuing fund and a provident, benefit, superannuation or retirement fund.

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

The Fund is a provident, benefit, superannuation or retirement fund

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 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).

In this case, the Fund provides for retirement benefits for eligible employees of the Foreign State and its political subdivisions. The payment of retirement benefits is allowed upon members reaching the relevant retirement ages and years of service. In addition to retirement benefits, a member of the Fund may also receive survivor benefits, a health insurance subsidy and disability programs that provide disability retirement benefits. The Fund does not provide any benefits for employee hardships, emergencies, loans, medical or educational expenses, principal residence purchases or for any other reason.

Therefore, the Fund satisfies this requirement.

The Fund was established in a foreign country

The Fund was established in the Foreign State. Therefore, the Fund satisfies this requirement.

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

The Fund was established and is maintained, for the sole purpose of providing superannuation benefits for persons other than persons who are or would ordinarily be or become residents of Australia.

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. Therefore, the Fund satisfies this requirement.

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

Paragraphs 20 and 21 of Taxation Ruling TR 2008/9 Income tax: meaning of 'Australian superannuation fund' in subsection 295-95(2) of the Income Tax Assessment Act 1997 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 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 decision making and management of the Fund is undertaken by Trustee. The Trustee receives, invests and holds the assets of the Fund for the benefits of the members and for the payment of reasonable costs of the Fund. It carries out the strategic direction in the daily financial investments and operations of the Fund. The Trustee is based in the Foreign State.

Based on the above-mentioned factors the CM&C of the Fund takes place in the Foreign State by entities that are not Australian residents. Therefore, the Fund satisfies this requirement.

No amount paid to the Fund or set aside for the Fund has been or can be deducted under the ITAA 1997 and no tax offset has been allowed or is allowable for such an amount

No contributions to the Fund are capable of being claimed as a tax offset or as a deduction under either the ITAA 1997 or the 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 for the purposes of subparagraph 128B(3)(jb)(i) of the ITAA 1936.

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

The Fund will receive interest income and/or dividend income from companies who are residents of Australia. Therefore, this requirement is satisfied.

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

The Fund is exempt from income tax on its interest and dividend income in its country of residence. Therefore, this requirement is satisfied.

Subsection 128(3CA) of the ITAA 1936

The Treasury Laws Amendment (Making Sure Foreign Investors Pay Their Fair Share of Tax in Australia and Other Measures) Act 2019 introduced extra requirements that must be met for paragraph 128B(3)(jb) of the ITAA 1936 to apply. Generally, these extra requirements apply to income derived from 1 July 2019.

Relevantly:

•                     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

-   Subdivision 880-C of the ITAA 1997, or

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

Each of these requirements are discussed in detail below.

(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.

In this case, the Fund will receive interest income and/or dividend income from companies who are residents of Australia. The Fund holds less than 10% of the total participation interests in each of the Australian resident entities. Further, the Fund would hold less than 10% of the total participation interests in the Australian resident entities in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936.

The Fund therefore satisfies the 'portfolio interest test' in respect of its investments in the Australian entities.

(2)         The Fund satisfies the 'influence test'

Subsection 128(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 Australian investments acquired after 27 March 2018 that are relevant to this ruling:

•                     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 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.

(3)         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

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