Private ruling: Foreign superfund - withholding tax exemption
Date of advice: 13 October 2020
Published: February 2021
Ruling period: 1 July 2019 to 30 June 2020 | 1 July 2020 to 30 June 2021 | 1 July 2021 to 30 June 2022 | 1 July 2022 to 30 June 2023 | 1 July 2023 to 30 June 2024
Date scheme commenced: 28 April 2020

Ruling: Q1: Is the Master Trust excluded from liability to withholding tax on its interest, dividend and non-share dividend income derived from its investments in Australia (listed in Appendix 1) in accordance with paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: Yes

Relevant facts and circumstances: 1. The Master Trust is a defined benefit plan which provides retirees with a predetermined monthly retirement benefit upon reaching a specific age. 2. Under this type of plan: a. The retirement benefit paid to a retiree is calculated using a formula which employs years of credited service under the plan and salary information; b. The retirement benefit is payable to the employees upon attainment of their normal retirement age for the remainder of their lifetime; c. Benefits are referred to as accrued benefits; d. This type of plan does not maintain individual accounts for employees; e. The Alternate Payee is not awarded a lump sum cash payment from the plan; f. It is usually a requirement of the plan that the amount awarded to the Alternate Payee be expressed in terms of a monthly benefit payable for either the lifetime of the Participant or the Alternative Payee. 3. The Master Trust invests on behalf of multiple pension or retirement plans. 4. Each of the Plan's investments are held in a Master Trust, consisting of the Plan and other defined contribution plans of the Master Trust and subsidiaries. 5. All Plan income or loss is derived from Master Trust investment appreciation or depreciation. 6. Each of the participating retirement plans listed in the application which have invested in the Master Trust: a. are managed separately from the Master Trust; b. only invest via the Master Trust; and c. the Master Trust is managed in the United States of America. 7. The Master Trust confirmed that: a. its participating retirements plans are indefinitely continuing; b. it was established in a country other than Australia; c. it was established and is maintained only to provide benefits for individuals who are not Australian residents; d. it carries on its central management and control outside of Australia by entities none of whom are Australian residents; e. it cannot deduct any amount paid to it under the Income Tax Assessment Act 1997 (ITAA 1997) or ITAA 1936; f. no tax offsets would be allowable for an amount paid to it or set aside for it; g. its income is not non-assessable non-exempt income because of either: i. Subdivision 880-C of the ITAA 1997, or ii. Division 880 of the Income Tax (Transitional Provisions) Act 1997 . 8. The Master Trusts Australian provided a list of its Australian investments. 9. All its investments in Australia are listed on the ASX and its total participation interest in each investment is well below 1%. 10. Further, the Master Trust confirmed that for each investment, the Master Trust: a. does not hold any right to appoint a person to a board, committee or similar, either directly or indirectly; b. has not entered into or received any side letters, arrangements or agreements; c. does not hold any veto rights on security holder votes; and d. does not hold any other influence potentially of a kind described in subsection 128B(3CD) of the ITAA 1936.

Relevant legislative provisions: Income Tax Assessment Act 1936 subsection 6(1) | Income Tax Assessment Act 1936 section 128B | Income Tax Assessment Act 1936 paragraph 128B(3)(jb) | Income Tax Assessment Act 1936 subsection 128B(3CA) | Income Tax Assessment Act 1936 subsection 128B(3CB) | Income Tax Assessment Act 1936 subsection 128B(3CC) | Income Tax Assessment Act 1936 subsection 128B(3CD) | Income Tax Assessment Act 1936 subsection 128B(3CE) | Income Tax Assessment Act 1936 section 128D | Income Tax Assessment Act 1997 subsection 118-520(1) | Income Tax (Transitional Provisions) Act 1997 Division 880 | Income Tax Assessment Act 1997 subdivision 880-C | Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision: Summary: 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: • 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) of the ITAA 1936 must also be met. | Detailed Reasoning - The Master Trust is a non-resident: The Master Trust is not a resident of Australia. Therefore, the Master Trust satisfies this requirement. | Detailed Reasoning - 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. Section 118-520 of the ITAA 1997 provides: (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 is 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. The Master Trust must be a 'fund' that satisfies each of the conditions in subsection 118-520(1) of the ITAA 1997 (and none of the paragraphs in subsection 118-520(2) of the ITAA 1997) to be a 'superannuation fund for foreign residents'. An indefinitely continuing fund 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 , 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 legislation provides no guidance on the meaning of 'indefinitely continuing'. It is not a technical legal expression, and the ordinary meanings of indefinitely and continuing involve little ambiguity or controversy. The Macquarie Dictionary , viewed on 24 August 2020, macquariedictionary.com.au defines 'indefinitely' and 'continuing' as follows: Indefinite: adjective 1. not definite; without fixed or specified limit; unlimited: an indefinite number. 2. not clearly defined or determined; not precise. - indefinitely, adverb Continue: verb ( Continued, continuing ) 1. to go forwards or onwards in any course or action; keep on. 2. to go on after suspension or interruption. 3. to last or endure. 4. to remain in a place; abide; stay. 5. to remain in a particular state or capacity. In the present case, the Master Trust is a 'fund' which is established to continue in perpetuity in order to provide retirement and death benefits. Therefore, the Master Trust satisfies this requirement. 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 there from being capitalised. In a later case, Mahoney v. Commissioner of Taxation (Cth) (1967) 41 ALJR 232; (1967); 14 ATD 519; 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 a sickness or accident. In this case, the purpose of the Master Trust is to pay pension benefits to eligible members upon retirement, death or invalidity in accordance with the pension plan. Therefore, the Master Trust satisfies this requirement. Established in a foreign country The Master Trust was established in the state of Missouri, the United States of America (USA). Therefore, the Master Trust satisfies this requirement. Was established and maintained only to provide benefits for individuals who are not Australian residents The Master Trust is employer-sponsored plan for employees of the employer. These qualified members reside in the USA. Therefore, the Master Trust satisfies this requirement. 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 Master Trust is responsible for administering the plan and the Master Trust is based in the state of Missouri, USA. Therefore, the Master Trust satisfies this requirement. Subsection 118-520(2) The Master Trust has not and cannot deduct amounts under either the ITAA 1997 or the ITAA 1936 for amounts paid to it. The Master Trust has not been allowed a tax offset or a tax offset is not allowable for an amount that has been paid to it. Therefore, the Master Trust satisfies these requirements. Conclusion As the above requirements are satisfied, the Master Trust meets the requirements of being a superannuation fund for foreign residents as defined by section 118-520 of the ITAA 1997. | Detailed Reasoning - The Fund is exempt from income tax in the country in which the non-resident resides: The Master Trust has provided a copy of certificate of residence from tax authorities the USA dated 30 March 2020 certifying that the Master Trust is a qualified trust under section 401(a) of the Internal Revenue Code that is exempt from Federal income taxes under Section 501(a) of the Internal Revenue Code . The certificate confirms that the Master Trust is a resident of the USA and is exempt from income tax in the USA. There is no evidence indicating its income tax status changed since. Therefore, the Master Trust satisfies this requirement. | Detailed Reasoning - Subsection 128(3CA) of the ITAA 1936: 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. Generally, these extra requirements apply to income derived from 1 July 2019. Relevantly: • The Master Trust must satisfy the 'portfolio interest test' in relation to the test entity (subsection 128B(3CC) of the ITAA 1936) • The Master Trust must satisfy the 'influence test' (subsection 128B(3CD) of the ITAA 1936) in relation to the test entity, and • The income cannot otherwise be non-assessable non-exempt income of the Master Trust because of: a. Subdivision 880-C of the ITAA 1997, or b. Division 880 of the Income Tax (Transitional Provisions) Act 1997 . 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. The Master Trust holds less than 10% of the total participation interests in each Australian company, trust or real estate investment trust (REIT). Further, the Master Trust holds less than 10% of the total participation interests in each Australian company, trust or REIT in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936. The Master Trust therefore satisfies the 'portfolio interest test' in respect of its current investments (listed in Appendix 1 to the relevant facts and circumstances of this Ruling). The Fund satisfies the 'influence test' Subsection 128(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 Master Trust 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 Master Trust 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 Master Trust, 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 Master Trust. Relevantly, in respect of the investment listed in Appendix 1 of the relevant facts and circumstances to this Ruling: a. Neither the Master Trust, nor any related party of the Master Trust, has involvement in the day to day management of the business of any of the Australian companies, trusts or REITs. b. Neither the Master Trust, nor any related party of the Master Trust, has the right to appoint a director to the Board of Directors of the Australian company or equivalent role in a trust or REIT. c. Neither the Master Trust, nor any related party, holds the right to representation on any investor representative or advisory committee (or similar) of the Australian company, or equivalent role in a trust or REIT. d. Neither the Master Trust, nor any related party, has the ability to direct or influence the operation of the Australian company, trust or REIT outside of the ordinary rights conferred by the equity interest held. e. The Master Trust only holds rights to vote in proportion to its equity interest in each Australian company, trust or REIT. Based upon the above, the Master Trust does not have influence of a kind described in subsection 128B(3CD) of the ITAA 1936. Otherwise non-assessable non-exempt The income received by the Master Trust 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 . | Detailed Reasoning - Conclusion: The Master Trust is excluded from withholding tax in relation to interest, dividend and non-share dividend income derived from its current investments.