Is The Fund excluded from liability to withhold tax on interest, dividend and non-share dividend income derived from its 'Australian Investments' as listed in the facts in accordance with paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)?
Yes. This ruling applies for the following period(s) 1 July 20XX to 30 June 20XX The scheme commences on 1 July 20XX
Background/creation: 1. The Fund is a pension scheme providing benefits for members who were employees of a U.S. state Government department. 2. The Fund is governed by a Trust Deed. 3. The Board of Trustees is the administrator of The Fund and must operate in accordance with the Act. The Board is required to act in the best interests of the contributors and all other members. Purpose: 4. The Fund is the vehicle for the delivery of scheme benefits. 5. The purpose of the Fund is to receive monies in respect of contributions, transfer values and investment income, invest monies in accordance with policy formulated by the administering authority and pay out monies in respect of scheme benefits, transfer values, costs, charges and expenses. Plan management: 6. The Trustee is managed by a Board, totalling nine members. The Board of Trustees are appointed by the Governor. All vacancies of appointed members on the Board are appointed by the Governor. 7. Trustees operate under an Act that lists their role and objectives in managing he Fund. Trustees will:
• Make reasonable rules and regulations as the Board deems necessary for transacting its business and administering the System. • Provide administrative direction and control of the Executive Secretary and clerical staff. • Provide actuarial evaluations when the Board deems necessary. • Exercise discretionary power and authority in the investment and disbursement of the funds of the System subject to conditions in the Act. • Designate the necessary medical examiners for disabled members. • Serve without renumeration but to be reimbursed for expenses when attending Board meetings. • To do any and all things necessary for the proper administration of the Act. 8. A statement from the Chief Investment Officer confirms: • To the best of their knowledge and belief that the Fund is established as an indefinitely continuing fund and a provident, benefit, superannuation or retirement fund. • The Fund has been established in a foreign country and is maintained only to provide benefits for non-residents of Australia.
• The central management and control is carried on outside of Australia by entities none of whom are Australian residents. • No amounts paid to or set aside for the Fund have been or are capable of being claimed as a tax offset, rebate or deduction under any sections of the ITAA 1997. Membership: 9. Membership of the Fund includes: • All officers and employees of any agency, board, commission or department of the State whose compensation was or is payable from state appropriated funds. • All employees of the relevant Departments whose salaries were or are payable in whole or part from Federal funds. • Official court reporters or stenographers of the relevant Courts of the State. 10. Membership in the Fund may be terminated by retirement, by permanent or total disability, by superannuation, by death or by withdrawal, either voluntary or involuntary from active service in the State. Eligibility: 11. As a condition of obtaining or continuing employment, all employees of the State from a specified date become a member of the Fund. Contributions:
12. All participating employers are required to contribute a portion of their eligible employees' salaries into the System. 13. The Fund established a new employee contributory plan effective 1 July 20XX. All employees first hired on or after 1 July 20XX contribute 5% of their salary into the System. 14. These contributions are tax-deferred contributions and are withheld from members' pay. 15. Members may have employee contributions in the System if: • They were members of The Fund on or before 1 January 19XX; or • They are members first hired after 1 July 20XX; or • They have purchased service in the System. 16. Employee contributions remaining on deposit with the Fund earn interest at a rate of 4% per year. Benefits: 17. The normal retirement age for both men and women is 65. 18. Members are eligible for full benefits under the following conditions: • At age 65 with five years of actual service. • At any age with 28 years of actual service. • At age 60 with 20 years of actual service if under the old contributory plan (prior to 1 July 20XX); or • At age 55 with 35 years of credited service for local elected officials.
19. The normal retirement benefit amount, paid on a monthly basis, is determined by the member's final average salary and years of service. 20. A member may retire with a reduced benefit at age 55 with at least five years of actual service or at any age with 25 years of actual service. 21. No member shall be eligible for retirement benefits unless such member was an employee as defined herein for a period of not less than 18 months during the 24 calendar months immediately preceding the date of retirement. 22. No member may accrue more than 35 years creditable service in System, employee and employer contributions as provided for herein shall be made until said employees retire, or upon the expiration of 35 years in the current service, whichever period of time is less. Any person who has made employee contributions to the system for a period of 35 years cannot make further contributions to the System but is eligible for full retirement benefits upon reaching retirement age. 23. Retirement from the System is compulsory to all members on July 1, following their 70 th Birthday.
24. In the case of withdrawal from the service within 5 years after becoming a member of the System, the Board upon request will pay the member all of their accumulated contribution without interest. The Fund withholds 20% for federal taxes and 5% for state taxes if the member chooses a lump-sum payout. A member may elect to rollover the balance to an independent tax-deferred retirement account. If the withdrawal occurs after 5 years of membership in the system, the Board upon request shall pay to the member all of their accumulated contributions plus interest as determined by the Board. Death Benefits 25. If a member dies prior to retirement, the accumulated contributions become payable to the designated beneficiary. 26. If a retired member dies before all benefits equivalent to contributions to the System have been paid, the difference between the benefit received and the contributions whilst an active member, together with any other balance in credit in the System will be paid to the designated beneficiary.
27. If there is no designated beneficiary, the refund of the unpaid balance shall be paid to the spouse, children or parents of the deceased under the law of descent and distribution. Benefits in other circumstances 28. A member is eligible for disability retirement benefits after ten or more years of creditable service to the State, provided they are not eligible to receive benefits for disability incurred prior to becoming a member. Place of establishment: 29. The Fund was established in the United States. Central management and control: 30. The central management and control of the Fund is carried out in the United States. Wind up and insolvency: 31. The Fund is not subject to any Act relating to the insolvency or winding-up of any corporation on the basis that it does not have its own separate legal personality . Tax status: 32. The Fund is a tax-exempt Public Retirement Fund under section 401(a) of the U.S. Internal Revenue Code. 33. Formal certification from Department of the Treasury was supplied with the ruling application confirming that The Fund is exempt of U.S. tax by virtue of section 501(a) of the U.S. Internal Revenue Code.
Department of the Treasury have also confirmed that, to the best of their knowledge and belief, The Fund is a trust under section 401(a) of the U.S. Internal Revenue Code as at 24 February 2020. Australian Investments: 34. The Fund provided a list of its Australia investments (all are shares). 35. All its investments in Australia are listed on the ASX and its total participation interest in respect of each investment is below 10%. 36. All of the investments listed were acquired after 20 November 20XX. 37. The Fund does not have influence of a kind described in subsection 128(3CD) of the ITAA 1936 in respect of these investments. 38. The Fund does not have capacity to influence (either directly or indirectly) the day-to-day management of the operations of their investments. 39. The Fund does not hold any right to appoint a person to a board, committee or similar (either directly or indirectly). 40. The Fund does not hold any veto rights on security holder votes. 41. The Fund does not hold more than 1% ownership of any of the entities listed above.
Income Tax Assessment Act 1936 paragraph 128B(3)(jb) Does Part IVA apply to this ruling? Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or DPT tax benefit in connection with an arrangement. If Part IVA applies the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax. We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part. If you want us to rule on whether Part IVA applies we will first need to
These reasons for decision accompany the Notice of private ruling for The Fund. While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision. Summary The Fund is excluded from liability to withhold tax on interest, dividend and non-share dividend income derived from its 'Australian Investments' as listed in the facts 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 nonresident that consists of dividend income (subsection 128B(1) of the ITAA 1936), interest income (subsection 128B(2) 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) 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) must also be met. 1. Superannuation fund for foreign residents The Fund is not a resident of Australia for tax purposes. Therefore, the Fund satisfies this requirement. 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. The term 'superannuation fund for foreign residents' is defined in section 118-520 of the Income Tax Assessment Act 1997 (ITAA 1997) as follows: 118-520 Meaning of superannuation fund for foreign residents (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. i An indefinitely continuing fund The term 'indefinitely continuing 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 general view is that an indefinitely continuing fund does not have to continue forever, but rather that the governing rules should not fix an express termination date. The terms and regulations of the Fund do not provide for winding up at a defined point in time. On that basis, the Fund is accepted to be indefinitely continuing. ii 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 1936 or the ITAA 1997. ATO Interpretative Decision ATO ID 2009/67
Income Tax: Superannuation fund for foreign residents (ATO ID 2009/67) 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; Mahoney 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 extract 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). It is accepted that the Fund is a "provident, benefit, superannuation or retirement fund" on the basis that: • The Fund's sole purpose is to provide the relevant participant employees money benefits upon their reaching a prescribed age (i.e. immediate annuities, deferred annuities, etc as explained above); • The Fund can be described as "provident" on the basis that it provides money benefits upon particular contingencies (e.g. death, ill-health and retirement); • The Fund provides benefits upon an employee's retirement or death or other cessation of employment, including to survivors and children of the employee; • The terms of The Fund (i.e. the Act) are consistent with a superannuation fund and the terms are strictly adhered to (evidenced by the fact that the terms of The Fund are enacted in law and violation of them could lead to criminal or civil sanctions);
• The amounts collected by the Fund are not used for any purpose other than providing benefits to participants, former participants and their beneficiaries under the Fund and paying the reasonable expenses of administering the Fund. Therefore, the Fund satisfies this requirement. iii Established in a foreign country: The Fund was established by U.S. as a tax-exempt Public Retirement Fund under section 401(a) of the U.S. Internal Revenue Code. Furthermore, the Chief Investment Officer of the Fund attests that The Fund has been established in a country outside of Australia. Therefore, the Fund satisfies this requirement. iv Was established and maintained only to provide benefits for individuals who are not Australian residents:
The trustee of the Fund attests that the Fund does not provide benefits to Australian residents. Accordingly, the Commissioner accepts that the Fund was established and is maintained only to provide benefits for individuals who are not Australian residents. 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. v Central management and control (CM&C): 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: 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.
The Fund is a pension scheme providing benefits for members who were employees of the State in the United States (US). The Board of Trustees is the administrator of the Fund and must operate in accordance with the Act and consists of nine members. The Board is required to act in the best interests of the contributors and all other members. Based on this, it is reasonable to conclude that the central management and control of the Fund occurs in the United States by entities that are not Australian residents. Therefore, the Fund satisfies this requirement. vi Subsection 118-520(2): 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 the ITAA 1936 or ITAA 1997; or b) A tax offset has been allowed or is allowable for such an amount. No amount paid to the Fund or set aside for the Fund has been or can be deducted (and no tax offset has been allowed or is allowable for such an amount) under the ITAA 1936 or ITAA 1997. Therefore, the Fund satisfies these requirements. 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. 2. The Fund is exempt from income tax in the country in which the non-resident resides: As per the facts provided (including a statement from Department of the Treasury) the Fund is generally exempt of U.S. tax by virtue of section 501(a) of U.S. Internal Revenue Code. Therefore, the interest and dividend income derived by The Fund will be exempt from tax in the U.S. Therefore, the Fund satisfies this requirement. Subsection 128B(3CA): 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) 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)
• The fund must satisfy the 'influence test' (subsection 128B(3CD) 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 . i. The fund satisfies the 'portfolio interest test' Subsection 128B(3CC) 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.
As per the facts, the Fund does not hold more than 1% ownership of any of the entities listed in the 'Australian Investments' section. In these circumstances, the Commissioner is satisfied that the total participation interest the Fund holds in the test entities: • is less than 10% pursuant to paragraph 128B(3CC)(a) at all relevant times; and • would be less than 10% in the circumstances detailed in paragraph 128B(3CC)(b) at all relevant times. The Fund therefore satisfies the 'portfolio interest test' in respect of its 'Australian Investments' listed in the relevant facts of this Ruling. ii. The fund satisfies the 'influence test' Subsection 128(3CD) 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), 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), 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 investments listed in the relevant facts and circumstances of this Ruling:
• Neither the Fund, nor any related party, is involved in the day to day management of the business of any of the Australian companies or trusts. • Neither the Fund, nor any related party, has the right to appoint a director to the Board of Directors of the Australian company, Australian debt issuer or equivalent role in a trust. • Neither the Fund, nor any related party, holds the right to representation on any investor representative or advisory committee (or similar) of the Australian companies or trusts. • Neither the Fund, nor any related party, has the ability to direct or influence the operation of the Australian companies or trusts outside of the ordinary rights conferred by the equity interest held. • The Fund does not hold any veto rights on security holder votes.
Accordingly, the Fund does not have influence of a kind described in subsection 128(3CD) of the ITAA 1936 in respect of these investments. The Fund does not have capacity to influence (either directly or indirectly) the day-to-day management of the operations of their equity investments. Consequently, the Commissioner accepts that the Fund does not have influence of a kind described in subsection 128B(3CD). iii. 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 . Income derived by the Fund would not be otherwise treated as not assessable and not exempt income by virtue of the above provisions. Accordingly, the above exclusion should not apply to exclude the Fund from entitlement to the withholding tax exemption for superannuation funds for foreign residents. Conclusion The Fund is excluded from liability to withhold tax on interest, dividend and non-share dividend income derived from its 'Australian Investments' as defined in the facts in accordance with paragraph 128B(3)(jb) of the ITAA 1936.