Is ForeignTrust 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')?
No This ruling applies for the following period : 1 July 20xx to 30 June 20xx The scheme commenced on: 1 July 20xx
1. ForeignTrust is a trust established by Trustee in Country X under Country X law. 2. ForeignTrust is intended to provide for the investment of assets of pension plans and certain other entities ('Participating Trusts'). It manages the commingled investments of two other trusts (Feeder Funds) that represent pension plans. 3. ForeignTrust is a Country X resident for tax purposes. ForeignTrust is exempt from Country X income tax. 4. The Trustee may establish such funds ('Investment Funds') as it deems necessary and advisable to provide for the collective investment and reinvestment of assets of Participating Trusts. The Trustee shall have exclusive management and investment authority with such Investment Funds. 5. The Trustee is responsible for the custody and safekeeping of ForeignTrust's assets, performs certain administrative functions for the Investment Fund in accordance with the provisions of the Agreement, and provides certain recordkeeping and accounting services to the Investment Fund.
6. The Trustee is a fiduciary in relation to the assets entrusted to it by a Participating Trust. Ownership of all of the assets of the Trust and each Investment Fund is at all times vested in the Trustee in its fiduciary capacity. No Participating Trust will be deemed to have an individual ownership of any asset of any Investment Fund, but will have an undivided beneficial interest in the Investment Fund and will share proportionately with all other Participating Trusts invested within the Investment Fund in the net income, profits and loses, subject to the allocation of certain fees and expenses. 7. As fiduciary, the Trustee will discharge its duties solely in the interest of the participants or beneficiaries who are entitled to benefits from the Participating Trusts. 8. The Trustee maintains distinct and separate books and records, with audited annual reports for ForeignTrust collectively, and also details each of its component Fund Portfolios separately. 9. The Trustee shall be entitled to receive reasonable compensation for its services in managing and administering ForeignTrust.
10. The Trustee may charge expenses and taxes to the Investment Fund. If ForeignTrust is assessed for tax, the Participating Trusts may bear its payment. 11. Fees and expenses charged for administering ForeignTrust are to be subtracted from the value of the assets, rather than separately invoicing such fees and expenses to each Participating Trust for payment. 12. The Trustee may charge to an Investment Fund: a. the cost of borrowing money b. costs, commissions, income taxes, withholding taxes, transfer and other taxes and expenses associated with the holding, purchase and sale and receipt of income from investments c. reasonable expenses of an audit of the Fund and the Trust d. attorney fees and litigation expenses e. Trustee's compensation f. investment advisor or consultant expenses and fees. Participation 13. The Participating Trusts all exist within a master-feeder trust structure. ForeignTrust
serves as the 'Master' Fund to the Feeder Funds. The Master serves as the central investment vehicle that pools the assets from all the Feeders and is responsible for trading and portfolio management under a unified investment strategy. The Feeders are established as separate trusts for specific investment products that gather capital from investors and contribute that capital directly to the Master. 14. Only Participating Trusts (i.e. custodial accounts and other entities which meet certain conditions) may participate in ForeignTrust. 15. The Participating Trusts are the Feeder Funds. 16. Participating Trusts may acquire a beneficial interest in the Trustee's Investment Funds by virtue of its units: a. as instructed by the Participating Trust or its representative b. as directed by the participants and beneficiaries in a Participating Trust (if permitted by the Participating Trust).
17. The Trustee will credit to the account of each Participating Trust that makes a deposit in an Investment Fund, the number of units that the deposit will purchase at the value of each unit in which the Participating Trust will acquire an interest. 18. The Trustee determines value of the units and assets. 19. The Trustee will value the units of the Investment Fund after the close of business on each business day (known as a Valuation Date). The Valuation Date means each Business Day upon which the Trustee is open for business, unless the Trustee shall determine otherwise. 20. The value of each unit shall be determined by adding the value of all assets, subtracting all accrued expenses and liabilities, and dividing by the number of units outstanding. Withdrawal 21. At the Trustee's discretion, a Participating Trust may request withdrawal of their units. 22. The Trustee may determine that the Participating Trust pay the expenses associated with withdrawal.
23. Upon withdrawal of units, the Trustee will distribute from the Investment Fund to the Participating Trust, a withdrawal sum calculated by multiplying the number of units by their value. 24. The Trustee may in its discretion suspend withdrawal of units. Participating Trusts may, as of any valuation date, withdraw any number of units. However, the Trustee may suspend withdrawal in certain circumstances: a. where dealing or trading in the investments on a stock market or exchanged are restricted or suspended b. there exists any state of affairs which, in the opinion of the Trustee, constitutes an emergency as a result of which disposition of the assets of such Investment Fund would not be reasonably practicable or be seriously prejudicial to the Participating Trusts c. communication breakdown in the prices of valuation of investments d. transfer of funds involved in the realisation or acquisition of investments cannot, in the opinion of the Trustee, be effected at normal rates of exchange
e. normal settlement procedures for the purchase or sale of securities or other assets cannot be effected in the customary matter or in accordance with generally applicable time periods. Powers of the Trustee 25. The Trustee shall have the rights, powers and privileges of an absolute owner in the management and administration of each Investment Fund, including to enter into contracts, hold investments and sell, lend, borrow as well as distribute to Participating Trusts. 26. The Trustee's discretion, when exercised in good faith and with reasonable care under the circumstances then prevailing, shall be final and conclusive and binding upon each Participating Trust.
27. The Trustee or ForeignTrust does not determine or distribute the benefits for the pension plans' members and beneficiaries. ForeignCompany assists the Trustee in composing and designing public retirement plan program and options. ForeignCompany assists the Trustee in providing administrative support to Investment Funds for which the Trustee pays a fee, although it does not do so on its behalf as the Trustee's agent. A separate account will be maintained to reflect the interest of each Participating Trust, including separate accounting for contributions to ForeignTrust by such Participating Trust and disbursements made from each such Participating Trust's accounts. 28. Apart from paying ForeignTrust's taxes and expenses, the income shall be used for benefit of the Participating Trusts. Amendment and Termination 29. The Trustee through its Board of Directors may amend or restate the Agreement at any time. 30. The Trustee may terminate the Trust by its Board of Directors authorised to take such action. Investments 31. The Australian equity investments held by the Trustee have with the following characteristics:
a. All investments are listed on the Australian Securities Exchange ('ASX'). b. The Trustee holds less than 10% of the total participation interests on issue of each Australian company or MIT. c. The Trustee would hold less than 10% of the total participation interests in each Australian company or MIT in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936. d. The Trustee has no involvement in the day to day management of the business of any of the Australian companies / MITs. e. The Trustee has no right to appoint a director to the Board of Directors of the Australian company or equivalent role in a MIT. f. The Trustee has no right to representation on any investor's representative or advisory committee (or similar) of the Australian company or MIT. g. The Trustee has no ability to direct or influence the operation of the Australian company or MIT outside of the ordinary rights conferred by the equity interest held. h. The Trustee only hold rights to vote in proportion to their equity interest in each Australian company or MIT.
Income Tax Assessment Act 1997, section 118-520 Income Tax Assessment Act 1936, paragraph 128B(3)(jb)
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. Section 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) excludes income from the operation of section 128B that: (i) is derived by a non-resident that is a superannuation fund for foreign residents, and (ii) consists of interest, or consists of dividends or non-share dividends paid by a company that is a resident, and (iii) is exempt from income tax in the country in which the non-resident resides. Further, from 1 July 2019, the extra requirements in subsection 128B(3CA) of the ITAA 1936 must also be met.
Accordingly, for ForeignTrust to be excluded from liability to withholding tax on interest, dividend and non-share dividend income derived from its Australian investments under paragraph 128B(3)(jb) of the ITAA 1936, ForeignTrust must, along with the other requirements, be considered a non-resident that is a superannuation fund for foreign residents. The requirements of this definition are considered below. The Fund is a non-resident ForeignTrust is not a resident of Australia for tax purposes. ForeignTrust was established and is managed in Country X. Therefore, ForeignTrust 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 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 resident; 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; (b) a tax offset has been allowed or is allowable for such an amount. Consequently, for ForeignTrust to be considered a superannuation fund for foreign residents for the purposes of paragraph 128B(3)(jb) of the ITAA 1936, it must satisfy all of the following criteria: • ForeignTrust is an indefinitely continuing fund.
• ForeignTrust is a provident, benefit, superannuation or retirement fund. • ForeignTrust was established in a foreign country. • ForeignTrust was established and maintained only to provide benefits for individuals who are not Australian residents. • The central management and control of ForeignTrust is carried on outside of Australia by entities none of whom are Australian residents. • No amount paid to ForeignTrust or set aside for ForeignTrust has been or can be deducted under the ITAA 1997. • No tax offsets have been allowed or would be allowable for an amount paid to ForeignTrust or set aside for ForeignTrust. Indefinitely continuing fund The term 'indefinitely continuing fund' is not defined in either the ITAA 1997 or the ITAA 1936. Therefore, sits ordinary meaning should be considered, subject to the context in which it appears and having regard to any relevant case law authorities. 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 ( LLUN and Commissioner of Taxation (Taxation) [2017] AATA 3058; Cameron Brae Pty Ltd v Federal Commissioner of Taxation (2007) 161 FCR 468; [2007] FCAFC 135; Baker and Commissioner of Taxation [2015] AATA 469). ForeignTrust is governed by the Agreement. There is no indication that ForeignTrust is to be wound up in the near future. There is sufficient evidence to accept that ForeignTrust will continue to operate in accordance with the Agreement. Therefore, ForeignTrust satisfies this requirement.
Provident, benefit, superannuation or retirement fund The key issue in this case is if ForeignTrust is a provident, benefit, superannuation or retirement fund. The phrase 'provident, benefit, superannuation or retirement fund' under subparagraph 118-520(1)(a)(ii) of the ITAA 1997 is not defined in either the ITAA 1997 or the ITAA 1936. However, the phrase has been subjected to judicial consideration. In Scott v. FCT (No 2) (1966) 40 ALJR 265; 14 ATD 333, Windeyer J stated (40 ALJR 265 at 278; 14 ATD 333 at 351): 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 common parlance ... I have come to the conclusion that there is no 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 Mahony v Commissioner of Taxation
(1967) 41 ALJR 232; (1967) 14 ATD 519, Kitto J stated:
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 employment, 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 in a general sense, but characterised by some specific future purpose. A funeral benefit is a familiar example.
In Cameron Brae Pty Limited v FCT (2007) 161 FCR 468; [2007] FCAFC 135; 2007 ATC 4936, the Full Federal Court held that the relevant fund was a superannuation fund for the purposes of former section 82AAE of the ITAA 1936. 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. ATO Interpretative Decision
ATO ID 2009/67 Income Tax: Superannuation fund for foreign residents (ATO ID 2009/67) provides 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 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; Mahoney 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).
ForeignTrust is a trust, which is a resident in Country X for tax purposes and is exempt from Country X income tax. ForeignTrust's purpose is to provide for the investment of assets of pension plans, including those of other trusts. ForeignTrust does not collect contributions from members of the Participating Trusts. However, the Agreement does allow for a Participating Trust to acquire a beneficial interest in the Investment Fund by transferring assets to the Trustee as instructed by the Participating Trust members, in circumstances where the Participating Trust permits members to direct investment of their accounts. The instructions are limited to the direction of the investment of the member's account and do not amount to the Investment Fundactually collecting the contributions from individual members. Participating Trusts then receive units in the Investment Fund. The beneficial ownership of the Investment Fund is represented by units, with each unit equal in value to every other unit of the same tier. Each unit represents an undivided proportionate interest in all assets of such Investment Fund.
A Participating Trust can request a withdrawal from ForeignTrust. The Trustee is obliged to make distributions to the Participating Trusts upon a Participating Trust making a request to the Trustee to withdraw partially or totally from its participation in ForeignTrust. While the Agreement permits a Participating Trust to be a pension plan, the Participating Trusts are currently the Feeder Funds. This is reflective of ForeignTrust's function in serving as the "Master" Fund to the Feeder Funds under which the Master serves as the central investment vehicle that pools the assets from all the Feeders and is responsible for trading and portfolio management under a unified investment strategy. ForeignTrust has no legal obligation to provide benefits to members of the Participating Trusts (including when they are pension plans, rather than the Feeder Funds they are currently). ForeignTrust does not act as a body distributing pension benefits to members.
ForeignTrust itself does not distribute or provide benefits to members of the Participating Trusts, and, in particular, does not provide benefits to a member upon the member reaching a prescribed age or upon their retirement, death or other cessation of employment. Rather, its purpose and function is to provide for the investment of assets that are held by the Participating Trusts. Even if ForeignTrust did not operate as a Master fund for the two Feeder Funds and did invest assets provided directly from pension plans, the above conclusions would also be reached, as ForeignTrust's purpose remains the provision for the investment of assets, it does not have any obligation to provide benefits to the members of those pension plans, and it does not distribute benefits.
Therefore, ForeignTrust's sole purpose is not to provide superannuation benefits to members upon reaching a prescribed age or upon death, retirement or other cessation of employment. Rather, ForeignTrust's sole purpose is to provide for the collective investment and reinvestment of assets of pension and profit-sharing plans, and retiree welfare plans or Feeder Funds, like the Participating Trusts, that represent such entities. ForeignTrust is not a 'provident, benefit, superannuation or retirement fund' for the purposes of subparagraph 118-520(1)(a)(ii) of the ITAA 1997 and cannot be considered a superannuation fund for foreign residents. As such, the other factors under section 118-520 and paragraph 128(3)(jb) of the ITAA 1936 have not been considered. Conclusion As ForeignTrust is not a superannuation fund for foreign residents, paragraph 128B(3)(jb) of the ITAA 1936 will not apply to exclude it from liability to withholding tax on interest, dividend and non-share dividend income derived from ForeignTrust's investments into Australia.