Private ruling: exemption from withholding tax
Date of advice: 5 July 2018
Published: September 2018
Ruling period: Year ended 30 June 2018 | Year ended 30 June 2019 | Please note that the edited version of your ruling only covers the period from 1 July 2017 to 30 June 2019. This is due to potential law changes that will come into force on 1 July 2019 and at this stage we are not issuing Rulings beyond this date until details of the new measures are finalised. Further information can be found at: http://sjm.ministers.treasury.gov.au/media-release/024-2018/.
Date scheme commenced: 1 July 2017

Ruling: Q1: Is the P Investment Trust Fund (PITF) excluded from liability to withholding tax on its interest and/or dividend income derived from Australia under paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: Yes | Q2: Is interest and/or dividend income derived from Australia by the PITF non-assessable and non-exempt income under section 128D of the ITAA 1936? | A2: Yes

Relevant facts and circumstances: 1. The application includes the following documentation: • A copy of the P Investment Management (PIM) Board Operating Trust Agreement; • Letter from the Revenue Authority outlining that the P Investment Trust Fund (PITF) is a tax exempt trust, • A copy of PITF’s 2016 comparative annual financial statements. 2. PITF was created by State X legislature as a retirement plan established and maintained for employees of State X. 3. PITF was mandated to invest assets to meet their future pension obligations. 4. Pursuant to the PIM Board’s Operating Trust Agreement (the Operating Trust Agreement), PIM Board’s declaration of trust provides that PIM Board has been charged by its enabling legislation, with the general supervision of the investment and management of the PITF established under State X’s legislative provisions. 5. The PIM Board consists of various board members. The various board members are made up of the Government appointees and members. 6. In accordance with the Operating Trust Agreement the PIM Board is established, operated and maintained exclusively for the management, investment and reinvestment of PITF. 7. The relevant membership and retirement benefits are contributory and defined benefit governed by State law. The PTIF provides retirement, disability, survivor and death benefits to members and beneficiaries. 8. Membership in the PTIF is mandatory for nearly all state employees who are regular employees on a part time or full time basis. 9. All members make mandatory pre-tax contributions and contribute a percentage of their regular compensation based upon when they joined. State law mandates the contribution rate based upon the year the member joined. 10. Members are entitled to a retirement allowance pursuant to the relevant provision of State law which is made up of two parts, an annuity and a pension. The retirement allowance also takes into consideration calculation of benefits governing disability or death. 11. A member is vested if they have at least 10 years of full time service and are eligible to retire subject to the conditions outlined under State law. 12. Pursuant to State law a member is not allowed to withdraw or borrow from their annuity savings account under any circumstances, including mortgage down payments or education. 13. The PITF is exempt from income tax in its country of residence. 14. A statement from the PIM Board provides that: ● PITF is an indefinitely continuing fund and is a provident, benefit, superannuation or retirement funds; ● PITF was established in a foreign country; ● PITF was established and maintained only to provide provident, benefit, superannuation or retirement benefits to those who are not Australian residents and was established and maintained only to provide benefits for individuals who are not Australian residents; ● The central management and control of PITF is carried on outside Australia by entities none of whom are Australian residents; ● An amount paid to or set aside for PITF has not been and cannot be deducted under the Income Tax Assessment Act 1997 (ITAA 1997) or ITAA 1936, and ● A tax offset has not been allowed and is not allowable for such an amount. 15. In the course of its investment activities, PITF has invested into an Australian resident company and expects to receive dividend and interest income in respect of this investment.

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

Reasons for decision: Summary: The PITF will be excluded from liability to withholding tax on its interest and/or dividend income derived from Australia under paragraph 128B(3)(jb) of the ITAA 1936. | Detailed Reasoning - Detailed reasoning: For the financial years ended 30 June 2008 and onwards, paragraph 128B(3)(jb) of the ITAA 1936 excludes interest and dividend income from withholding tax where that income: (i) is derived by a non-resident that is a superannuation fund for foreign residents; and (ii) consists of interest, or consists of dividends or non-share dividends paid by a company that is a resident; and (iii) is exempt from income tax in the country in which the non-resident resides. The term ‘superannuation fund for foreign residents’ is defined in section 118-520 of the Income Tax Assessment Act 1997 (ITAA 1997) as follows: 118-520(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. 118-520(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. Is PITF a ‘fund’ and is it an indefinitely continuing fund? Based on consideration of the relevant facts, and constituent documents of the PITF Fund there is nothing to indicate that PITF is subject to a specific termination or wind up date, we consider that PITF is an indefinitely continuing fund for the purposes of paragraph 118-520(1)(a)(i). Is PITF a provident, benefit, superannuation or retirement fund for the purposes of section 118-520? The phrase ‘a provident, benefit, superannuation or retirement fund’ under paragraph 118-520(1)(a)(ii) is not defined in either the ITAA 1997 or the ITAA 1936. However, the phrase has been subject to judicial consideration. In Scott v FCT (No. 2) (1966) 40 ALJR 265;14 ATD 333;10 AITR 290 (Scott), the High Court examined the terms ‘superannuation fund’ and ‘fund’. Windeyer J. enunciated at ALJR 278; ATD 351; AITR 312 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), the High Court took a similar view as in Scott, Justice Kitto expressed the view at ALJR 232; 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 ‘provident, benefit or superannuation fund’ 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 where the benefit must be characterised by some future purpose e.g. a funeral benefit. On the same note, 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 abovementioned 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. Application to the facts PITF was created by the State X legislature as a retirement plan established and maintained for employees of State X. The PIM Board is authorised and required under the provisions of the State X’s general laws to act as Trustee. The PIM Board operates and maintains exclusively the management, investment and reinvestment of PITF pursuant to the Operating Trust Agreement in meeting the future pension obligations of State X. The PTIF provides retirement, disability, survivor and death benefits to members and beneficiaries. Pursuant to State law a member is not allowed to withdraw or borrow from their annuity savings account under any circumstances, including mortgage down payments or education. As such it is considered that the PTIF is a ‘provident, benefit, superannuation or retirement fund’ as that phrase has been interpreted by the relevant judicial authorities. Was PITF established in a foreign country? PITF was created by the State X legislation in a foreign country. As such PITF was established in a foreign country for the purposes of paragraph 118-520(1)(b) of the ITAA 1997. Was PITF established, and maintained only to provide benefits for individuals who are not Australian residents? PITF was specifically established and maintained to provide retirement benefits only for the employees of State X. Therefore, it can be concluded that PITF provides benefits to individuals who are not Australian residents for the purposes of paragraph 118-520(1)(c) of the ITAA 1997. Is PITF’s central management and control carried on outside Australia by entities none of whom is an Australian resident? The central management and control of PITF is held by several appointees of the PIM Board which is authorised and required to act as trustee for each retirement system pursuant to the general laws of State X. It is considered that the central management and control of PITF is carried on outside Australia by the PIM Board, none of whom is an Australian resident for the purposes of paragraph 118-520(1)(d) of the ITAA 1997. Has an amount been paid to the fund or set aside for the fund or has an amount been deducted or can be deducted under this Act, or has a tax offset been allowed or is allowable for such an amount? In the course of its investment activities, PITF has invested into an Australian resident company and expects interest or dividend income to be derived. It is considered that no amount that would be paid to the fund or set aside for the fund has been or can be deducted and that no tax offset has been allowed or allowable for such an amount pursuant to paragraphs 118-520(2)(a) and (b) of the ITAA 1997. | Detailed Reasoning - Conclusion: It is considered that as PITF qualifies as a superannuation fund for foreign residents as defined in section 118-520 of the ITAA 1997 as it fulfils the relevant conditions under that provision. As such the dividend and interest income derived by PITF will be exempt pursuant to paragraph 128B(3)(jb) of the ITAA 1936 on the basis that: • PITF qualifies as a superannuation fund for foreign residents; and • dividend and interest income derived by PITF Fund will be from an Australian resident company; and • income derived by PITF will be exempt from tax in its country of residence.. | Detailed Reasoning - Question 2: Is interest and/or dividend income derived from Australia by PITF non-assessable and non-exempt income under section 128D of the ITAA 1936? | Summary: The interest and/or dividend income derived from Australia by PITF is considered to be non-assessable and non-exempt income under section 128D of the ITAA 1936. | Detailed Reasoning - Detailed Reasoning: As the PITF will be entitled to an exemption under paragraph 128(3)(jb) of the ITAA 1936, the interest or dividend income derived by PITF will be considered to be non-assessable and non-exempt income under section 128D of the ITAA 1936.

Question 1: Is the PITF excluded from liability to withholding tax on its interest and/or dividend income derived from Australia under paragraph 128B(3)(jb) of the ITAA 1936?