Private ruling: Foreign superannuation funds withholding tax - exemption
Date of advice: 2 August 2024
Published: 9 September 2024
Ruling period: Year ended 30 June 20XX to Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is Entity A on behalf of the Pension Plans excluded from liability to withholding tax on its interest, dividend and non-share dividend income derived in respect of its Australian investments under paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: Yes

Relevant facts and circumstances: Background Entity A is the fund manager of the Pension Plans, which are foreign superannuation funds operated by the Country A Government. Each Pension Plan was established pursuant to an Act of Country A's Government collectively referred to as the Pension Plan Acts. Entity A In accordance with the Entity A Act, the objects of Entity A are to manage and invest amounts transferred to it under the Pension Plan Acts. Entity A has the capacity, and the rights, powers and privileges of a natural person, subject to the Entity A Act. Entity A's head office is in Country A and its principal business office is in Country A. Entity A is exempt from income tax in Country A. Entity A cannot be wound up unless Country A's Government provides for it. Assets Entity A manages assets for pension funds and amounts transferred to it from superannuation investment funds (Funds). The Funds were established pursuant to the Pension Plan Acts for the Pension Plans. Entity A maintains strictly separate accounts for each of the pension plans for which it invests. The Funds are charged service fees and derive an amount of income from Entity A's investments in proportion with the size of their Fund relative to the other funds for which Entity A invests. Entity A on behalf of the Funds invests directly into Country A. The first entry point into Country A is directly owned by Entity A on behalf of the funds and there are no interposed non-resident entities in the investment structure. These investments are covered by this Ruling. Entity A has its costs covered by the relevant pension plan to whom the cost relates. Entity A does not manage any amounts for its own benefit. The pension plans The Pension Plans are registered pension plans in Country A. The Pension Plans were established in Country A and are Country A residents for tax purposes. Notwithstanding that, the Pension Plans are each exempt from tax in Country A. As the Pension Plans and Entity A are all established by Acts in Country A, they cannot be discontinued until the Country A Government repeals any of the Pension Plan Acts. The Pension Plans are not open to the general public and were established to provide benefits for individuals who are employees of the public service of Country A Government (referred to as the Pension Plan Employers). The Pension Plans have been established and maintained only to provide benefits for individuals who are not Country A residents. The Pension Plans are indefinitely continuing funds and are provident, benefit, superannuation or retirement funds. An amount paid to, or set aside for, the Pension Plans, has not been and cannot be deducted under the Income Tax Assessment Act 1997 (ITAA 1997) and a tax offset has not been allowed or is not allowable for such amount. Entity A manages and invests the funds of the Funds which consists of contributions made by employees and employers under the Pension Plans, as well as income derived from said contributions. Entity A on behalf of the Pension Plans will receive interest income from Australian investments, along with dividend and non-share dividend income from companies who are residents of Australia for tax purposes. Contributions The Pension Plans are defined benefit pension plans where both the employer and employee make contributions. Once an employee has accumulated XX years of pensionable service, their contribution rate significantly lowers. Benefits The normal retirement age for members of the Pension Plans ranges from XX to XX years of age (depending on the Pension Plan). The benefit to be paid to a member is determined by reference to the number of years of pensionable service, the commencement date of service, the number of years of public service, the average annual salary, any amounts transferred into the fund to the credit of the member from other retirement funds, and the age of retirement. Adjustments are made to these numbers based on certain criteria. If an employee leaves the public service, they may choose from a number of options depending on their age and years of pensionable service. If an employee has worked for a Pension Plan Employer for less than two years, they are entitled to a return of their contributions. All employees with greater than two years of service have their contributions 'locked in' and are entitled to a benefit greater than simply a return of their contributions. The potential benefits include: • a return of contributions • an immediate annuity • a deferred annuity • an annual allowance • a transfer value • a transfer of their service to a new employer's pension plan if the new employer has an agreement in place with the Pension Plan Employer Other potential benefits include: • disability benefits, which result in the payment of an immediate annuity irrespective of age • a death benefit to be paid to the estate of the employee, and • a survivor benefit to a surviving partner of an employee and/or their dependent children consisting of an immediate allowance and/or a lump sum payment up to an amount equal to a return of contributions. Entity A's current Australian investments Entity A has invested in Australian equity investments. These equity investments have the following characteristics: (a) All investments are listed on a relevant securities exchange. (b) Entity A holds less than 10% of the total equity interests on issue of each Australian company or trust. (c) Neither Entity A, or any related party of Entity A has any involvement in the day to day management of the business of any of the Australian companies or trusts. (d) Entity A has no right to appoint a director to the Board of Directors of the Australian company or equivalent role in a trust. (e) Entity A has no right to representation on any investor representative or advisory committee (or similar) of the Australian company, or equivalent role in a trust. (f) Entity A 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. (g) Entity A only holds rights to vote in proportion to its equity interest in each Australian company or trust. Entity A has invested in Australian debt investments. These debt investments have the following characteristics: (a) The investments are publicly offered. (b) 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. (c) Entity A holds less than 10% of the total interests on issue of each Australian debt issuer. (d) Entity A has no involvement in the day to day management of the business of any of the Australian debt issuers. (e) Entity A has not acquired the right to appoint a director to the Board of Directors of any issuing debt issuer. (f) Entity A has not acquired the right to representation on any investor representative or advisory committees (or similar) of any issuing Australian debt issuer. (g) Entity A 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. (h) Entity A has no voting rights in respect of the debt investments held. (i) There is no special relationships or arrangements between Entity A 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.

Relevant legislative provisions: Income Tax Assessment Act 1936 paragraph 128B(3)(jb) | Income Tax Assessment Act 1997 section 118-520

Reasons for decision: Summary: The requirements of paragraph 128B(3)(jb) of the ITAA 1936 are satisfied. Therefore, Entity A on behalf of the Pension Plans is excluded from liability to withholding tax on its interest, dividend and / or non-share dividend income derived from its Australian investments under paragraph 128B(3)(jb) of the ITAA 1936. | Detailed Reasoning - Detailed reasoning: 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. 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: Except where the transitional rules in Schedule 3 to the Treasury Laws Amendment (Making Sure Foreign Investors Pay Their Fair Share of Tax in Australia and Other Measures) Act 2019 (Amendment Act)apply, from 1 July 2019, the extra requirements in subsection 128B(3CA) of the ITAA 1936 must also be met. Schedule 3 of the Amendment Act amended the ITAA 1936 to improve the integrity of the income tax law to limit access to tax concession for foreign investors. For superannuation funds for foreign residents, this was achieved by limiting the withholding tax exemption to interest, dividend and non-share dividend income derived from an entity in which the superannuation fund has a portfolio-like interest. The amendments to limit the withholding tax exemption apply to income that is derived by a superannuation fund on or after 1 July 2019. | Detailed Reasoning - Paragraph 128B(3)(jb) of the ITAA 1936: The term 'superannuation fund for foreign residents' is defined in section 118-520 of the ITAA 1997 as follows: | Detailed Reasoning - 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 Entity A on behalf of the Pension Plans to be excluded from withholding tax on interest, dividend and / or non-share dividend income that it derives from its Australian investments under paragraph 128B(3)(jb) of the ITAA 1936, it must be established that the Pension Plans: (i) are indefinitely continuing funds (ii) are provident, benefit, superannuation or retirement funds (iii) were established in a foreign country (iv) were established and maintained only to provide benefits for individuals who are not Australian residents (v) have their central management and control carried on outside of Australia by entities none of whom are Australian residents (vi) do not receive or have amounts set aside for them that have been or can be deducted under the ITAA 1936 or the ITAA 1997 (vii) do not receive or have amounts set aside for them that give rise to a tax offset (viii) receive income that consists of interest, dividends or non-share dividends paid by a company that is an Australian resident, and (ix) are exempt from income tax in the country in which the non-resident resides. These requirements are considered below. (i) Indefinitely continuing funds Neither the ITAA 1936 or the ITAA 1997 provide guidance on the meaning of 'indefinitely continuing', however, the ordinary meanings of 'indefinitely' and 'continuing' involve little ambiguity or controversy. The Australian Oxford Dictionary defines the 'indefinitely' as '1. for an unlimited time...2. in an indefinite manner' and 'continuing' as '...persist in, maintain, nonstop'. 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. The Australian Oxford Dictionary 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. 3. money resources. The Pension Plans are Country A public service pension plans that were created by the Country A Government. As Entity A and the Pension Plans are all established by Acts of Government in Country A, they cannot be discontinued until the Country A Government repeals any of the respective Acts. Further, the Entity A Act provides that in no case shall Entity A be wound up unless the Country A Government provides and there is no indication that Entity A or any of the Pension Plans are to be wound up in the near future. Entity A was established for the object of managing assets and amounts transferred to it under the Pension Plan Acts in the best interests of the contributors and beneficiaries under those Acts; and to invest its assets having regard to the funding policies and requirements of the Pension Plans. Entity A maintains strictly separate accounts for each of the Pension Plans for which it invests. The Pension Plans derive an amount of income from Entity A's investments in proportion with the size of their fund relative to the other funds for which Entity A invests. The Pension Plans and Entity A are indefinitely continuing, and it is therefore accepted that this requirement is satisfied. (ii) Provident, benefit, superannuation or retirement funds 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. The phrase, however, has been subject to judicial consideration. In Scott v Commissioner of Taxation (No 2) (1966) 40 ALJR 265, Windeyer J stated 278: There is no definition in the Act of a superannuation fund. The meaning of the term must therefore depend upon ordinary usage ... 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, Kitto J stated at 232: 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 recognized 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 characterized by some specific future purpose . A funeral benefit is a familiar example. In Cameron Brae Pty Limited v FCT (2007) 161 FCR 468, 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 stated at 506: 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) refers to these authorities and provides the following guidance on the meaning of the phrase: 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 relevant authorities therefore establish that in order 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 Pension Plans are defined benefit funds that apply to employees of the Pension Plan Employers and provide retirement, disability, death and survivor benefits to members of the Pension Plans and their dependents. Members are eligible for a pension at the normal retirement age (being XX or XX years of age depending on the Pension Plan). In some circumstances, an early pension may be accessed before the participant reaches the normal retirement age, depending on their accumulated years of continuous service and their age. There are no benefits provided by the Pension Plans to contributors and beneficiaries beyond those as prescribed above and the Commissioner accepts that the alternate circumstances of access to the funds, being incapacity, death, the transfer of funds to another retirement fund, and a return of contributions in very limited circumstances, align to the contemplated contingencies of a 'provident, benefit, superannuation or retirement fund' as outlined in the relevant judicial decisions and ATO ID 2009/67. Entity A is responsible for managing assets and amounts transferred to it on behalf of the Pension Plans and all monies managed by Entity A on behalf of the Pension Plans are amounts that are used solely for the purposes of administering and paying out benefits under the Pension Plans. Therefore, it is accepted that this requirement is satisfied. (iii) Established in a foreign country Entity A and the Pension Plans were established in Country A. Therefore, Entity A and the Pension Plans were established in a foreign country and this requirement is satisfied. (iv) Established and maintained only to provide benefits for individuals who are not Australian residents The Pension Plans were established in Country A for its members, being employees of the Pension Plan Employers; all of whom are not Australian residents. Therefore, this requirement is satisfied. (v) Central management and control is carried on outside Australia by entities none of whom is an Australian resident The central management and control of the Pension Plans is in Country A. Further, Entity A's head office is located in Country A, and its central management and control in Country A. It is therefore reasonable to conclude that the central management and control of Entity A on behalf of Pension Plans occurs outside of Australia by entities that are not Australian residents. Therefore, this requirement is satisfied. (vi) Do not receive, or have amounts set aside for them, that have been or can be deducted under the ITAA 1936 or ITAA 1997 No amounts received by Entity A, or set aside for Entity A, in connection with the Pension Plans have or can be deducted under the ITAA 1936 or ITAA 1997. Therefore, this requirement is satisfied. (vii) Do not receive, or have amounts set aside for them, that give rise to a tax offset. No amounts received by Entity A, or set aside for Entity A, in connection with the Pension Plans are amounts for which a tax offset has been allowed, or would be allowable, under the ITAA 1936 or the ITAA 1997. Therefore, this requirement is satisfied. (viii) Receives income that consists of interest, dividends or non-share dividends paid by a company that is an Australian resident Entity A on behalf of the Pension Plans is expected to receive Australian sourced income in the form of interest, dividends and / or non-share dividends from its Australian investments, which are Australian resident companies. Therefore, this requirement is satisfied. (ix) Is exempt from income tax in the country in which it resides Country A has stated that Entity A and the Pension Plans are both exempt from taxation in Country A. Therefore, Entity A and the Pension Plans are exempt from tax in the country in which they reside, and this requirement is satisfied. | Detailed Reasoning - Conclusion: As all of the above requirements are satisfied, it is accepted that Entity A on behalf of the Pension Plans meets the requirements of paragraph 128B(3)(jb) 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) Entity A on behalf of the Pension Plans must satisfy the 'portfolio interest test' (subsection 128B(3CC) of the ITAA 1936) in relation to the test entity (ii) Entity A on behalf of the Pension Plans must satisfy the 'influence test' (subsection 128B(3CD) of the ITAA 1936) in relation to the test entity, and (iii) the income received by Entity A on behalf of the Pension Plans 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 . These requirements are considered below. (i) 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. Entity A holds less than 10% of the total participation interests in each Australian company, or trust. Further, Entity A would hold less than 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. Entity A therefore satisfies the 'portfolio interest test' in respect of its current Australian investments. (ii) Influence test Subsection 128B(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. | Detailed Reasoning - Sub-test one:: The first sub-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 any of the entities. The first sub-test 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 any of the entities. | Detailed Reasoning - Sub-test two:: The second sub-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 Entity A on behalf of the Pension Plans. Relevantly, in respect of the Australian investments: (a) Neither Entity A, 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 Entity A, 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 Entity A, 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 Entity A, 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) Entity A 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 Entity A does not have influence of a kind described in subsection 128B(3CD) of the ITAA 1936. (iii) The income derived by Entity A on behalf of the Pension Plans cannot otherwise be non-assessable non-exempt income. The income received by Entity A 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 . Therefore, it is accepted that this requirement is satisfied. | Detailed Reasoning - Conclusion: Entity A on behalf of the Pension Plans is excluded from withholding tax in relation to interest, dividend and non-share dividend income derived from its current Australian investments.

derived by a superannuation fund for foreign residents (as defined in section 118-520 of the ITAA 1997), and | exempt from income tax in the country in which the superannuation fund for foreign residents resides.