Dividends: non-share dividends and interest - superannuation fund for foreign residents - withholding tax

Are dividends, non-share dividends and interest paid to the taxpayer, the trustee of a superannuation fund for foreign residents, income to which paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936) applies?

Yes. The dividend, non-share dividend and interest income derived by the taxpayer in its capacity as the trustee of a superannuation fund for foreign residents is income to which paragraph 128B(3)(jb) of the ITAA 1936 applies.

The taxpayer is a 'non-resident' as defined in subsection 6(1) of the ITAA 1936.

The taxpayer is the trustee of a superannuation fund (the fund).

The fund was established in the taxpayer's country of residence and is a superannuation fund for foreign residents as defined in section 118-520 of the Income Tax Assessment Act 1997 (ITAA 1997).

In its capacity as trustee of the fund, the taxpayer received income in the 2007-08 income year that consisted of dividends and non-share dividends paid by Australian resident companies and interest.

Within the last three years, the taxing authority in the country of residence of the taxpayer has certified that the fund is exempt from income tax in that country.

Paragraph 128B(3)(jb) of the ITAA 1936 excludes certain income from being subject to 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 consists 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.

The definition of the term 'non-resident' in subsection 6(1) of the ITAA 1936 states that, unless contrary intention appears, a non-resident is a 'person who is not a resident of Australia'. The definition of 'person' in subsection 6(1) provides that the term 'person' includes a company.

Subsection 128A(10) of the ITAA 1936 provides that, for the purposes of Division 11A of the ITAA 1936, the trustee of a provident, benefit, superannuation or retirement fund is a non-resident at a particular time if, and only if, the fund is a foreign superannuation fund at that time.

Applying the definition of 'non-resident' as stated in subsection 6(1) of the ITAA 1936 to the phrase 'a non-resident that is a superannuation fund for foreign residents' in subparagraph 128B(3)(jb)(i) of the ITAA 1936 means that the subparagraph can not be satisfied where the superannuation fund for foreign residents is a trust. This is because the trust is not a 'person' as defined. In such circumstances, subparagraph 128B(3)(jb) of the ITAA 1936 will not operate to exclude the relevant types of income of such a fund from being subject to withholding tax.

This result is inconsistent with paragraph 128B(3)(jb) of the ITAA 1936 in a withholding tax context achieving a similar purpose to that of former paragraph 23(jb) of the ITAA 1936. Before being rewritten into paragraph 128B(3)(jb), former paragraph 23(jb) exempted interest and dividends of foreign superannuation funds. (See paragraph 2.110 of the Explanatory Memorandum to the Tax Laws Amendment (Repeal of Inoperative Provisions) Bill 2006).

Furthermore, the phrase 'a non-resident that is a superannuation fund for foreign residents' is inconsistent with subsection 128A(10) of the ITAA 1936 for present purposes treating the trustee of a superannuation fund as a non-resident.

The term 'foreign superannuation fund' is defined in subsection 995-1(1) of the ITAA 1997 as being a superannuation fund that is not an Australian superannuation fund. Paragraph 295-95(2)(b) of the ITAA 1997 provides that for a superannuation fund to be an 'Australian superannuation fund' at a particular time, the fund must have its central management and control ordinarily in Australia.

Subparagraph 118-520(1)(a)(ii) and paragraph 118-520(1)(d) of the ITAA 1997 provides for present purposes that a fund is a 'superannuation fund for foreign residents' at a particular time if the fund is a superannuation fund and its central management and control is carried on outside Australia by entities, none of whom is an Australian resident. Accordingly, the fund cannot be an Australian superannuation fund.

Subsection 128A(10) of the ITAA 1936 applies to the taxpayer because the fund is a 'superannuation fund for foreign residents' and is also a 'foreign superannuation fund'.

Given that subsection 128A(10) of the ITAA 1936 treats the trustee to be the non-resident, the Commissioner considers that, where a superannuation fund for foreign residents is a trust, the phrase 'a non-resident that is a superannuation fund for foreign residents' is for the purposes of subparagraph 128B(3)(jb)(i) of the ITAA 1936 a reference to a non-resident that is the person acting in its capacity as the trustee of a superannuation fund for foreign residents.

Accordingly, the Commissioner accepts that the taxpayer is 'a non-resident that is a superannuation fund for foreign residents' for the purposes subparagraph 128B(3)(jb)(i) of the ITAA 1936.

As the dividend, non-share dividend and interest income was received by the taxpayer in its capacity as the trustee of the fund, the Commissioner accepts that, for the purposes of subparagraph 128B(3)(jb)(i) of the ITAA 1936 and for the reasons stated above, the income of the fund is derived by a non-resident that is a superannuation fund for foreign residents.

As the income derived is dividends and non-share dividends paid by companies that are Australian residents and interest, it is income of the type specified in subparagraph 128B(3)(jb)(ii) of the ITAA 1936.

Given that the taxing authority in the country of residence of the taxpayer has provided relevant certification of the fund being exempt in its country of residence, the Commissioner accepts that, for the purposes of subparagraph 128B(3)(jb)(iii) of the ITAA 1936, the income of the fund that satisfies subparagraphs 128B(3)(jb)(i) and 128B(3)(jb)(ii) of the ITAA 1936 is exempt from income tax in the country in which the taxpayer resides.

Therefore, for the reasons stated above, the dividend and interest income of the fund is income to which paragraph 128B(3)(jb) of the ITAA 1936 applies. Note: By operation of paragraph 128B(3)(jb) of the ITAA 1936, this income is excluded from being income that is subject to withholding tax under section 128B of the ITAA 1936.