Is the Fund 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 Income Tax Assessment Act 1936 (ITAA 1936)?
Yes. This ruling applies for the following period : XX July 20YY to XX June 20YY The scheme commenced on: XX July 20YY
Overview of the Fund 1. The Fund was established by State Statue. 2. The Fund is a state-wide entity that administers a cost-sharing, multiple-employer, defined benefit public employees' retirement system. 3. The Fund includes the employees of the State, cities, schools, state government and other local public employers. 4. The Fund is administered to provide a reasonable base income to qualified employees who have been employed by a public employer and whose earning capacities have been removed or substantially impaired by age or disability. 5. The Fund comprises of two sub-funds. Membership 6. Membership is required of any person employed in a qualifying position commencing on the employee's first day of work. 7. Membership is cancelled upon refund, retirement, or death. Service 8. Public employees earn service credit for years, months and days in a paid status. 9. Members with five years of creditable service may purchase up to five years of service credit. Governance 10. The Board is the governing body of the Fund with responsibility for administration and management in conformance with the relevant law.
11. The Executive Officer is responsible for day-to-day operations including the administration of the Fund. Contributions 12. The Fund's basic funding policy provides for periodic contributions at a level pattern of cost as a percentage of salary throughout an employee's working lifetime to accumulate sufficient assets to pay benefits when due. 13. Per the State Statue a member may withdraw the employee contributions credited to the member's individual account if they have terminated service for which contribution is required or the member is employed in a position for which contribution is prohibited. Benefits provided 14. The Fund distributes benefits directly to members. 15. Benefits are determined by the number of years of accredited service at the time of retirement and the member's highest average compensation. 16. Benefit payments to which participants or their beneficiaries may be entitled under the plan include pension benefits, disability benefits, and survivor benefits.
17. Members with the years of service necessary to receive a retirement benefit but who have not reached the age for an unreduced benefit may retire at any age with the benefit reduced for each full year they are under the required age. 18. There are age and service requirements that must be met before a member can retire. Disability Benefit 19. Members with five or more years of service who become totally unable to perform their current or any comparable job because of an injury or mental or physical illness of a permanent nature are eligible to apply for disability retirement. 20. Disability retirement benefits are calculated in the same manner as service retirement without reduction for age. Survivor Benefits 21. In certain circumstances, eligible survivors of a member who dies prior to retirement are entitled to specific benefits. 22. An additional benefit is available for a surviving spouse/registered domestic partner of an active member killed in the line of duty or in the course of employment regardless of service credit. Investments 23. The Fund holds the Australian investments. 24. The Australian investments pay dividend and/or interest income.
25. The Board is responsible for investing the funds. 26. The Fund's assets are invested for the exclusive benefit of members and beneficiaries of the fund. 27. All the Australian investments have the following characteristics: (a) All investments are in companies listed on the Australian Securities Exchanged (ASX). (b) The Fund holds less than 10% of the total participation interests in each entity it has invested in and has never held more than 10% participation interest. (c) 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. (d) Neither the Fund, nor any related part of the Fund, has involvement in the day-to-day management of the business of any of the Australian companies. (e) Neither the Fund, nor any related part of the Fund, has the right to appoint a director to the Board of Directors of the Australian company. (f) Neither the Fund, nor any related party of the Fund, holds the right to representation on any investor representative or advisory committee (or similar) of the Australian company.
(g) Neither the Fund, nor any related party of the Fund, has the ability to direct or influence the operation of the Australian company outside of the ordinary rights conferred by the equity or debt interest held. (h) The Fund only holds rights to vote in proportion to its equity interest in each Australian company and does not hold any veto rights on security holder votes. 28. The Fund uses investment managers to manage their Australian investments. 29. The Fund is paid the dividend and interest income from the Australian investments. 30. The Board may invest and reinvest the money and may employ investment counsel for that purpose. The Board may also employ investment supervisory services, trust audit services and other related investment services which it deems necessary to invest effectively and safeguard the money in the Fund's sub-funds. Other Relevant Facts 31. Employers collect contributions directly from members and pay those contributions to the Fund. 32. The Fund was established in a foreign country. 33. The Fund was established, and is maintained, only to provide benefits for individuals who are not Australian residents.
34. An amount paid to the Fund or set aside for the entity has not been or cannot be deducted under the ITAA 1997 and a tax offset has not been allowed or is not allowable for such an amount. 35. The income of the Fund is not non-assessable non-exempt income of the Fund because of: (i) Subdivision 880-C of the ITAA 1997; or (ii) Division 880 of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A 1997). 36. The Fund has not entered into or received any side letters, arrangements or agreements in relation to its Australian investments.
Income Tax Assessment Act 1936 paragraph 128B(3)(jb)
Question 1 Is the Fund excluded from liability to withholding tax on interest, dividend and non-share dividend income from its Australia investments under paragraph 128B(3)(jb) of ITAA 1936? Summary The requirements of paragraph 128B(3)(jb) of the ITAA 1936 are satisfied. Therefore, the Fund is excluded from liability to withholding tax on its interest, dividend and/or non-share dividend income derived from its Australian investments under paragraph 128B(3)(ib) 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. 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. These requirements are considered below. Income that is derived For paragraph 128B(3)(jb) of the ITAA 1936 to apply, the superannuation fund for foreign residents must derive the relevant income. The Fund is the entity which holds/owns the relevant investments and is paid the dividend and interest income from the Australian resident companies. The Commissioner therefore accepts that the Fund derives the relevant income Therefore, the Fund satisfies this requirement. A non-resident The Fund is not a resident of Australia for tax purposes as it is established in a foreign country. The Fund has provided a letter from their relevant taxation authority stating that it is a resident of Country X. Therefore, the Fund satisfies this requirement. A superannuation fund for foreign residents
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. For the Fund to be considered a superannuation fund for foreign residents for the purposes of paragraph 128B(3)(jb) of the ITAA 1936, it must satisfy the requirements set out in section 118-520 of the ITAA 1997, which states: 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. Consequently, for the Fund to be considered a superannuation fund for foreign residents for the purposes of paragraph 128B(3)(jb) of the ITAA 1936, it must be established that the Fund: • is an indefinitely continuing fund • is a provident, benefit, superannuation or retirement fund • was established in a foreign country • was established and maintained only to provide benefits for individuals who are not Australian residents • has their central management and control carried on outside of Australia by entities none of whom are Australian residents • does not receive or have amounts set aside for them that have been or can be deducted under the ITAA 1936 or the ITAA 1997 • does not receive or have amounts set aside for them that give rise to a tax offset • that receives income that consists of interest, dividends or non-share dividends paid by a company that is an Australia resident, and
• ; that is exempt from income tax in the country in which the non-resident resides. Consideration of the above requirements of section 118-520 of the ITAA 1936, is outlined below. 1. An indefinitely continuing fund The legislation provides no guidance on the meaning of 'indefinitely continuing'. It is not a technical legal expression, and the ordinary meanings of indefinitely and continuing involve little ambiguity or controversy. The Macquarie Dictionary , [Online], viewed 22 August 2023, www.macquariedictionary.com.au defines 'indefinitely' and 'continuing' as follows: Indefinite: 1. not definite; without fixed or specified limit; unlimited: an indefinite number. 2. not clearly defined or determined; not precise. o indefinitely, adverb Continue: (verb (Continued, continuing)) 1. to go forwards or onwards in any course or action; keep on. 2. to go on after suspension or interruption. 3. to last or endure. 4. to remain in a place; abide; stay. 5. to remain in a particular state or capacity The Fund has provided a letter to the Commissioner, which states that the Fund 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 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 meets this objective by providing for retirement, death, disability and refund of contributions (in certain cases) to members. The Fund does not provide benefits as a result of events other than retirement, disability or death. As both the key objective of the Fund and the operation of the Fund have the sole purpose of providing retirement benefits or benefits in other allowable contemplated contingencies, the Commissioner accepts the Fund is considered to be a 'provident, benefit, superannuation or retirement fund'. Therefore, the Fund satisfies this requirement. 3. Established in a foreign country
The Fund was established in and is a tax resident of 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 for the principal purpose to manage and invest the Fund members' savings for their retirement. The employers and their employees reside in Country X. 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 and should not be taken to conclude that the Fund, in this case, has not been established and is not maintained only to provide benefits for non-residents, based on the rules and operation of the Fund. Therefore, the Fund satisfies this requirement. 5. Central management and control (CM&C) carried on outside Australia by entities none of whom is an Australian resident 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 Board is responsible for the general administration and operation of the Fund. None of the Board members are Australian residents for tax purposes, and all are residents of Country X. No Australian residents are involved in the central management and control of the Fund in any capacity. Further, the Fund's head office and its central management and control is in Country X. It is therefore reasonable to conclude that the central management and control of the Fund occurs outside of Australia by entities that are not Australian residents. Therefore, this requirement is satisfied. 6.
No amount paid to the Fund or set aside for the Fund has been or can be deducted under the ITAA 1997 and no 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 under the ITAA 1936 or ITAA 1997. A tax offset has not been allowed nor would be allowable for any amount paid to the Fund or set aside for the Fund. The Fund has also confirmed that no amount paid to the Fund can be deducted under ITAA 1997 or ITAA 1936. Therefore, this requirement is satisfied. 7. 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. Consists of interest or dividend and/or non-share dividends 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 derive income from the Australian investments, being interest, dividend and non-share dividend income from companies who are residents of Australia for tax purposes.
Therefore, the Fund will satisfy this requirement. The Fund is exempt from income tax in the country in which the non-resident resides The relevant taxation authority confirmed in a letter, that the Fund is exempt from taxation in Country X. Subsection 128B(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: (i) The superannuation fund for foreign residents must satisfy the 'portfolio interest test' in relation to the test entity (subsection 128B(3CC) of the ITAA 1936) (ii) The superannuation fund for foreign residents must not, at the time the income was derived, have influence of a kind described in subsection 128B(3CD) of the ITAA 1936 in relation to the test entity, and (iii) The income cannot otherwise be 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.
These requirements are considered below. 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. Subsection 128B(3CB) defines the test entity to be either the entity that paid the interest, dividends or non-share dividends or, if subsection 128A(3) of the ITAA 1936 applies in relation to a resident trust estate, that trust estate. In the case of the Fund, the relevant 'test entities' are the Australian entities which it holds investments in.
The Fund holds less than 10% of the total participation interests in each entity and has never held more than a 10% participation interest. 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 current investments listed. 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 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 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.
The Fund only has portfolio investments of less than 1% of the membership interests in the listed entities, none of which give it the power to appoint persons who may be involved in decisions comprising the control and direction of the test entity's operations. Sub-test 2 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 the Fund's Australian investments: (a) Neither the Fund, nor any related part of the Fund, has involvement in the day-to-day management of the business of any of the Australian companies. (b) Neither the Fund, nor any related part of the Fund, has the right to appoint a director to the Board of Directors of the Australian company. (c) Neither the Fund, nor any related party of the Fund, holds the right to representation on any investor representative or advisory committee (or similar) of the Australian company.
(d) Neither the Fund, nor any related party of the Fund, has the ability to direct or influence the operation of the Australian company outside of the ordinary rights conferred by the equity or debt interest held. (e) The Fund only holds rights to vote in proportion to its equity interest in each Australian company and does not hold any veto rights on security holder votes. For the same reasons outlined above, there is nothing to suggest that a decision-maker 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. Based upon the above, the Commissioner accepts that the Fund does not have influence of a kind described in subsection 128B(3CD) of the ITAA 1936. 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
Having regard to the requirements of paragraph 128B(3)(jb) of the ITAA 1936, the Fund is excluded from liability to withholding tax in relation to interest, dividend and non-share dividend income derived from its Australian investments.