1 Is the Fund exempt from liability to withholding tax on interest, dividend and non-share dividend income under paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)?
Yes. This ruling applies for the following periods : 1 January 201x to 31 December 202x The scheme commenced on: 1 January 201x
1. The Fund was established in and is a resident of Country A, a foreign jurisdiction. 2. The Fund does not have a termination date and there is no contemplation of the Fund being terminated. 3. The Fund was established and maintained solely for the purpose of providing retirement, death and disability benefits to the members of the Fund, all of whom were not Australian residents. 4. The Fund was a pension plan which received member contributions and provided retirement benefits as annuities or refund amounts. 5. Benefit payments were also available upon the event of disability or death, and the Fund also provided for a refund of contributions in the event of certain employment terminations. 6. Entitlement to any benefit payments depended upon various relevant factors such as age, retirement status and years of service in accordance with Fund rules. 7. The Fund's management board carried out the central management and control of the Fund in Country A. 8. All the members of the Fund's management board were not Australian residents.
9. Income earned by the Fund was exempt from income tax in Country A in accordance with a determination from the tax authority of Country A. 10. All the Fund's Australian investments were acquired after 1 July 2019. 11. The Fund held share equity in listed Australian entities from which the Fund received dividend income. 12. The Fund held less than 1% of the total equity on issue from each of the listed Australian entities it invested in. 13. The Fund held corporate debt issued by listed Australian entities from which the Fund received interest income. 14. No amount paid to the Fund or set aside for the Fund has been or can be deducted under the Income Tax Assessment Act 1997 (ITAA 1997) or the Income Tax Assessment Act 1936 (ITAA 1936), and no tax offsets have been allowed or would be allowable for an amount paid to the Fund or set aside for the Fund. 15. 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 .
16. Neither the Fund, nor any related party, was involved in the day-to-day management of the business of any of the Australian investments. 17. The Fund did not hold any right to appoint a person to a board, committee or similar, either directly or indirectly, of an Australian investment. 18. Neither the Fund, nor any related party, had any veto rights on security holder votes in the Australian investments. 19. Neither the Fund, nor any related party, had the ability to direct or influence the operation of the Australian entities outside of the ordinary rights conferred by the interests held. 20. The Fund had not entered into or received any side letters, arrangements or agreements connected to the Australian investments. 21. The Fund only held rights to vote in proportion to its equity interest in each Australian investment. 22. The Fund did not hold any other influence over any Australian investments potentially of a kind described in subsection 128B(3CD) of the Income Tax Assessment Act 1936 (ITAA 1936).
Income Tax Assessment Act 1936 Paragraph 128B(3)(jb)
Question 1 Is the Fund exempt from liability to withholding tax on interest, dividend and non-share dividend income under paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)? Summary The Fund is excluded from liability to withholding tax on its interest, dividend and non-share dividend income derived from its Australian investments in accordance with paragraph 128B(3)(jb) of the ITAA 1936. Detailed reasoning Background 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. The Fund is a non-resident
The Fund is not a resident of Australia for tax purposes. Therefore, the Fund satisfies this requirement. Superannuation Fund for Foreign Residents The term 'superannuation fund for foreign residents' is defined in section 118-520 of the ITAA 1997 as follows: (1) A fund is a superannuation fund for foreign residents at a time if: (a) at the 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 deducted under this Act; or (b) a tax offset has been allowed or is allowable for such an amount. An indefinitely continuing fund In Scott v Commissioner of Taxation (No 2) (1966) 40 ALJR 265 ( 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'. The Fund consisted of the contribution of money from members which was set aside, invested and capitalised for the sole purpose of providing retirement, disability and death benefits to members. The Fund is therefore a 'fund' within the ordinary meaning of the term. Neither the ITAA 1936 or the ITAA 1997 provide guidance on the meaning of 'indefinitely continuing'. However, the ordinary meanings of 'indefinitely' and 'continuing' involve little ambiguity or controversy. 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 Fund does not have a termination date there is no contemplation of the Fund being terminated. Therefore, the Fund is an indefinitely continuing fund. 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 (ATO ID 2009/67) provides guidance on the meaning of the phrase 'provident, benefit, superannuation or retirement fund'. 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 according to Scott per Windeyer J; Mahony v. Commissioner of Taxation (1967) 41 ALJR 232, per Kitto J and Cameron Brae Pty Ltd v. Federal Commissioner of Taxation (2007) 161 FCR 468 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).
The Fund was a pension plan and was established solely to provide Fund members with retirement benefits as well as other benefits in allowable contemplated contingencies including certain employment terminations, disability, and death. The payment of benefits was dependent on various relevant factors including age, retirement status and years of service in accordance with Fund rules. There were no benefits provided by the Fund to members and their beneficiaries beyond those as prescribed above and the alternate circumstances of access to the funds, being certain employment terminations, disability, or death align to the contemplated contingencies of a provident, benefit, superannuation or retirement fund. As a result, the Fund satisfies the definition of a provident, benefit, superannuation or retirement fund. The Fund was established in a foreign country The Fund was established in Country A. Therefore, the Fund satisfies this requirement. Was established and maintained only to provide benefits for individuals who are not Australian residents The Fund was established and maintained only to provide benefits for members, all of whom were not Australian residents.
As a result, the Fund satisfies this requirement. Central management and control The Fund's central management and control activities were carried out in Country A which is outside Australia. The entities which carried out the Fund's central management and control were the members of its management board. None of the board members were Australian residents. Therefore, the Fund satisfies this requirement. Subsection 118-520(2) The Fund has not and cannot deduct amounts under either the ITAA 1997 or the ITAA 1936 for amounts paid to it. The Fund has not been allowed a tax offset or a tax offset is not allowable for an amount that has been paid to it. Therefore, the Fund satisfies this requirement. As a result, the Fund meets all the requirements of being a 'superannuation fund for foreign residents' as defined by section 118-520 of the ITAA 1997. The Fund is exempt from income tax in the country in which the non-resident resides The Fund's income is exempt from the income tax of Country A where it resides, in accordance with a determination from Country A's tax authority. Therefore, the Fund satisfies this requirement. 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. As the Fund has derived income from Australian investments which were acquired after 1 July 2019, subsection 128(3CA) of the ITAA 1936 applies to the Fund's income from its Australian investments. 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 . 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. The Fund held less than 10% of the total participation interests in each Australian entity to which it invested. Further, the Fund would hold less than 10% of the total participation interests in each entity 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 Australian investments. 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: (iii) is directly or indirectly able to determine; or (iv) in acting in concert with others, is directly or indirectly able to determine; (b) 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; (c) 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 each of the Australian entities to which the Fund has invested:
• neither the Fund, nor any related party of the Fund, had involvement in the day-to-day management of the business of any of the Australian investments • neither the Fund, nor any related party of the Fund, held any right to appoint a person to a board, committee or similar, either directly or indirectly, of any of the Australian investments • neither the Fund, nor any related party, held the right to representation on any investor representative or advisory committee (or similar) of any of the Australian investments • neither the Fund, nor any related party, had the ability to direct or influence the operation of any of the Australian investments outside of the ordinary rights conferred by the equity interest held • the Fund has not entered into or received any side letters, arrangements or agreements, and • the Fund did not hold any veto rights on security holder votes. Based on the above, the Fund did not have influence of a kind described in subsection 128B(3CD) of the ITAA 1936. Otherwise non-assessable non-exempt income
The income received by the Fund were 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 . Conclusion Having regard to the requirements of paragraph 128B(3)(jb) of the ITAA 1936, the Fund is excluded from withholding tax in relation to interest and dividend income derived from its Australian investments.