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 : 01 July XXXX to 30 June XXXX The scheme commenced on: 01 July XXXX
Background 1. The Fund is a pension plan established in a Foreign Country and administered by the laws in that country. 2. The Company is the sponsor and administrator of the Fund. The Fund provides benefits to eligible employees of the Company and its affiliates and the beneficiaries of those employees. 3. The Fund is a non-contributory and contributory defined pension plan that provides members with monthly pension income at retirement based on a prescribed plan formula which is based on a combination of yearly maximum pensionable earnings, average earnings at retirement and length of service recognised in the plan. 4. A trust fund is maintained to receive contributions, manage assets, and make distributions in accordance with the Fund's terms and applicable legislation. 5. A corporate trustee is appointed pursuant to a trust and custodial service agreement, The Trustee is authorised to appoint domestic or foreign custodian and sub custodian of the trust fund, responsible for custodial and related recordkeeping responsibilities.
6. The Funds central management and control is in a Foreign Country and is carried out by persons who are not Australian residents. 7. The Fund has been established and maintained only to provide benefits for individuals who are not Australian residents. Membership 8. Full-time and part-time employees of the Company or its participating subsidiaries are eligible to join the Fund and are automatically enrolled upon meeting eligibility criteria. 9. Employees hired on or after 1 May XXXX become non-contributory members after 3 months of continuous service. Those hired before 30 April XXXX may choose to be contributory or non-contributory members after 3 months of continuous service. Contributions 10. Employers make quarterly or monthly contributions as recommended by the Actuary to cover current service costs, member contributions, and any unfunded liabilities or experience shortfalls, in line with applicable legislation. 11. Contributory members contribute via payroll deduction based on a set formula. Non-contributory members are not permitted to contribute. Retirement
12. Members are eligible for a pension at age 65 (normal retirement) or be eligible for early retirement from age 55. 13. A member is eligible for postponed retirement where they continue to work after the age of 65 but they must start receiving their benefits no later than the age of 69. Benefits 14. Available pension benefits include: a. Lifetime retirement pension b. Spouse benefit c. Dependent child benefit d. Death benefit e. Disability benefit f. Termination benefit trust fund 15. All benefits payable at termination, death or retirement are paid from the trust fund. 16. The Trustee may hold assets in nominee, bearer, or book-entry form, including through clearinghouses or affiliated depositories, provided records clearly identify them as trust fund assets. 17. The Trustee may collect fund income and distributions, and sign necessary documents to recover payments, including tax reclaims and proceeds from securities or other assets. 18. The Trustee may appoint domestic or foreign custodians and sub-custodians to manage safekeeping and records. Termination
19. If the Trustee is removed or resigns, the Company shall appoint a successor trustee or other funding agent permitted by law, with the same powers and duties under this Agreement. 20. The Company may terminate the trust fund with 60 days' written notice to the Trustee. Upon termination, and subject to regulatory approval, the Trustee shall distribute the fund's assets as directed by the Company in line with the Fund's terms. The Australian investments The Fund provided a list of its Australian investments. The Fund has invested in Australian equity investments. These equity investments have the following characteristics: • The Fund holds less than 1% of the total equity interests on issue of each Australian company or trust. • The Fund has no involvement in the day to day management of the business of any of the Australian companies or trusts. • The Fund has no rights to appoint any person to any board, committee or similar, either directly or indirectly, of the Australian company or trust.
• The Fund has no ability to direct or influence the operation of the Australian company or trust outside of the ordinary rights conferred by the equity interest held.
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)
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 non-resident that is 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 Fund is established in a Foreign Country.
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 ITAA 1997 as follows: Meaning of superannuation fund for foreign residents (1) A fund is a superannuation fund for foreign residents at a time if: (a) at the 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 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: a) the Fund is an indefinitely continuing fund b) the Fund is a provident, benefit, superannuation or retirement fund c) the Fund was established in a foreign country d) the Fund was established and maintained only to provide benefits for individuals who are not Australian residents e) The central management and control of the Fund is carried on outside of Australia by entities none of whom are Australian residents f) No amount paid to the Fund or set aside for the Fund has been or can be deducted under the ITAA 1997, and g) 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 indicate the Company intends to maintain the Fund indefinitely, with no provision for winding up at a specific time. A letter provided to the Commissioner confirms the Fund is intended to continue indefinitely. Accordingly, the Fund satisfies this requirement. ii. 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 1936 or the ITAA 1997. ATO Interpretative Decision ATO ID 2009/67 Income Tax: Superannuation fund for foreign residents (ATO ID 2009/67) refers to these authorities and provides the following guidance on the meaning of the phrase 'provident, benefit, superannuation or retirement fund': None of the four descriptors 'provident', 'benefit', 'superannuation' or 'retirement fund' in subparagraph (a)(ii) of the definition of 'superannuation fund for foreign residents' in section 118-520 of the ITAA 1997 are defined. The terms have, however, been the subject of judicial consideration.
The courts have held that for a fund to be a 'provident, benefit, superannuation or retirement fund', the fund's sole purpose must be to provide superannuation benefits, that is, benefits to a member upon the member reaching a prescribed age or upon their retirement, death or other cessation of employment ( Scott v. FC of T (No 2) (1966) 14 ATD 333; (1966) 10 AITR 290, per Windeyer J; Mahony v. FC of T (1967) 14 ATD 519, per Kitto J; Walstern Pty Ltd v. Commissioner of Taxation (2003) 138 FCR 1; 2003 ATC 5076; (2003) 54 ATR 423, per Hill J and Cameron Brae Pty Ltd v. Federal Commissioner of Taxation (2007) 161 FCR 468; 2007 ATC 4936; (2007) 67 ATR 178, per Stone and Allsop JJ). The above establishes that for a fund to qualify as a 'provident, benefit, superannuation or retirement fund', it must have the sole purpose of providing retirement benefits or benefits in other contemplated contingencies (such as death, disability or serious illness). The Fund is a registered defined benefit pension plan in a Foreign Country for employees of the Company established to provide retirement pension, disability and death benefits to member's and their beneficiaries.
The plan provides member benefits calculated using formulas outlined in the plan rules. These formulas consider factors such as the member's highest and average earnings, years of pensionable service, age at retirement, and any election of a spouse or beneficiary. The fund meets this requirement by providing the following benefits to members: Lifetime Pension Disability Benefits Termination Benefits Death Benefits It is thus accepted that the Fund is a 'provident, benefit, superannuation or retirement fund' on the basis that the objective of the Fund is to provide superannuation for retired employees of the Company. The Fund will therefore satisfy this requirement. iii. Established in a foreign country The Fund was established and is a registered pension plan in a Foreign Country. The Fund therefore satisfies this requirement. iv. Was established and maintained only to provide benefits for individuals who are not Australian residents The Fund was established and is maintained only to provide benefits to members who were employees of the Company in Foreign Country, all of whom are not Australian residents. The Fund therefore satisfies this requirement. v.
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: 20. The CM&C of a superannuation fund involves a focus on the who, when and where of the strategic and high level decision making processes and activities of the fund. In the context of the operations of a superannuation fund, the strategic and high level decision making processes includes: • formulating the investment strategy for the fund; • reviewing and updating or varying the fund's investment strategy as well as monitoring and reviewing the performance of the fund's investments; • if the fund has reserves - the formulation of a strategy for their prudential management; and • determining how the assets of the fund are to be used to fund member benefits.
21. The other principal areas of operation of a superannuation fund that form part of the day-to-day or operational side of the fund's activities will not constitute CM&C. These activities do not form part of the CM&C of the fund because they are not of a strategic or high level nature. Rather, these activities are of a more formalistic or administrative nature. Examples of such activities include the acceptance of contributions that are made on a regular basis, the actual investment of the fund's assets, the fulfilment of administrative duties and the preservation, payment and portability of benefits. The central management and control of the Fund is carried out by the local pension committees, senior management or a board of trustees, all significant plan changes require approval from the management resources and compensation committee in Foreign Country. In addition, the Company has advised that all of the Fund's central management and control, which includes the high level and strategic decision making processes outlined above in paragraph 20 and 21 of the TR 2008/9, is carried on outside of Australia by persons none of whom is a resident of Australia.
The Fund therefore satisfies this requirement. vi. Does not receive, or have amounts set aside for it, that have been or can be deducted under the ITAA 1936 or ITAA 1997 The Company has advised that no amounts have been paid to the Fund or have been set aside to be paid to the Fund, that have or can be deducted under the ITAA 1936 or ITAA 1997. The Fund therefore satisfies this requirement. vii. Does not receive, or have amounts set aside for it, that give rise to a tax offset. The Company has advised that no amounts that have been paid to the Fund, or set aside to be paid to the Fund, that are amounts for which a tax offset has been allowed, or would be allowable, under the ITAA 1936 or the ITAA 1997. The Fund therefore 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 for the purposes of subparagraph 128B(3)(jb)(i) of the ITAA 1936. Receives income that consists of interest, or consists of dividends or non-share dividends paid by a company that is an Australian resident
In order to be excluded from withholding tax under paragraph 128B(3)(jb) of the ITAA 1936, the interest, dividend and/or non-share dividend income must be derived by a non-resident superannuation fund for foreign residents. The Fund invests directly into Australia and receives only dividend income, which is received directly 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, this requirement is satisfied. Is exempt from income tax in the country in which it resides The Fund is exempt from tax in the Foreign Country in which it resides. Therefore, this requirement is satisfied. Subsection 128(3CA) of the ITAA 1936 As outlined above, due the operation of the Schedule 3 of the Amendment Act, in order to be excluded from liability to withholding tax under paragraph 128B(3)(jb) of the ITAA 1936, the additional requirements in subsection 128B(3CA) of the ITAA 1936 must also be met. Relevantly: i. the Fund must satisfy the 'portfolio interest test' in relation to the 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 entities, and iii. the income derived by the Fund cannot otherwise be non-assessable non-exempt (NANE) 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' in relation to the entities Subsection 128B(3CC) of the ITAA 1936 states: (3CC) A superannuation fund satisfies the portfolio interest test in this subsection in relation to the test entity at a time if, at that time, the total participation interest (within the meaning of the Income Tax Assessment Act 1997 ) the superannuation fund holds in the test entity: (a) is less than 10%; and (b) would be less than 10% if, in working out the direct participation interest (within the meaning of that Act) that any entity holds in a company: (i) an equity holder were treated as a shareholder; and (ii) the total amount contributed to the company in respect of non-share equity interests were included in the total paid-up share capital of the company.
The Fund holds less than 1% of the total participation interests in the Australian investments. Further, the Fund would hold less than 10% of the total participation interests in the circumstances detailed at paragraph 128B(3CC)(b) of the ITAA 1936. The Fund satisfies the 'portfolio interest test' in respect of its Australian investments. ii. The Fund satisfies the 'influence test' in relation to the entities Subsection 128B(3CD) of the ITAA 1936 states: (3CD) 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 foreign 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 foreign 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 foreign 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 directions, instructions or wishes of the Fund. The following are relevant in determining whether the Fund satisfies the 'influence test' in respect of its Australian investments: Neither the Fund, nor any related party, has direct or indirect involvement in the day-to-day management of the business of the Australian company. Neither the Fund, nor any related party, has direct or indirect right to appoint a director to the Board of Directors, or any investor representative or advisory committee (or similar) of the Australian company. Neither the Fund, nor any related party has direct or indirect ability to direct or influence the operation of the entities outside the ordinary rights conferred by the interest held.
Neither the Fund, nor any related parties, interests provide it with an entitlement to either directly or indirectly determine the identity of any person who makes decisions that comprise the control and direction of the entities' operations, and No person involved in the control and direction of the entities' operations is accustomed or obliged to act in accordance with the direct or indirect directions, instructions or wishes of the Fund. The Fund only holds rights to vote in proportion to its equity interest in each Australian company, trust, or Australian debt issuer. Based on the above, it is reasonable to conclude that the Fund does not have influence over the Australian investments of the kind described in subsection 128B(3CD) of the ITAA 1936. Therefore, this requirement is satisfied. iii. the income derived by the Fund cannot otherwise be non-assessable none-exempt (NANE) income. The income derived by the Fund is not NANE income because of Subdivision 880-C of the ITAA 1997. Therefore, this requirement is satisfied. Conclusion The Fund is excluded from withholding tax in relation to interest, dividend and non-share dividend income derived from its Australian investments.