Edited version of private advice

Authorisation Number: 1052393222843

Date of advice: 13 May 2025

Ruling

Subject:Superannuation fund for foreign residents - withholding tax

Question 1

Does Article X of the Convention between Australia and the Foreign Country (the Convention) apply to exempt Entity A from withholding tax on dividend income received from its Australian equity investments?

Answer 1

Yes.

Question 2

Does Article X of the Convention apply to the interest income paid by the Australian investments to Entity A such that the interest income shall not be taxed in Australia?

Answer 2

Yes.

This ruling applies for the following periods:

Year ending 31 December 20XX

Year ending 31 December 20XX

Year ending 31 December 20XX

Year ending 31 December 20XX

Year ending 31 December 20XX

The scheme commenced on:

1 January 20XX

Relevant facts and circumstances

Entity A is a fund, whose products are only investable by pension funds providing compulsory occupational pensions to all individuals and employers, provided Entity A meet the statutory requirements.

Entity A was established outside of Australia and is domiciled outside of Australia.

The object of Entity A is the investment and management of assets for pension schemes.

Entity A's assets are to be used exclusively for the purpose of pension provision.

Entity A's Board is responsible for the management and supervision, including strategic and business policy decisions, as well as fundamental resolutions regarding the investment and management of the pension funds entrusted to it.

The members of the Fund are all non-residents of Australia. The central management and control of Entity A is carried on outside of Australia, by entities who are not Australian residents.

Entity A does not carry on a business through a permanent establishment situated in Australia and does not perform independent personal services from a fixed base in Australia.

Entity A is a resident of a foreign country for tax purposes and is treated as a company for tax purposes.

Entity A is exempt from tax in foreign country as confirmed by the Foreign country tax authorities.

Australian investments of Entity A

Entity A has invested in various Australian investments including ASX-listed equities and REITs.

Entity has legal and beneficial title to the investment income.

Entity A is not involved in the day-to-day management of the business of the investments.

Entity A has no rights to appoint any person to any board, committee or similar, either directly or indirectly, of the investments.

Entity A has no ability to direct or influence the operation of the investments outside of the ordinary rights conferred by the equity interest held.

Entity A owns less than 10% of the voting, capital or dividend rights in the investments.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 128B

International Tax Agreements Act 1953 subsection 3AAA(1)

International Tax Agreements Act 1953 subsection 5(1)

Convention between Australia and the Foreign Country (the Convention)

Reasons for decision

Question 1

Summary

Yes, Article X of the Convention applies to exempt Entity A from withholding tax on unfranked dividends received from Australian resident entities. If the dividend is fully or partly franked, there is no withholding tax paid on the franked amount of the dividend and therefore no exemption available.

Detailed reasoning

Convention - application to taxes on interest and dividends

Generally, non-residents who derive Australian dividend or interest income are liable to pay withholding tax on that income (see section 128B of the Income Tax Assessment Act 1936 (ITAA 1936) and subsections 128B(1)-(5) of the ITAA 1936).

However, in determining liability to Australian tax on Australian source income derived by a non-resident, it is necessary to consider not only the income tax laws but also any applicable Convention or Double Taxation Agreement contained in the International Tax Agreements Act 1953 (Agreements Act).

Section 4 of the Agreements Act incorporates that Act with the ITAA 1936 and the Income Tax Assessment Act 1997 (ITAA 1997) so that those Acts are read as one. The Agreements Act effectively overrides the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except for some limited provisions).

As Entity A meets the requirements of Article C of the Convention and is therefore subject to its application.

Convention - application to dividend income

Dividend income

Article X of the Convention is the relevant provision in relation to dividend income.

1. There are dividends that are paid by companies that are residents of Australia

A company is defined in Article Z of the Convention as 'any body corporate or any entity which is treated as a company or body corporate for tax purposes'.

Entity A holds investments in certain ASX-listed companies. Consequently, the unfranked dividends received from these companies to Entity A are paid by a company that is a resident of Australia.

Entity A holds investments in certain REITs that may not be taxed as companies. However, if they have received unfranked dividends from investments in underlying Australian tax resident companies and distribute it to Entity A, these dividends will retain their character and will also meet the requirements of Article X of the Convention subject to provision of evidence that an unfranked dividend has been paid and an amount of withholding tax has been withheld.

If a dividend is franked, then no withholding tax is paid and cannot be reclaimed (see below).

2. The beneficial owner of the dividends

The term 'beneficial owner' is not defined in the Convention.

The 2017 OECD Commentaries on Article X states:

... The term "beneficial owner" is therefore not used in a narrow technical sense (such as the meaning it has under the trust law of many common law countries), rather, it should be understood in its context, in particular in relation to the words "paid ... to a resident", and in light of the object and purposes of the Convention, including avoiding double taxation and the prevention of fiscal evasion and avoidance.

The OECD Commentaries provide an example of using the term 'beneficial owner' in a narrow technical sense regarding a 'meaning it has under the trust law of many common law countries':

... where the trustees of a discretionary trust do not distribute dividends earned during a given period, these trustees, acting in their capacity as such (or the trust, if recognised as a separate taxpayer), could constitute the beneficial owners of such income for the purposes of Article ... even if they are not the beneficial owners under the relevant trust law.

Therefore, the term 'beneficial owner' should be used in a purposive sense in light of the operation of the Convention.

The OECD Commentaries informs that the 'beneficial owner' can be found through identifying the entity which has the unconstrained right to use and enjoy the dividend income:

... Where the recipient of a dividend does have the right to use and enjoy the dividend unconstrained by a contractual or legal obligation to pass on the payment received to another person, the recipient is the "beneficial owner" of that dividend. It should also be noted that Article ... refers to the beneficial owner of a dividend as opposed to the owner of the shares, which may be different in some cases.

Further, the OECD Commentaries provides examples of situations where agents, nominees, and conduit companies acting as a fiduciary or administrator on account of the interested parties would not be the 'beneficial owner' of the income despite being the direct recipient of the income. In particular:

In these various examples (agent, nominee, conduit company acting as a fiduciary or administrator), the direct recipient of the dividend is not the 'beneficial owner' because that recipient's right to use and enjoy the dividend is constrained by a contractual obligation to pass on the payment received to another person.

Entity A is the beneficial owner of the income which it derives from the Australian investments it holds in the sub-funds. As such, Entity A will be the beneficial owner of the dividends.

3. Entity A is a pension scheme and its investment income is exempt from tax foreign country tax

Entity A is a pension scheme pursuant to the Convention, and is exempt from tax in the foreign country.

Therefore, this condition is satisfied.

4. Entity A holds directly no more than 10 per cent of the voting power in the company paying the dividends

Entity A directly holds no more than 10 per cent of the voting power in the investments.

Therefore, this condition is satisfied.

5. Entity A does not carry on a business through a permanent establishment in Australia or perform independent personal services from a fixed base in Australia.

Entity A does not carry on a business through a permanent establishment situated in Australia and does not perform independent personal services from a fixed base in Australia.

Therefore, this condition is satisfied.

6. The Australian resident company that pays dividends is not a dual resident of both Australia and the foreign country, pursuant to Article X of the Convention.

The Convention operates to limit the application of Article X of the Convention in circumstances where the company paying the dividend is a dual resident under the Convention.

It is assumed that the companies and trusts are not dual residents of both Australia and the Foreign Country, pursuant to Article E of the Convention.

As such, the application of Article X of the Convention will not be limited in these circumstances.

Therefore, this condition is satisfied.

Conclusion

Entity A is a pension scheme whose investment income is exempt from tax in the foreign country. In addition, Entity A is the beneficial owner of dividends paid by companies that are Australian residents from investments held in its own name and legal holding. Furthermore, Entity A holds directly no more than 10 per cent of the voting power in the Australian company paying dividends.

Therefore, Article X of the Convention will operate to exempt Entity A from withholding tax on unfranked dividends paid by Australian resident entities in respect of the investments held through it sub-funds, such that the dividends shall not be taxed in Australia.

Franked dividends

Section 128B of the Income Tax Assessment Act 1936 (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) as well as other income prescribed in that section. Paragraph 128B(3)(ga) of the ITAA 1936 prescribes that section 128B of the ITAA 1936 will not apply to income that consists of the franked part of a dividend.

Therefore, if dividends paid on the Australian investments are franked, then there is no withholding tax claimable as a refund.

Question 2

Summary

Yes, Article T of Convention will apply to the interest income paid to Entity A on its Australian investments such that the interest income shall not be taxed in Australia.

Detailed reasoning

Convention - application to taxes on interest and dividends

Generally, non-residents who derive Australian dividend or interest income are liable to pay withholding tax on that income (see section 128B of ITAA 1936 and subsections 128B(1)-(5) of the ITAA 1936).

However, in determining liability to Australian tax on Australian source income derived by a non-resident, it is necessary to consider not only the income tax laws but also any applicable Convention or Double Taxation Agreement contained in the Agreements Act.

Section 4 of the Agreements Act incorporates that Act with the ITAA 1936 and the ITAA 1997 so that those Acts are read as one. The Agreements Act effectively overrides the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except for some limited provisions).

As Entity A meets the requirements of Article C of the Convention and is therefore subject to its application.

Convention - application to interest income

Article T of the Convention is the relevant provision in relation to interest income.

For Article T of the Convention to apply to Entity A, in respect of an exemption from withholding tax on interest income, it must satisfy the following:

•                     there is interest that arises in Australia

•                     Entity A is the beneficial owner of the interest and derives the interest

•                     Entity A is a resident of the foreign country, and

•                     Entity A is a pension scheme and its investment income is exempt from tax in foreign country.

Interest that arises in Australia

Entity A holds interests the Australian entities which derive interest income from its Australian debt investments.

All interest income arising from the Australian investments is paid by Australian residents for the purposes of Australian tax, and all such income is not connected to a permanent establishment or a fixed base situated outside Australia. Accordingly, pursuant to Article T of the Convention, interest income arises in Australia.

Therefore, interest arises in Australia from the Australian investments held by Entity A accordance with Article T of the Convention.

The beneficial owner of the interest and derives the interest

Entity A is the beneficial owner of the interest income which it derives from its holdings. As such, it will be the beneficial owner of the interest.

Resident of Foreign Country

As determined above, Entity A is a resident of the foreign country as it satisfies the definition of a 'resident of a Contracting State' and was established in the foreign country.

Pension scheme and investment income is exempt from tax

As determined above, Entity A is a pension scheme, pursuant to the Convention, and is exempt from tax in the foreign country.

Other provisions of Article T of the Convention

Entity A does not meet any of the restrictions on the availability of the exemptions regarding its debt investments held through its sub-funds under Article T.

Consequently, the restrictions prescribed in the Convention relevant to the availability of the exemptions from income and withholding tax on interest income discussed above will not be applicable in respect of the interest income derived by the Entity A.

Conclusion

Entity A is a pension scheme whose investment income is exempt from tax. In addition, it derives interest income from Australian investments.

As none of the restrictions prescribed in the Convention regarding the availability of the exemptions from tax on interest income apply, Article T of the Convention will operate to exempt Entity A from withholding tax on interest paid to Entity A in respect of the Australian investments.