Edited version of private advice

Authorisation Number: 300017950374

Date of advice: 27 January 2021

Ruling

Subject: Foreign superfund - withholding tax exemption

Question 1

Is the Fund excluded from liability to withholding tax on its interest and/or dividend income derived in respect of its current investments in Australia under paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

Question 2

Is the interest and/or dividend income, derived by the Fund, non-assessable non-exempt income under section 128D of the ITAA 1936?

Answer

Yes.

This ruling applies for the following periods:

1 July 2019 to 30 June 20xx

1 July 2020 to 30 June 20xx

1 July 2021 to 30 June 20xx

1 July 2022 to 30 June 20xx

1 July 2023 to 30 June 20xx

1 July 2024 to 30 June 20xx

The scheme commences on:

1 July 20xx

Relevant facts and circumstances

The Fund was established in the Netherlands under the Articles of Association which were most recently amended by deed executed in 20xx.

Resident and Tax Status

The Fund is a resident of the Netherlands within the meaning of Article 4 (Residence) of the Agreement between Australia and the Kingdom of the Netherlands for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income, and Protocol (Agreement).

The Fund is a tax-exempt pension fund in the Netherlands in accordance with Article 5 of the Dutch Corporation Income Tax Act (CIT Act).

Objects

The objects of the Fund are to provide a pension to the relevant employees and their surviving relatives in accordance with rules to be laid down in a set of pension regulations.

Resources

The income and resources of the Fund consist of:

•         the capital set aside upon its establishment;

•         the monies that have been deposited with regard to the period before the commencement date of this pension scheme and that, pursuant to agreements between general practitioners and health insurance funds are designated for a group scheme as referred to in the objects of the Fund;

•         the contributions, owed pursuant to a set of pension regulations;

•         payments from reinsurance agreements;

•         income from investments;

•         other income.

In so far as they are not immediately used to achieve the objects described in the Fund's rules, the Board will invest the monies of the Fund in accordance with the 'prudence person' rules and the following basic principles:

•         the monies will be invested in the interest of those entitled to claims or pensions; and

•         the investment will be valued at market value.

Eligibility and Benefits

The pension scheme is a fixed-sum benefits scheme. These fixed sums are increased annually by an amount relating to the salary trend for civil servants and the income trend for relevant employees.

The target retirement age is more than 65 years of age.

The benefits provided by the Fund include:

•         retirement pension,

•         partner's pension,

•         orphan's pension and

•         disability pension.

A disability pension scheme applies exclusively for salaried relevant employees. The Fund provides the payment of premiums in the event of permanent professional occupational disability.

The Fund does not provide any loans.

Contributions

The pension scheme is funded by premiums payable by relevant employees, depending on their gross occupational income.

Premiums for salaried employees are fixed as a percentage of the pension basis (salary less contribution-free allowance).

The premiums are then invested for its members.

Investments in Australia

The Fund confirmed that:

•         the Fund is an indefinitely continuing fund;

•         the Fund was established in a country other than Australia;

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

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

•         no amount paid to the Fund can be deducted under the Income Tax Assessment Act 1997 (ITAA 1997) or ITAA 1936;

•         no tax offsets would be allowable for an amount paid to the Fund or set aside for the Fund;

•         the income of the Fund is not non-assessable non-exempt income of the Fund because of either:

•         Subdivision 880-C of the ITAA 1997, or

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

The Fund provided a list of its Australian investments.

All of its investments in Australia are listed on the ASX and its total participation interest is well below 10%.

Further, the Fund confirmed that for each investment, the Fund:

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

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

•         does not hold any veto rights on security holder votes, and

•         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 subsection 6(1)

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

Income Tax Assessment Act 1936 section 128D

Income Tax Assessment Act 1997 subsection 118-520(1)

Income Tax Assessment Act 1997 Subdivision 880-C

Income Tax Assessment Act 1997 subsection 995-1(1)

Income Tax (Transitional Provisions) Act 1997 Division 880

Superannuation Industry (Supervision) Act 1933 section 10

Reasons for decision

Question 1

Summary

The Fund is a superannuation fund for foreign residents as defined in section 118-520 of the ITAA 1997 and is therefore excluded from liability to withholding tax on its interest and dividend income derived from its investments in Australia under paragraph 128B(3)(jb) of the ITAA 1936.

Detailed reasoning

Superannuation fund for foreign residents

The term 'superannuation fund for foreign residents' is defined in section 118-520 of the ITAA 1997 as follows:

118-520(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.

118-520(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;

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

Fund

The first question to consider in determining whether the Fund is a 'superannuation fund for foreign residents' within the meaning of section 118-520 of the ITAA 1997 is whether the Fund is a 'fund'.

The term '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 Fund's income and resources consist of the capital set aside upon its establishment, contributions payable by relevant employees, payments from reinsurance agreements and other income. The money of the Fund is then invested in the interests of members by the Board in accordance with the prudence person rules. Any investment returns being credited to the Fund for the purposes of payment to its members as the pension obligations in accordance with the objects of the Fund.

Therefore, the income and resources of the Fund constitute a 'fund' for the purposes of subsection 118-520(1) of the ITAA 1997.

Indefinitely continuing fund

The term 'indefinitely continuing fund' in subparagraph (a)(i) of the definition of 'superannuation fund for foreign residents' in section 118-520 of the ITAA 1997 is not defined.

The Australian Oxford Dictionary defines 'indefinite' as 1 vague, undefined. 2 unlimited... and 'indefinitely' as 1 for an unlimited time... 2 in an indefinite manner.

The requirement that the fund be 'indefinitely continuing' simply means that the fund must not have a specific termination date.

The Fund has been in operation since its establishment with the objects to provide pension benefits in respect retirement of the members (as described in its Articles of Associations). In respect of retirement pension, the target retirement age is 68 years. Further, apart from the dissolution of the Fund (as provided in the Articles of Association), the Fund is not required to be terminated after a specified date. It is intention and expectation that the Fund will be continued indefinitely.

Accordingly, the Fund is an 'indefinitely continuing fund' within the meaning of subparagraph 118-520(1)(a)(i) of the ITAA 1997.

Provident, benefit, superannuation or retirement fund

None of the four descriptors 'provident, 'benefit', 'superannuation' or 'retirement fund' in subparagraph 118-520(1)(a)(ii) of the ITAA 1997 are defined. However, the terms have, however, been subject to 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).

According to the terms of Articles of Association and Pension Regulations, the object of the Fund is to provide pension benefits to, or in respect of, participating members whose participation ends as a result of reaching the retirement age of 68 years old, being permanently disabled or death. Therefore, it is considered that the Fund is a 'provident, benefit, superannuation or retirement fund' as that phrase has been interpreted by the relevant authorities.

Therefore, the Fund satisfies the requirements in subparagraph 118-520(1)(a)(ii) of the ITAA 1997 of the definition of 'superannuation fund for foreign residents' in section 118-520 of the ITAA 1997.

Paragraphs 118-520(1)(b), 118-520(1)(c) and 118-520(1)(d) of the ITAA 1997

According to the Trustee's Declaration, the Fund was established in the Netherlands and is maintained only to provide pension benefits to participating members who are not Australian residents. The Fund's central management and control carried out in the Netherlands by the Board of Directors none of whom is an Australian resident. The Board is charged with responsibility in managing the business of the Fund, the administration and disposition of its capital in accordance with the rules set by the articles of association and the regulations of the Fund.

Therefore, the Fund satisfies the requirements in paragraphs 118-520(1)(b), (c) and (d) of the definition of 'superannuation fund for foreign residents' in section 118-520 of the ITAA 1997.

Paragraph 118-520(2)(a) and 118-520(2)(b) of the ITAA 1997

The Trustee's Declaration also confirms that no amount paid to or set aside for the Fund has been or can be deducted under the ITAA 1997 and the ITAA 1936 and that a tax offset has not been allowed or is allowable for such an amount.

Therefore, paragraphs 118-520(2)(a) and (b) of the ITAA 1997 do not apply.

Accordingly, the Fund is a 'superannuation fund for foreign residents' within the meaning of section 118-520 of the ITAA 1997.

Withholding Tax Exemption

For income derived before 1 July 2019

Paragraph 128B(3)(jb) excludes interest and dividend/non-share dividend income from withholding tax where that income:

    (i)        is derived by a non-resident that is a superannuation fund for foreign residents; and

   (ii)        consists of interest, or 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.

Subparagraphs 128B(3)(jb)(i), (ii) and (iii)

As established above, the Fund is a superannuation fund for foreign residents as defined in section 118-520 of the ITAA 1997. The Fund is the ultimate beneficial owner of the Australian investments (Australian companies, trusts or REITs) which are held through a custodian.

The Fund will accordingly derive income (being interest/dividends) from the Australian investments for the purposes of subparagraphs 128B(3)(i) and(ii).

Further, the statement issued by the tax authority in the Netherlands confirms that the Fund is a resident of the Netherlands and income derived by the Fund is subject to the Dutch CIT Act. However, the income is exempt from taxation in accordance with article 5 of the Dutch CIT Act.

Therefore, the requirement under subparagraph 128B(3)(iii) is also satisfied.

Accordingly, paragraph 128B(3)(jb) will apply to exempt the Fund from withholding tax for the income (interest, dividend including non-share dividend) derived from Australian investments prior to 1 July 2019 because the Fund satisfies all of the requirements under subparagraphs 128B(3)(jb)(i), (ii) and (iii).

For income derived on or after 1 July 2019

Schedule 3 to the Treasury Laws Amendment (Making Sure Foreign Investors Pay Their Fair Share of Tax in Australia and Other Measures) Act 2019 (the Act) limits access to tax concessions for foreign investors by limiting the withholding tax exemption for superannuation funds for foreign residents to portfolio-like investments only (i.e. a fund that holds an ownership interest of less than 10% of the entity and does not have influence over the entity's key decision making).

The Act introduced extra requirements that must be met for paragraph 128B(3)(jb) to apply. Generally, these extra requirements apply to income derived from 1 July 2019.

However, under the transitional rules, the exemption continues to apply until 1 July 2026 for income from investment assets acquired by the superannuation fund on or before 27 March 2018.

Item 3 of Part 2 of Schedule 3 of the Actprovides specific detail in relation to when the extra requirements in subsection 128B(3CA) would apply.

Schedule 3 Superannuation funds for foreign residents withholding tax exemption

Part 2 Application and transitional provisions

3 Application

(1)    Subject to subitems (2) and (3), the amendments made by this Schedule apply in relation to income that is derived on or after 1 July 2019.

(2)    The amendments made by this Schedule apply to income that is derived by a superannuation fund on or after 1 July 2026 if:

(a)    the income was derived by the superannuation fund in respect of an asset; and

(b)     subsection 128A(3) of the Income Tax Assessment Act 1936 does not apply in relation to that income; and

(c)     the superannuation fund acquired the asset on or before 27 March 2018.

(3)    The amendments made by this Schedule apply to income that is derived by a superannuation fund on or after 1 July 2026 if:

(a)    because of the operation of subsection 128A(3) of the Income Tax Assessment Act 1936, a superannuation fund derived the income because it holds an interest in a trust estate; and

(b)    the superannuation fund started to hold that interest on or before 27 March 2018; and

(c)    the dividend, non-share dividend or interest that was included in the income of the trust estate as mentioned in that subsection was so included in respect of an asset; and

(d)    the trustee of the trust estate acquired the asset on or before 27 March 2018.

Section 128B(3CA) states that paragraph 128B(3)(jb) applies to income derived by a superannuation fund for foreign residents as mentioned in subparagraph 128B(3)(jb)(i) only if the superannuation fund:

(a)  satisfies the portfolio interest test in subsection 128B(3CC) in relation to the test entity (as defined in subsection 128B(3CB):

(i)            at the time the income was derived, and

(ii)           throughout any 12 months period that began no earlier than 24 months before that time and ended no later than that time; and

(b)  does not, at the time the income was derived, have influence of a kind described in subsection 128B(3CD) in relation to the test entity; and

(c)   the income is not non-assessable non-exempt income (NANE) of the superannuation fund because of:

(i)            Subdivision 880-C of the ITAA 1997, or

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

The portfolio interest test

Question 2

Summary

The interest and dividend income (including non-share dividend income) derived by the Fund from Australian investments is not assessable income and is not exempt income of the Fund under section 128D.

Detailed reasoning

Section 128D provides that income other than income to which section 128B applies by virtue of subsection (2A), (2C) or (9C) of that section upon which withholding tax is payable, or upon which withholding tax would, but for paragraphs 128B(3)(ga),(jb) or (m), section 128F, section 128FA or section 128GB, be payable, is not assessable income and is not exempt income of a person.

Dividend and interest income from the investments in Australia derived by the Fund would, but for the operation of the withholding tax exemption under paragraph 128B(3)(jb), be subject to withholding tax liability under subsections 128B(1) and 128B(2) respectively. As paragraph 128B(3)(jb) is specifically referred to in section 128D, any dividend and interest income derived by the Fund from the investments in Australia will be considered NANE income of the Fund.

Not otherwise be NANE income because of Subdivision 880-C of the ITAA 1997or Division 880 of the Income Tax (Transitional Provisions) Act 1997(ITTPA)

According to section 880-15 of the ITAA 1997, a 'sovereign entity' is any of the following:

(a)  a body politic of a foreign country, or a part of a foreign country;

(b)  a foreign government agency;

(c)   an entity:

               (i)        in which an entity covered by paragraph (a) or (b) holds a total participation interest of 100%; and

              (ii)        that is not an Australian resident; and

             (iii)        that is not a resident trust estate for the purposes of Division 6 of Part III of the Income Tax Assessment Act 1936.

Section 880-125 of the ITAA 1997 states that a sovereign entity is covered by this section if it satisfies all of the following requirements:

(a)  the entity is funded solely by public monies;

(b)  all returns on the entity's investments are public monies;

(c)   the entity is not a partnership;

(d)  the entity is not any of the following:

               (i)        a public non-financial entity;

              (ii)        a public financial entity (other than a public financial entity that only carries on central banking activities).

On the facts, the Fund is a company pension fund which is funded by the capital set aside upon its establishment, contributions payable by relevant employees, payments from reinsurance agreements and returns on its investments. The Fund is not funded solely by public monies and returns on its investments are not public monies. The money of the Fund is put aside to provide a pension to general practitioners and their surviving relatives.

Therefore, the Fund is not a 'sovereign entity' covered by section 880-125 of the ITAA 1997. Accordingly, Subdivision 880-C of the ITAA 1997 and Division 880 of the ITTPA 1997 have no application.