1 Is The Fund excluded from liability to withhold tax on interest, dividend and non-share dividend income derived from its 'Direct Investments' as listed in the facts in accordance with paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)?
Yes. Question 2 Is interest, dividend and non-share dividend income derived by the Fund from its Direct Investments, except to the extend that interest, dividend and non-share dividend income is derived from assets acquired by the Fund, or the trust in which the Fund invests, after 27 March 2018, not assessable and not exempt income under section 128D of the ITAA 1936? Answer Yes. Question 3 Is the Fund excluded from liability to withhold tax on interest, dividend and non-share dividend income derived from its 'Public Australian Investments' as listed in the facts in accordance with paragraph 128B(3)(jb) of the ITAA 1936? Answer Yes. Question 4 Is interest, dividend and non-share dividend income derived by the Fund from its Public Australian Investments not assessable or not exempt income under 128D of the ITAA 1936? Answer Yes. This ruling applies for the following period: 01 July 20XX - 30 June 20XX The scheme commenced on: 1 July 20XX
Background The Fund is a pension plan established in a foreign country and administer by the laws in that country. The Fund provides retirement, disability and death benefits to eligible employees and their beneficiaries. The Fund's central management and control is carried out outside of Australia. The Fund currently invests in several Australian entities. The Fund's application included the following documentation: • Letters from the relevant overseas taxation authority certifying that the fund is exempt from income tax in its country of residence; • A copy of the Trust Deed; • A copy of the Fund's Plan Documents; • A Statement from the Fund confirming that: o The Fund is an indefinitely continuing fund, and a provident, benefit, superannuation or retirement fund; o The Fund was established in a foreign country; o The Fund was established and is maintained only to provide benefits for individuals who are not Australian residents; o The central management and control of the Fund is carried on outside of Australia by entities none of whom is an Australian resident;
o An amount paid to the Fund or set aside for the Fund has not been or cannot be deducted under ITAA 1997; and o A tax offset has not been allowed or is not allowable for an amount The Plan: The Plan is a defined benefit plan, which uses an employees salary and pension service to calculate the amount of pension benefit they will receive for life. The Plan has expanded to add a second plan schedule under the original plan which offers a reduced schedule of applicable benefits to the non-profit sector of the foreign city. Both members and employers make contributions which are pooled and invested. Pension benefits vest immediately under both the standard and the reduced schedule, including a lifetime pension payable when members reach the designated age. Members under the standard schedule may be eligible to retire early with an unreduced pension if they meet particular criteria. Ineligible and reduced schedule members may retire early with a reduced pension. Contributions Contributions and investment earnings fund the Plan benefits, with the value of benefits and required contributions based upon periodic actuarial valuations.
Contributions are made up of a percentage of pensionable salary, contributed by both the employer and members. Membership Membership in the Plan is comprised of both mandatory and optional membership based on the employment type of Members. Once a member, mandatory or optional, joins the Plan they may not end their membership until they terminate employment or retire. Members who terminate membership have the right to leave their entitlement in the Plan and receive a pension when they retire, or otherwise transfer the commuted value of their pension to an alternative retirement plan. Retirement The lifetime pension for Members is calculated using a formula which takes into account the Members pensionable pay and their years of pension service. Regular schedule members may elect to retire early if they are eligible, and allows for cost of living increases. Reduced schedule members do not have subsidies early retirement options, and any cost of living increases to their pension are dependant on annual Board approval. Death
Upon the death of a Member or pensioner, death benefits are available to a surviving eligible spouse, eligible children, a designated beneficiary or the Member's estate. The death benefit may be in the form of a survivor pension, a lump sum payment, or both. The regular schedule Plan provides a 60% survivor pension to an eligible spouse at no cost to the pensioner. Pre-retirement death benefits are provided to an eligible spouse, eligible children, the member's designated beneficiary or estate (in that order of priority). The reduced schedule Plan reduces a Member's pension to pay for a spousal survivor pension. Pre-retirement death benefits are provided only to an eligible spouse, the Member's designated beneficiary, or their estate. Disability Under the regular schedule a disability pension is available to Members with a minimum of 10 years pensionable service in the Plan who meet established criteria. The disability pension is calculated using the Member's pensionable service time and their average salary. Reduced schedule members do not receive disability pensions. Australian Investments The Fund provided a list of its of investments in Australia.
The Fund holds both private market ('direct') investments along with investments in listed Australian entities ('public' investments). The public investments of the Fund have the following characteristics: • All public investments are listed on the Australian Securities Exchange (ASX); • The Fund holds less than 1% of the total equity interests on issue of each Australian company or trust; • The Fund has no involvement in the day to day management of the business of any of the Australian companies or trusts;\ • The Fund has no rights to appoint any person to any board, committee or similar, either directly or indirectly, of the Australian company or trust. • The Fund has no ability to direct or influence the operation of the Australian company or trust outside of the ordinary rights conferred by the equity interest held. • The Fund has not entered into or received any side letters, arrangements or agreements;
Income Tax Assessment Act 1936 subsection 6(1) Income Tax Assessment Act 1936 Paragraph 128A(3) Income Tax Assessment Act 1936 Paragraph 128B(3)(jb) Income Tax Assessment Act 1936 section 128D Income Tax Assessment Act 1997 section 118-520 Income Tax Assessment Act 1997 subsection 995-1(1)
Question 1 Is the Fund excluded from liability to withholding tax on its interest and dividend income derived in respect of its Direct Investments, except to the extent that interest of dividend income is derived from assets acquired by the Fund, or the trust in which the Fund invests, after 27 March 2018, under paragraph 128B(3)(jb) of theITAA 1936? Summary The Fund is excluded from liability to withholding tax on its interest and dividend income derived in respect of its Direct Investments, except to the extent that interest of dividend income is derived from assets acquired by the Fund, or the trust in which the Fund invests, after 27 March 2018, under paragraph 128B(3)(jb) of theITAA 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 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 from 1 July 2019 onwards. These extra requirements apply only to assets which were acquired after 27 March 2018. For the purposes of Question 1, which only considers the Fund's assets acquired on or before 27 March 2018, these extra requirements are not applicable.
The Fund is a non-resident The Fund is not a resident of Australia for tax purposes. Therefore, the Fund satisfies this requirement. The Fund is 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. The term 'superannuation fund for foreign residents' is defined in section 118-520 of the Income Tax Assessment Act 1997 (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 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 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. • The Fund is a provident, benefit, superannuation or retirement fund. • The Fund was established in a foreign country. • The Fund was established and maintained only 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 the ITAA 1997, and
• No tax offsets have been allowed or would be allowable for an amount paid to the Fund or set aside for the Fund. The Fund is an indefinitely continuing fund The term 'indefinitely continuing 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 , 2004, Oxford University Press, Melbourne 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. In Scott v. FC of T (No 2) (1966) 14 ATD 333; (1966) 10 AITR 290 (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'. Windeyer J's views in Scott were cited with approval by Hill J in Walstern Pty Ltd v. Commissioner of Taxation (2003) 138 FCR 1; 2003 ATC 5076; (2003) 54 ATR 423 who stated that 'for present purposes, the point is the need for "money" or "other property" to constitute a fund'.
The general view is that an indefinitely continuing fund does not have to continue forever, but rather that the governing rules should not fix an express termination date. The Fund's Trust Agreement sets out the process in the event of termination or wind up. There is no indication in the termination clause that there is any contemplation of the Fund ending at a defined point in time. Therefore, it is accepted that the Trust will continue to operate in accordance with the Rules for an indefinite period of time and this requirement is satisfied. The Fund is a provident, benefit, superannuation or retirement fund The phrase 'a provident, benefit, superannuation or retirement fund' under paragraph 118-520(1)(a)(ii) is not defined in either the ITAA 1997 or the ITAA 1936. However, the phrase has been subject to judicial consideration. 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 there from being capitalised. In a later case, Mahoney v. Commissioner of Taxation (Cth) (1967) 41 ALJR 232; (1967); 14 ATD 519; 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 court found that the expression takes its meaning from past usage and the meaning of the several expressions must be arrived at in light of their ordinary usage. As such, the term 'benefit' requires a purpose narrower than conferring benefits in a completely general sense. The benefit must be characterised by some future purpose. Likewise, a provident fund must not refer to the provision of funds in a general sense but must relate to a provision against contemplated contingencies.
Both of the above mentioned cases emphasise that the benefits must be provided for a specific purpose and require that there is a connection between the benefit received and the provision by the fund for retirement or death of a member or against 'contemplated contingencies', such as death, disability or serious illness. The Fund administers the Plan for active and retired employees from specific employers. The Fund's role, as plan administrators, is to prudently manage the plan's assets and ensure that members and retirees receive the pension benefits to which they are entitled. The plan is administered by the Board of Trustees under the applicable legislation and the plan's governing documents to invest the plan's assets to support the cost of Members' and retirees' pension benefits. The payment of retirement benefits is allowed upon members reaching the specified retirement ages and years of service. If a member ceases employment before retirement age they are entitled to a pension once reaching retirement age, or a transfer of funds to an equivalent pension plan; they do not gain early access to these funds.
Further, the Commissioner accepts that the alternate circumstances of access in this case, being disability and death align to the contemplated contingencies of a provident, benefit, superannuation or retirement fund. Therefore, the Fund will satisfy this requirement. The Fund was established in a foreign country The Fund was established and is a resident of a foreign country. Therefore, the Fund will satisfy this requirement. The Fund was established and maintained only to provide benefits for individuals who are not Australian residents The Fund was established in a foreign country for the benefit of members who are employed by specific employers within that country. 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 will satisfy this requirement.
The Fund's central management and control is 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 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 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, paragraphs 10 and 11 of 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. Based on the facts it is reasonable to conclude that the central management and control of the Fund occurs in a foreign country by entities that are not Australian residents. Therefore, the Fund will satisfy this requirement. 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 An amount paid to the Fund or set aside for the Fund has not been and cannot be deducted under the 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. Therefore, the Fund will satisfy this requirement. The income, consisting of interest, dividend or non-share dividend income, is derived by the Fund
Subsection 128B(3CA) of the ITAA 1936, along with paragraph 128B(3)(jb) of the ITAA 1936 requires the superannuation fund for foreign residents to derive the interest, dividends or non-share dividends paid by Australian resident companies. 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 income from its investments in companies who are residents of Australia for tax purposes. Therefore, the Fund will satisfy this requirement. TheFund is exempt from income tax in the country in which the non-resident resides The Fund is a registered pension plan and thus exempt from income tax under the legislation is governed by in the country which it resides. Therefore, the Fund will satisfy this requirement. Conclusion As all the requirements of paragraph 128B(3)(jb) of the ITAA 1936 are satisfied, the Fund will be entitled to an exemption from withholding tax on interest and dividend income derived in respect of Direct Investment assets acquired on or before 27 March 2018 under paragraph 128B(3)(jb) of the ITAA 1936. Question 2
Is interest and dividend income derived by the Fund from its Direct Investments, except to the extent that interest or dividend income is derived from assets acquired by the Fund, or the trust in which the Fund invests, after 27 March 2018, not assessable and not exempt income under section 128D of the ITAA 1936? Summary Interest and dividend income derived by the Fund from its Direct Investments acquired prior to 27 March 2018 are not assessable not exempt income under section 128D of the ITAA 1936. Detailed reasoning Not assessable not exempt income is ordinary or statutory income that is expressly made neither assessable income nor exempt income by a provision of the tax legislation. Section 128D of the ITAA 1936 provides as follows: Income other than income to which section 128B applies by virtue of subsection (2A), (2C) or (9C) of that section upon which withholding tax is payable, or upon which withholding tax would, but for paragraph 128B(3)(ga),(jb) or (m), section 128F, section 128FA or section 128GB, be payable, is not assessable income and is not exempt income of a person.
Dividend and interest income derived by the Fund from their Direct Investments would be subject to withholding tax under subsection 128B(1) and 128B(2) of the ITAA 1936 respectively, but for the operation of the withholding tax exemption under paragraph 128B(3)(jb) of the ITAA 1936. As paragraph 128B(jb) of the ITAA 1936 is specifically referred to in section 128D of the ITAA 1936 any interest, dividend or non-share income derived by the Fund will be not assessable and not exempt income under section 128D of the ITAA 1936. Question 3 Is the Fund excluded from liability to withholding tax on its interest and dividend income derived in respect of the Fund's Public Investments, under paragraph 128B(3)(jb) of the ITAA 1936? Summary The Fund is excluded from liability withholding tax on its interest and dividend income derived in respect of their Public Investments under paragraph 128B(3)(jb) of the ITAA 1936. Detailed reasoning As detailed in question one, above, 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) of the ITAA 1936 states: (jb) income that:
(i) is derived by a non-resident that is a superannuation fund for foreign residents; and (ii) consists of interest, or consists of dividends or non-share dividends paid by a company that is a resident; and (iii) is exempt from income tax in the country in which the non-resident resides; The Fund is a non-resident The Fund is not a resident of Australia for tax purposes. Therefore, The Fund satisfies this requirement. The Fund is a superannuation fund for foreign residents Section 118-520 of the ITAA 1997 states the following: (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, • The Fund is a provident, benefit, superannuation or retirement fund, • The Fund was established in a foreign country, • The Fund was established and maintained only 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 the ITAA 1997, and • No tax offsets have been allowed or would be allowable for an amount paid to the Fund or set aside for The Fund. The Fund is an indefinitely continuing fund
The Fund's Trust Agreement sets out the process in the event of termination or wind up. There is no indication in the termination clause that there is any contemplation of the Fund ending at a defined point in time. Therefore, it is accepted that the Fund will continue to operate in accordance with the Rules for an indefinite period of time and this requirement is satisfied. The Fund is 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) refers to these authorities to provide 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 administers the Plan for active and retired employees of the Government of Ontario and certain Ontario Crown agencies, boards and commissions represented by the OPSEU and their eligible beneficiaries. The Plan was amended on 30 April 2018 to expand coverage to the non-profit sector in Ontario. The Fund's role, as plan administrators, is to prudently manage the Plan's assets, ensure that members and retirees receive the pension benefits to which they are entitled and provide them with the finest service and communications. The Board of Trustees administers the Plan and is legally responsible under the Pension Benefits Act (Ontario) and the Plan's governing documents for investing the Plan's assets to support the cost of members' and retirees' pension benefits. The payment of retirement benefits is allowed upon members reaching the specified retirement ages and years of service. If a member ceases employment before retirement age they are entitled to a pension once reaching retirement age, they do not get to access the money early.
Further, the Commissioner accepts that the alternate circumstances of access in this case, being disability and death align to the contemplated contingencies of a provident, benefit, superannuation or retirement fund. Therefore, the Fund will satisfy this requirement. The Fund was established in a foreign country The Fund was established and is a resident of a foreign country. Therefore, the Fund will satisfy this requirement. The Fund was established and maintained only to provide benefits for individuals who are not Australian residents The Fund was established in a foreign country, for the benefit of members who are employees of certain employers who reside in that country. The Fund administers the Plan for active and retired employees and their eligible beneficiaries and is responsible for investing the assets of the plan to support the cost of members' and retirees' pension benefits.
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 will satisfy this requirement. The Fund's central management and control is 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 in respect of the central management and control (CM&C) of a superannuation fund: 20. The CM and 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, paragraphs 10 and 11 of 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. Based on the facts it is reasonable to conclude that the central management and control of the Fund occurs in a foreign country by entities that are not Australian residents. Therefore, the Fund will satisfy this requirement. 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 An amount paid to the Fund or set aside for the Fund has not been and cannot be deducted under the 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. Therefore, the Fund will satisfy this requirement.
The income, consisting of interest, dividend or non-share dividend income, is derived by the Fund Subsection 128B(3CA) of the ITAA 1936, along with paragraph 128B(3)(jb) of the ITAA 1936 requires the superannuation fund for foreign residents to derive the interest, dividends or non-share dividends paid by Australian resident companies. 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 income from its investments in companies who are residents of Australia for tax purposes. Therefore, the Fund will satisfy this requirement. TheFund is exempt from income tax in the country in which the non-resident resides The Fund is a registered pension plan and thus exempt from income tax under the legislation is governed by in the country which it resides. Therefore, the Fund will satisfy 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 from 1 July 2019 onwards. These extra requirements apply only to assets which were acquired after 27 March 2018. For the purposes of Question 2, which only considers the Fund's assets acquired after 27 March 2018, these extra requirements are applicable. Relevantly: i. The fund must satisfy the 'portfolio interest test' in relation to the test entity (subsection 128B(3CC) ii. The fund must satisfy the 'influence test' (subsection 128B(3CD) in relation to the test entity, and iii. The income 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 . 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. On the facts, the Fund will satisfy the 'portfolio interest test' in respect of its Public Investments. The Fund satisfies the 'influence test' Subsection 128(3CD) of the ITAA 1936 states: A superannuation fund has influence of a kind described in this subsection in relation to the test entity at a time if any of the following requirements are satisfied at that time: (a) the superannuation fund: (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 Fund is able to determine the identity of at least one of the persons who, individually or together with others, makes or is reasonably expected to make, decisions comprising the control and direction of the test entity's operations. This includes situations where the Fund is able to act in concert with others to determine the identity of a relevant decision-maker in the test entity. Sub-test 1 also extends to situations where the Fund, in its own right, holds the ability to approve or veto decisions which go to the control or direction of the test entity.
Sub-test 2 of the influence test, as contained in paragraph 128B(3CD)(b) of the ITAA 1936, assesses whether at least one of the relevant decision-making persons of the test entity is accustomed or obliged to act, or might reasonably be expected to act, in accordance with the directions, instructions or wishes of the Fund. Relevantly, in respect of the public investment listed in Appendix 1 of 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 test entities. 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 test entities. c. Neither the Fund, nor any related party, has the ability to direct or influence the operation of the test entities outside of the ordinary rights conferred by the equity interest held. 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 . Therefore, the Fund satisfies this requirement. Conclusion The Fund is excluded from withholding tax in relation to interest, dividend and non-share dividend income derived from its current public investments. Question 4 Is interest or dividend income derived by the Fund from its Public Investments not assessable or not exempt income under section 128D of the ITAA 1936? Summary Interest or dividend income derived by the Fund from its Public Investments are not assessable and not exempt income under section 128D of the ITAA 1936. Detailed reasoning As stated in Question 2 of this Ruling, section 128D of the ITAA 1936 provides: Income other than income to which section 128B applies by virtue of subsection (2A), (2C) or (9C) of that section upon which withholding tax is payable, or upon which withholding tax would, but for paragraph 128B(3)(ga),(jb) or (m), section 128F, section 128FA or section 128GB, be payable, is not assessable income and is not exempt income of a person.
Dividend and interest income derived by the Fund from their Public Investment would be subject to withholding tax under subsection 128B(1) and 128B(2) of the ITAA 1936 respectively, but for the operation of the withholding tax exemption under paragraph 128B(3)(jb) of the ITAA 1936. As paragraph 128B(jb) of the ITAA 1936 is specifically referred to in section 128D of the ITAA 1936 any interest, dividend or non-share income derived by the Fund will be not assessable and not exempt income under section 128D of the ITAA 1936.