Private ruling: Foreign superannuation fund withholding tax exemption
Date of advice: 12 November 2018
Published: January 2019
Ruling period: Year ending 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX
Date scheme commenced: 1 January 20XX

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

Relevant facts and circumstances: 1. The Fund is a resident of country A, a foreign jurisdiction. Income earned on funds belonging to The Fund is exempt from income tax in that jurisdiction. 2. The Fund is an independent state agency and is subject to legislative and executive department budgetary review and comment. It is managed by a board of directors whose powers and duties are bound by a Code. 3. The Fund was established to provide benefits for members of The Fund, none of which are Australian residents. 4. Under the Code there is no requirement for The Fund to be terminated or wound up after a specified period. 5. The pension system administered by the Fund is a defined benefit scheme where the employee member will receive a pension (based on years of service and a calculation of their final average salary) on retirement, and as such the benefits provided under the pension system are determined according to a formula and not directly related to the contributions or investment returns on the contributions. 6. Benefits received by members of The Fund include withdrawals at retirement age and early retirement due to disability. The pension system also allows a member to withdraw their contributions on termination of employment, however, in doing so the members forfeit any right to the employer contributions and also face tax penalties. 7. The central management and control of The Fund is carried on outside Australia by entities none of whom is an Australian resident. 8. The income of The Fund includes interest and/or dividends paid by a resident of Australia and that income is exempt from income tax in the Fund’s country of residence, country A. 9. No amount paid to The Fund or set aside for The Fund has not been or cannot be deducted under the ITAA 1936 or ITAA 1997 and a tax offset has not been allowed or is not allowable for such an amount.

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 Fund is excluded from liability to withholding tax on its interest, dividend and non-share dividend income 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 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; (b) a tax offset has been allowed or is allowable for such an amount Consequently, for the Fund to be excluded from withholding tax on interest and dividend income, it must be established that it: 1. is a non-resident 2. is an indefinitely continuing fund 3. is a provident, benefit, superannuation or retirement fund 4. was established in a foreign country 5. was established and maintained only to provide benefits for individuals who are not Australian residents 6. has its central management and control carried on outside of Australia by entities none of whom are Australian residents 7. does not receive or have amounts set aside for it that have been or can be deducted under the ITAA 1997 8. does not receive or have amounts set aside for it that give rise to a tax offset 9. received income that consists of interest, or consists of dividends or non-share dividends paid by a company that is an Australian resident, and 10. is exempt from income tax in the country in which the non-resident resides The Fund is an indefinitely continuing fund which was established in a foreign jurisdiction as an independent state agency subject to legislative requirements and is governed by a Code of that independent state. The Fund is not a resident of Australia for tax purposes. As such, elements 1,2 and 4 above are satisfied. ATO Interpretative Decision ATO ID 2009/67 Income Tax: Superannuation fund for foreign residents (ATO ID 2009/67) provide 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; Mahony v. FC of T (1967) 14 ATD 519, per Kitto J; Walstern Pty Ltd v. Commissioner of Taxation (2003) 138 FCR 1; 2003 ATC 5076; (2003) 54 ATR 423, per Hill J and Cameron Brae Pty Ltd v. Federal Commissioner of Taxation (2007) 161 FCR 468; 2007 ATC 4936; (2007) 67 ATR 178, per Stone and Allsop JJ). Having regard to the terms of the deed of the Plan, it is considered that the Plan is a 'provident, benefit, superannuation or retirement fund' as that phrase has been interpreted by the relevant authorities. The sole purpose of the Plan is the provision of benefits to, or in respect of, participating employees who: ● cease their employment upon or after reaching retirement age (age 60) ● cease their employment after the satisfaction of certain service requirements ● cease their employment because of death or total and permanent disability, or ● reach age 70, whether or not they have ceased employment. Therefore, the Plan satisfies subparagraph (a)(ii) of the definition of 'superannuation fund for foreign residents' in section 118-520 of the ITAA 1997. The above 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). The Fund provides retirement benefits to its members upon the satisfaction of eligibility requirements based upon their age and years of service which are paid upon and following retirement. It also provides disability benefits and survivors benefits where a member dies before retirement. While the Fund provides for withdrawal from the fund prior to retirement, it is heavily disincentivised with substantial tax applied unless the funds are rolled over to another qualified retirement or pension plan. The Commissioner accepts that the alternate circumstances of access in this case, being death, disability and transfer upon termination of employment, align to the contemplated contingencies of a provident, benefit, superannuation or retirement fund. As such, element 3 above is satisfied. The Fund only provides for retirement, disability and Survivor‘s benefits for resident employees of Country A all of whom are not Australian residents. The possibility of a very small number of members of the Fund being returned residents or becoming Australian residents after ceasing eligible employment is incidental and should not be taken to conclude that the Fund was not established for individuals who are not Australian residents. As such, element 5 above is satisfied. The central management and control of the Fund is carried on outside Australia by a Board of Trustees appointed according to the Code, none of whom is an Australian resident. As such, element 6 above is satisfied. A statement has been provided by the Fund confirming that no amounts have been paid to the Fund, nor set aside to be paid to the Fund, that can be deducted under the ITAA 1997 or the ITAA 1936. Further, no amounts have been paid to the Fund, or set aside or be paid to the Fund, for which a tax offset has been allowed, or would be allowable, under this Act. As such, elements 7 and 8 above are satisfied. Based on the above, the Fund is a superannuation fund for foreign residents as defined in section 118-520 of the ITAA 1997. The Fund receives Australian sourced income in the form of interest and dividends from Australian ASX listed companies. Further, the Fund has provided certification that it is exempt from taxation in Country A, and that it is considered a resident of that country for its taxation purposes. As such, elements 9 and 10 above are satisfied. Accordingly, the Fund will satisfy the requirements for exclusion from liability to interest, dividend and non-share dividend withholding tax under paragraph 128B(3)(jb) of the ITAA 1936. | Summary: The interest and/or dividend income derived by the Fund is non-assessable and non-exempt income of the Fund under section 128D of the ITAA 1936. | Detailed Reasoning - Detailed reasoning: Section 128D of the ITAA 1936 provides: ‘Income other than income to which section 128B applies by virtue of subsection (2A), (2C) or (9C) of that section upon which withholding tax is payable, or upon which withholding tax would, but for paragraph 128B(3)(ga) ,( jb) or (m), section 128F, section 128FA or section 128GB, be payable, is not assessable income and is not exempt income of a person.’ Dividend and interest income derived by the Fund would be subject to withholding tax under subsections 128B(1) and 128B(2) of the ITAA 1936 respectively, but for the operation of the withholding tax exemption under paragraph 128B(3)(jb) of the ITAA 1936. As determined in Question 1 above, the Fund is excluded from liability to interest, dividend and non-share dividend withholding tax under paragraph 128B(3)(jb) of the ITAA 1936 as the Fund is a ‘superannuation fund for foreign residents’ as defined in section 118-520. As paragraph 128B(3)(jb) of the ITAA 1936 is specifically referred to in section 128D of the ITAA 1936 any interest or dividend income derived by the Fund will be considered not assessable not exempt income under section 128D of the ITAA 1936.