Is the Fund excluded from liability to withholding tax on interest, dividend and non-share dividend income derived from its investment in accordance with paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)?
Yes. This ruling applies for the following period : 30 June 20XX to 30 June 20XX The scheme commences on: 1 July 20XX
The Fund was established in a foreign country and continues to be a resident of the foreign country. The Fund must comply with the pension act and its policy regulation in its foreign country. The Fund's income is exempt from taxation in its foreign country. The Fund states that it provides compulsory collective pensions for the care and welfare sector. Members can only access benefits under a normal retirement pension, partners pension, orphans' pension, or in situations of occupational disability Other than on their death, members can only receive a benefit prior to turning 60 in situations of occupation disability, or if they were born before 1965. Management of Investments The Fund is actively managed by a Fund manager that is also based in the foreign country. The Fund manager performs discretionary portfolio management and provides investment advice. The Fund is invested in Australian assets via a number of Sub Funds. The Fund is financed by the contribution of its members. The Fund invests the contributions paid by employers and employees with the aim of achieving a high, stable and responsible return over the long term at an acceptable level of risk.
The Fund's investment strategy of its Australian assets is to primarily invest in stocks and shares that are listed on the Australian Securities Exchange (ASX), and to hold less than a 10% in any one entity. The total participation interest in the majority of these stocks and shares is less than 10%. Other relevant facts The Fund does not or has not: • have any right to appoint a person to a board, committee or similar, either directly or indirectly • entered into or received any side letters, arrangements or agreements • hold any veto rights on security holder votes, and • hold any other influence potentially of a kind described in subsection 128B(3CD) of the ITAA 1936. The Fund is an indefinitely continuing fund and a provident, benefit, superannuation or retirement fund. The Fund was established in a foreign country. The Fund was established, and is maintained, only to provide benefits for individuals who are not Australian residents. The central management and control of the Fund is carried on outside Australia by entities none of whom is an Australian resident;
An amount paid to the Fund or set aside for the Fund has not been or cannot be deduced under the Income Tax Assessment Act 1997 or the Income Tax Assessment Act 1936, and a tax offset has not been allowed or is not allowable for such an amount. The income of the Fund is not non-assessable non-exempt income of the Fund because of: (i) Subdivision 880-C of the ITM 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 1936 subsection 128B(3CA) Income Tax Assessment Act 1936 section 128D Income Tax Assessment Act 1997 section 118-520
Broadly, paragraph 128B(3)(jb) of the ITAA 1936 provides an exclusion from withholding tax for interest, dividends and non-share dividends derived by a superannuation fund for foreign residents (subject to the satisfaction of certain conditions). For the exclusion to apply, the interest, dividend and/or non-share dividend income must be: • derived by a superannuation fund for foreign residents (as defined in section 118-520 of the ITAA 1997), and • exempt from income tax in the country in which the superannuation fund for foreign residents arise. Further, from 1 July 2019, the extra requirements in subsection 128B(3CA) of the ITAA 1936 must also be met. Each of the requirements of paragraph 128B(3)(jb) will be considered below. The Fund is a non-resident The Fund is a resident of a foreign state. Therefore, the Fund satisfied this requirement. Superannuation fund for foreign residents Section 118-520 of the ITAA 1997 provides: (1) A fund is a superannuation fund for foreign residents at a time if: (a) at that time, it is: (iii) an indefinitely continuing fund; and
(iv) 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. An indefinitely continuing fund The term 'fund' is not defined in either the ITAA 1997 or the ITAA 1936. Therefore, it should be given its ordinary meaning subject to the context in which it appears and having regard to any relevant case law authorities. The Australian Oxford Dictionary , 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'. Based on the relevant facts and circumstances described in this ruling there is no indication that there is any contemplation of the Fund ending at a defined point in time. The Fund has also provided an attestation that confirms that the Fund is an indefinitely continuing fund. Therefore, it is accepted that 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 1997 or the ITAA 1936.
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 establishes 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 was established in foreign country as a 'general pension fund'. The Fund has as its sole purpose providing retirement benefits or benefits in alignment with other contemplated contingencies such as death and occupational disability, the Fund is considered to be a provident, benefit, superannuation or retirement fund. Therefore, the Fund satisfies this requirement. Established in a foreign country The Fund was established in a foreign country. Therefore, the Fund satisfies this requirement. Was established and maintained only to provide benefits for individuals who are not Australian residents The Fund was established and is maintained only to provide benefits to individuals who are not Australian residents. Therefore, the Fund satisfies the requirements. Central management and control (CM&C) Paragraphs 20 and 21 of Taxation Ruling TR 2008/9
Income tax: meaning of 'Australian superannuation fund' in subsection 295-95(2) of the Income Tax Assessment Act 1997 (TR 2008/9) states: 20. The CM&C of a superannuation fund involves a focus on the who, when and where of the strategic and high-level decision-making processes and activities of the fund. In the context of the operations of a superannuation fund, the strategic and high-level decision-making processes includes: • formulating the investment strategy for the fund; • reviewing and updating or varying the fund's investment strategy as well as monitoring and reviewing the performance of the fund's investments; • if the fund has reserves - the formulation of a strategy for their prudential management; and • determining how the assets of the fund are to be used to fund member benefits.
21. The other principal areas of operation of a superannuation fund that form part of the day-to-day or operational side of the fund's activities will not constitute CM&C. These activities do not form part of the CM&C of the fund because they are not of a strategic or high-level nature. Rather, these activities are of a more formalistic or administrative nature. Examples of such activities include the acceptance of contributions that are made on a regular basis, the actual investment of the fund's assets, the fulfilment of administrative duties and the preservation, payment and portability of benefits. The central management and control of the Fund is carried on outside Australia. Therefore, the Fund satisfies this requirement. Subsection 118-520(2) The Fund has not and cannot deduct amounts under either the 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. Therefore, the Fund satisfies these requirements. Conclusion
As all the above requirements are satisfied, the Fund meets the requirements of being a superannuation fund for foreign residents as defined by section 118-520 of the ITAA 1997. Consists of interest or dividends and/or non-share dividends paid by a company that is a resident In order to be excluded from withholding tax under paragraph 128B(3)(jb) of the ITAA 1936, the Fund must derive the relevant interest and dividend income. Relevant to this analysis is subsection 128A(3) of the ITAA 1936 which provides: 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 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.
ATO Interpretative Decision ATO ID 2008/61 Withholding Tax Exemption: interest and dividends paid by an Australian resident and received by a Dutch Stichting as unitholder in an Irish Common Contractual Fund (ATOID 2008/61) is an example of this. In this ATOID, an Irish CCF was found to be a trust for Australian income tax purposes. The terms of the deed states that income of the CCF accrued to unitholders as it arose. As such, the unitholder would have a present legal right to demand and receive payment of the income, and therefore was presently entitled to the dividend and interest income received by the CCF. The requirements in subsection 128A(3) were therefore satisfied, and the unitholder was deemed to have derived the income at the time when it became presently entitled. Being an entity entitled to be excluded from withholding tax under paragraph 128B(3)(jb) of the ITAA 1936, the unitholder was subsequently exempt from withholding tax.
As such, the critical factor is to determine whether the Fund is 'presently entitled' to the income of the Sub Funds. The requirement in subsection 128A(3) of the ITAA 1936 of present entitlement to a share of the dividend, interest or royalty income of the trust estate refers to a beneficiary's present vested right to demand and receive payment of the whole or part of what has been received by the trustee as income and, retaining that character in the trustee's hands, is legally available to be distributed to those entitled to it as beneficiaries of the trust.
Having considered the circumstances of the Fund, the Sub Funds and the underlying constituent documents, the Commissioner accepts that the Fund is presently entitled to the interest and dividend income as it arises to the Sub Fund. Therefore, the Fund is deemed to have derived the relevant dividend and interest income for the purposes of Division 11A of the ITAA 1936. As such, the Fund is considered to have derived dividend and interest income for the purposes of determining a withholding tax liability. As they have otherwise established their exclusion from withholding tax under paragraph 128(3)(jb) of the ITAA 1936, this means that the Fund will be excluded from dividend and interest withholding tax on amounts paid from the Australian investments. Subparagraph 128B(3)(jb)(ii) of the ITAA 1936 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 and to which the Fund is presently entitled. The Fund has provided a list of its Australian Investments (Appendix 1) relevant to the Fund and therefore, this requirement is satisfied.
The Fund is exempt from income tax in the country in which the non-resident resides The Fund is exempt from income tax in its country of residence. Therefore, the Fund satisfies this requirement. Subsection 128B(3CA) of the ITAA 1936 The Treasury Laws Amendment (Making Sure Foreign Investors Pay Their Fair Share of Tax in Australia and Other Measures) Act 2019 introduced extra requirements that must be met for paragraph 128B(3)(jb) of the ITAA 1936 to apply. Generally, these extra requirements apply to income derived from 1 July 2019. Relevantly: The Fund must satisfy the 'portfolio interest test' in relation to the test entity (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 entity, and 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 . Each of these requirements is discussed in detail below. The Fund satisfies the 'portfolio interest test' Subsection 128B(3CC) of the ITAA 1936 states:
A superannuation fund satisfies the portfolio interest test in this subsection in relation to the test entity at a time if, at that time, the total participation interest (within the meaning of the Income Tax Assessment Act 1997 ) the superannuation fund holds in the test entity: (a) is less than 10%; and (b) would be less than 10% if, in working out the direct participation interest (within the meaning of that Act) that any entity holds in a company: (i) an equity holder were treated as a shareholder; and (ii) the total amount contributed to the company in respect of non-share equity interests were included in the total paid-up share capital of the company. The total participation interest in the Australian investments is less than 10%. The Fund's Australian Investments also meet certain 'Equity Characteristics' listed in the relevant facts and circumstances of the Ruling. In the circumstances, the Commissioner is satisfied that the total participation interest the Fund holds in the test entities: • is less than 10% pursuant to paragraph 128B(3CC)(a) at all relevant times; and
• would be less than 10% in the circumstances detailed in paragraph 128B(3CC)(b) at all relevant times. The Fund therefore satisfies the 'portfolio interest test' in respect of its current Australian investment. The Fund satisfies the 'influence test' Subsection 128B(3CD) of the ITAA 1936 states: A superannuation fund has influence of a kind described in this subsection in relation to the test entity at a time if any of the following requirements are satisfied at that time: (a) the superannuation fund: (i) is directly or indirectly able to determine; or (ii) in acting in concert with others, is directly or indirectly able to determine; the identity of at least one of the persons who, individually or together with others, make (or might reasonably be expected to make) the decisions that comprise the control and direction of the test entity's operations;
(b) at least one of those persons is accustomed or obliged to act, or might reasonably be expected to act, in accordance with the directions, instructions or wishes of the superannuation fund (whether those directions, instructions or wishes are expressed directly or indirectly, or through the superannuation fund acting in concert with others). As such, there are two distinct sub-tests within the influence test. Sub-test 1 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 can 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 investment listed in the relevant facts and circumstances to this Ruling: • They do not have any right to appoint a person to a board, committee or similar, either directly or indirectly • They have not entered into or received any side letters, arrangements or agreements • They do not hold any veto rights on security holder votes, and • They do not hold any other influence potentially of a kind described in subsection 128B(3CD) of the ITAA 1936. Based on the above, the Commissioner has determined that it is reasonable to conclude that the Fund does not have influence over the entities listed in its Australian investments of the kind described in subsection 128B(3CD) of the ITAA 1936. Therefore, the Fund satisfies this requirement.
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, the Fund satisfies this requirement. Conclusion The Fund is excluded from withholding tax in relation dividend income derived from its investments.