1 Is the Fund excluded from liability to withholding tax on interest, dividend and non-share dividend income derived from Australian resident companies 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 period : 1 July 20XX - 30 June 20XX The scheme commenced on: 1 July 20XX
1. The Fund was established by an act (the Act) of the Government of Country X. The Fund is governed by the Act. 2. The purpose of the Plan is to provide eligible members pension benefits in accordance with the plan. 3. The Fund's members are limited to those employed in Industry A. 4. There is no consideration of a cessation date for the Fund. 5. The Fund was established in a foreign country and continues to be a resident of the foreign country. 6. The Fund is a qualified pension plan and exempt from taxation in its foreign country. 7. The Fund is governed by a Board. 8. The Fund consists of three of Plans: Defined Benefits, Defined Contributions and a combined plan. Defined Benefits Plan 9. The Fund's primary purpose under the Defined Benefit Plans is to provide lifetime benefits for eligible retired member. 10. Members and Employers contribute to the Plan. 11. Members benefits are calculated based on age, years of service and final average salary. 12. The Defined Benefits Plan offers a death benefit option to members, to provide a lump sum or monthly benefit to elected beneficiaries.
13. The Defined Benefits Plan provides members with two disability benefit programs depending on the year the Member joined the Fund. Defined Contribution Plan 14. The Fund offers a Defined Contribution Plan to eligible members. 15. Members and Employers contribute to the Plan. 16. Members may select their investment choices from a number which are managed by the Fund. 17. Retirement benefits under the Defined Contribution Plan are based on contributions to the Members account, the performance of the investment choices selected and the annuity rates at retirement. 18. Members may opt in to a death benefit option to provide for beneficiaries after the Member's death. 19. In the case of a permanent disability a member may withdraw their accounts after terminating employment. Combined Plan 20. The combined plan offers Members features of both the Defined Benefits and Defined Contribution Plans. 21. Members and Employers contribute to this plan, with a percentage of contributions going to a defined contribution account and a percentage going to a defined benefit account.
22. Members may select their investment choices for the Defined Contribution account from a number of investments which are managed by the Fund. 23. Separate retirement benefits are paid from the defined benefit and defined contribution portions of the member's account. 24. The eligibility for retirement benefits and calculation of benefit payments from each of the of the accounts will be the same as described under those specific plans above. 25. Members may combine the defined benefit and defined contribution accounts for a disability benefit if they meet the eligibility criteria. 26. The plan has survivor benefits in the event of the death of the Member, with separate benefits paid from the defined benefit and defined contribution portions of the Member's account. Australian Investments 1. The Fund holds investments in Australia. 2. In respect of each of the Australian entities in which the Fund has invested: a. The Fund does not hold more than 10% of the total participation interests in each entity in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936
b. The Fund does not hold any right to appoint a person to a board, committee, or similar, either directly or indirectly c. The Fund has not entered into or received any side letters, arrangements or agreements d. The Fund does not hold any veto rights on security holder votes, and e. The Fund does not hold any other influence potentially of a kind described in subsection 128B (3CD) of the ITAA 1936
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
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) 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 paid by a company that is a resident of Australia; 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 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. There is no indication of the Fund ending at a defined point in time. Therefore, the Fund satisfies this requirement. The Fund is a provident, benefit, superannuation or retirement fund The phrase 'a provident, benefit, superannuation or retirement fund' under subparagraph 118-520(1)(a)(ii) 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. The Fund was established to provide retirement benefits to the Fund participants on the satisfaction of the Fund requirements. Members must meet eligibility requirements around their age and years of service to access benefits, and may also be provided with disability benefits and survivors benefits by the Fund where requirements and elections are met. Therefore, the Fund will satisfy 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 was established to provide retirement, disability and death benefits for members of a particular industry in a foreign country.
The Fund has provided a statement that it was not established to provide benefits to individuals that are Australian residents. It is considered that the possibility of a very small number of members being returned residents or becoming Australian residents after ceasing eligible employment is incidental and should not be taken to conclude that the Fund, in this case, has not been established and is not maintained only to provide benefits for non-residents, based on the rules and operation of the Fund. Therefore, the Fund satisfies this requirement. The Fund's central management and control is carried on outside Australia by entities none of whom is an Australian resident 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. Based on the composition of the Fund's Board and the connection of the Fund with the specific location of its Members, it is reasonable to conclude the central management and control of the Fund occurs outside of Australia by entities that are not Australian Residents. 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 offset has been allowed or is allowable for such an amount 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 Fund has confirmed that an amount paid to the Fund or set aside for the Fund has not been and cannot be deducted under the ITAA 1997. A tax offset has not been allowed nor would be allowable for any amount paid to the Fund or set aside for the Fund. Therefore, the Fund will satisfy 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 for the purposes of subparagraph 128B(3)(jb)(i) of the ITAA 1936. The income consists of interest, unfranked dividends or non-share dividends paid by an Australian resident company Paragraph 128B(3)(ga) of the ITAA 1936 prescribes that section 128B of the ITAA 1936 will not apply to income that consists of the franked part of a dividend. Therefore it is only necessary to consider dividend income that is unfranked for the purposes of the exemption in 128B(3)(jb). The income the Fund receives from certain investments circumstances includes unfranked dividends paid by Australian companies that are listed on the ASX.
If that part of the dividend is franked then no withholding tax has been paid and no amount of withholding tax to be reclaimed (paragraph 128B(3)(ga) of the ITAA 1936. The Fund's investment portfolio includes investments in complex investment structures. The income the Fund receives from these investments may include interest, unfranked dividends or non-share dividends paid by Australian companies. These types of income qualify for the withholding tax exemption in paragraph 128B(3)(jb) as the Fund meets the other requirements of the section. However, the income received from these investments may also include other payments. Any amounts of withholding tax withheld from income that is not: interest unfranked dividends paid by an Australian resident company non share dividends paid by an Australian resident company will not be eligible for the exemption from withholding tax under paragraph 128B(3)(jb) of the ITAA 1936. The 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 derive the income that consists of interest, dividends or non-share dividends paid by Australian resident companies. It is accepted that unfranked dividends from some of the Fund's investments would be derived by the Fund 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. Income that is exempt from income tax in the country in which the non-resident resides The Fund has provided a letter from Country X's Tax Authority confirming that it is exempt from taxation in Country X. The Commissioner has accepted based on the facts and circumstances that the Fund is exempt from income tax in Country X. 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 in subsection 128B(3CA) of the ITAA 1936 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. Subsection 128B(3CA) of the ITAA 1936 states: (3CA) Paragraph (3)(jb) applies to income derived by the superannuation fund mentioned in subparagraph (3)(jb)(i) only if: (a) the superannuation fund satisfies the portfolio interest test in subsection (3CC) in relation to the entity mentioned in subsection (3CB) (the test entity ): (i) at the time the income was derived; and (ii) throughout any 12 month period that began no earlier than 24 months before that time and ended no later than that time; and (b) the superannuation fund does not, at the time the income was derived, have influence of a kind described in subsection (3CD) in relation to the test entity; and (c) the income is not non-assessable non-exempt income of the superannuation fund because of: (i) Subdivision 880-C of the Income Tax Assessment Act 1997 ; or (ii) Division 880 of the Income Tax (Transitional Provisions) Act 1997 . These requirements are considered 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 nonshare equity interests were included in the total paidup share capital of the company. The Fund holds less than 10% of the total participation interests in each of the Test Entities. Further, the Fund would hold less than 10% of the total participation interests in each of the Test Entities 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. 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 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 superannuation 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 superannuation 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 direction, instructions or wishes of the superannuation fund. In respect of the Australian Investments:
a. 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. b. Neither the Fund, nor any related party of the Fund, has the right to appoint a director to the Board of Directors of any of the Australian companies or to an equivalent role in a trust or REIT. c. Neither the Fund, nor any related party of the Fund, holds the right to representation on any investor representative or advisory committee (or similar) for any of the Australian companies or a similar role for the trusts or REITs. d. Neither the Fund, nor any related party of the Fund, has the ability to direct or influence the operation of any of the Australian companies, trusts or REITs outside of the ordinary rights conferred by the equity interest held. e. The Fund has not entered into or received any side letters, arrangements or agreements. f. The Fund only hold rights to vote in proportion to its equity interest in each Australian company, trust or REIT and does not hold any veto rights on security holder votes.
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. Otherwise non-assessable non-exempt The income received by the Fund from the Australian investments will not be non-assessable non-exempt income consequent to the operation 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 Having regard to the requirements of paragraph 128B(3)(jb) of the ITAA 1936, the Fund is excluded from liability to withholding tax in relation to interest and dividend and non-share dividend income derived from its Australian investments listed in this Ruling. Prima facie, the Fund is excluded from withholding tax in relation to interest income and dividend and non-share dividend income it receives from its Australian investments, provided: The Fund derives the income at a relevant time any dividend and non-share dividend income is derived from an Australian resident company, or an entity that is treated as such under Australian tax law.