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 : 1 July 20XX - 30 June 20XX The scheme commenced on: 1 July 20XX
1. The Fund was established as a retirement trust fund for the purpose of providing a retirement plan inclusive of service retirements, disability retirements, and survivor benefits. 2. The Fund provides pension, disability and a medical and dental benefit option to qualified members. The medical and dental benefit option is only available post-retirement for qualified members. In addition, The Fund provides survivor benefits, death benefits and a medical and dental benefit option for eligible survivors, spouses, children and dependent parents. 3. The Fund was established in a foreign country. Plan administration 4. The Board manages the Plan. The Board determines general policy and adopts rules and regulations necessary to carry out the operations of the Plan. The Board sets the overall investment strategy and policy for the Fund's assets and approves Members' retirement applications, including applications for disability retirements. The investment strategies are set with the goal of establishing an optimal investment portfolio from risk and return perspectives. The Board approves The Fund's asset allocation and selects and monitors investment fund managers.
5. The Board General Manager is responsible for implementing the Board's polices and administering the Plan on a day-to-day basis. Plan membership 6. Permanent full-time employees or employees who work an approved XX hours per pay period work schedule are eligible to become a Member of the Plan under which each job classification is covered. 7. Part-time employees may become members of the Plan if they meet certain requirements. Contributions 8. Each year, the employer also contributes to the Plan at a rate determined by the Board. This annual contribution is an actuarially determined percentage that, when combined with the Member contribution, is sufficient to fully meet the actuarial funding requirements of the Plan. 9. Member also make contributions to the Fund. Fund benefits 10. The Fund offers different types of service retirement. Members may be eligible for normal service retirement or early service retirement. Each type has different eligibility guidelines and calculations based on the Members age and years of service when they retire.
11. Final compensation is subject to certain statutory and administrative limitations, therefore not all salary, earnings, or compensation may be used in the calculation. Other benefits 12. In addition to retirement benefits, The Fund also provides disability retirement, survivor benefits. 13. Disability benefits are available to all members who have five or more years of Continuous Service. Disability benefits may vary depending on length of service. 14. If a Member dies, their survivors may be entitled to benefits. Survivor benefits will depend on a members' years of Service and Service Credit. The survivor benefit options range from one or more of the following: a refund of contributions, a possible Limited Pension, possible Disability Retirement Survivorship, possible Deferred or Service Retirement Survivorship.
15. Members are also eligible to enrol themselves and eligible dependents in The Fund health plans if they are a retired employee who receives a monthly retirement allowance. Participation in this program is not compulsory and can be ended at any time. The Members may also be eligible to receive a monthly medical or dental plan premium subsidy from The Fund if certain eligibility criteria are met. The Board annually determines the maximum monthly subsidy amount that a Member may receive. Leaving Service Prior to Retirement 16. If a member has less than five years of Continuous Service and leaves employment they can choose to: • leave their contributions on deposit with the Plan; or • take a refund of their contributions; or • roll the funds into another qualified retirement plan. 17. If a member has five or more years of Continuous Service, they can: • leave their contributions on deposit with the Plan until they are eligible for a Deferred Service Retirement; or • take a refund of their member contributions; or • roll the funds into another qualified retirement plan.
18. If contributions are withdrawn, they are subject to taxation. Members are also unable to withdraw the Employer's contributions if they are withdrawing their funds prior to retirement. Other relevant facts 19. The Fund confirmed that: a) the Fund is an indefinitely continuing fund b) the Fund was established in a country other than Australia c) the Fund was established and is maintained only to provide benefits for individuals who are not Australian residents d) the Fund's central management and control is carried on outside of Australia by entities none of whom are Australian residents e) no amount paid to the Fund can be deducted under the Income Tax Assessment Act 1997 (ITAA 1997) or ITAA 1936 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 . Management of Investments 20. The Fund hires multiple investment managers who invest in Australia on their behalf.
21. The investment managers may purchase and sell securities within the Investment Policy and Guidelines adopted by the Board. 22. The Fund pays a management fee to the Investment Managers for services rendered. The fees are outlined in each of the investment management agreements. Australian investments 23. The Fund provided a list of its Australian investments. 24. All of the Fund's equity investments in Australia are listed on the ASX and its total participation interest in each Australian Test Entity is below 10%. 25. Further, the Fund confirmed that for each investment, the Fund: a) does not hold any right to appoint a person to a board, committee or similar, either directly or indirectly, b) has not entered into or received any side letters, arrangements or agreements, c) does not hold any veto rights on security holder votes, and d) does not hold any other influence potentially of a kind described in subsection 128B(3CD) of the ITAA 1936.
26. The Australian debt investments of the Fund do not provide the Fund with the ability to direct or influence the operation of the company or trust, or otherwise provide the Fund with anything that would constitute influence under subsection 128B(3CD) of the ITAA 1936. 27. The Fund derives dividend, interest, capital gains and managed investment trust fund payments from its Australian investments.
Income Tax Assessment Act 1936 Paragraph 128B(3)(jb) Income Tax Assessment Act 1936 Section 128D Income Tax Assessment Act 1997 Section 118-520
Question 1 Summary The Fund is excluded from liability to withholding tax on interest, dividend and non-share dividend income derived from its investments in accordance with paragraph 128B(3)(jb) or 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. Subsection 128B(3) of the ITAA 1936 notes that section 128B of the ITAA 1936 will not apply to prescribed categories of income. Relevantly, paragraph 128B(3)(jb) of the ITAA 1936 provides an exclusion from withholding tax on 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 resides. 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 for tax purposes. Therefore, the Fund satisfies this requirement. The Fund is a superannuation fund for foreign residents Superannuation fund for foreign residents is a defined term in the ITAA 1936. Subsection 6(1) of the ITAA 1936 states: superannuation fund for foreign residents has the meaning given by subsection 995-1(1) of the Income Tax Assessment Act 1997. Subsection 995-1(1) of the ITAA 1997 sets out the following: superannuation fund for foreign residents has the meaning given by section 118- 520. The term 'superannuation fund for foreign residents' is defined in section 118-520 of the Income Tax Assessment Act 1997 (ITAA 1997) as follows: 118-520 Meaning of superannuation fund for foreign residents (1) A fund is a superannuation fund for foreign residents at a time if: (a) at that time, it is: (i) an indefinitely continuing fund; and
(ii) a provident, benefit, superannuation or retirement fund; and (b) it was established in a foreign country; and (c) it was established, and is maintained at that time, only to provide benefits for individuals who are not Australian residents; and (d) at that time, its central management and control is carried on outside Australia by entities none of whom is an Australian resident. (2) However, a fund is not a superannuation fund for foreign residents if: (a) an amount paid to the fund or set aside for the fund has been or can be deducted under this Act; or (b) a *tax offset has been allowed or is allowable for such an amount. Consequently, for the Fund to be considered a superannuation fund for foreign residents for the purposes of paragraph 128B(3)(jb) of the ITAA 1936, it must be established that: • the Fund is an indefinitely continuing fund • the Fund is a provident, benefit, superannuation or retirement fund • the Fund was established in a foreign country • the Fund was established and maintained only to provide benefits for individuals who are not Australian residents
• The central management and control of the Fund is carried on outside of Australia by entities none of whom are Australian residents • No amount paid to the Fund or set aside for the Fund has been or can be deducted under the ITAA 1997, and • No tax offsets have been allowed or would be allowable for an amount paid to the Fund or set aside for the Fund. The Fund is an indefinitely continuing fund The term 'indefinitely continuing fund' is not defined in either the ITAA 1997 or the ITAA 1936. Therefore, it should be given its ordinary meaning subject to the context in which it appears and having regard to any relevant case law authorities. The Australian Oxford Dictionary , 2004, Oxford University Press, Melbourne defines the term 'fund' as 1 a permanent stock of something ready to be drawn upon... 2 a stock of money, especially one set apart for a purpose. In Scott v. FC of T (No 2) (1966) 14 ATD 333; (1966) 10 AITR 290 (Scott) , Windeyer J expressed the view that 'fund' in the context of 'superannuation fund' ordinarily meant 'money (or investments) set aside and invested, the surplus income therefrom being capitalised'. Windeyer J's views in Scott
were cited with approval by Hill J in Walstern Pty Ltd v. Commissioner of Taxation (2003) 138 FCR 1; 2003 ATC 5076; (2003) 54 ATR 423 who stated that 'for present purposes, the point is the need for "money" or "other property" to constitute a fund'. The general view is that an indefinitely continuing fund does not have to continue forever, but rather that the governing rules should not fix an express termination date. The Fund provided a statement dated 30 June 2024 confirming the fund is an indefinitely continuing fund. Therefore, The Fund satisfies this requirement. The Fund is a provident, benefit, superannuation or retirement fund The phrase 'provident, benefit, superannuation or retirement fund' under subparagraph 118-520(1)(a)(ii) of the ITAA 1997 is not defined in either the ITAA 1997 or the ITAA 1936. However, the phrase has been subject to judicial consideration. In Scott , the High Court examined the terms 'superannuation fund' and 'fund'. Justice Windeyer stated at ATD 351; AITR 312; ALJR 278 that:
... I have come to the conclusion that there is no essential single attribute of a superannuation fund established for the benefit of employees except that it must be a fund bona fide devoted as its sole purpose to providing for employees who are participants money benefits (or benefits having a monetary value) upon their reaching a prescribed age. In this connexion "fund", I take it, ordinarily means money (or investments) set aside and invested, the surplus income there from being capitalised. In a later case, Mahoney v. Commissioner of Taxation (Cth) (1967) 41 ALJR 232; (1967); 14 ATD 519; 10 AITR 463 (Mahoney case), the High Court took a similar view as in Scott, Justice Kitto expressed the view at ALJR 232; (1967); ATD 520; AITR 464 that:
...all that need be recognised is that just as 'provident' and 'superannuation' both referred to the provision of a particular kind of benefit - in the one case a provision against contemplated contingencies, and in the other case a provision, to arise on an employee's retirement or death or other cessation of employee, of a subvention for him or his estate or persons towards whom he may have stood in some kind of relation commonly giving rise to a legal or moral responsibility - so 'benefit' must have meant a benefit, not a general sense, but characterised by some specific future purpose. The court found that the expression takes its meaning from past usage and the meaning of the several expressions must be arrived at in light of their ordinary usage. As such the term 'benefit' requires a purpose narrower than conferring benefits in a completely general sense. The benefit must be characterised by some future purpose. Likewise, a provident fund must not refer to the provision of funds in a general sense but must relate to a provision against contemplated contingencies.
Both of the above-mentioned cases emphasise that the benefits must be provided for a specific purpose and require that there is a connection between the benefit received and the provision by the fund for retirement or death of a member or against 'contemplated contingencies', such as death, disability or serious illness. In the present case, benefits are provided to members of the Fund by way of a pension upon reaching retirement age. Benefits are also provided upon death of a member to their dependants or estate, or to a member when they are unable to work due to injury, sickness or accident. Therefore, the Fund satisfies this requirement. The Fund was established in a foreign country The Fund was established in a foreign country. Therefore, the Fund satisfies this requirement. The Fund was established and maintained only to provide benefits for individuals who are not Australian residents The Fund is a pension fund for employees. These qualified members reside in a foreign country. Therefore, the Fund satisfies this requirement. The central management and control of the Fund is carried on outside of Australia by entities none of whom are Australian residents
Paragraphs 20 and 21 of Taxation Ruling TR 2008/9 Income tax: meaning of 'Australian superannuation fund' in subsection 295-95(2) of the Income Tax Assessment Act 1997 (TR 2008/9) states in respect of the central management and control (CM&C) of a superannuation fund: 20. The CM&C of a superannuation fund involves a focus on the who, when and where of the strategic and high level decision making processes and activities of the fund. In the context of the operations of a superannuation fund, the strategic and high level decision making processes includes: • formulating the investment strategy for the fund; • reviewing and updating or varying the fund's investment strategy as well as monitoring and reviewing the performance of the fund's investments; • if the fund has reserves - the formulation of a strategy for their prudential management; and • determining how the assets of the fund are to be used to fund member benefits.
21. The other principal areas of operation of a superannuation fund that form part of the day-to-day or operational side of the fund's activities will not constitute CM&C. These activities do not form part of the CM&C of the fund because they are not of a strategic or high level nature. Rather, these activities are of a more formalistic or administrative nature. Examples of such activities include the acceptance of contributions that are made on a regular basis, the actual investment of the fund's assets, the fulfilment of administrative duties and the preservation, payment and portability of benefits. Furthermore, paragraphs 10 and 11 of Taxation Ruling TR 2018/5 Income tax: central management and control test of residency (TR 2018/5) states: 10. Central management and control refers to the control and direction of a company's operations. It does not refer to a physical location in which the control and direction of a company is located and may ultimately be exercised in more than one location.
11. The key element in the control and direction of a company's operations is the making of high-level decisions that set the company's general policies and determine the direction of its operations and the type of transactions it will enter. The Fund's Board of Administration is responsible for setting general policy of the fund and adopts rules and regulations necessary for the Fund to operate. Among other duties, the Board directs investment strategy and policy for the Fund's assets. The Fund's Board of Administration is based in the foreign country. Therefore, the Fund satisfies this requirement. No amount paid to the Fund or set aside for the Fund has been or can be deducted under the ITAA 1997 and no tax offsets have been allowed or would be allowable for an amount paid to the Fund or set aside for the Fund Pursuant to subsection 118-520(2) of the ITAA 1997, a fund is not a superannuation fund for foreign residents if: a) an amount paid to the fund or set aside for the fund has been or can be deducted under the Act; or b) a tax offset has been allowed or is allowable for such an amount.
The contributors to the Fund are based in the foreign country and make contributions in respect of their employment undertaken in that foreign country. As contributors to the Fund are based in the foreign country and make contributions in respect of their employment undertaken in the foreign country, the contributions to the Fund are neither eligible for deductions nor allowed as offsets under the ITAA 1936 or ITAA 1997. The Fund has also confirmed no amount paid to the Fund can be deducted under the ITAA 1936 or ITAA 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 income, consisting of interest and dividend income, is derived by the Fund Subsection 128B(3CA) of the ITAA 1936, along with paragraph 128B(3)(jb) of the ITAA 1936 requires the superannuation fund for foreign residents to derive the interest, dividends or non-share dividends paid by Australian resident companies.
The Fund receives interest and dividend income from its Australian investments. It will, therefore, derive the relevant income for the purposes of subsection 128B(3CA) of the ITAA 1936 and paragraph 128B(3)(jb) of the ITAA 1936. Therefore, the Fund will satisfy this requirement. The Fund is exempt from income tax in the country in which the non-resident resides The Fund is exempt from income tax in the foreign country. Therefore, the Fund satisfies this requirement. 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 . Income derived by the Fund would not be otherwise treated as not assessable and not exempt by virtue of the above provisions. Accordingly, the above exclusion should not apply to exclude the Fund from entitlement to the withholding tax exemption for superannuation funds for foreign residents. Subsection 128(3CA) of the ITAA 1936 The Treasury Laws Amendment (Making Sure Foreign Investors Pay Their Fair Share of Tax in Australia and Other Measures) Act 2019
introduced extra requirements that must be met for paragraph 128B(3)(jb) of the ITAA 1936 to apply from 1 July 2019 onwards. These extra requirements apply only to assets which were acquired after 27 March 2018 for income that is derived on or before 1 July 2026. For income that is derived on or after 1 July 2026, these extra requirements will apply to all assets, regardless of when they were acquired. Relevantly: The fund must satisfy the 'portfolio interest test' in relation to the test entity (subsection 128B(3CC)), The fund must satisfy the 'influence test' (subsection 128B(3CD)) in relation to the test entity, and The income cannot otherwise be non-assessable non-exempt income of the fund because of: Subdivision 880-C of the ITAA 1997, or Division 880 of the Income Tax (Transitional Provisions) Act 1997 . The Fund satisfies the 'portfolio interest test' 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. Subsection 128B(3CB) defines the test entity to be either the entity that paid the interest, dividends or non-share dividends or, if subsection 128A(3) of the ITAA 1936 applies in relation to a resident trust estate, that trust estate. Subsection 995-1(1) of the ITAA 1997 defines total participation interest to have the meaning given by section 960-180 of the ITAA 1997, which states: An entity's total participation interest at a particular time in another entity is the sum of: (a) the entity's *direct participation interest in the other entity at that time; and (b) the entity's *indirect participation interest in the other entity at that time.
A 'direct participation interest' that the Fund will have in a test entity is defined in the table in subsection 960-190(1) of the ITAA 1997 and depends on what type of entity the other entity is. Item 1 of the table in subsection 960-190(1) and subsection 960-190(2) of the ITAA 1997 provides that a direct participation interest in a company is the 'direct control interest' (within the meaning of section 350 of the ITAA 1936 excluding the operation of subsection 350(6) and (7)) that the first entity holds in the other entity. Subsection 350(1) of the ITAA 1936 provides that an entity holds a direct control interest in a company at a particular time equal to the percentage of: (a) total paid up share capital, (b) voting rights, or (c) rights to distributions of capital or profits that it holds in the company. Where there are different percentages in each of the above, the direct control interest is the greater or greatest of those percentages. Subsection 350(2) of the ITAA 1936 provides that where an entity holds different percentages of total rights to vote for the purposes of (b) above, the highest of those percentages applies in establishing the direct control interest.
Subsection 960-185(1) of the ITAA 1997 provides that an entity's indirect participation interest in a test entity is established by multiplying it direct participation interest in an intermediate entity by the sum of the intermediate entity's direct and indirect participation interests in the test entity. In these circumstances, the Commissioner is satisfied that the total participation interest that the Fund holds in the test entities: is less than 10% pursuant to paragraph 128B(3CC)(a) of the ITAA 1936 at all relevant times; and would be less than 10% in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936 at all relevant times. The Fund therefore satisfies the 'portfolio interest test' in respect of its current investments (listed in Appendix 1 to the Relevant facts and circumstances of this Ruling). The Fund does not have influence of a kind described in subsection 128B(3CD) of the ITAA 1936 in relation to the test entity at the time the income was derived Subsection 128(3CD) of the ITAA 1936 states:
A superannuation fund has influence of a kind described in this subsection in relation to the test entity at a time if any of the following requirements are satisfied at that time: (a) the superannuation fund: (i) is directly or indirectly able to determine; or (ii) in acting in concert with others, is directly or indirectly able to determine; the identity of at least one of the persons who, individually or together with others, make (or might reasonably be expected to make) the decisions that comprise the control and direction of the test entity's operations; (b) at least one of those persons is accustomed or obliged to act, or might reasonably be expected to act, in accordance with the directions, instructions or wishes of the superannuation fund (whether those directions, instructions or wishes are expressed directly or indirectly, or through the superannuation fund acting in concert with others). As such, there are two distinct sub-tests within the influence test.
Sub-test 1 of the influence test, as contained in paragraph 128B(3CD)(a) of the ITAA 1936, assesses whether the Fund is able to determine the identity of at least one of the persons who, individually or together with others, makes or is reasonably expected to make, decisions comprising the control and direction of the test entity's operations. This includes situations where the Fund is able to act in concert with others to determine the identity of a relevant decision-maker in the test entity. Sub-test 1 also extends to situations where the Fund, in its own right, holds the ability to approve or veto decisions which go to the control or direction of the test entity. Sub-test 2 of the influence test, as contained in paragraph 128B(3CD)(b) of the ITAA 1936, assesses whether at least one of the relevant decision-making persons of the test entity is accustomed or obliged to act, or might reasonably be expected to act, in accordance with the directions, instructions or wishes of the Fund. Relevantly, in respect of the investments listed in Appendix 1 of the Relevant facts and circumstances to this Ruling: (a) The equity investments are listed on the ASX.
(b) The Fund holds less than 10% of the total equity interests on issue of the Australian companies in which it invests. (c) The Fund has no involvement in the day-to-day management of the business of the Australian companies. (d) The Fund has no right to appoint a director to the Board of Directors of the Australian companies. (e) The Fund has no right to representation on any investor representative or advisory committee (or similar) of the Australian companies. (f) The Fund has no ability to direct or influence the operation of the Australian company outside of the ordinary rights conferred by the equity interests held. (g) In addition to the above, the Fund does not have the ability to direct or influence the operation of the companies, or otherwise provide the Fund with anything that would constitute influence under subsection 128B(3CD) of the ITAA 1936. Accordingly, the Fund does not have influence of a kind described in subsection 128B(3CD) of the ITAA 1936 in respect of its Australian investments. The Fund does not have capacity to influence (either directly or indirectly) the day-to-day management of the operations of their investments.
Consequently, the Commissioner accepts that the Fund does not have influence of a kind described in subsection 128B(3CD) of the ITAA 1936. The income received by the Fund is not non-assessable and non-exempt income of the Fund because of Subdivision 880-C of the ITAA 1997 or Division 880 of the Income Tax (Transitional Provisions) Act 1997 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 . The Fund satisfies this condition in respect of its current investments listed in Appendix 1 to the Relevant facts and circumstances of this Ruling Conclusion As the Fund has met both the pre-existing and extra requirements under paragraph 128B(3)(jb) of the ITAA 1936, the Fund is excluded from withholding tax in relation to interest and dividend income derived from its current investments (listed in Appendix 1 to the Relevant facts and circumstances of this Ruling).