Private ruling: Exemption from withholding tax for a superannuation fund for foreign residents
Date of advice: 1 March 2019
Published: May 2019
Ruling period: Year ended 30 June 2018 | Year ended 30 June 2019
Date scheme commenced: 1 July 2017

Ruling: Q1: Is the fund exempt from liability to withholding tax on interest, dividend and non-share dividend income under paragraph 128B(3)(jb) of the ITAA 1936? | A1: Yes. | Q2: Is interest, dividend and non-share dividend income derived by the Fund not assessable and not exempt income of the Fund under section 128D of the ITAA 1936? | A2: Yes.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. The Fund 1. The Fund is a company pension fund that originated and is registered in a foreign country. 2. The Fund executes the pension scheme for a number of companies. 3. The Fund’s operations are specified in their Articles of Association as duly amended. 4. The Fund pays an old age pension to participants and former participants, as well as partner’s and orphan’s pensions to their survivors. 5. All agreement and conditions of the pension scheme are laid down in the Fund’s Pension Regulations (Pension Regulations). The Pension Regulations comply with the provisions of the foreign country’s legislation regarding pensions and other applicable laws and regulations. 6. The object of the fund is to operate as a company pension fund, which collects money for the members, deferred members, pension beneficiaries and other persons entitled to claim funds. The money serves to insure the pension in accordance with the provisions in the Articles of Association and the Regulations. 7. The fund is managed and administered by the Board with the day to day policy of the fund determined by the Board that comprises of ten Board members representing the affiliated companies and members. 8. The Board members, all of whom are not Australian residents, are ultimately responsible for all activities of the Fund including the implementation of the pension scheme. 9. Board meetings are conducted at least four times per year. No meetings are held in Australia. 10. A Certificate of Residence from the foreign country’s Tax Authority declares that: ● The Fund is a resident of the foreign country within the meaning of the relevant Article of the Convention for the avoidance of double taxation between the foreign country and Australia, and ● is subject to income tax, however the income is exempt from taxation in accordance with a specific Article of the foreign country’s Income Tax Act and is a tax exempt pension fund. 11. A Statement from the Chairman and Deputy Chairman of the Fund states that: ● The Fund is an indefinitely continuing fund and a provident, benefit, superannuation or retirement fund. ● The Fund was established in a foreign country and is 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 individuals, 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. 12. The Fund can be dissolved by virtue of a Board resolution. Such a resolution can only be passed at a Board meeting explicitly convened for that purpose and by a majority of at least three quarters of the votes validly cast. 13. The liquidation will be effected in a manner deemed by the Board to be in the best interest of the persons involved in the fund, taking their rights ensuing from the regulations into account. To the greatest extent possible, this will be effected by purchasing pensions from or concluding similar contracts with one or more insurance companies or by transferring the rights and commitments to another pension provider. 14. There are currently no plans for a Board resolution to dissolve the pension fund and no move to call such a resolution is anticipated. Plan Description 15. The pension scheme is compulsory for all employees of the affiliated employers to whom the Fund collective labour agreement applies, or for those employees of the affiliated employers in which the participation in the pension scheme has been agreed upon in the employment contract. 16. Under the pension plan, participants accrue entitlements towards: ● A retirement pension ● A partner’s pension ● An orphan’s pension. 17. Participants of the scheme are also assured a temporary partner’s pension and premium free continuation of their pension if they become disabled. 18. The contribution of participants is calculated as a percentage of the pension base and deducted from the salary by affiliated employers. 19. Participation stops on retirement, upon termination of employment or upon death of the participant. Retirement 20. Participants in the pension plan have the following options available to them upon retirement: ● decide when they would like to retire or elect to partially retire at an earlier date and commence receiving a pension as calculated under the Plan ● exchange some of their accrued entitlements of their retirement pension towards their partner’s pension, and ● elect to vary the pay-out levels of their retirement pension. 21. Pensions are paid out at the end of each month, in monthly instalments of equal size, after all statutory taxes required to be paid have been withheld. Temporary partner’s pension 22. If a participant dies whilst contributing to the pension plan, the partner will be entitled to receive a temporary partner’s pension. This pension will only be released if the partner has not yet reached the required age for receiving a state pension. Partner’s pension 23. The participant accrues partner pension entitlements over the pension base that applies to the participant’s participation. 24. A partner pension will be released starting on the first day of the month of the participant’s death and will be paid until the last day of the month of the partner’s death. Orphan’s pension 25. An orphan’s pension will be released starting on the first day of the month following the month of the participant’s death. Termination 26. If a participant’s employment is terminated before retirement (other than by death or disability), participation in the Fund will also terminate. The participant will, however, retain the entitlements accrued towards their retirement pension, their partner’s pension and the orphan’s pension during their employment. 27. A participant can choose to either leave their accrued pension with the Fund until retirement or take their pension to a new pension provider. Disability 28. If a participant is deemed to have been rendered (partially) disabled, they will continue to partially accrue pension entitlements in a non-contributory fashion according to their pension base and part-time factor. The amount of pension entitlements that continue to accrue will depend both on the degree to which the participant is deemed to have been rendered disabled and whether the participant remains employed with the employer. 29. If a participant remains employed, they will continue to accrue pension entitlements according to the pension base and part-time factor that would have applied had they not been rendered disabled. The Fund’s Investments 30. All Australian investments made by the Fund are held directly and interest and dividend income is received from these investments.

Relevant legislative provisions: Income Tax Assessment Act 1936 subsection 6(1) | Income Tax Assessment Act 1936 paragraph 128A(3) | Income Tax Assessment Act 1936 paragraph 128B(3)(jb) | Income Tax Assessment Act 1936 section 128D | Income Tax Assessment Act 1997 section 118-520 | Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision: Detailed Reasoning - Detailed reasoning: 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 states: (jb) income that: (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 Fund is a non-resident The Fund is not a resident of Australia for tax purposes. Therefore, the Fund will satisfy this requirement. 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. Section 118-520 of the ITAA 1997 states the following: (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. 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. The Fund is an indefinitely continuing 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 , [Online], viewed on 1 February 2018, www.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. The Deed of Amendment states that the fund can be dissolved by virtue of a Board resolution and can be passed only at a meeting convened for that purpose and by a majority of at least three quarters of the votes validly cast. There are currently no plans for a Board resolution to dissolve the pension fund and no move to call such a resolution is anticipated. Therefore, it is accepted that the Fund will continue to operate in accordance with the Rules for an indefinite period of time and will meet the requirement of being an indefinitely continuing fund. The Fund is a provident, benefit, superannuation or retirement fund In Scott v. FCT (No. 2) (1966) 40 ALJR 265; 14 ATD 333, Windeyer J stated (40 ALJR 265 at 278; 14 ATD 333 at 351): There is no definition in the Act of a superannuation fund. The meaning of the term must therefore depend upon ordinary usage, the attributes of a thing thus denominated being those which things ordinarily so described have...the connotation of the phrase in the Act must be determined by one’s general knowledge of the extent of the denotation of the phrase in common parlance...I have come to the conclusion that there is no 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 Mahony v Commissioner of Taxation (1967) 41 ALJR 232; (1967) 14 ATD 519, Kitto J stated: There was no definition in the Act of ‘a provident, benefit or superannuation fund’, and the meaning of the several expressions must therefore be arrived at in light of ordinary usage and with only one piece of assistance to be gathered from the immediate context. Since a fund, if its income was to be exempt under the provision, was separately required to be one established for the benefit of employees, each of the three descriptive words ‘provident’, ‘benefit’ and ‘superannuation’ must be taken to have connoted a purpose narrower than the purpose of conferring benefits, in a completely general sense, upon employees. Precise definition may be difficult, and in any case is unnecessary for present purposes. All that need be recognized 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 employment, 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 in a general sense, but characterized by some specific future purpose. A funeral benefit is a familiar example. In Cameron Brae Pty Limited v FCT (2007) 161 FCR 468; [2007] FCAFC 135; 2007 ATC 4936, the Full Federal Court held that the relevant fund was a superannuation fund for the purposes of former section 82AAE of the ITAA 1936. Jessup J at [106] stated: In answering the question whether the fund was a “superannuation fund” as the term is ordinarily understood, it is, in my view, critical that payments could not have been made out of the fund (other than by way of administration expenses, taxation, etc) save to members of the relevant discretionary class, and save in circumstances which fell within the ordinary understanding of superannuation. A proper characterisation of the fund should, in my view, depend upon the purposes for which the assets and moneys of the fund might have been used rather than upon the quality of the rights of individual members of the fund. If the fund could have been used only to achieve what might be described as a superannuation purpose, I would describe the fund as a “superannuation fund”. That a particular member of a discretionary class might not, ultimately, have received any payment, was not, in my view, disqualifying. ATO Interpretative Decision ATO ID 2009/67 Income Tax: Superannuation fund for foreign residents (ATO ID 2009/67) refers to these authorities to 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 establish 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 is a fund that operates as a company pension fund, which collects money for the members and pension beneficiaries to insure that old age pensions are paid to participants and former participants as well as partner and orphan pensions to their survivors in accordance with the provisions in the Articles of Association and the Regulations. The payment of retirement benefits is allowed upon members reaching the specified retirement ages. Further, the Commissioner accepts that the alternate circumstances of access in this case, being disability and death, align to the contemplated contingencies of a provident, benefit, superannuation or retirement fund. Therefore, the Fund will satisfy this requirement. The Fund was established in a foreign country The Fund was established and is a resident of a foreign country. Therefore, the Fund will satisfy this requirement. The Fund was established and maintained only to provide benefits for individuals who are not Australian residents The Fund was established in a foreign country to provide an old age pension to participants and former participants who are employees of employers based in the foreign country, as well as partner’s and orphan’s pensions to their survivors. 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, in this case, 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 will satisfy this requirement. The Fund’s central management and control is carried on outside Australia by entities none of whom is an Australian resident 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 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 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. Furthermore, paragraphs 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 was founded and is registered in the foreign country. The Fund is managed and administered by the Board comprising of ten Board members. The Board members, all of whom are not Australian residents and are responsible for all fund activities including the implementation of the pension scheme. Board meetings are conducted at least four times per year with all meetings being held outside of Australia. Based on this, it is reasonable to conclude that the central management and control of the Fund occurs in the foreign country by entities that are not Australian residents. Therefore, the Fund will satisfy this requirement. 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 offset has been allowed or is allowable for such an amount An amount paid to the Fund or set aside for the Fund has not been and cannot be deducted under the ITAA 1997. A tax offset has not been allowed nor would be allowable for any amount paid to the Fund or set aside for the Fund. Therefore, the Fund will satisfy this requirement. 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. Consists of interest or dividend and/or non-share dividends paid by a company that is a resident Paragraph 128B(3)(jb) of the ITAA 1936 will only apply to interest, or to dividends and non-share dividends paid by Australian resident companies. The Fund will receive interest income, along with dividend and non-share dividend income from companies who are residents of Australia for tax purposes. Therefore, the Fund will satisfy this requirement. Is exempt from income tax in the country in which the non-resident resides The Fund is exempt from taxation in the foreign country in accordance with the foreign country’s Income Tax Act and is a tax exempt pension fund. Therefore, the Fund will satisfy this requirement. | Detailed Reasoning - Conclusion: As all the requirements of paragraph 128B(3)(jb) of the ITAA 1936 are satisfied, the Fund will be entitled to an exemption under paragraph 128B(3)(jb) of the ITAA 1936. | Detailed Reasoning - Question 2: Is interest, dividend and non-share dividend income derived by the Fund not assessable and not 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. Section 128D of the ITAA 1936 provides that, inter alia , where withholding tax would be payable but for the operation of paragraph 128B(3)(jb) of the ITAA 1936, the income is not assessable income and is not exempt income. The interest, dividend and non-share dividend income derived by the Fund from its Australian investments will not be assessable income or exempt income under section 128D of the ITAA 1936 because the aforementioned income: ● would have been subject to withholding tax, and ● is not exempt from withholding tax under any provision other than paragraph 128B(3)(jb) of the ITAA 1936. | Detailed Reasoning - Conclusion: The interest, dividend and non-share dividend income derived in Australia by the Fund is not assessable and not exempt income of the Fund under section 128D of the ITAA 1936.