Private ruling: Foreign super fund - exemption from income tax/withholding tax
Date of advice: 26 November 2020
Published: January 2021
Ruling period: 1 July 2019 to 30 June 2024
Date scheme commenced: 1 July 2019

Ruling: Q1: Is the Fund excluded from liability to withhold tax on interest, dividend and non-share dividend income derived from its 'Australian Investments' as listed in the facts in accordance with paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: Yes

Relevant facts and circumstances: Background/creation: 1. The Fund is a pension scheme providing benefits for members who were employees of XXX in the United Kingdom (UK). 2. The Fund is governed by a 'Trust Deed and General Rules' (the Trust Deed) dated between XXX (the Company) and XXX Trustee Limited (the Trustee). 3. The Trustee is the administrator of the Fund and must operate in accordance with the Trust Deed. The Trustee is required to act in the best interests of the contributors and all other members. 4. The Trustee is committed to ensuring the Fund's objectives are met by managing risk using effective decision-making processes and by adopting pension industry 'best practice' where this is appropriate for the Fund. Purpose: 5. the Fund is the vehicle for the delivery of scheme benefits. 6. The purpose of the Fund is to receive monies in respect of contributions, transfer values and investment income, invest monies in accordance with policy formulated by the administering authority and pay out monies in respect of scheme benefits, transfer values, costs, charges and expenses. Plan type: 7. The current investment objective of the Fund is to achieve investment returns that, together with the contributions paid by the Company and by its members, ensure that the assets of the Fund are sufficient to meet the benefits due to each member as they fall due. 8. The Trustee has invested in assets with a profile that closely matches the liabilities by using bonds or bond-like assets. 9. Trustees are responsible for the investment of the Fund's assets and set out the key elements of the Fund's investment policy. Trustees appoint investment managers to deal with the day to day investment decisions in line with the investment policy and rules. 10. The Investment Committee meets quarterly to review the investments and make recommendations regarding changes in strategy or managers. Plan management: 11. The Trustee is managed by a Board of Directors, totalling X members. The Board of Directors are nominated by the Company and the members of the Fund. The Fund pensioners nominate x Directors from their number, a Director is nominated from either deferred or pensioner membership and the Company nominates x Directors (collectively, Trustees). 12. Trustees operate under a Charter that lists their role and objectives in managing the Fund. 13. A statement from the Trustee confirms: • To the best of their knowledge and belief that the Fund is established as an indefinitely continuing fund and a provident, benefit, superannuation or retirement fund. • The Fund has been established in a foreign country and is maintained only to provide benefits for non-residents of Australia. • The central management and control is carried on outside of Australia by entities none of whom are Australian residents. • No amounts paid to or set aside for the Fund have been or are capable of being claimed as a tax offset, rebate or deduction under any sections of the ITAA 1997. Membership: 14. The Fund is a mature pension scheme and has closed to future accrual. At this time all active members became deferred members and the Fund stopped receiving ongoing contributions from active membership. 15. As at the closure date, all pensionable service ceased and members were treated as having life service on this date. 16. At 31 March 2020, the Fund has xx,xxx members with xx,xxx receiving a pension and xx,xxx being deferred members. Eligibility: 17. Until 20XX the Fund was open to any eligible employee of a participating company. In 20XX, the Company closed the Fund to new entrants. The Fund was closed to future accrual in 20XX. Contributions: 18. From the date when an employee first became a member, the employer deducted from the employee's remuneration sums equal to the contributions payable as stated in the Trust Deed. 19. The Fund closed to future accrual in 20XX and there were no active members contributing from that date. 20. Prior to 20XX, a member in Service could pay additional voluntary contributions (AVC) to the Fund. 21. The AVC scheme was closed to new accounts from 20XX and members stopped being able to make payments from 20XX. 22. AVC's are invested separately from the Fund's assets to ensure there are individual funds for each member that are clearly identifiable. The member has the choice to invest in a number of funds. Benefits: 23. The normal retirement age for both men and women is 65. 24. On retirement a member will receive a pension paid monthly in advance for the rest of their life. 25. A member may choose to take a tax-free cash sum, subject to the limits set by Her Majesty's Revenue and Customs ("HMRC"). 26. If a member has not yet retired, their pension will be deferred until they reach retirement age. 27. A member may apply to start receiving a pension before normal retirement age if they are at least age 50 and have either ceased significant gainful employment or were an active member of the Fund on the date it was closed to accrual. 28. On or after the closure date, a deferred pensioner, who is a closer member, shall be entitled to their deferred benefits from the earliest of: a) The deferred pensioner's normal retirement date (NRD); and b) The date on which: i. the member leaves employment with an employer by reason of redundancy; and ii. is over age 50; and iii. had the member retired from all significant gainful employment to the satisfaction of the Trustee, the member would have been entitled under the Rules applicable to them to start receiving their pension; and c) such other date permitted pursuant to the Rules applicable to them. 29. Where, on or after the closure date, a deferred pensioner or an acquired deferred pensioner would not have the ability to take their benefits after the NRD, they may request that their pension commences at a date later than the NRD, subject to the agreement of the Trustee that: a) they shall become a postponed pensioner on their NRD; and b) the retirement benefits shall not commence being paid until such date as they shall notify the Trustee and increased on a basis certified as reasonable, having regard to: i. the period of postponement; and ii. increases in the Guaranteed Minimum Pension (as listed in the Trust Deed). 30. Where a person would be entitled to an immediate pension from the Fund but for any restrictions under the section of the Rules relating to them which require that they have retired from significant gainful employment (or similar) before receiving benefits from the Fund and that person is a closure member, then the Trustee shall disregard such restrictions. Death Benefits: 31. If a member dies prior to retirement, a pension may be payable to a surviving spouse or civil partner at a rate of 50% of the pension increased from the date of leaving to date of death. Children and other dependents may also be payable. 32. A lump sum death benefit would also be payable equal to five times the yearly amount of the member's deferred pension increased to date of death, plus any AVC's that may have been paid. 33. If a member dies after retirement, the Fund will provide a pension for the member's surviving spouse or civil partner at the rate of 50% of the member's pension and a lump sum if the member dies within five years of retiring. The lump sum is equal to five times the value of the annual pension when the member retired, less all pension and tax-free cash paid since retirement. 34. A pension is automatically payable to the member's spouse or civil partner and to any dependent children under 16 years of age. A pension may be payable to dependent children up to age 23 if they are unmarried and in full time education. Benefits in other circumstances: 35. If a member becomes ill prior to retirement, they may be able to take their benefits prior to age 50. If a member becomes terminally ill prior to retirement, the Trustee may be permitted to convert the pension to a one-off lump sum. 36. Instead of receiving a pension from the Fund, the member can investigate the option of transferring their benefits to another scheme of their choice. Place of establishment: 37. The Fund was established in the UK. Central management and control: 38. The offices of the Fund are in England. The central management and control of the Fund is carried out in England. Wind up and insolvency: 39. The Fund is not subject to any Act relating to the insolvency or winding-up of any corporation on the basis that it does not have its own separate legal personality . Tax status: 40. The Fund is a registered public service scheme under section 1(1) of Schedule 36 of the Finance Act 2004 (UK) and as such is exempt from UK income tax on interest received and from capital gains tax on the proceeds of investments sold. 41. Formal certification from HMRC was supplied with the ruling application confirming that the Fund is generally exempt of UK tax by virtue of section 186 of the Finance Act 2004 . HMRC have also confirmed that, to the best of their knowledge and belief, XX is registered under Part 4 of the Finance Act 2004 (UK) as at 1 January 2020. Australian Investments: 42. The Fund provided a list of its 'Australian Investments'. 43. All of the Fund's investments in Australia are debt investments and interest bearing. 44. The Fund does not have influence of a kind described in subsection 128(3CD) of the ITAA 1936 in respect of these investments. 45. The Fund does not have capacity to influence (either directly or indirectly) the day-to-day management of the operations of their investments. 46. The Fund does not hold any right to appoint a person to a board, committee or similar (either directly or indirectly). 47. The Fund does not hold any veto rights on security holder votes. 48. The Fund does not hold more than 10% ownership of any of the entities it holds investments in.

Relevant legislative provisions: Income Tax Assessment Act 1936 paragraph 128B(3)(jb)

Reasons for decision: Summary: 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 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 arise. Further, from 1 July 2019, the extra requirements in subsection 128B(3CA) must also be met. | Detailed Reasoning - 1.Superannuation fund for foreign residents: The Fund is not a resident of Australia for tax purposes. Therefore, the Fund satisfies this requirement. 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 Income Tax Assessment Act 1997 (ITAA 1997) as follows: | Detailed Reasoning - 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 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 or can be deducted under this Act; or (b) a *tax offset has been allowed or is allowable for such an amount. 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. Although the Fund closed to future accruals in 20XX, there is no indication that there is any contemplation of the Fund ending at a defined point in time and the terms and regulations of the Fund do not provide for winding up at a defined point in time. On that basis, the Fund is accepted to be an indefinitely continuing fund. 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) 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, 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; 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). The above extract 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 allowable contemplated contingencies (such as death, disability or serious illness). It is accepted that the Fund is a "provident, benefit, superannuation or retirement fund" on the basis that: • The Fund's sole purpose is to provide the relevant participant employees money benefits upon their reaching a prescribed age (i.e. immediate annuities, deferred annuities, etc as explained above); • The Fund can be described as "provident" on the basis that it provides money benefits upon particular contingencies (e.g. death, ill-health and retirement); • The Fund provides benefits upon an employee's retirement or death or other cessation of employment, including to survivors and children of the employee; • The terms of XXX (i.e. the Acts and Regulations) are consistent with a superannuation fund and the terms are strictly adhered to (evidenced by the fact that the terms of XXX are enacted in law and violation of them could lead to criminal or civil sanctions); • The amounts collected by the Fund are not used for any purpose other than providing benefits to participants, former participants and their beneficiaries under the Fund and paying the reasonable expenses of administering the Fund. Therefore, the Fund satisfies this requirement. iii. Established in a foreign country: XXX was established by UK Legislation (being the Superannuation Act 1972 and the Public Service Pensions Act 2013) and is a registered pension scheme under UK legislation ( Finance Act 2004) . Furthermore, the trustee of XXX attests that the Fund has been established in a country outside of Australia. Therefore, the Fund satisfies this requirement. iv. Was established and maintained only to provide benefits for individuals who are not Australian residents: The trustee of the Fund attests that the Fund does not provide benefits to Australian residents. Accordingly, the Commissioner accepts that the Fund was established and is maintained only to provide benefits for individuals who are not Australian residents. It is considered that the possibility of a very small number of members being returned residents or becoming Australian residents after ceasing eligible employment is incidental. Therefore, the Fund satisfies this requirement. v. Central management and control (CM&C): 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 Fund is a pension scheme established by the Company and the Trustee in the UK. The Trust Deed and Rules are administered by the Trustee and the Board of Directors consisting of x members. The board directors are nominated by the Company and the members of the Fund. The Fund pensioners nominate x Directors from their number, a Director is nominated from either deferred or pensioner membership and the Company nominates x Directors. The Trustee acts in the best interests of the contributors and all other members. Based on this, it is reasonable to conclude that the central management and control of the Fund occurs in the UK by entities that are not Australian residents. Therefore, the Fund satisfies this requirement. vi. Subsection 118-520(2): 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 the ITAA 1936 or ITAA 1997; or b) A tax offset has been allowed or is allowable for such an amount. No amount paid to the Fund or set aside for the Fund has been or can be deducted (and no tax offset has been allowed or is allowable for such an amount) under the ITAA 1936 or ITAA 1997. Therefore, the Fund satisfies these requirements. 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. | Detailed Reasoning - 2.The Fund is exempt from income tax in the country in which the non-resident resides:: As per the facts provided (including a statement from HMRC) XXX is generally exempt of UK tax by virtue of section 186 of the Finance Act 2004. Therefore, the interest and dividend income derived by XXX will be exempt from tax in the UK. Therefore, XXX satisfies this requirement. | Detailed Reasoning - Subsection 128B(3CA):: 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. Generally, these extra requirements apply to income derived from 1 July 2019. Relevantly: • The fund must satisfy the 'portfolio interest test' in relation to the test entity (subsection 128B(3CC) • The fund must satisfy the 'influence test' (subsection 128B(3CD) in relation to the test entity, and • The income cannot otherwise be non-assessable non-exempt income of the Fund 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' Subsection 128B(3CC) 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. As per the facts, the Fund does not hold more than 10% ownership of any of the Australian entities it holds investments in. In these circumstances, the Commissioner is satisfied that the total participation interest the Fund holds in the test entities: • is less than 10% pursuant to paragraph 128B(3CC)(a) at all relevant times; and • would be less than 10% in the circumstances detailed in paragraph 128B(3CC)(b) at all relevant times. The Fund therefore satisfies the 'portfolio interest test' in respect of its 'Australian Investments' listed in the relevant facts of this Ruling. ii. The fund satisfies the 'influence test' Subsection 128(3CD) 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. Sub-test 1 of the influence test, as contained in paragraph 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. 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. Sub-test 2 of the influence test, as contained in paragraph 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. Relevantly, in respect of the investments listed in the relevant facts and circumstances of this Ruling: • Neither the Fund, nor any related party, is involved in the day to day management of the business of any of the Australian companies or trusts. • Neither the Fund, 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. • Neither the Fund, nor any related party, holds the right to representation on any investor representative or advisory committee (or similar) of the Australian companies or trusts. • Neither the Fund, nor any related party, has the ability to direct or influence the operation of the Australian companies or trusts outside of the ordinary rights conferred by the equity interest held. • The Fund does not hold any veto rights on security holder votes. Accordingly, the Fund does not have influence of a kind described in subsection 128(3CD) of the ITAA 1936 in respect of these investments. The Fund does not have capacity to influence (either directly or indirectly) the day-to-day management of the operations of their equity investments. Consequently, the Commissioner accepts that the Fund does not have influence of a kind described in subsection 128B(3CD). iii. Otherwise non-assessable non-exempt 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 Income Tax (Transitional Provisions) Act 1997 . Income derived by the Fund would not be otherwise treated as not assessable and not exempt income by virtue of the above provisions. Accordingly, the above exclusion should not apply to exclude the Fund from entitlement to the withholding tax exemption for superannuation funds for foreign residents. | Detailed Reasoning - Conclusion: The Fund is excluded from liability to withhold tax on interest, dividend and non-share dividend income derived from its 'Australian Investments' as defined in the facts in accordance with paragraph 128B(3)(jb) of the ITAA 1936.