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 period: 1 July 20xx to 30 June 20yy The scheme commenced on: 1 July 20xx
The Fund was established in Country X. The Fund's registered office is in Country X. The Fund has a Governing Agreement. The Fund's Plan informs what benefits are available, conditions of access, payment options and benefit application procedures. The Plan provides the rules and procedures for the payment of benefits from the Fund which have been established and adopted by the Governing Body. The Plan is a defined benefit plan. The Governing Agreement sets out the relevant duties and powers afforded to the Governing Body. The Governing Body is responsible for the Plan's and the Fund's operation. The Governing Body has sole authority to make final decisions regarding any benefit applications. The Fund is created, established and maintained for the purpose of providing benefits for the Employees and their beneficiaries in accordance with the Plan. The Fund holds the Plan's assets. The Fund is primarily funded by employer contributions. Employee contributions are not allowed. Under the Governing Agreement, a participant enters the Fund once the employer is obligated to contribute to the Fund. Members of the Fund are not residents of Australia.
The Fund is tax-exempt in accordance with Country X law. Benefits provided The Fund provides benefits to members as follows: (i) Normal Retirement Benefits (ii) Early Retirement Benefits: An Employee shall be eligible to retire at an earlier age for a reduced/ recalculation of retirement benefits. (iii) Total and Permanent Disability Benefits (iv) Joint and Survivor Benefit (v) Termination Benefits: If a member is vested in the Plan at the time of termination, they would be entitled to a pension benefit based on the Plan rules. If the member is not vested at the time of termination and suffers a break in service, those funds would be forfeited and remain in the Fund. If employment is terminated before retirement, the termination benefit is to be received when the Employee reaches their retirement age. (vi) Small Distributions: If the distribution occurs, the actuarial value of the benefit is $x or less, it will be paid as a single lump sum. (vii) Death Benefits Investment management
The Fund's investment policy was adopted in accordance with laws that govern the Fund and sets out the objectives and rules of investment for the Fund. Custodian holds the Australian assets on behalf of the Fund. Australian investments The Fund has invested in the Australian equity investments. These equity investments all have the following characteristics: (viii) All investments are listed on the Australian Securities Exchange (ASX). (ix) The Fund holds less than 10% of the total participation interests in each Australian company. (x) The Fund would hold less than 10% of the total participation interests in each Australian company in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936. (xi) 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. (xii) Neither the Fund, nor any related party of the Fund, has the right to appoint a director to the Board of Directors of any of the Australian companies
(xiii) Neither the Fund, nor any related party, holds the right to representation on any investor representative or advisory committee (or similar) of any of the Australian companies. (xiv) Nether the Fund, nor any related party, has the ability to direct or influence the operation of the Australian companies outside of the ordinary rights conferred by the equity interest held. (xv) The Fund only holds rights to vote in proportion to its equity interest in each Australian company. Other relevant facts 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. The Fund has not been allowed a tax offset or a tax offset is now allowable for an amount that has been paid to it. Income of the Fund is not non-assessable non-exempt income because of: (xvi) Subdivision 880-C of the ITAA 1997, or (xvii) Division 880 of the Income Tax (Transitional Provisions) Act 1997 .
The circumstances in which the Fund can be amended are limited and must not decrease the benefits of an Employee, or beneficiary, who is receiving benefits. In the event of termination of the Fund, all accrued benefits of the affected Employees, to the extend then funded, shall become fully vested and be nonforfeitable. No funds can be returned to an employer. The Governing Body may terminate the Plan.It is not contemplated the Plan will be terminated. It is not contemplated that the Fund will be wound up or terminated by the Governing Body.
Income Tax Assessment Act 1936 Paragraph 128B(3)(jb)
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 non-resident that is a superannuation fund for foreign residents (as defined in section 118-520 of the Income Tax Assessment Act 1997 (ITAA 1997)), and • exempt from income tax in the country in which the non-resident resides. Paragraph 128B(3)(jb) of the ITAA 1936 The term 'superannuation fund for foreign residents' is defined in section 118-520 of the ITAA 1997 as follows: Meaning of superannuation fund for foreign residents (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. Consequently, for the Fund to be excluded from withholding tax on interest and dividend income that it derives from investments into Australia under paragraph 128B(3)(jb) of the ITAA 1936, it must be established that the Fund: i. is an indefinitely continuing fund ii. is a provident, benefit, superannuation or retirement fund iii. was established in a foreign country
iv. was established and maintained only to provide benefits for individuals who are not Australian residents v. has its central management and control carried on outside of Australia by entities none of whom are Australian residents vi. does not receive or have amounts set aside for it that have been or can be deducted under the ITAA 1936 or the ITAA 1997 vii. does not receive or have amounts set aside for it that give rise to a tax offset viii. receives income that consists of interest, or consists of dividends or non-share dividends paid by a company that is an Australian resident, and ix. is exempt from income tax in the country in which the non-resident resides. These requirements are considered below. i. An indefinitely continuing fund The term '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 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. 3. ...money resources. 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'. Justice's Windeyer views in Scott were cited with approval by Hill J in Walstern Pty Ltd v Commissioner of Taxation (2003) 138 FCR 1; who stated that 'for present purposes, the point is the need for "money" or "other property" to constitute a fund'. The Fund is responsible for managing the assets of the Plan, for the sole purpose of providing retirement benefits or benefits in alignment with other contemplated contingencies via the Plan. 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 Australian Oxford Dictionary defines the 'indefinitely' as '1. for an unlimited time...2. in an indefinite manner' and 'continuing' as '...persist in, maintain, nonstop'. The Fund can only be amended or terminated by the Governing Body in accordance with the Governing Agreement. The circumstances in which the Fund can be amended are limited and must not decrease the benefits of an Employee, or beneficiary, who is receiving benefits. In the event of termination of the Fund, all accrued benefits of the affected Employees, to the extend then funded, shall become fully vested and be nonforfeitable. No funds can be returned to an employer. The terms of the Governing Agreement do not require the Fund to be terminated or wound up after a specified period. In addition, there is no indication that there is any contemplation of the Fund ending at a defined point in time and there is no expectation that the Plan or the Fund will be discontinued. Therefore, it is accepted that the Fund is an indefinitely continuing fund. 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. The phrase, however, has been subject to judicial consideration. In Scott , Windeyer J stated 278: There is no definition in the Act of a superannuation fund. The meaning of the term must therefore depend upon ordinary usage...I have come to the conclusion that there is no 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. (emphasis added) In Mahony v Commissioner of Taxation (1967) 41 ALJR 232, Kitto J stated at 232:
There was no definition in the Act of 'a provident, benefit or superannuation fund', and the meaning of the several expressions must therefore be arrived at in light of ordinary usage and with only one piece of assistance to be gathered from the immediate context. Since a fund, if its income was to be exempt under the provision, was separately required to be one established for the benefit of employees, each of the three descriptive words 'provident', 'benefit' and 'superannuation' must be taken to have connoted a purpose narrower than the purpose of conferring benefits, in a completely general sense, upon employees. Precise definition may be difficult, and in any case is unnecessary for present purposes. All that need be recognized 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 employment
, 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 in a general sense, but characterized by some specific future purpose . A funeral benefit is a familiar example. (emphasis added) In Cameron Brae Pty Limited v FCT (2007) 161 FCR 468, the Full Federal Court held that the relevant fund was a superannuation fund for the purposes of former section 82AAE of the ITAA 1936. Jessup J stated at 506: In answering the question whether the fund was a "superannuation fund" as the term is ordinarily understood, it is, in my view, critical that payments could not have been made out of the fund (other than by way of administration expenses, taxation, etc) save to members of the relevant discretionary class, and save in circumstances which fell within the ordinary understanding of superannuation . A proper characterisation of the fund should, in my view, depend upon the purposes for which the assets and moneys of the fund might have been used rather than upon the quality of the rights of individual members of the fund.
If the fund could have been used only to achieve what might be described as a superannuation purpose, I would describe the fund as a "superannuation fund" . That a particular member of a discretionary class might not, ultimately, have received any payment, was not, in my view, disqualifying. (emphasis added) ATO Interpretative Decision ATO ID 2009/67 Income Tax: Superannuation fund for foreign residents (ATO ID 2009/67) refers to these authorities and provides the following guidance on the meaning of the phrase: 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 relevant authorities therefore establish that in order 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 contemplated contingencies (such as death, disability or serious illness). The Fund is created, established and maintained for the purpose of providing benefits for the Employees and their beneficiaries in accordance with the Plan. The Fund holds the Plan's assets. The Governing Body is responsible for the Plan's and the Fund's operation. The Governing Body has sole authority to make final decisions regarding any benefit applications. The Fund provides benefits to members in certain circumstances including, normal retirement, early retirement and benefits in limited instances where a member is terminated. Where a member's employment is terminated, the termination benefit is only eligible to be received when the member reaches their retirement age.
It is considered that the circumstances in which a member can ordinarily receive funds from the Fund upon retirement from employment are consistent with those of a provident, benefit, superannuation or retirement fund. Further, the alternative circumstances of access available to members and their beneficiaries, which include survivor pensions, disability pensions, single life annuity options and spouse benefits, are considered to align with the contemplated contingencies of a 'provident, benefit, superannuation or retirement fund' as outlined in the relevant judicial decisions and ATO ID 2009/67. As both the objective of the Fund and the actual operation of the Fund have the sole purpose of providing retirement benefits or benefits in alignment with other contemplated contingencies via the Plan, the Fund is considered to be a provident, benefit, superannuation or retirement fund. It is therefore reasonable to conclude that the Fund satisfies this requirement. iii. Established in a foreign country The Fund and the Plan were established in Country X. Therefore, the Fund was established in a foreign country and this requirement is satisfied.
iv. Was established and maintained only to provide benefits for individuals who are not Australian residents The Fund was established and is maintained to provide benefits to the Plan's Employees and their beneficiaries, all of whom are not Australian residents. Therefore, the Fund satisfies this requirement. v. Central management and control is carried on outside Australia by entities none of whom is an Australian resident The Fund was established in Country X and is registered and operated from Country X. In addition, the Fund's central management and control is carried on outside of Australia by persons none of whom is a resident of Australia. Based on the above, it is reasonable to conclude that the Fund's central management and control occurs outside of Australia by entities that are not Australian residents. Therefore, the Fund satisfies this requirement. vi. Does not receive, or have amounts set aside for it, that have been or can be deducted under the ITAA 1936 or ITAA 1997 No amounts that have been paid to the Fund, or have been set aside to be paid to the Fund, have or can be deducted under the ITAA 1936 or ITAA 1997.
Therefore, the Fund satisfies this requirement. vii. Does not receive, or have amounts set aside for it, that give rise to a tax offset. The Fund has advised that no amounts that have been paid to the Fund, or set aside to be paid to the Fund, are amounts for which a tax offset has been allowed, or would be allowable, under the ITAA 1936 or the ITAA 1997. Therefore, the Fund satisfies this requirement. viii. Receives income that consists of interest, or consists of dividends or non-share dividends paid by a company that is an Australian resident The Fund receives Australian sourced income in the form of interest and dividends from the entities, which are Australian resident companies. Therefore, the Fund satisfies this requirement. ix. Is exempt from income tax in the country in which it resides The Fund is tax-exempt under Country X law. The Fund is exempt from tax in the country in which it resides. 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.
The Fund therefore meets the requirements of paragraph 128B(3)(jb) of the ITAA 1936. In order to be excluded from liability to withholding tax under paragraph 128B(3)(jb) of the ITAA 1936, the requirements in subsection 128B(3CA) of the ITAA 1936 must be met. Relevantly: i. the Fund must satisfy the 'portfolio interest test' in relation to the entities (subsection 128B(3CC) of the ITAA 1936) ii. the Fund must satisfy the 'influence test' (subsection 128B(3CD) of the ITAA 1936) in relation to the entities, and iii. the income cannot otherwise be NANE income 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' in relation to the entities Subsection 128B(3CC) of the ITAA 1936 states: (3CC) 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 the entities. Further, the Fund would hold less than 10% of the total participation interests in the circumstances detailed at paragraph 128B(3CC)(b) of the ITAA 1936. As such, it is reasonable for the Commissioner to conclude that the Fund satisfies the 'portfolio interest test' in respect of its Australian investments. ii. The Fund satisfies the 'influence test' in relation to the entities Subsection 128B(3CD) of the ITAA 1936 states the following: (3CD) 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) of the ITAA 1936, assesses whether the foreign superannuation 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 foreign superannuation fund is able to act in concert with others to determine the identity of a relevant decision-maker in any of the entities. Sub-test 1 also extends to situations where the foreign superannuation fund, in its own right, holds the ability to approve or veto decisions which go to the control or direction of any of the entities. Law Companion Ruling LCR 2020/3 - The superannuation fund for foreign residents withholding tax exemption and sovereign immunity (LCR 2020/3) provides examples and guidance on the 'influence test' and states the following at paragraphs 11 to 13 with respect of sub-test 1:
11. Whether the relevant entity is able to determine the identity of (to settle or decide upon, to choose or appoint) one of those persons is a question of fact. The phrase 'able to' focuses on the relent entity's capacity or power. The sub-test is therefore not limited to situations where the entity has already determined, or intends to determine, the identity of one of the relevant decision makers. A right to determine will be sufficient for the requisite level of influence to exist. 12. The relevant entity will not be 'able to' determine, as a matter of fact, where it has irrevocably and unconditionally waived its rights by way of a legally enforceable agreement. 13. The sub-test also extends to situations where the relevant entity has the indirect capacity to determine the identity of one of the relevant decision makers. This may occur, for example, where the relevant entity controls another entity and that other entity holds the right to determine the decision-maker's identity.
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. LCR 2020/3 provides the following guidance at paragraph 29 in respect of sub-test 2: 29. The three matters ('accustomed', 'obliged' or 'might reasonably be expected to') are not a composite phrase denoting a single test; they comprise different considerations each of which is sufficient to establish influence: • Whether a person is 'accustomed' to act in accordance with the directions, instructions or wishes of the relevant entity requires an analysis of past facts. This necessitates an examination of any discernible pattern of the person following the directions, instructions or wishes given by the relevant entity. • Whether a person is 'obliged' to act in accordance with the directions, instructions or wishes of the relevant entity depends upon a formal or informal obligation existing at the relevant time.
• Whether a person 'might reasonably be expected' to act in accordance with the directions, instructions or wishes of the relevant entity requires a prediction as to future events and a consideration as to the objective likelihood of those future events occurring. This requires a consideration of all of the facts and circumstances impacting upon the relationship between the two parties. The following are relevant in determining whether the Fund satisfies the 'influence test' in respect of its Australian investments: • the Fund has no direct or indirect involvement in the day-to-day management of the business of any of the entities • the Fund has no direct or indirect right to appoint a director to the Board of Directors, or any investor representative or advisory committee (or similar) of any of the entities • the Fund has no direct or indirect ability to direct or influence the operation of the entities outside the ordinary rights conferred by the interest held
• the Fund's interests do not provide it with an entitlement to either directly or indirectly determine the identity of any person who makes decisions that comprise the control and direction of the entities' operations, and • no person involved in the control and direction of the entities' operations is accustomed or obliged to act in accordance with the direct or indirect directions, instructions or wishes of the Fund. Based on the above, the Commissioner has determined that it is reasonable to conclude that the Fund does not have influence over the entities in subsection 128B(3CD) of the ITAA 1936. Therefore, the Fund satisfies this requirement. iii. the income derived by the Fund cannot otherwise be non-assessable none-exempt (NANE) income. The income of the Fund is not NANE income because of Subdivision 880-C of the ITAA 1997. Therefore, the Fund satisfies this requirement.