1 Is the Fund excluded from liability to withholding tax on its dividend income derived in respect of its Australian investments under paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)?
1 Yes This ruling applies for the following periods : 1 January 20XX to 31 December 20XX The scheme commenced on: 1 January 20XX
1. The Fund was established in a foreign state, Country X and is governed by the pension rules. 2. The Fund was created to provide retirement and disability benefits for employees of Company A. 3. The Fund is the pension fund for the employees of Company A. 4. The Fund's benefits are financed by contributions by Company A. 5. The Fund provides pension benefits upon a member's retirement. 6. The Fund also provides termination benefits, disability benefits and death benefits. Those benefits are only accessible by members (or their beneficiary if it is a death benefit) of the Fund when they meet the specific criteria set out within the pension rules. 7. The Fund does not accept new members. Investments in Australia 8. The Fund holds shares in certain Australian resident entities (Australian Investments). 9. In respect of each Australian Entity, the Fund: • holds less than 10% of the total participation interests in each entity,
• holds less than 10% of the total participation interests in each entity in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936, • the Fund has no ability to direct or influence the operation outside the ordinary rights conferred by the equity interest held, • has no right (either individual or acting in concert with others) to appoint a person to a board, committee, or similar (either directly or indirectly) in respect of each entity, • has not entered into or received any side letters, arrangements or agreements, • does not hold any veto rights on security holder votes, • does not hold any other influence potentially of a kind described in subsection 128(3CD) of the ITAA 1936. 10. The Fund receives dividend income from the Australian Investments. Other relevant information 11. The Funds has confirmed that: • the Fund is an indefinitely continuing fund, • the Fund was established in a foreign country,
• the Fund was established, and is 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 is an Australian resident, • the Fund has not and cannot deduct amounts under either the Income Tax Assessment Act (ITAA 1997) or the ITAA 1936 for amounts paid or set aside for the Fund, • the Fund has not been allowed a tax offset or a tax offset is not allowable for an amount that has been paid to the Fund, and • the income of the Fund is not non-assessable non-exempt income of the Fund because of: o Subdivision 880-C of the ITAA 1997, or o Division 880 of the Income Tax (Transitional Provisions) Act 1997 (Transitional Act). 12. The Fund is expected to continue indefinitely with no termination date. 13. The Fund is exempt from income tax in Country X. 14. Other than the benefits as described above, the Fund does not provide any other benefits to its members.
Income Tax Assessment Act 1936 subsection 6(1) Income Tax Assessment Act 1936 subparagraph 128B(3)(jb)(i)) Income Tax Assessment Act 1936 subparagraph 128B(3)(jb)(ii) Income Tax Assessment Act 1936 subparagraph 128B(3)(jb)(iii) Income Tax Assessment Act 1936 paragraph 128B(3)(jb) Income Tax Assessment Act 1936 subsection 128B(1) Income Tax Assessment Act 1936 subsection 128B(2) Income Tax Assessment Act 1936 subsection 128B(3CA) Income Tax Assessment Act 1936 subsection 128B(3CB) Income Tax Assessment Act 1936 subsection 128B(3CC) Income Tax Assessment Act 1936 subsection 128B(3CD) Income Tax Assessment Act 1936 section 128B Income Tax Assessment Act 1997 section 118-520 Income Tax Assessment Act 1997 subsection 880-105(1)
All legislative references are to the ITAA 1936 unless otherwise stated. 15. Section 128B imposes liability to withholding tax on income derived by a non-resident that consistent of dividend income (subsection 128B(1)), interest income (subsection 128B(2)),as well as other income prescribed in that section. 16. Subsection 128B(3) states that section 128B 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. 17. For the exclusion to apply, the income must: • be derived by a non-resident that is a superannuation fund for foreign residents (subparagraph 128B(3)(jb)(i)); • consist of interest, dividends or non-share dividends paid by a company that is a resident (subparagraph 128B(3)(jb)(ii)); and • be exempt from income tax in the country in which the superannuation fund for foreign residents arises (subparagraph 128B(3)(jb)(iii)).
18. Further, from 1 July 2019, there are also extra requirements in subsection 128B(3CA) that must be met. Subparagraph 128B(3)(jb)(i) - the income is derived by a non-resident that is a superannuation fund for foreign residents The Fund is a non-resident 19. The Fund was established in Country X and does not carry on business in Australia. The Fund is not a resident of Australia. The Fund is a non-resident. 20. Therefore, the Fund satisfies this requirement. The Fund is a superannuation fund for foreign residents 21. 'Superannuation fund for foreign residents' is defined in the ITAA 1936. Subsection 6(1) states: Superannuation fund for foreign residents has the meaning given by subsection 995-1(1) of the Income Tax Assessment Act 1997. 22. 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 23. The term 'superannuation fund for foreign residents' is defined in section 118-520 of the ITAA 1997 as follows: (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 is paid to the fund or set aside for the fund has been or can be deducted under this Act; or (b) a *tax offset has been allowed or is allowable for such an amount. The Fund is indefinitely continuing 24. The term 'fund' is not defined in either the ITAA 1997 or the ITAA 1936. Therefore, it should be given its ordinary meaning subject to the context in which it appears and having regard to any relevant case law authorities. 25. 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. 26. In Scott v Federal Commissioner of Taxation [1966] HCA 48 ( 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] FCA 1428 who stated that 'for present purposes, the purposes, the point is the need for 'money' or 'other property' to constitute a fund. 27. The legislation provides no guidance on the meaning of 'indefinitely continuing'. It is not a technical legal expression, and the ordinary meanings of 'indefinitely' and 'continuing' involve little ambiguity or controversy. 28. The Macquarie Dictionary defines 'indefinitely' and 'continuing' as follows: Indefinite: Adjective 1. not definite; without fixed or specified limit; unlimited: an indefinite number 2. not clearly defined or determine; not precise indefinitely, adverb Continue: verb (Continued, continuing)
1. to go forwards or onwards in any course or action; keep on. 2. to go on after suspension or interruption. 3. to last or endure. 4. to remain in place; abide; stay. 5. to remain in a particular state or capacity. 29. The Fund is expected to continue indefinitely with no termination date. 30. Therefore, the Commissioner accepts that the Fund is an indefinitely continuing fund. The Fund was a 'provident, benefit, superannuation or retirement fund' 31. The phrase 'a provident, benefit, superannuation or retirement fund' under paragraph 118-520(1)(a)(ii) is not defined in either the ITAA1997 or the ITAA1936. However, the phrase has been subject to judicial consideration. 32. In Scott, the High Court examined the terms 'superannuation fund' and 'fund'. Windeyer J stated at ATD 351; AITR 312; ALJR 278 that:
There is no definition in the Act of a superannuation fund. The meaning of the term must therefore depend upon ordinary usage, the attributes of a thing thus denominated being those which things ordinarily so described have...the connotation of the phrase in the Act must be determined by one's general knowledge of the extent of the denotation of the phrase in common parlance... 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. 33. In a later case, Mahoney v. Commissioner of Taxation (Cth) (1967) 41 ALJR 232 (1967); 14 ATD 519; 10 AITR 463 ( Mahoney ), the High Court took a similar view as in Scott . Kitto J expressed the view at ALJR 232; ATD 520; AITR 464 that:
There was no definition in the Act of 'a provident, benefit or superannuation fund', and the meaning of the several expressions must therefore be arrived at in light of ordinary usage and with only one piece of assistance to be gathered from the immediate context. Since a fund, if its income was to be exempt under the provision, was separately required to be one established for the benefit of employees, each of the three descriptive words 'provident', 'benefit' and 'superannuation' must be taken to have connoted a purpose narrower than the purpose of conferring benefits, in a completely general sense, upon employees. Precise definition may be difficult, and in any case is unnecessary for present purposes. 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.
34. In Cameron Brae Pty Limited v Commissioner of Taxation [2007] FCAFC 135, the Full Federal Court held that the relevant fund was a superannuation fund for the purposes of former section 82AAE. Jessup J at [106] stated: In answering the question whether the fund was a "superannuation fund" as the term is ordinarily understood, it is, in my view, critical that payments could not have been made out of the fund (other than by way of administration expenses, taxation, etc) save to members of the relevant discretionary class, and save in circumstances which fell within the ordinary understanding of superannuation. A proper characterisation of the fund should, in my view, depend upon the purposes for which the assets and moneys of the fund might have been used rather than upon the quality of the rights of individual members of the fund. If the fund could have been used only to achieve what might be described as a superannuation purpose, I would describe the fund as a "superannuation fund". That a particular member of a discretionary class might not, ultimately, have received any payment, was not, in my view, disqualifying.
35. ATO Interpretative Decision ATO ID 2009/67 Income Tax: Superannuation fund for foreign residents refers to these authorities to provide 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). 36. 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). 37. The Fund provides retirement benefits, disability benefits and death benefits, for members (or their beneficiary if it is a death benefit) of the Fund. These benefits are only accessible by members of the Fund when they meet the specified criteria set out within the pension rules. 38. Therefore, the Fund satisfies this requirement. The Fund was established in a foreign country 39. The Fund was established in a foreign state, Country X. 40. Therefore, the Fund satisfies this requirement. The Fund was established to only provide benefits for those who are not Australian residents 41. Paragraph 118-520(1)(c) ITAA 1997 requires that the fund must have been established and is presently maintained to only provide benefits to individuals who are not Australian residents.
42. The Fund was established and is maintained only to provide benefits to members who are employees of Company A, in Country X. 43. It is considered that the possibility of a very small number of members being returned residents or becoming Australian residents after ceasing eligible employment or retiring is incidental and should not be taken to conclude that the Fund has not been established and maintained only to provide benefits for non-residents. 44. Therefore, the Fund satisfies this requirement. The Fund's central management and control ( CM&C ) is carried on outside Australia by entities none of whom is an Australian resident 45. 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 1997 states: 20. The CM&C of the 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 include:
• 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-of-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. 46. 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. 47. The central management and control of the Fund is carried on outside of Australia by entities none of whom are Australian residents. 48. 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 49. No amount paid to the Fund or set aside for the Fund has been and can be deducted under the ITAA 1997. No tax offset has been allowed or is allowable for any amount paid to the Fund or set aside for the Fund. 50. Therefore, the Fund satisfies this requirement.
Subparagraph 128B(3)(jb)(ii) - the income that consists of interest, dividend or non-share dividend income are paid by a company that is a resident 51. Subparagraph 128B(3)(jb)(ii) requires the superannuation fund for foreign residents to derive the interest, dividends or non-share dividends that are paid by the Australian resident companies. 52. The Fund directly holds shares in Australian resident entities from which it derives dividend income. 53. Therefore, the Fund satisfies this requirement. Subparagraph 128B(3)(jb)(iii) - the income is exempt from income tax in the country in which the non-resident resides 54. The Fund is exempt for income tax in Country Tax. 55. Therefore, the Fund satisfies this requirement. Conclusion in relation to paragraph 128B(3)(jb) 56. The Fund satisfies all of the requirements in paragraph 128B(3)(jb), however, from 1 July 2019, extra requirements in subsection 128B(3CA) must also be met. Treasury Laws Amendment 2019 57. 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) to apply from 1 July 2019 onwards. These extra requirements apply only to assets which were acquired after 27 March 2018. 58. These requirements are specified in subsection 128B(3CA) as follows: i. the superannuation fund for foreign residents must satisfy the 'portfolio interest test' contained in subsection 128B(3CC) in relation to the test entity at certain times (paragraph 128B(3CA)); ii. the superannuation fund for foreign residents must not, at the time the income was derived, have influence of a kind described in subsection 128(3CD) in relation to the test entity (paragraph 128B(3CA)(b)); iii. the income cannot otherwise be non-assessable non-exempt income of the superannuation fund because of: a. Subdivision 880-C of the ITAA 1997; or b. Division 880 of the Income Tax (Transitional Provisions) Act 1997 ( Transitional Act ) (paragraph 128B(3CA)(c)). 59. These requirements are specified in subsection 128B(3CA) as follows: The Fund satisfies the 'portfolio interest test'
60. 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. 61. 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) applies in relation to a resident trust estate, that trust estate.
62. The Fund holds less than 10% of the participation interests in each of those entities. As such, the Fund satisfies the portfolio test with respect to its Australia investments from which it derives dividend income. The Fund does not have influence of a kind described in subsection 128B(3CD) in relation to the test entity at the time the income was derived 63. 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). 64. As such, there are two distinct sub-tests within the influence test. 65. Sub-test 1 of the influence test, as contained in subparagraph 128B(3CD)(a), 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. 66. 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.
67. Sub-test 2 of the influence test, as contained in subparagraph 128B(3CD)(b), 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. 68. Relevantly with respect to all of the Australian Investments: • 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, • the Fund does not hold any right (either individual or acting in concert with others) to appoint a person to a board, committee, or similar (either directly or indirectly) in respect of each entity, • the Fund has not entered into or received any side letters, arrangements or agreements, • the Fund does not hold any veto rights on security holder votes, • the Fund does not hold any other influence potentially of a kind described in subsection 128B(3CD) of the ITAA 1936.
69. 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 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 Transitional Act? 70. 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 Transitional Act. 71. The Fund therefore satisfies this condition in respect of its investments in the Australian entities. Conclusion 72. As the Fund has met the requirements under paragraph 128B(3)(jb) and subsection 128B(3CA) in relation to its investments in the Australian entities, it will be excluded from withholding tax in relation to its dividend income received in respect of those investments.