Is the Fund excluded from liability to withholding tax on its interest, dividend and non-share dividend income derived in respect of its current investments under paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)?
Yes This ruling applies for the following period 1 July 20xx to 30 June 20xx The scheme commenced on: 1 July 20xx
1. The Fund is the administrator of a multiple employer retirement system that provides retirement, survivor, disability and death benefits to employees. 2. The Fund is governed by a board of trustees (the Trustees). 3. The Trustees are based in Country X. 4. The main purpose of the Fund is to provide retirement annuities and other benefits (outlined below) for employees, and their dependents. 5. The Fund operates as one legal entity. 6. The Trustees have the power to ensure the proper administration of the Fund. 7. The plans administered by the Fund include two defined benefit retirement plans and two defined contribution plans a. Defined Benefit Plan 1; b. Defined Benefit Plan 2; c. Defined Contribution Plan 1; d. Defined Contribution Plan 2. 8. The Fund is funded through contributions from non-employer, employer and employee contributions as well as investment earnings. 9. Both employers and employees contribute to the Fund. Management of Investments 10. The Fund has a number of investment managers. The Trustees have oversight of all investment managers.
11. The Trustees have a master trustee and custodian (the Custodian). Assets are held at the Custodian. All returns are paid directly into the appropriate Fund account at the Custodian. The Custodian invests in securities under the instruction of the appointed investment managers. 12. It is possible for the Fund to invest into commingled funds. There is no such Investments currently in Australia. 13. The contributions made to the different plans offered by the Fund are accounted for and invested separately. Termination of the Fund 14. The Fund provided a statement that is an indefinitely continuing fund. 15. The Defined Contribution Plan 1 (Plan 1) may be terminated. If this were to occur, members of this plan would join one of the remaining plans on offer. Benefits Provided Defined Benefit Rules a. Normal retirement: a defined pension upon normal retirement age, depending upon years of continuous service provided.
b. Early retirement: a defined benefit pension before normal retirement age is a member has not reached the standard age of retirement and is retiring from service with X% reduction per year. Member may apply for an accelerated pension payment in lieu of the full pension benefits if they meet certain conditions. c. Disability retirement annuities or disability benefits: a defined benefit pension where a member becomes unable to work or is dismissed by their employer before normal retirement age due to ill-health or infirmity, provided x years of continuous service are met. d. Death and Survivors Insurance benefits. Defined Contribution Rules for Plan 1 a. Normal retirement: a member who retires from service at or after normal retirement is entitled to a defined contribution pension and/or lump sum. b. Disability benefits: a member becomes unable to work before normal retirement age is entitled to a defined contribution pension. c. No Death or Survivors Insurance Benefits. d. Plan 1 offers an investment account benefit. Members can allocate X% of their account balance which in turn qualifies them for retiree health insurance.
16. Members will be refunded of their contributions where their employee status is terminated. By accepting the separation refund, all future benefits are forfeited. The member must have terminated employment from all employers covered under the Fund or have been laid off for over x days. The member is to instruct where the funds should be sent - home or financial institution or whether they wish to roll the funds into another retirement plan. 17. If a member terminates employment and applies for a refund with less than x years of service credit, the member will be entitled to receive the total contributions plus effective rate of interest accumulated. For x year or more of qualified service, the refund includes member contributions and interest plus an equal match from employer. The Fund will withhold a certain amount for income tax for those that choose this refund if it is over a certain amount and may also be subject to an early withdrawal penalty unless certain factors are met. Defined Contribution Plan 2
18. Defined Contribution Plan 2 (Plan 2) is an additional plan that has recently started accepting contributions. Those employed before 30 June 20XX can choose to join Plan 2. Any new members who join after 1 July 20XX will be enrolled automatically. 19. Plan 2 allows for emergency withdrawals in certain situations. Distributions from Plan 2 are allowed upon separation of employment with the Fund-covered employment, attainment of age x for disability, an unforeseeable emergency or death. 20. Plan 2 is accounted for separately to the other plans of the Fund. The assets of Plan 2 are maintained under a trust administered by the Trustees. 21. The Fund maintains separate custodial funds for Plan 1 and Plan 2. The Fund utilises a third-party administrator for certain aspects of both Defined Contribution Plans. Plan 2 currently has no attributable investment income in the Fund's investment profile in Australia. This Ruling does not apply to income derived from investments held by the Fund for the purposes of the administration of Defined Contribution Plan 2. Other relevant facts 22. The Fund has not and cannot deduct amounts under either the
Income Tax Assessment Act 1997 (ITAA 1997) or the ITAA 1936 for amounts paid to it. 23. 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. 24. The Fund's employee and employer contributions are treated as being under a particular form of trust with Fund as trustee to its members, which prohibits the beneficiary's interest from being assigned and also prevents a creditor from attaching interest. 25. This trust does not alter the Fund's tax status. 26. Excess funds are to be used for Fund members, not to provide money for the Fund itself. 27. The Fund as a particular form of trust can only withhold pension payments to an eligible member if so ordered by a court or taxing authority. 28. The Fund has submitted a notice from Country X tax authority which states that they are a resident of Country X, is registered and that tax relief exemptions are available. 29. Income of the Fund is not non-assessable non-exempt income because of: a. Subdivision 880-C of the ITAA 1997, or b. Division 880 of the Income Tax (Transitional Provisions) Act 1997. The Fund's Australian investments
30. The Fund's investments include Australian equity and debt investments. The investments have the following characteristics: a. All equity investments are listed on the Australian Securities Exchange (ASX). b. The Fund holds less than 10% of the total participation interests in each Australian company, trust, or real estate investment trust (REIT). c. The Fund would hold less than 10% of the total participation interest in each Australian company, trust or REIT in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936. d. Neither the Fund, nor any related party, has involvement in the day to day management of the business of any of the Australian companies, trusts or REITs. e. Neither the Fund, nor any related party of the Fund, has the right to appoint a director to the Board of Directors of the Australian company or equivalent role in a trust or REIT. f. Neither the Fund, nor any related party, has the ability to direct or influence the operation of the Australian company, trust or REIT outside of the ordinary rights conferred by the interest held.
g. The Fund only holds rights to vote in proportion to its interests in each Australian company, trust or REIT. h. The Fund's investments in Australia do not derive income that are attributable to the Defined Contribution Plan 2.
Question 1 Is the Fund excluded from liability to withholding tax on interest, dividends and non-share dividend income derived from its Australian investments in accordance with paragraph 128B(3)(jb) of the ITAA 1936? Summary The Fund is excluded from liability to withholding tax on interest, dividend and non-share dividend income derived from its Australian investments under 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 non-resident 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. The Fund is a non-resident The Fund is not a resident of Australia for income tax purposes. The Fund was established and managed in Country X. 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: 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 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; (b) a tax offset has been allowed or is allowable for such an amount. To be considered a superannuation fund for foreign residents for the purpose of paragraph 128B(3)(jb) of the ITAA 1936, it must be established that: The Fund is an indefinitely continuing fund The Fund is a provident, benefit, superannuation, or retirement fund The Fund was established in a foreign country The Fund was established and maintained to provide benefits for individuals who are not Australian residents The central management and control of the Fund is carried on outside of Australia by entities none of whom are Australian residents No amount paid to the Fund or set aside for the Fund has been or can be deducted under ITAA 1997, and No tax offset has been allowed or would be allowed for an amount paid to the Fund or set aside for the Fund. 1. The Fund is an indefinitely continuing fund
The Fund was created as a trust with the main purpose to provide pensions and other benefits to the members of the Fund, including their dependents. The Fund has provided a statement that it is an indefinitely continuing fund. Therefore, the Fund satisfies this requirement. 2. 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 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). In Scott , the High Court examined the terms 'superannuation fund' and 'fund'. Justice Windeyer stated at ATD 351; AITR 312; ALJR 278 that:
... I have come to the conclusion that there is no essential single attribute of a superannuation fund established for the benefit of employees except that it must be a fund bona fide devoted as its sole purpose to providing for employees who are participants money benefits (or benefits having a monetary value) upon their reaching a prescribed age. In this connexion "fund", I take it, ordinarily means money (or investments) set aside and invested, the surplus income from being capitalised. In Mahoney v. Commissioner of Taxation (Cth) (1967) 41 ALJR 232; (1967) 14 ATD 419; 10 AITR 463 ( Mahoney Case ), the High Court took a similar view as in Scott , Justice Kitto expressed the view at ALJR 232; (1967) ATD 520; AITR 464 that:
All that need be recognised is that just as 'provident' and 'superannuation' both referred to the provision of a particular kind of benefit - in the one case a provision against contemplated contingencies, and in the other case a provision, to arise on an employee's retirement or death or other cessation of employee, of a subvention for him or his estate or persons towards whom he may have stood in some kind of relation commonly giving rise to a legal or moral responsibility - so 'benefit' must have meant a benefit, not a general sense, but characterised by some specific future purpose. The above cases emphasise that the benefits provided must have a specific purpose. It is also a requirement to show that there is a connection between the benefit received and the provision of the fund for retirement or death of a member or against 'contemplated contingencies', such as death, disability, or serious illness. The Fund provides the following benefits to its members: Defined Benefit Rules a. Normal retirement: a defined benefit pension upon normal retirement age, depending upon years of continuous service provided.
b. Early retirement: a defined benefit pension before normal retirement age if a member has not reached the standard retirement age and is retiring from service with X% reduction per year. Members may apply for an accelerated pension payment in lieu of the full pension benefits if they meet certain conditions. c. Disability retirement annuities or disability benefits: a defined benefit pension where a member becomes unable to work or is dismissed by their employer before normal retirement age due to ill-health or infirmity, provided two years of continuous service are met. d. Death and Survivors Insurance benefits. Defined Contribution Rules for Plan 1: a. Normal retirement: a member who retires from service at or after normal retirement is entitled to a defined contribution pension and/or lump sum. b. Disability benefits: a member becomes unable to work before normal retirement age is entitled to a defined contribution pension. c. No Death and Survivors Insurance Benefits. d. Plan 1 offers an insurance investment benefit. Members can allocate up to X% of their account balance which in turn qualifies them for retiree health insurance.
Members will be refunded their contributions in the circumstances that their employment is terminated and by accepting the refund they forfeit any future benefits available to them. The member must have terminated employment from all employers covered under the Fund or have been laid off for more than x days. The member must also instruct where the funds should be sent. In respect to the insurance investment benefit, a part of the Defined Contribution Plan 1, this benefit is subordinate to the provision of retirement benefits. As health insurance is an ancillary function of a superannuation fund, this benefit may be seen as merely auxiliary to the purpose of the Fund, and a contemplated contingency. The benefits of the Fund overall align with the sole purpose of providing retirement benefits or benefits in other allowable contemplated contingencies. The Fund's Defined Contribution Plan 2 is an account offered as an optional plan in relation to legislative requirement. The investments are accounted for separately and do not relate to the investments made by the Fund into Australia to which this Ruling applies. Therefore, the Fund satisfies this requirement.
3. Established in a foreign country The Fund is established in Country X. Therefore, the Fund satisfies this requirement. 4. Was established and maintained only to provide benefits for individuals who are not Australian residents The Fund was established and is maintained only to provide benefits to its employees of various Fund employers. The employers and their employees reside in Country X. Therefore, the Fund satisfies this requirement. 5. Central management and control (CM&C) Paragraph 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 in respect of the central management and control (CM&C) of a superannuation fund: 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 operations 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 central management and control of the Fund is done by the Trustees, none of whom are Australian residents. All acts of CM&C are carried on outside of Australia. Therefore, the Fund satisfies this requirement. 6. Subsection 118-520(2)
The Fund has not and cannot deducts amounts under either the ITAA 1936 or the ITAA 1997 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. 7. Conclusion As all of the above requirements are satisfied, the Fund meets the relevant conditions to be a superannuation fud for foreign residents defined in section 118-520 of the ITAA 1997. Consists of interest or dividend and/or non-share dividend paid by a company that is a resident 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 will receive interest income from its investments and dividend income paid by Australian residents from its investments. 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 Fund must satisfy the 'portfolio interest test' in relation to the test entity (subsection 128B93(CC) 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 derived 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. 1. 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 holds less than 10% of the total participation interests in each Australian company, trust, or real estate investment trust (REIT). Further, the Fund would hold less than 10% of the total participation interests in each Australian company, trust, or REIT 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 current investments. 2. The Fund satisfies the 'influence 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 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). There are then two distinct tests within the influence test. Sub-test 1 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 other to determine the identity of a relevant decision maker in a test entity.
Law Companion Ruling LCR 2020/3 The superannuation fund for foreign residents withholding tax exemption and sovereign immunity (LCR 2020/3) states in paragraph 18 that the phrase 'acting in concert' was considered by Finkelstein J in Papua New Guinea Dockyard Limited v Adams [2005] FCA 413 at [13]: 'Many of the important cases that discuss the meaning of acting in concert are helpfully collected by Barrett J in Bateman v. Newhaven Park Stud Ltd (2004) 49 ACSR 597. These cases show that a person, A, will be acting in concert with another person B, if A engages in conduct (act or omission) in consequence of an agreement or understanding between A and B and the conduct is in pursuance of an objective or purpose which is common to both. It is not as is sometimes suggested necessary to show that the common objective or purpose "has some pejorative element [such as] to circumvent the letter, or perhaps even the spirit, of some other statutory obligation or requirement.' Sub-test 1 may also extend 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 either alone or acting in concert as represented by the Fund. In respect to the investments listed in the relevant facts and circumstances to this Ruling: a) Neither the Fund, nor any related party of the Fund, has involvement in the day-to-day management of the business of any of the Australian companies, trusts or REITs. b) Neither the Fund, nor any related party of the Fund, has the right to appoint a director to the Board of Directors of the Australian company or equivalent role in a trust or REIT. c) Neither the Fund, nor any related party to the Fund, holds the right to representation on any investor representative or advisory committee (or similar) of the Australian company, or equivalent role in a trust or REIT.
d) Neither the Fund, nor any related party of the Fund, has the ability to direct or influence the operation of the Australian company, trust or REIT outside of the ordinary rights conferred by the interest held. e) The Fund only holds right to vote in proportion to its interest in each Australian company, trust, or REIT. Based on the statements above, the Commissioner accepts that the Fund does not have influence of a kind described in subsection 128B(3CD) of the ITAA 1936. 3. 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. Conclusion The Fund is excluded from withholding tax in relation to interest, dividend and non-share dividend income derived from its Australian investments.