Is the Fund, excluded from liability to withholding tax on interest, dividend and non-share dividend income derived from its investment(s), in accordance with paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)?
Yes. This ruling applies for the following period : 30 June 20XX to 1 July 20XX The scheme commences on: 30 June 20XX
Background 1. The Fund is pension plan established by a foreign country (Country A). 2. The Fund is a qualified governmental pension plan pursuant to the state laws in Country A. 3. The Fund is governed and administered by a Board of Trustees appointed by the Governor. 4. The Fund's Defined Benefit Plan is the primary plan for members and will provide, upon retirement, lifelong monthly benefits. 5. Other benefits provided by the Fund include death, disability and survivor benefits to dependents of the members or to the member's estate. 6. A member may also receive early retirement benefits after reaching a certain age and completed required years of service, but a reduction will be applied to the benefit. Investment Objectives 7. In respect to the shares held, the following characteristics apply: a. The Fund does not hold more than 10% of the total equity of an investment. b. The Fund does not hold any right to appoint a person to a board, committee, or similar, either directly or indirectly. c. The Fund has not entered into or received any side letters, arrangements or agreements.
d. The Fund does not hold any veto rights on security holders votes. e. The Fund does not hold any other influence potentially of a kind described in subsection 128(3CD) of the ITAA 1936. Other facts 8. The central management and control of the Fund is not in Australia. 9. The Fund is an indefinitely continuing fund and has no termination date. 10. The Fund is exempt from income tax in Country A. 11. No amount paid to the Fund by members or employers contributing to the Fund entitle the member or employer to a tax offset or deduction under Australian income tax.
Income Tax Assessment Act 1936 paragraph 128B(3)(jb)
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 resides. 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 Commissioner has determined from the facts and circumstances that the Fund is not a resident of Australia. Therefore, the Fund satisfies this requirement. Superannuation fund for foreign residents Section 118-520 of the ITAA 1997 provides: 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 is 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. An indefinitely continuing fund The Fund was established in 1953 and legislation does not state how or if the Fund can be terminated. The Fund has provided a statement which states that the Fund is an indefinitely continuing Fund. Therefore, the Fund satisfies this requirement. 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': 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; 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). The above establish 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 established to provide benefits to the Fund participants on the satisfaction of the Fund requirements. The Fund has retirements benefits, disability benefits, death benefits and survivor benefits.
The purpose of the Fund is to provide retirement, disability, death and survivor benefits to employees of Country A, universities and political subdivisions. The Fund contains retirement age and minimum service requirements for members to be eligible for retirement benefits. The Fund also allows members to access early retirement, or late retirement benefits where a member can accrue additional retirement benefits based on having more years of service. There are no benefits provided by the Fund to members and their beneficiaries beyond those as prescribed above and the Commissioner accepts that the alternate circumstances of access to the funds, being incapacity, and death align to the contemplated contingencies of a provident, benefit, superannuation or retirement fund. All monies managed by the Fund are used solely for the purposes of administering and paying out benefits under the Fund. Therefore, the Fund satisfies this requirement. Established in a foreign country The Fund was established in Country A, which is a foreign country. 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 in Country A for the benefit of its members, who are employees of Country A, participating political subdivisions and Country A school districts. Therefore, the Fund satisfies this requirement. 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. Furthermore, paragraph 10 and 11 of the Taxation Ruling TR 2018/5 Income tax: Central Management and Control test of residency (TR 2018/5) states: 10. Central management and control refers to the control and direction of a company's operations. It does not refer to a physical location in which the control and direction of a company is located, and may ultimately be exercised in more than one location.
11. The key element in the control and direction of a company's operations is the making of high-level decisions that set the company's general policies, and determine the direction of its operations and the type of transactions it will enter. The Commissioner has determined from the facts and circumstances that the Fund's CM&C is exercised by the Board in the USA. 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. 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. Subparagraph 128(3)(jb)(ii) of the ITAA 1936 Paragraph 128B(3)(jb) of the ITAA 1936 will only apply to interest, or to dividends and non-share dividends paid by Australian resident companies.
The Fund has provided a list of its Australian investments that comprise dividend income being paid by Australian resident companies. 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. Relevantly: • The Plan must satisfy the 'portfolio interest test' in relation to the test entity (subsection 128B(3CC) of the ITAA 1936) • The Plan 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 Plan 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. In relation to equity investment listed in Appendix 1, the Fund confirms that they do not own more than 10% of the total equity of an investment. Therefore, the Fund satisfies the 'portfolio interest test' in respect of its investments listed in Appendix 1 of the relevant facts and circumstances of this ruling. The Fund satisfies the 'influencer test' Subsection 128B(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: (i) is directly or indirectly able to determine; or (ii) 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 Plan 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 Plan 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 Plan, 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 Plan. Relevantly, in respect of the investment listed in Appendix 1 and the relevant facts and circumstances of this Ruling:
a) The Fund does not own more than 10% of the total equity of an investment. b) The Fund does not hold any right to appoint a person to a board, committee, or similar, either directly or indirectly. c) The Fund has not entered into or received any side letters, arrangements or agreements. d) The Fund does not hold any veto rights on security holders votes. e) The fund does not hold any other influence potentially of a kind described in subsection 128B(3CD) of the ITAA 1936. Based on the above, the Commissioner accepts that the Plan does not have influence of a kind described in subsection 128B(3CD) of the ITAA 1936. Otherwise, non-assessable non-exempt The Fund has advised that 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. Conclusion
Having regard to the requirements of paragraph 128(3)(jb) of the ITAA 1936, the Fund is excluded from 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.