1 Is the fund excluded from liability to withholding tax on interest, dividend and non-share dividend income derived from its Australian investments, in accordance with paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)?
Yes. This ruling applies for the following periods : Year ended 31 December 20XX to Year ended 31 December 20XX The scheme commenced on: 1 January 20XX
Background The fund The fund was established by Corporation A pursuant to provisions of Foreign Country Act. The fund is federally regulated and governed by the provisions of the Pension Act and its Regulations thereof. The fund was established for members of Corporation A and covers the majority of employees of Corporation A. The fund's head office is located in foreign country. The fund is a contributory defined benefit pension plan where the employer promises a specified monthly benefit on retirement that is predetermined by a formula based on the employee's earnings, history, and years of service under the plan, rather than depending on investment returns. Employees are required to contribute to the plan a percentage of their pensionable salary. Board of trustees Corporation A has transferred the responsibility for administering the fund to the board of trustees through a trust deed. The Board of Trustees administers the fund as a trustee for the employer, members of the plan, former members, and any other persons entitled to pension benefits or refunds under the fund.
The Trust Deed between Corporation A and the Board of Trustees makes the Board of Trustees responsible for the administration of the fund, which includes managing the fund's assets and calculating and paying out pension benefits to members. The Board of Trustees responsibilities include approving and monitoring investments and administering pension benefits. Plan Sponsor The plan sponsor is the organisation or individual who establishes a pension plan, defines the pension benefits and establishes criteria for membership and entitlement to pension benefits. Corporation A is the plan sponsor for the fund. The fund benefits General rules The benefits for the fund are outlined in the fund text. A contributor is a person who contributes or has formerly contributed to the fund and who is subsequently entitled to benefits. A contributor who ceases to be an employee by reason of retirement or becoming disabled shall be entitled to retirement benefits subject to conditions. Normal retirement date of a contributor is the last day of the month in which the contributor attains the age of XX years. Benefits
Several different forms of pension payments are available for members of the funds which include the following: i. Normal retirement pension ii. Early retirement benefits iii. Late retirement benefits iv. Disability benefits v. Lifetime pension vi. Joint and survivor pension vii. Death benefits viii. Termination benefits Contributor pension Contributors had access to a contributor pension which allowed contributors to make additional contributions to the plan. The purpose of the contributor pension was to enable contributors to enhance the ancillary features of their pension otherwise payable. Additional benefits associated with the contributor pension are fully employee paid. The contributor pension was closed to new contributions, or further contributions on 1 January 20XX. All previously made contributions and investment earnings will continue to be used in accordance with the fund text.
The additional contributions must be used to provide optional ancillary benefits. The additional contributions may not be used for any other purpose nor refunded to the contributor, the contributor's spouse or other beneficiary. The contributor shall also not withdraw, or otherwise receive a refund of the optional ancillary contributions prior to them ceasing to be an employee. The plan text allows for a payment of a benefit to or in respect of the contributor, where such lump-sum amount represents the only benefit paid to or on behalf of the contributor. The benefits available under the contributor pension include: An increased lifetime retirement pension. Bridge benefit. A new 'pensionable salary rate' or 'adjusted pensionable earnings'. An increase to the survivor benefit payable to the contributors spouse and children. An increased disability pension. If the contributor terminates or dies prior to retirement, the contributor or the contributor's spouse may elect for the pension benefit credit and optional ancillary benefits to be transferred to another pension plan, authorised savings plan or to purchase an immediate or deferred life annuity of an authorized kind.
Termination of plan The trust deed provides that if the fund is terminated by Corporation A, the trustees shall, if so requested in writing by Corporation A, surrender the trust property to any trust company, person or persons, corporation or corporations designated by Corporation A upon being satisfied that the trust property will be held by on terms substantially identical to the terms under which the trustees operate. 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. Australian investments held by the fund The fund has invested in Australian equity investments. These equity investments all have the following characteristics: All investments are listed on the Australian Securities Exchange (ASX). The fund holds less than 10% of the total participation interests in each Australian company, trust or real estate investment trust (REIT). Neither the fund, nor any related party of the fund, has involvement in the day-to-day management of the business of any of the Australian companies, trusts or REITs.
Neither the fund, nor any related party of the fund, has the right to appoint a director to the board of directors of the Australian company, or equivalent role in a trust or REIT. Neither the fund, nor any related party, holds the right to representation on any investor representative or advisory committee (or similar) of the Australian company, or equivalent role in a trust or REIT. Neither the fund, nor any related party, has the ability to direct or influence the operation of the Australian company, trust or REIT outside of the ordinary rights conferred by the equity interest held. The fund only holds rights to vote in proportion to its equity interest in each Australian company, trust or REIT. The fund has not entered into or received any side letters, arrangements or agreements in respect of its investments in the Australian entities. Other information A letter from the foreign country's revenue agency confirms the fund is considered a resident of foreign country for income tax purposes and is exempt from tax in foreign country as it is governed by a registered pension plan. The board of trustees has confirmed the following in respect of the fund:
a. it is an indefinitely continuing retirement fund and a provident, benefit, superannuation or retirement fund b. it was established in a foreign country c. it was established and maintained only to provide benefits for individuals who are not Australian residents d. its central management and control is carried on outside of Australia by entities none of whom is an Australian resident e. an amount paid to or set aside for The fund cannot be deducted under the Income Tax Assessment Act 1997 (ITAA 1997) f. no tax offsets would be allowable for an amount paid to The fund or set aside for The fund g. the income of The fund is not non-assessable non-exempt income of the fund because of either: i. Subdivision 880-C of the ITAA 1997, or ii. Division 880 of the Income Tax (Transitional Provisions) Act 1997.
Income Tax Assessment Act 1936 paragraph 128B(3)(jb) Income Tax Assessment Act 1997 section 118-520
Question 1 Is the fund excluded from liability to withholding tax on interest, dividend and non-share dividend income derived from its Australian investments, in accordance with paragraph 128B(3)(jb) of the ITAA 1936? Summary The requirements of paragraph 128B(3)(jb) of the ITAA 1936 are satisfied. Therefore, the fund is excluded from liability to withholding tax on its interest, dividend and / or non-share dividend income derived from its Australian investments, under paragraph 128B(3)(jb) of the ITAA 1936. Detailed reasoning Section 128B of the ITAA 1936 imposes liability to withholding tax on income derived by a non-resident that consists of dividend income (subsection 128B(1) of the ITAA 1936), interest income (subsection 128B(2) of the ITAA 1936) as well as other income prescribed in that section. 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 superannuation fund for foreign residents reside. Except where the transitional rules in Schedule 3 to the Treasury Laws Amendment (Making Sure Foreign Investors Pay Their Fair Share of Tax in Australia and Other Measures) Act 2019 (Amendment Act)apply, from 1 July 2019, the extra requirements in subsection 128B(3CA) of the ITAA 1936 must also be met. Schedule 3 of the Amendment Act amended the ITAA 1936 to improve the integrity of the income tax law to limit access to tax concession for foreign investors. For superannuation funds for foreign residents, this was achieved by limiting the withholding tax exemption to interest, dividend and non-share dividend income derived from an entity in which the superannuation fund has a portfolio-like interest. The amendments to limit the withholding tax exemption apply to income that is derived by a superannuation fund on or after 1 July 2019. 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, dividend and / or non-share dividend income that it derives from its Australian investments, 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 them 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 them that give rise to a tax offset viii. receives income that consists of interest, 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. Indefinitely continuing funds 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 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. The fund was created by Corporation A for their employees pursuant to provisions of the Foreign Country Act.Corporation A has transferred the responsibility for administering the fund to the board of trustees through a trust deed.
The trust deed provides that if the fund is terminated by Corporation A, the trustees shall, if so requested in writing by Corporation A, surrender the trust property to any trust company, person or persons, corporation or corporations designated by Corporation A upon being satisfied that the trust property will be held on terms substantially identical to the terms under which the trustees operate. Further, there is no indication the fund is to be wound up in the near future. The fund is indefinitely continuing, and it is therefore accepted that this requirement is satisfied. ii. Provident, benefit, superannuation or retirement funds 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 v Commissioner of Taxation (No 2) (1966) 40 ALJR 265, 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. 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. 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. 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 contributory defined benefit fund that provides retirement, disability, death and survivor benefits to members of the fund and their dependents. An employee may, in limited circumstances such as termination, have their contributions in the form of a lump-sum. There are no benefits provided by the fund to employees and beneficiaries beyond those as prescribed above and the Commissioner accepts that the alternate circumstances of access to the funds, being incapacity, death, the transfer of funds to another retirement fund, and a return of contributions in very limited circumstances, align to the contemplated contingencies of a 'provident, benefit, superannuation or retirement fund' as outlined in the relevant judicial decisions and ATO ID 2009/67. Therefore, it is accepted that this requirement is satisfied. iii. Established in a foreign country
The fund was established in foreign country. Therefore, the fund was established in a foreign country and this requirement is satisfied. iv. Established and maintained only to provide benefits for individuals who are not Australian residents The fund was established in foreign country for its members, being employees of the Corporation A; all of whom are not Australian residents. Therefore, this requirement is satisfied. v. Central management and control is carried on outside Australia by entities none of whom is an Australian resident The central management and control of the fund is in foreign country. Further, the fund's head office is located in foreign country and its central management and control in foreign country. It is therefore reasonable to conclude that the central management and control of the fund occurs outside of Australia by entities that are not Australian residents. Therefore, this requirement is satisfied. vi. Do not receive, or have amounts set aside for them, that have been or can be deducted under the ITAA 1936 or ITAA 1997
No amounts received by the fund, or set aside for the fund, in connection with the fund have or can be deducted under the ITAA 1936 or ITAA 1997. Therefore, this requirement is satisfied. vii. Do not receive, or have amounts set aside for them, that give rise to a tax offset. No amounts received by the fund, or set aside for the fund, in connection with 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, this requirement is satisfied. viii. Receives income that consists of interest, dividends or non-share dividends paid by a company that is an Australian resident The fund is expected to receive Australian sourced income in the form of interest, dividends and / or non-share dividends from its Australian investments, which are Australian resident companies. Therefore, this requirement is satisfied. ix. Is exempt from income tax in the country in which it resides The foreign country revenue agency has stated that the fund is exempt from taxation in foreign country. Therefore, the fund is exempt from tax in the country in which it resides, and this requirement is satisfied. Conclusion
As all of the above requirements are satisfied, it is accepted that the fund meets the requirements of paragraph 128B(3)(jb) of the ITAA 1936. As outlined above, due the operation of the Schedule 3 of the Amendment Act, in order to be excluded from liability to withholding tax under paragraph 128B(3)(jb) of the ITAA 1936, the additional requirements in subsection 128B(3CA) of the ITAA 1936 must also be met. Relevantly: i. The fund must satisfy the 'portfolio interest test' (subsection 128B(3CC) of the ITAA 1936) in relation to the test entity ii. The fund must satisfy the 'influence test' (subsection 128B(3CD) of the ITAA 1936) in relation to the test entity, and iii. the income received by the fund cannot otherwise be non-assessable non-exempt income because of: a. Subdivision 880-C of the ITAA 1997, or b. Division 880 of the Income Tax (Transitional Provisions) Act 1997 . These requirements are considered below. i. Portfolio interest test 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 each Australian company, or trust. Further, the fund would hold less than 10% of the total participation interests in each Australian company or trust in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936. The fund therefore satisfies the 'portfolio interest test' in respect of its current Australian investments. ii. Influence test Subsection 128B(3CD) of the ITAA 1936 states:
(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 one
The first sub-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. The first sub-test 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 two The second sub-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 Australian investments:
a. Neither the fund, nor any related party, has involvement in the day to day management of the business of any of the Australian companies, trusts, or Australian debt issuer. b. Neither the fund, nor any related party, has the right to appoint a director to the Board of Directors of the Australian company, Australian debt issuer or equivalent role in a trust. c. Neither the fund, nor any related party, holds the right to representation on any investor representative or advisory committee (or similar) of the Australian company, or equivalent role in a trust. d. Neither the fund, nor any related party, has the ability to direct or influence the operation of the Australian company or trust outside of the ordinary rights conferred by the equity interest held. e. The fFund only holds rights to vote in proportion to its equity interest in each Australian company or trust. 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. iii. the income derived by the fund cannot otherwise be non-assessable non-exempt income.
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, it is accepted that this requirement is satisfied. Conclusion The fund is excluded from withholding tax in relation to interest, dividend and non-share dividend income derived from its current Australian investments.