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 20YY to 30 June 20YY The scheme commenced on: 1 July 20YY
1. The Fund was established by State Statue in Country A (a foreign country). 2. The Fund is a resident of Country A. 3. The Fund is responsible for the administration of the State retirement plans. 4. The Fund was established, and is maintained, only to provide benefits for individuals who are not Australian residents. 5. Contributions to the Fund are made by employees and employers in the retirement plans. 6. The Fund oversees the retirement plans of the participating systems. 7. The Fund is governed by a board of trustees and a council responsible for investment under the law of Country A. 8. The registered office of the Fund is in Country A. 9. The retirement plans of participating systems contain the entitlements to benefits such as retirement, termination of employment, death benefits, and disability retirement. 10. The eligibility requirements for receiving public pension benefits typically depend on the specific retirement plans of the participating system that an individual member belongs to. 11. The Fund's funding mechanism operates through a combination of employee contributions, employer contributions, and investment returns.
12. The Fund's central management and control is in Country A. 13. The Fund does not have a contemplated end date. 14. The Fund is exempt from tax in Country A. 15. 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 . Australian investments 16. The Fund's investment council is responsible for investing the assets of the participating systems, including international investments such as those in Australia. All funds from the participating systems are pooled into a single investment fund managed by the Fund's investment council. The participating systems do not have separate investment mandates; instead, they each hold a proportional interest in the pooled assets and share in the investment returns accordingly.
17. The Fund uses investment managers to manage their Australian investments. Although the investments are managed by external firms and held in custody, the state of Country A is the legal owner of the funds and any investment gains. The interest, dividend or non-share dividend income from Australian assets, like all other earnings, flows back into the pooled fund owned by the state and remains there until the Fund requests withdrawals to pay benefits. 18. The Australian equity investments have the following characteristics: • All investments are listed on the Australian Securities Exchange (ASX). • The Fund holds less than 10% of the total equity interests on issue of each Australian company or trust • does not hold any right to appoint a person to a board, committee or similar either directly or indirectly, • did not enter into or receive any side letters, arrangements or agreements, • does not hold any veto rights on security holder votes, and • does not hold any other influence potentially of a kind described in subsection 128B(3CD) of the ITAA 1936.
19. The Australian debt investments have the following characteristics: • All investments are listed on the Australian Securities Exchange (ASX). • The investments are either corporate, securitised, index linked, and Government debt investments and treasuries from which it will ordinarily derive income in the form of interest. • The Fund holds less than 10% of the total interests on issue of each Australian debt issuer. • The Fund has no involvement in the day to day management of the business of any of the Australian debt issuers. • The Fund has not acquired the right to appoint a director to the Board of Directors of any issuing debt issuer. • The Fund has not acquired the right to representation on any investor representative or advisory committees (or similar) of any issuing Australian debt issuer. • The Fund has no ability to direct or influence the operation of the Australian debt issuer outside of the ordinary right conferred by the debt interest held.
• The Fund has no voting rights in respect of the debt investments held. • There are no special relationships or arrangements between the Fund and the issuers of any Australian debt investment to be held which effect the amount of interest income that will be paid from those investments.
Income Tax Assessment Act 1936 Paragraph 128B(3)(jb) Income Tax Assessment Act 1936 Paragraph 128B(3CA) Income Tax Assessment Act 1936 Paragraph 128B(3CC) Income Tax Assessment Act 1936 Paragraph 128B(3CD) Income Tax Assessment Act 1936 Section 128D Income Tax Assessment Act 1997 Section 118-520
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 Fund is excluded from liability to withholding tax on interest, dividend and non-share dividend income derived from its Australian investments in accordance with paragraph 128B(3)(jb) of the ITAA 1936 because it satisfies the requirements of the exemption as detailed below. 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 Income Tax Assessment Act 1997 (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 Commissioner has determined from the facts and circumstances that the Fund is not a resident of Australia. Therefore, the Fund satisfies this requirement. The Fund is a superannuation fund for foreign residents The term '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 ITAA 1997 as follows: Section 118-520 of the ITAA 1997 provides: 118-520(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. 118-520(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; (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. I. 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's rules provide no indication that there is an intention for the Fund to end at a definite point in time. Therefore, it is acceptable that the Fund will continue to operate for an indefinite period and the Fund is considered to satisfy this requirement. Therefore, the Fund satisfies this requirement. II. A provident, benefit, superannuation or retirement fund
The phrase 'a provident, benefit, superannuation or retirement fund' under paragraph 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 above establish 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 main purpose of the Fund as set out in the retirement plans is to provide pensions for members on retirement. Broadly, the Fund provides benefits to members in the following circumstances: a. Retirement pension b. Death benefits c. Disability benefits
There are no benefits provided by the Fund to contributors and beneficiaries beyond those as prescribed above. The Commissioner accepts that, apart from the retirement at or after normal retiring age, the alternate circumstances of access to the funds above listed align to the contemplated contingencies of a provident, benefit, superannuation or retirement fund. All monies managed by the administrators of the Fund are used solely for the purposes of administering and paying out benefits under the Fund. Therefore, the Fund will satisfy this requirement. III. Established in a foreign country The Fund was established in Country A (a foreign country). Therefore, it satisfies this requirement. IV. Was established and maintained only to provide benefits for individuals who are not Australian residents The Fund was established to provide pension benefits to different groups of public sector employees in the state of Country A. The Fund confirmed that it was established and is maintained only to provide benefits for individuals who are not 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 will satisfy this requirement. V. 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 registered office of the Fund is in Country A. The Fund is governed a board of trustees and a body responsible for investing the assets of the Fund including international investments managed by the state's investment council. None of these entities are Australian residents.
The Fund has further confirmed in its statement letter that its central management and control is carried outside Australia by entities none of whom is an Australian resident. Therefore, the Fund satisfies this requirement. VI. Subsection 118-520(2) A statement has been provided by the Fund confirming that no amounts have been paid to the Fund, nor set aside to be paid to the Fund, that can be deducted under this Act. Further, no amounts have been paid to the Fund, or set aside or be paid to the Fund, for which a tax offset has been allowed, or would be allowable, under this Act. Consequently, based on the statement provided by the applicant, this requirement is satisfied. 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, dividend or non-share dividend income, is derived by the Fund Subparagraph 128B(3)(jb)(i) of the ITAA 1936
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, dividend or non-share dividend income from its Australian investments. The Fund invests directly into Australia in accordance with its investment management agreements with investment managers and receives interest, dividend or non-share dividend income directly from its Australian investments via the custodian accounts. The investment managers provide investment management services to the Fund subject to the investment guidelines within the agreements, and for payment of a prescribed fee. The Fund has also confirmed that it is the legal and beneficial owner of all the Australian investments. The Fund is exempt from income tax in the country in which the non-resident resides The Fund is exempt from taxation in accordance with Section XX of Country A's law. Therefore, the Fund will satisfy this requirement. 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.
The Fund will receive interest income from its Australian investments, along with dividend and non-share dividend income from companies who are residents of Australia for tax purposes. Therefore, the Fund will satisfy this requirement. Subparagraph 128B(3)(jb)(iii) of the ITAA 1936 The Fund is exempt from taxation on the interest, dividend and non-share dividend paid by Australian companies under the laws of Country A. Therefore, the Fund will satisfy 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: i. The Fund must satisfy the 'portfolio interest test' in relation to the test entity (subsection 128B(3CC) of the ITAA 1936) ii. The Fund must satisfy the 'influence test' (subsection 128B(3CD) of the ITAA 1936) in relation to the test entity, and iii. The income cannot otherwise be non-assessable non-exempt income because of:
a. Subdivision 880-C of the ITAA 1997, or b. Division 880 of the Income Tax (Transitional Provisions) Act 1997 . i. 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.
The Fund holds less than 10% of the total participation interests in each Australian company, or trust. Further, the Fund would hold less 10% of the total participation interests in each Australian company or trust in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936. Also refer to paragraph 18 and 19 to the relevant facts and circumstances in relation to the participation interest. The Fund therefore satisfies the 'portfolio interest test' in respect of its current investments. ii. 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; 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 investment listed in the relevant facts and circumstances to this Ruling: a. Neither the Fund, nor any related party, has involvement in the day-to-day management of the business of any of the Australian companies, trusts, or Australian debt issuer. b. Neither the Fund, nor any related party, has the right to appoint a director to the Board of Directors of the Australian company, Australian debt issuer or equivalent role in a trust. c. Neither the Fund, nor any related party, holds the right to representation on any investor representative or advisory committee (or similar) of the Australian company, Australian debt issuer or equivalent role in a trust.
d. Neither the Fund, nor any related party, has the ability to direct or influence the operation of the Australian company, Australian debt issuer or trust outside of the ordinary rights conferred by the equity interest held. e. The Fund only holds rights to vote in proportion to its equity interest in each Australian company, trust, or Australian debt issuer. Based upon the above, the Commissioner accepts that the Fund does not have influence of a kind described in subsection 128B(3CD) of the ITAA 1936. iii. 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 interest, dividend and non-share dividend income derived from its current investments in Australia.