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)?
1 Yes This ruling applies for the following periods : Year ending XX March 20XX Year ending XX March 20XX Year ending XX March 20XX Year ending XX March 20XX Year ending XX March 20XX Year ending XX March 20XX The scheme commences on: XX April 20XX
1. The Fund is established in a country (Country A) outside of Australia for the purpose of providing retirement allowances and death benefits for governmental employees. 2. The Fund administers two defined benefit plans (ABC plan and XYZ plan, collectively "the System"). 3. The intention of the System is to provide service and disability retirement benefits, as well as death benefits. The System's plans are cost-sharing, multiple-employer, defined benefit pension plans. 4. The trustee of the Fund (Trustee) is the administrative head of the System. The Trustee of the Fund is directly accountable for the investment of Fund assets and for the oversight and management of the Fund. The Trustee is responsible for implementing an asset allocation with an appropriate balance of risk and return. 5. The Trustee is expressly permitted to invest the assets of the Fund pursuant to various provisions of the relevant law, which also contains limitations on the amount and quality of investments the Fund may hold in certain asset categories.
6. The retirement benefits are based on factors such as member's tier, retirement plan, service credit, final average salary (FAS) and age at retirement, The benefit eligibility and the calculation are categorised by tiers. 7. A service credit is earned through public employment with a participating employer. Members are automatically considered "vested" when they have earned sufficient service credit to qualify for a pension. The number of years of member service to be considered "vested" is dependent on the tier. Member who joined the System prior to XX January 20XX need X years of service to be XX percent vested. Members who joined on or after XX January 20XX (ABC plan) or XX January 20XX (XYZ plan) require XX years of service credit to be XX percent vested.
8. If a member terminates employment with a participating employee, they may choose to either leave the contributions in their account and qualify for a retirement benefit when they are age XX or, withdraw the accumulated contributions and may choose to have the taxable portion of their withdrawal payment made as a direct rollover to an Individual Retirement Account or to their new employer's plan if that plan accepts rollovers. If a termination is requested without a rollover, the taxable amount is paid directly to the terminating member. Income tax will be withheld as required by law and the terminating member will be taxed on withdrawal/excess payment from the Fund if there is no rollover. If the member is under the age of XX and do not rollover, they will have to pay a XX% additional income tax on early distributions. 9. The ABC plan and XYZ plan are qualified defined benefit retirement plans under the relevant foreign law. Both of the plans are exempt from federal income taxes in Country A. 10. The Fund currently holds shares in Australian companies listed on the Australian Stock Exchange. Other relevant facts 11. The Fund:
a) Holds less than XX% of the total participation interests in the Australian companies and has never held more than a XX% participation interest. b) Holds less than XX% of the total participation interests in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936. 12. The Fund nor any related party of these entities c) Have involvement in the day to day management of the business of the Australian companies. d) Hold any right to appoint a person to a board, committee or similar, either directly or indirectly, of the Australian companies. e) Hold the right to representation on any investor representative or advisory committee (or similar) of the Australian companies. f) Have the ability to direct or influence the operation of any of the Australian companies outside of the ordinary rights conferred by the equity interest held. g) Have entered into or received any side letters, arrangements or agreements. h) Hold any veto rights on security holder votes. Other relevant facts
13. The Fund is an indefinitely continuing fund and a provident, benefit, superannuation or retirement fund. 14. The Fund was established in a foreign country and are maintained, only to provide benefits for individuals who are not Australian residents. 15. The central management and control of the Fund is carried on outside Australia by entities none of whom is an Australian resident. 16. 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 them. 17. The Fund has not been allowed a tax offset or a tax offset is not allowable for an amount that have been paid to them. 18. The income of the Fund is not non-assessable non-exempt income of the Fund because of 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 Income Tax Assessment Act 1936 subsection 128(3CA)
Question 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)? Summary The requirements of paragraph 128B(3)(jb) of the ITAA 1936 are satisfied. The Fund is excluded from liability to withholding tax on dividend derived from its Australian investment under paragraph 128B(3)(jb) of the ITAA 1936. Detailed reasoning 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.
The fund is a non-resident The Fund is not a resident of Australia. Therefore, the Fund satisfies this requirement. 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. 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: (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) Howev er, 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. The Fund must be a 'fund' that satisfies all of the conditions in subsection 118-520(1) of the ITAA 1997 (and none of the paragraphs in subsection 118-520(2) of the ITAA 1997) to be a 'superannuation fund for foreign residents'. 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'. The legislation provides no guidance on the meaning of 'indefinitely continuing'. It is not a technical legal expression, and the ordinary meanings of indefinitely and continuing involve little ambiguity or controversy. The Macquarie Dictionary , viewed on 1 February 2018, www.macquariedictionary.com.au defines 'indefinitely' and 'continuing' as follows: Indefinite: adjective 1. not definite; without fixed or specified limit; unlimited: an indefinite number 2. not clearly defined or determined; not precise. indefinitely, adverb Continue: verb (Continued, continuing) 1. to go forwards or onwards in any course or action; keep on. 2. to go on after suspension or interruption.
3. to last or endure. 4. to remain in a place; abide; stay. 5. to remain in a particular state or capacity The Fund has been established as an indefinitely continuing fund through foreign legislation and this has been confirmed by the statement prepared by the Trustee. There is no indication that the Fund will end at a definite point in time. Therefore, it is reasonable to conclude that the Fund will continue to operate for an indefinite period and the Fund is considered to satisfy this requirement. 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. 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 a sickness or accident. ABC and XYZ are cost-sharing, multiple-employer, defined benefit pension plans providing service and disability retirement benefits, as well as death benefits. Eligibility criteria of a benefits depends on the membership tier. The Commissioner concludes that the sole purpose of the Fund is to provide retirement benefits or benefits in other allowable contemplated contingencies and, as such, 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 the Country A. 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 for the purpose of providing retirement allowances retirement allowances and other benefits for employees of participating public employers. These qualified members reside in Country A. Therefore, the Fund satisfies this requirement. 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 trustee is the administrative head of the System, responsible for the general administration, management and proper operation of the Fund, based in Country A. 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 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 is exempt from income tax in the country in which the non-resident resides The Fund resides in a foreign country and is exempt from income tax in that country. Therefore, the Fund satisfies 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. 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 . 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. In this case, the Fund holds less than a 10% ownership interest in the Australian companies and has never held more than a 10% ownership interest.
The total participation interest is therefore below 10% 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 investments in Australia. 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; iii. 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 Fund's Australian investments and relevant facts and circumstances of this ruling: (a) The Fund does not hold any right to appoint a person to a board, committee or similar, either directly or indirectly. (b) The Fund has not entered into or received any side letters, arrangements or agreements. (c) The Fund does not hold any veto rights on security holder votes. (d) The Fund does not hold any other influence potentially of a kind described in subsection 128B(3CD) of the ITAA 1936. Based upon the above, 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 . Conclusion The Fund is excluded from withholding tax in relation to dividend income derived from its current investments in Australia.