Private ruling: Withholding taxes
Date of advice: 6 May 2022
Published: July 2022
Ruling period: 1 July 20XX to 30 June 20XX
Date scheme commenced: DD MM 20XX

Ruling: Q1: Is the Fund excluded from liability to withholding tax on its interest, dividend and non-share dividend income derived in respect of its current investments in Australia under paragraph 128B(3)(jb) of the ITAA 1936? | A1: Yes.

Relevant facts and circumstances: Background 1. The Fund is a public employee retirement system established outside of Australia. 2. The Fund is administered by Entity A to provide service retirement, disability and death/survivor benefit for numerous employing bodies. 3. Entity B administers and manages the Fund's investment strategy. 4. All board meetings are held outside of Australia. 5. The Fund is governed by legislation and internal policies. 6. The Fund offers a number of retirement plans Management of the Fund 7. Entity A is responsible for the administration of the retirement system and the review and processing of disability applications. 8. Entity B is responsible for establishing the Fund's investment policy and objects, exercising authority and control over the investment management of the pension and benefits trusts. Description of the Fund Common Benefits 9. Members receive a lifetime benefit payable each month. 10. A member's retirement benefit is determined by their age at retirement, amount of service credit and final compensation. 11. Member's make contributions to the plan through automatic pre-tax payroll deduction. The member's contribution rate is a percentage of their compensation earned. Retirement Options 12. There are a number of retirement options available for members to choose from. Purchase of Service Credit 13. Members are able to purchase service credits for certain types of service. Reciprocity 14. Members of the Fund may be eligible for the benefits of reciprocity. Reciprocity is an agreement between public defined benefit retirement systems to allow members to move from one employer to another employer within a specific time limit without losing valuable privileges related to their retirement benefits. There is no transfer of funds or service credit between retirement systems, instead the member becomes a member of both systems. Restoring to a Prior Plan 15. If a member who previously terminated service, subsequently withdrew their accumulated contributions, and later returns to service, may restore their former plan, provided all withdrawn contributions are redeposited (including the interest those contributions would have earned had they been left on deposit). Cost of Living Adjustment 16. Entity A will determine whether there has been an increase or decrease in the cost of living and an adjustment is made. Disability Retirement 17. The Fund provides disability benefits for active members who are determined by the Board of Retirement to be permanently incapacitated for the performance of their regular job duties. A member who has withdrawn their retirement contributions is not eligible for a disability retirement. 18. There are two types of disability retirement. Death/Burial Benefit 19. A one-time, lump-sum death/burial benefit is payable upon the death of a retired member. Death Benefits 20. If a member dies prior to retirement, death benefits are determined based on a number of circumstances. Depending on the circumstances of the case, the benefits may be payable as a lump-sum cash payment, or a continuing benefit or a combination of the two. Retirement Age 21. The retirement age of the member is dependent on the Plan and the age/years of service of the member. 22. Penalties apply if contributions are withdrawn early and not contributed to another retirement plan. Other Information 23. The Fund provided a letter to the Commissioner stating: a. The Fund is an indefinitely continuing fund established to provide retirement benefits to eligible members and was established in a country other than Australia, b. The Fund was established and is maintained only to provide benefits for individuals who are not Australian residents, c. The Fund's central management and control is carried on outside of Australia by entities none of whom are Australian residents, d. No tax offset would be allowable for an amount paid to the Fund or set aside for the Fund, e. The income of the Fund is not non-assessable non-exempt income of the fund because of either: i. Subdivision 880-C of the ITAA 1997, or ii. Division 880 of the Income Tax (Transitional Provisions) Act 1997. 24. The Fund is a resident of a country other than Australia. Investments in Australia 25. The Fund invests into Australia through independent investment managers. The Fund retains all aspects of beneficial ownership rights (which constitute absolute entitlement of underlying investments). 26. The Fund 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 via its investment in Separate Account Investments with investment advisors with whom the Fund has investment management agreements. 27. The Fund has investments in Australian equity and debt interests. The Australian equity investments of the Fund have the following characteristics: a. The equity investments are listed on the ASX. b. The Fund holds less than 10% of the total equity interests on issue of the Australian companies in which it invests. c. The Fund has no involvement in the day-to-day management of the business of the Australian companies. d. The Fund has no right to appoint a director to the Board of Directors of the Australian companies. e. The Fund has no right to representation on any investor representative or advisory committee (or similar) of the Australian companies. f. The Fund has no ability to direct or influence the operation of the Australian company outside of the ordinary rights conferred by the equity interests held. g. The Fund does not have the ability to direct or influence the operation of the company, or otherwise provide the Fund with anything that would constitute influence under subsection 128B(3CD) of the ITAA 1936.

Relevant legislative provisions: Income Tax Assessment Act 1936 Paragraph 128B(3)(jb) | Income Tax Assessment Act 1936 Section 128D | Income Tax Assessment Act 1936 Section 118-520

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) 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: • 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. | Detailed Reasoning - The Fund is a non-resident: The Fund is not a resident of Australia for tax purposes. The Fund was established outside of Australia, and its management is also based outside of Australia. Therefore, the Fund satisfies this requirement. | Detailed Reasoning - 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 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; (b) a tax offset has been allowed or is allowable for such an amount. Consequently, for the Fund to be considered a superannuation fund for foreign residents for the purposes of paragraph 128B(3)(jb) of the ITAA 1936, it must be established that: • the Fund is an indefinitely continuing fund • the Fund is a provident, benefit, superannuation or retirement fund • the Fund was established in a foreign country • the Fund was established and 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 are Australian residents • 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 offsets have been allowed or would be allowable for an amount paid to the Fund or set aside for the Fund. | Detailed Reasoning - The Fund is 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. The Fund is governed by legislation, Entity A's regulations and investment policy. There is no indication that the Fund is to be wound up in the near future. Its annual reports state that it is in a position to meet its ongoing obligations to members and their beneficiaries. There is sufficient evidence to accept that the Fund will continue to operate in accordance with the relevant governing legislation, Entity A's regulations and the Fund will continue indefinitely to meet the obligations to pay benefits under the legislation and Entity's A regulations. Further, the Fund provided a letter to the Commissioner which states that the Fund is an indefinitely continuing fund. Therefore, the Fund satisfies this requirement. | Detailed Reasoning - The Fund 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 subject to judicial consideration. In Scott , the High Court examined the terms 'superannuation fund' and 'fund'. Justice Windeyer stated at ATD 351; AITR 312; ALJR 278 that: ... 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 from being capitalised. In a later case, Mahoney v. Commissioner of Taxation (Cth) (1967) 41 ALJR 232; (1967) 14 ATD 419; 10 AITR 463 ( Mahoney Case ), the High Court took a similar view as in Scott , Justice Kitto expressed the view at ALJR 232; (1967) ATD 520; AITR 464 that: 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. The Court found that the expression takes its meaning from past usage and the meaning of the several expressions must be arrived at in light of their ordinary usage. As such, the term 'benefit' requires a purpose narrower than conferring benefits in a completely general sense. The benefit must be characterised by some future purpose. Likewise, a provident fund must not refer to the provision of funds in a general sense but must relate to a provision against contemplated contingencies. Both of the above mentioned cases emphasise that the benefits must be provided for a specific purpose and require that there is a connection between the benefit received and the provision by the fund for retirement or death of a member or against 'contemplated contingencies', such as death, disability or serious illness. The Fund is a retirement system established to provide service retirement, disability, death and survivor benefits to members. The Fund is a defined benefit retirement plan which provides a fixed, pre-established benefit for members at retirement. As both the key objective of the Fund and the operation of the Fund have the sole purpose of providing retirement benefits, the Commissioner accepts that the Fund is considered to be a 'provident, benefit, superannuation or retirement fund'. Therefore, the Fund satisfies this requirement. | Detailed Reasoning - The Fund was established in a foreign country: The Fund was established outside of Australia. Therefore, the Fund was established in a foreign country. Therefore, the Fund satisfies this requirement. | Detailed Reasoning - The Fund was established and maintained only to provide benefits for individuals who are not Australian residents: The Fund was established outside of Australia to provide service retirement, illness, death and survivor benefits for employees of participants of the Fund. 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 and should not be taken to conclude that the Fund, has not been established and is not maintained only to provide benefits for non-residents, based on the rules and operation of the Fund. Therefore, the Fund satisfies this requirement. | Detailed Reasoning - The Fund's central management and control is carried on outside Australia by entities none of whom is an Australian resident: Paragraph 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 in respect of the central management and control (CM&C) of a superannuation fund: 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 operations 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. Furthermore, paragraph 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. The Fund is a pension plan established outside of Australia which is administered by Entity A. The operation of the Fund is governed by legislation, regulations, procedures and policies adopted by Entity A. Entity A is composed of non-residents of Australia and all of the decisions are undertaken outside Australia. This is supported by the fact that: • The Executive, Entity A and Entity B are all non-residents. • All the board meetings are held outside of Australia and significant management and investment decisions are undertaken outside of Australia. Based on these facts, it is reasonable to conclude that the central management and control of the Fund is exercised outside of Australia by entities that are not Australian residents. 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 1936 or ITAA 1997 and no tax offset has been allowed or is allowable for such an amount Pursuant to subsection 118-520(2) of the ITAA 1997, 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 Act; or b) a tax offset has been allowed or is allowable for such an amount. As the contributors to the Fund are based outside of Australia and make contributions in respect of the employment undertaken outside of Australia, the contributions to the Fund are neither eligible for deductions nor allowed as offsets under the ITAA 1936 or ITAA 1997. The Fund has also confirmed no amount paid to the Fund can be deducted under the ITAA 1936 or ITAA 1997. Therefore, the Fund satisfies this requirement. | Detailed Reasoning - 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 for the purpose of subparagraph 128B(3)(jb)(i) of the ITAA 1936. | Detailed Reasoning - The income, consisting of interest, dividend and non-share dividend income, is derived by the Fund: Subsection 128B(3CA) of the ITAA 1936, along with paragraph 128B(3)(jb) of the ITAA 1936 requires the superannuation fund for foreign residents to derive the interest, dividends or non-share dividends paid by Australian resident companies. The Fund invests directly into Australia and receives interest, dividend and non-share dividend income directly from its Australian investments. It will, therefore, derive the relevant income for the purposes of subsection 128B(3CA) of the ITAA 1936 and paragraph 128B(3)(jb) of the ITAA 1936. Therefore, the Fund will satisfy this requirement. | Detailed Reasoning - The Fund is exempt from income tax in the country in which the non-resident resides: The Fund is exempt from income tax in a foreign county under legislation in the foreign country. The Fund provided a letter to the Commissioner confirming that it is a resident of a foreign country. Therefore, the Fund satisfies this requirement. | Detailed Reasoning - 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 for assets acquired on or before 27 March 2018: As all the requirements of paragraph 128B(3)(jb) of the ITAA 1936 are satisfied, the Fund will be entitled to an exemption from withholding tax on interest, dividend and non-share dividend income derived in respect of assets acquired on or before 27 March 2018 under paragraph 128B(3)(jb) of the ITAA 1936. | Detailed Reasoning - Assets acquired after 27 March 2018: 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) of the ITAA 1936 to apply from 1 July 2019 onwards. These extra requirements apply only to assets which were acquired after 27 March 2018. Relevantly: i. The fund must satisfy the 'portfolio interest test' in relation to the test entity (subsection 128B(3CC) ii. The fund must satisfy the 'influence test' (subsection 128B(3CD) in relation to the test entity, and iii. 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 . | Detailed Reasoning - The Fund satisfies the '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. 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) of the ITAA 1936 applies in relation to a resident trust estate, that trust estate. Subsection 995-1(1) of the ITAA 1997 defines total participation interest to have the meaning given by section 960-180 of the ITAA 1997, which states: An entity's total participation interest at a particular time in another entity is the sum of: (a) the entity's *direct participation interest in the other entity at that time; and (b) the entity's *indirect participation interest in the other entity at that time. A 'direct participation interest' that the Fund will have in a test entity is defined in the table in subsection 960-190(1) of the ITAA 1997 and depends on what type of entity the other entity is. Item 1 of the table in subsection 960-190(1) and subsection 960-190(2) of the ITAA 1997 provide that a direct participation interest in a company is the 'direct control interest' (within the meaning of section 350 of the ITAA 1936 excluding the operation of subsection 350(6) and (7)) that the first entity holds in the other entity. Subsection 350(1) of the ITAA 1936 provides that an entity holds a direct control interest in a company at a particular time equal to the percentage of: (a) total paid up share capital, (b) voting rights, or (c) rights to distributions of capital or profits that it holds in the company. Where there are different percentages in each of the above, the direct control interest is the greater or greatest of those percentages. Subsection 350(2) of the ITAA 1936 provides that where an entity holds different percentages of total rights to vote for the purposes of (b) above, the highest of those percentages applies in establishing the direct control interest. Subsection 960-185(1) of the ITAA 1997 provides that an entity's indirect participation interest in a test entity is established by multiplying its direct participation interest in an intermediate entity by the sum of the intermediate entity's direct and indirect participation interests in the test entity. The Fund does not hold more than 10% of the total participation of any of the Australian entities that it holds investments in that were provided as part of the facts of this Ruling. In these circumstances, the Commissioner is satisfied that the total participation interest the Fund holds in the test entity: • is less than 10% pursuant to paragraph 128B(3CC)(a) of the ITAA 1936 at all relevant times; and • would be less than 10% in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936 at all relevant times. The Fund therefore satisfies the 'portfolio interest test' in respect of its current Australian investment. The Fund does not have influence of a kind described in subsection 128B(3CD) of the ITAA 1936 in relation to the test entity at the time the income was derived 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. Sub-test 1 of the influence test, as contained in paragraph 128B(3CD)(a) of the ITAA 1936, 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 situation 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) 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 the Fund. Relevantly, in respect of the investments that were provided as part of the Relevant Facts and Circumstances of this Ruling: (a) the equity investment is listed on the ASX. (b) the Fund holds less than 10% of the total equity interests on issue of the Australian company in which it invests. (c) the Fund has no involvement in the day to day management of the business of the Australian company. (d) the Fund has no right to appoint a director to the Board of Directors of the Australian company. (e) the Fund has no right to representation on any investor representative or advisory committee (or similar) of the Australian company. (f) the Fund has no ability to direct or influence the operation of the Australian company outside of the ordinary rights conferred by the equity interest held. (g) In addition to the above, the Fund does not have the ability to direct or influence the operation of the company, or otherwise provide the Fund with anything that would constitute influence under subsection 128B(3CD) of the ITAA 1936. Accordingly, the Fund does not have influence of a kind described in subsection 128B(3CD) of the ITAA 1936 in respect of its Australian investment. The Fund does not have capacity to influence (either directly or indirectly) the day-to-day management of the operations of their investment. Consequently, the Commissioner accepts that the Fund does not have influence of a kind described in subsection 128B(3CD) of the ITAA 1936. 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 Income Tax (Transitional Provisions) Act 1997 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 . The Fund therefore, satisfies this condition in respect of its current investments. | Detailed Reasoning - Conclusion for assets acquired after 27 March 2018: As the Fund has met both the pre-existing and extra requirements of paragraph 128B(3)(jb) of the ITAA 1936 in relation to assets acquired after 27 March 2018, the Fund is excluded from withholding tax in relation to interest, dividend and non-share dividend income derived from its current Australian investments.