Private ruling: Superannuation fund for foreign residents – withholding tax exemption
Date of advice: 2 November 2017
Published: March 2018
Ruling period: Year ended 30 June 2017 | Year ended 30 June 2018 | Year ended 30 June 2019 | Year ended 30 June 2020 | Year ended 30 June 2021
Date scheme commenced: 1 July 2016

Ruling: Q1: Is the Master Trust 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: No. | Q2: Is interest and/or dividend income derived from Australia by the Master Trust non-assessable and non-exempt income under section 128D of the ITAA 1936? | A2: No.

Relevant facts and circumstances: 1. The Master Trust is a group trust arrangement. 2. As per the Trust Agreement ( Master Trust Agreement ), the Master Trust consists of the a number of participating plans ( Plans ): 3. The Master Trust Agreement states that “the Plans or the trust maintained under such plans have being directed to adopt the Trust as the funding vehicle of such plans”. 4. The Master Trust Agreement provides details of the establishment of the fund, the benefits provided by the fund and the rules governing the fund. 5. A statement from the trustee of the Master Trust was provided stating that: a. the fund is an indefinitely continuing fund and a provident, benefit superannuation or retirement fund b. the fund was established in a foreign country c. the fund was established, and is maintained, only to provide benefits for individuals who are not Australian residents d. the central management and control of the fund is carried on outside Australia by entities none of whom is an Australian resident e. an amount paid to the fund or set aside for the fund has not been or cannot be deducted under the ITAA 1997, and f. a tax offset has not been allowed or is not allowable for such an amount.

Relevant legislative provisions: 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.

Reasons for decision: Summary: 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; (b) a tax offset has been allowed or is allowable for such an amount | Detailed Reasoning - Is the Master Trust a ‘fund’? and is it an indefinitely continuing fund?: On consideration of the relevant facts, circumstances and the constituent documents of the Master Trust, there is no question that the Master Trust is a ‘fund’ that is indefinitely continuing. | Detailed Reasoning - Is the Master Trust a provident, benefit, superannuation or retirement fund for the purposes of 118-520 of the ITAA 1997?: 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 FCT (No 2) (1996) 40 ALJR 265; 14 ATD 333; 10 AITR 290 ( Scott ), the High Court examined the terms ‘superannuation fund’ and ‘fund’. Justice Windeyer enunciated 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 ), 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 ‘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. | Detailed Reasoning - Application to the facts: The operation of the Master Trust leads to a conclusion that it is not a superannuation fund for foreign residents. It does not operate to provide retirement benefits to its members. It operates as a collective vehicle used to facilitate the investment of a number of entities that may or may not have a superannuation purpose. Therefore, the Master Trust is not a superannuation fund for foreign resident for the purposes of paragraph 128B(3)(jb) of the ITAA 1936. | Detailed Reasoning - Do the Plans in the Master Trust Derive the Income?: Since the Master Trust fails to meet the definition of being a superannuation fund for foreign residents, the only way an exemption can be granted is if it can be shown it is the Plans that actually derive the income, not the Master Trust. A non-resident beneficiary is liable for withholding tax when the beneficiary derives a dividend or interest included in the income of an Australian trust estate (Taxation Ruling IT 2680 Income Tax: withholding tax liability of non-resident beneficiaries of Australian trusts ( IT 2680 )). Subsection 128A(3) of the ITAA 1936 provides that a beneficiary who is presently entitled to income of a trust estate, which includes interest or dividends, shall be deemed to have derived the income consisting of the interest or dividends at the time they became presently entitled to the income of the trust estate that includes that interest or dividends. IT 2680 and ATO Interpretative Decision ATO ID 2008/61 Income Tax: Withholding Tax Exemption: interest and dividends paid by an Australian resident and received by a Dutch Stitchting as unitholder in an Irish Common Contractual Fund ( ATO ID 2008/61 ) make it clear that it is the terms of the trust deed that determines present entitlement in these cases. Therefore, under subsection 128A(3) of the ITAA 1936, a beneficiary in the Master Trust will only be deemed to have derived the interest and dividends when it is presently entitled to the income from the Master Trust that includes that interest or dividend income. While present entitlement is not defined in the legislation, numerous court cases have developed the requirements needed to show present entitlement ( Harmer v Federal Commissioner of Taxation (1991) 22 ATR 726 at 729,730, Taylor v Federal Commissioner of Taxation (1970) 110 CLR 444 at 452). A beneficiary of a trust becomes presently entitled to income from the trust if all of the following requirements are met: ● the relevant income is legally available for distribution ● the beneficiary has an absolutely vested beneficial interest in possession in the whole of the relevant income, and ● the beneficiary would succeed in an action to recover the income from the trustees ignoring for this point the existence of any legal disability from giving a valid discharge to the trustees. For the purposes of determining whether the fund derives the income subject to withholding tax, the liability to withholding comes into existence at the time the payment is made to a non-resident. At the time payments are made from the Australian entities, it does not appear that the Plans would be presently entitled to any income of the Master Trust that includes that interest and dividend income. The provisions of the Master Trust Agreement strongly indicate that valuations are not contemporaneously done when Australian dividend and interest income would be derived. For the exemption to be granted, it must be shown that the beneficiaries in this scenario are presently entitled at the time the liability to withholding exists. The operation of the Master Trust is that the contributions of the participating Plans are pooled and invested as the Trust Funds. The Trust Funds receive all the income and pay all expenses and disbursements. The Plans would not have present entitlement to the income earned on the investments of the Master Trust. More accurately, the Plans have an interest in the Trust Funds which will be valued monthly or as required. This can be contrasted with the funds involved in ATO ID 2008/61 where it was found that any interest or dividend income accrued to the unit holder as it arose. The Master Trust Agreement in this case does not allow the Plans to accrue the income as it arises. Accordingly the Master Trust will not be entitled to an exemption under paragraph 128B(3)(jb) of the ITAA 1936. | Detailed Reasoning - Question 2: Section 128D of the ITAA 1936 provides that interest and dividend income that is excluded from withholding tax pursuant to paragraph 128B(3)(jb) of the ITAA 1936 is not assessable income. As the Master Trust will not be entitled to an exemption under paragraph 128B(3)(jb) of the ITAA 1936, the interest or dividend income derived by the Master Trust will not be considered non-assessable and non-exempt income under section 128D of the ITAA 1936.