ATO ID 2008/61: Withholding Tax Exemption: interest and dividends paid by an Australian resident and received by a Dutch Stichting as unitholder in an Irish Common Contractual Fund
Date of decision: 21 April 2008
Year of income: Years ended 30 June 2007 Years ended 30 June 2008 Years ended 30 June 2009 Years ended 30 June 2010 Years ended 30 June 2011
Business line: Public Groups and International

Issue
Does a Dutch Stichting (Stichting) 'derive' interest and dividend income paid by Australian residents and received by the Stichting as a unitholder in an Irish Common Contractual Fund (CCF) for the purposes of the withholding tax exemption in paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Decision
Yes. The interest and dividend income is derived by the Stichting for the purposes of paragraph 128B(3)(jb) of the ITAA 1936.

Facts
The Stichting is a legal entity incorporated in the Netherlands. The Stichting is a non-resident for the purposes of paragraph 128B(3)(jb) of the ITAA 1936. The Stichting is a 'foreign superannuation fund' and a 'superannuation fund for foreign residents' for the purposes of paragraph 128B(3)(jb) of the ITAA 1936. The Stichting resides in the Netherlands and is exempt from income tax in the Netherlands. The Stichting is the only unitholder in an Irish CCF. Irish CCFs are regulated by the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2003 (the Regulations). According to the Regulations a CCF is a contractual arrangement under which participants participate in the co-ownership of assets. The CCF is not a legal entity in Ireland and is not subject to tax in Ireland. The CCF acts as a pooled investment vehicle for the assets of various pension funds and invests these assets on behalf of those funds. The CCF is established under a deed between the manager (an Irish company), custodian (an Irish company) and the unitholder. The assets of the CCF are managed and administered by the manager in the interests of the unitholder in the CCF. The manager generally holds legal title to the assets. The manager appoints the custodian as the fiduciary of the CCF under a custody agreement. The custodian holds and safeguards the assets of the CCF for the account and benefit of the unitholder in accordance with the deed and the custody agreement. In some cases, the custodian also holds legal title to the assets of the CCF. In dealing in the assets of the CCF, the deed requires the manager and custodian to act consistent with the best interests of the unitholder. The CCF receives interest and dividends from companies resident in Australia as a result of investing the assets of the CCF. The Stichting, as a unitholder in the CCF, is entitled to receive the income of the CCF as it arises. Under the deed, the Stichting is beneficially entitled to a proportion of the underlying assets of the CCF in accordance with its unit holding.

Reasons for decision
Summary: Section 128B of Division 11A of the ITAA 1936 imposes withholding tax on payment of dividends, interest and royalties made by Australian residents to non-residents. Subsection 128B(3) of the ITAA 1936 lists certain types of income to which withholding tax under section 128B of the ITAA 1936 does not apply. In particular, paragraph 128B(3)(jb) of the ITAA 1936 provides an exclusion from withholding tax for certain superannuation funds for foreign residents. Although, the interest and dividend income is initially received by the manager and/or custodian of the CCF before it is paid to the Stichting, under subsection 128A(3) of the ITAA 1936, the Stichting will be deemed to derive the income for the purposes of Division 11A of the ITAA 1936 where the relationship between the CCF and the Stichting is a trust relationship. Subsection 128A(3) of the ITAA 1936 states: For the purposes of this Division, a beneficiary who is presently entitled to a dividend, to interest or to a royalty included in the income of a trust estate shall be deemed to have derived income consisting of that dividend, interest or royalty at the time when he became so entitled. Is the relationship between the CCF and the Stichting a trust for the purposes of subsection 128A(3) of the ITAA 1936? The term 'trust estate' is not defined in the ITAA 1936 or Income Tax Assessment Act 1997 (ITAA 1997). Whether the interest and dividend income forms part of a trust estate, therefore, depends on whether a trust exists in accordance with guidance provided by the Courts. Justice French in Harmer & Ors v. FC of T 89 ATC 5180; (1989) 20 ATR 1461 stated that a trust 'is notably a definition of a relationship by reference to obligations'. His Honour went on to state that the four essential elements of a trust are: All four elements of a trust are present in the relationship between the manager, custodian and the unitholder of the CCF. The manager of the CCF, and in some cases the custodian, holds legal title to the assets of the CCF. The assets are not held by the manager and the custodian for their own benefit, but rather the deed obliges the manager and custodian to deal with the assets of the CCF on behalf of and in the best interests of the unitholder in the CCF. Accordingly, both the manager and the custodian are acting in a trustee capacity with respect to the assets of the CCF, being the trust property which initially arose from the unitholder's contributions to the CCF. A unitholder is beneficially entitled to a proportion of the underlying assets of the CCF in accordance with their unit holding and receives income from the investment of the CCF assets by the manager and/or custodian as it arises. Therefore, the relationship between the manager, custodian and the unitholder constitutes a trust relationship. Accordingly, the income received by the manager and/or custodian of the CCF is income of a trust estate for the purposes of subsection 128A(3) of the ITAA 1936. Under the terms of the deed, income of the CCF accrues to the unitholder as it arises. Accordingly, the Stichting would have a present legal right to demand and receive payment of the income and therefore, would be presently entitled to the interest and dividend income received by the CCF. The requirements of subsection 128A(3) of the ITAA 1936 are therefore satisfied, and the Stichting is deemed to have derived the interest and dividend income at the time when it became presently entitled to the income. As all elements of paragraph 128B(3)(jb) of the ITAA 1936 are satisfied by the Stichting, the interest and dividend income derived by the Stichting is exempt from withholding tax under s128B of the ITAA 1936. As a result, the income is also considered not assessable income and not exempt income of the Stichting under section 128D of the ITAA 1936.

Legislative references: Income Tax Assessment Act 1936 section 128B subsection 128A(3) Paragraph 128B(3)(jb) section 128D
Case references: Harmer & Ors v. FC of T 89 ATC 5180 (1989) 20 ATR 1461
Related ATO interpretative decisions: ATO ID 2008/62 | ATO ID 2008/63
Other references: European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2003
Subject references: Entities & taxpayer groups International tax Non resident dividend withholding tax Non resident entities Non resident interest withholding tax Trust distributions Trustees Trusts Withholding tax exemptions Withholding taxes