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) in respect of its directly held listed and unlisted investments, and its investments detailed in the Ruling?
Yes. This ruling applies for the following period : Year ended 30 June 20xx The scheme commenced on: 1 July 20xx
The Fund was established in accordance with the Articles of Association. The Fund was established as an entity under Country X law. The Fund has separate legal personality under Country X law. The Fund's registered office is in Country X. The Fund is a resident of Country X for tax purposes. The Fund is not a resident of Australia for tax purposes. The Articles of Association state the purpose, operation and rules of the Fund. The Articles of Association state that the Fund is a pension fund for the benefit of certain specified members. The object of the Fund is to provide pension benefits for members, deferred members, pension beneficiaries and other entitlement beneficiaries. The Fund is administered and managed by the Board. The Articles of Association state that the Fund has been formed for an indefinite time. The Fund can be wound up by resolution of the Board. There are currently no plans for a Board resolution to wind up the Fund and no intention to exercise this discretion in the future. Income of the Fund derived from Australian investments is not subject to income tax in Country X as the Fund is tax exempt. The Fund itself is not fiscally transparent.
The Articles of Association set out who are the participants of the Fund. To qualify as a pension fund in Country X, the scheme may only make provisions for certain circumstances, including: a. An old-age pension for the employee b. A partner pension c. An orphan pension d. An occupational disability pension The Fund's benefits for members are consistent with the above. The Fund's Australian investments Directly held listed investments The Fund has invested in Australian equity investments. These equity investments all have the following characteristics: a. All investments are listed on the Australian Securities Exchange (ASX). b. The Fund holds less than 10% of the total participation interests in each Australian entity. c. The Fund would hold less than 10% of the total participation interests in each Australian entity in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936. d. 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 entities.
e. 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 entities. f. 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 entities. g. Nether the Fund, nor any related party, has the ability to direct or influence the operation of the Australian entities outside of the ordinary rights conferred by the equity interest held. h. The Fund only holds rights to vote in proportion to its equity interest in each Australian entity. Directly held unlisted investments The Fund also directly acquired certain investments on or before 27 March 2018. Other investments In addition to investing directly into Australia, the Fund also invests into Australia through a specific type of investment vehicle (which is not a legal entity and not a partnership) established in Country X for the purposes of investing on behalf of Country X pension funds. The Fund's investments made in this manner include:
• portfolio interests in listed investments. Each of the investments have the same characteristics as listed in Fact 15; and • investments that were acquired on or before 27 March 2018. Other relevant facts The Fund was established and is maintained to provide benefits to the Fund's members and their beneficiaries in Country X. 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 not allowable for an amount that has been paid to it. Income of the Fund is not 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 .
Income Tax Assessment Act 1936 Paragraph 128B(3)(jb)
Question 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) in respect of its directly held listed and unlisted investments, and its investments detailed in the Ruling? 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 non-share dividend income derived from its Australian investments listed in the facts and circumstances of this ruling for the period of this Ruling. 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 non-resident that is 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 non-resident resides. 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 also be met. 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 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. 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: 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 its 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 it that have been or can be deducted under the ITAA 1936 or the ITAA 1997 does not receive or have amounts set aside for it that give rise to a tax offset
derives income that consists of interest, or consists of dividends or non-share dividends paid by a company that is an Australian resident, and is exempt from income tax in the country in which the non-resident resides. These requirements are considered below. 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. 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'. 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; who stated that 'for present purposes, the point is the need for "money" or "other property" to constitute a fund'. The Fund is a pension fund that exists for the sole purpose of providing retirement benefits to its members.
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 Articles of Association state that the Fund has been formed for an indefinite time. The Fund can be wound up by resolution of the Board. There are currently no plans for a Board resolution to wind up the Fund and no intention to exercise this discretion in the future. 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 Fund will be discontinued. Therefore, the Fund is an indefinitely continuing fund. 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 a pension fund that exists for the sole purpose of providing retirement benefits to its members. The Board manages and administers the Fund. The Board has sole authority to make final decisions regarding any benefit applications. The Fund provides benefits to members in certain circumstances, including normal retirement and benefits in limited circumstances such as where a former member retires earlier than normal 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, invalidity pensions and death benefits such as partner's and orphan's 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, the Fund is a provident, benefit, superannuation or retirement fund. Therefore, the Fund satisfies this requirement. Established in a foreign country The Fund was established in Country X. Therefore, the Fund was established in a foreign country and this requirement is satisfied. 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 Fund's members and their beneficiaries 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. Central management and control is carried on outside Australia by entities none of whom is an Australian resident The Fund was established in the 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, the Fund's central management and control occurs outside of Australia by entities that are not Australian residents. Therefore, the Fund satisfies this requirement. 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. 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. Derives income that consists of interest, or consists of dividends or non-share dividends paid by a company that is an Australian resident In order to be excluded from withholding tax under paragraph 128B(3)(jb) of the ITAA 1936, the interest, dividend and/or non-share dividend income must be derived by a non-resident superannuation fund for foreign residents. In relation to the direct investments, the Fund derives Australian sourced income in the form of interest, and dividends paid by Australian resident companies.
It is relevant to consider whether a trust relationship exists in relation to the investments held through the specific type of investment vehicle described in this Ruling. The Commissioner has accepted that subsection 128A(3) of the ITAA 1936 can apply to deem beneficiaries of non-resident trust estates to have derived the relevant income in limited circumstances (see ATO ID 2008/61). Subsection 128A(3) of the ITAA 1936 states: For the purposes of this Division, a beneficiary who is presently entitled to a dividend, to interest or to a royalty included in the income of a trust estate shall be deemed to have derived income consisting of that dividend, interest or royalty at the time when he or she became so entitled. The operation of subsection 128A(3) of the ITAA 1936 will therefore treat interest, or dividend or non-share dividend income that is included in a trust estate to be deemed to be derived by a beneficiary where the beneficiary remains presently entitled.
In relation to these investments held, based on the facts and circumstances of this Ruling and reviewing the documentation provided by the Fund, the Commissioner accepts that the Fund is presently entitled to the income from the investments and that the Fund derives the relevant income as required by paragraph 128B(3)(jb) of the ITAA 1936. Therefore, the Fund satisfies this requirement. Is exempt from income tax in the country in which it resides Income of the Fund derived from Australian investments is not subject to income tax in Country X. Therefore, the Fund satisfies this requirement. Extra requirements Subitem 3(1) of Part 2 of Schedule 3 of the Treasury Laws Amendment (Making Sure Foreign Investors Pay Their Fair Share of Tax in Australia and Other Measures) Act 2019 ('2019 Act') (subject to subitems (2) and (3)) provides that the extra requirements in subsection 128B(3CA) of the ITAA 1936 must be met for income derived on or after 1 July 2019.
Subitems 3(2) and 3(3) of Part 2 of Schedule 3 of the 2019 Act provides that the extra requirements in subsection 128B(3CA) of the ITAA 1936 may not need to be met for income derived until on or after 1 July 2026 in certain circumstances (the Transitional Provisions). Relevantly, the extra requirements in subsection 128B(3CA) of the ITAA 1997 are: the Fund must satisfy the 'portfolio interest test' in relation to the test entities at the time the income was derived and throughout any 12 month period that began no earlier than 24 months before that time and ended no later than that time (subsection 128B(3CC) of the ITAA 1936) the Fund must satisfy the 'influence test' (subsection 128B(3CD) of the ITAA 1936) in relation to the test entities, and 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 . These requirements are considered below in relation to income derived by the Fund. 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. Directly held listed investments For the directly held listed investments by the Fund in the Australian entities, the Fund holds less than 10% of the total participation interests. 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, the Fund satisfies the 'portfolio interest test' in respect of the directly held Australian listed investments. Assets acquired on or before 27 March 2018
As the Fund held these investments on or before 27 March 2018, the Transitional Provisions (subitems 3(2) and 3(3) of Part 2 of Schedule 3 of the 2019 Act) apply. As the requirements of subitems 3(2) and 3(3) of Part 2 of Schedule 3 of the 2019 Act are satisfied, the extra requirements in subsection 128B(3CA) of the ITAA 1936 will not apply to the income derived by the Fund from its interest in these investments until 1 July 2026 and therefore are not considered for the purposes of this Ruling because the ruling period ends prior to this date. Other Investments held Listed, portfolio investments These investments need to pass the portfolio interest test. The Fund holds less than 10% of the total participation interests in these 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, the Fund satisfies the 'portfolio interest test' in respect of these Australian listed investments, Assets acquired on or before 27 March 2018
As the Fund held these investments on or before 27 March 2018, the Transitional Provisions (subitems 3(2) and 3(3) of Part 2 of Schedule 3 of the 2019 Act) apply. As the requirements of subitems 3(2) and 3(3) of Part 2 of Schedule 3 of the 2019 Act are satisfied, the extra requirements in subsection 128B(3CA) of the ITAA 1936 will not apply to the income derived by the Fund from its interest in these investments until 1 July 2026 and therefore are not considered for the purposes of this Ruling because the ruling period ends prior to this date. 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. 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. Only the Fund's investments where the Transitional Provisions are not stated above to apply, will require the portfolio interest test and influence test to be satisfied. The following are applicable in determining that the Fund satisfies the 'influence test' in respect of its Australian directly held listed investments and the other listed, portfolio investments held: • 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 Fund does not have influence of the kind described in subsection 128B(3CD) of the ITAA 1936 in relation to the entities. Therefore, the Fund satisfies this requirement. 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 or Division 880 of the
Income Tax (Transitional Provisions) Act 1997 . 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 meets the requirements of paragraph 128B(3)(jb) of the ITAA 1936 and the requirements in subsection 128B(3CA) of the ITAA 1936 where applicable to the specific investments.