Private ruling: Withholding taxes
Date of advice: 31 March 2021
Published: May 2021
Ruling period: 1 July 20XX to 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is Entity A, as trustee of the Fund, excluded from liability to withholding tax on its interest, dividend and non-share dividend income derived in respect of its current investments into Australia under paragraph 128B(3)(jb) of the ITAA 1936? | A1: Yes.

Relevant facts and circumstances: Background The Pension Plan is a defined benefit pension plan for employees of X. It has many members. The Pension Plan and Fund were established outside Australia and governed by statute and the Pension Plan rules. Entity A is the administrator of the Pension Plan and trustee of the Fund. Entity B is responsible for making decisions around plan design and contribution rates. The cash, investments, other assets, liabilities and reserves of Entity A constitute the Fund. Entity A is trustee of the Fund. The Fund is constituted for the sole purpose of paying pension benefits in respect of members in accordance with the Pension Plan rules. The contributions of the employers and of the members, the income from investments plus profits less losses on the sale of investments and any other credits of Entity A in connection with the Pension Plan are deposited in the Fund. The benefits payable under the Pension Plan, the expenses of Entity A that constitute the fees and expenses of administering the Pension Plan, and the costs of Entity B attributable to the Pension Plan are paid out of the Fund. Entity A invests the Fund. Entity A and Entity B Entities A and B are corporations established without share capital. Entity A provides strategic, risk and operational management in serving Pension Plan members and employers, collecting contributions and paying pensions, and investing the Pension Plan funds. Entity B is responsible for decision making with regard to designing affordable pension benefits, setting contribution levels, and determining the composition of its own board and Entity A's board of directors. The statutory objects of Entity A are to act as administrator of the Pension Plan and trustee of the Fund, to advise and assist Entity B and to exercise such other powers and perform such other duties as required under its governing document. The duties performed by Entity A include administering the Pension Plan, paying pensions, establishing investment policies, allocating the assets of the Pension Plan, providing for the actuarial valuation of the Pension Plan, and providing reasonable technical and administrative support for Entity B. Entity A has offices in multiple global cities. However, all significant management and investment decisions are undertaken by Entity A's board of directors located outside of Australia. Investments in Australia Entity A invests the Fund directly into Australian investments and owns a number of Australian assets in its own name. The first entry point into Australia is directly owned by Entity A as trustee of the Fund, and there are no interposed non-resident entities in the investment structure. Description of the Pension Plan Membership A member of the Pension Plan includes employees who undertake full time continuous employment with an eligible employer as listed in the Pension Plan rules. Members remain part of the Pension Plan until either terminating their membership or death. Contributions Employees and employers contribute to the Pension Plan. The contributions to be paid depend on an employee's salary and the contribution rate for the year as set out in the governing regulations. Once an employee reaches 71 years of age, they must start their pension and can no longer make contributions. If a person leaves their previous employer and joins an eligible employer, thereby becoming a Pension Plan member, they may be able to transfer the commuted value of pension benefits accumulated under the previous employer's pension plan to the Pension Plan and receive credited service. Benefits The normal retirement age for members of the Pension Plan is 65 years of age. Some classes of members have a retirement age of 60 years. Members who cease employment within 10 years of their normal retirement age may start an early retirement pension. If a Pension Plan member is no longer employed by an eligible employer, they may choose from a number of options depending on their age and years of credited service. The following are potential benefits available to retirees; • A commuted value benefit • Retirement pension • Early retirement pension • Bridge benefit • A transfer of the commuted value of the pension • A transfer of their service to a new employer's pension plan if the new employer has an agreement in place with the Pension Plan. Other potential benefits receivable include: • Disability waiver benefits • Disability pension • A death benefit to be paid to the surviving spouse, dependent child, designated beneficiary or the estate of the member. • A survivor benefit to an eligible spouse and/or the member's eligible dependent children consisting of either a survivor pension and/or a lump sum payment. Cash refund of the commuted value benefit A member's pension is immediately locked in on joining the Pension Plan. A member immediately begins to earn a pension and is entitled to a benefit. A cash refund of the commuted value of a member's pension may be available in exceptional circumstances. These circumstances include: • when the annual pension to be paid is a very small amount, or • if a member has a shortened life expectancy due to a medical condition of less than two years. The commuted value is the estimated amount of money a member would have to set aside at a point in time, to grow with tax-sheltered investment earnings, to provide the member with a future benefit similar to what the member has earned under the Pension Plan. On receiving a cash refund of the commuted value of the pension, a member is no longer entitled to any benefits under the Pension Plan. Retirement and bridge benefits The benefit to be paid to a member is determined using a statutory formula and by reference to the number of years of credited service, salary, any amounts transferred into the Fund to the credit of the member from other retirement funds, and the age of retirement. Adjustments are made to these numbers based on certain criteria. A retirement pension is paid to a member when a member retires and reaches the normal retirement age. An early retirement pension may be paid to a member within 10 years of their normal retirement age. A member's age and years of service determine whether the pension is an unreduced early retirement pension or a reduced early retirement pension. Subject to the locking in provisions, a deferred benefit may also be paid, where a member is paid either a retirement or early retirement pension. This is for members who were not entitled to a retirement pension at the time of their departure from an eligible employer. A bridge benefit may be payable to members drawing their retirement or early retirement pension up until they reach 65 years of age. On retirement a member receiving a pension will be entitled to a defined amount paid in monthly instalments for the rest of their life. Transfer value A transfer value is the commuted value of pension benefits that would be payable in the future. A member can then have this amount transferred to another registered pension plan, a locked-in registered retirement savings vehicle, or to a financial institution to buy an annuity. A person who elects to transfer his/her commuted value ceases to be a member and is no longer entitled to any benefits under the Pension Plan. Transfer of service When an employee leaves an eligible employer and commences employment with another employer, it may be possible to have the person's years of credited service transferred to the person's new employer's pension plan subject to the locking in provisions. In this event, a person ceases to be a member of the Pension Plan and is no longer entitled to any benefits under the Pension Plan. AVCs In addition to the defined benefit component, the Pension Plan also offers an additional voluntary component (AVC) provision. AVCs are administered separately from the defined benefit component. AVCs are effectively an additional component to the Pension Plan for members that operate like an accumulation fund. Funds in an AVC account are invested by Entity A as part of the Fund and earn the fund's net rate of return. Amounts in an AVC account may be either non-locked in or locked in amounts. Non-locked in amounts may be withdrawn as cash or transferred to another registered pension plan or retirement vehicle. Non-locked in amounts withdrawn as cash are subject to local taxation provisions. Locked-in amounts may only be withdrawn in order to be transferred to other registered pension plans or retirement vehicles, or to purchase additional credited service for the purposes of the defined benefit component of the Pension Plan. The AVC component is only available to members of the Pension Plan. On ceasing membership to the Pension Plan, all amounts in the AVC account must be either transferred or withdrawn. Other facts As Entity A, Entity B, the Pension Plan, and Fund are all established and governed by statute and regulations, they cannot be discontinued unless the statute is repealed. Entity A provided a letter to the Commissioner stating (a) The Fund is an indefinitely continuing fund, (b) the Fund was established in a country other than Australia, (c) the Fund was established and maintained only to provide benefits for individuals who are not Australian residents, (d) the Fund's central management and control is carried on outside of Australia by entities none of whom are Australian residents, (e) no amount paid to the Fund can be deducted under the ITAA 1997 or ITAA 1936, (f) no tax offsets would be allowable for an amount paid to the Fund or set aside for the Fund, and (g) the income of the Fund is not non-assessable non-exempt income of the Fund because of Subdivision 880-C of the ITAA 1997 or Division 880 of the Income Tax (Transitional Provisions) Act 1997 . If the Pension Plan and Fund are to be wound up, the net assets of the Fund net of properly incurred liabilities are used to meet the accrued benefit entitlements of members, former members, and any other persons entitled to a benefit under the Pension Plan before any other distribution is made. The Fund is exempt from income tax in its resident country. Australian investments The Fund has investments in Australian equities. The Australian equity investments of the Fund have the following characteristics: (a) All equity investments are listed on the ASX. (b) The Fund holds less than 10% of the total equity interests on issue of each Australian company or trust in which it invests. (c) The Fund has no involvement in the day to day management of the business of any of the Australian companies or trusts. (d) The Fund has no right to appoint a director to the Board of Directors of the Australian company or equivalent role in a trust. (e) The Fund has no right to representation on any investor representative or advisory committee (or similar) of the Australian company, or equivalent role in a trust. (f) The Fund has no ability to direct or influence the operation of the Australian company or trust outside of the ordinary rights conferred by the equity interest held. (g) In addition to the above, the Fund does not have the ability to direct or influence the operation of the company or trust, or otherwise provide the Fund with anything that would constitute influence under subsection 128B(3CD) of the ITAA 1936. The Fund will receive interest income from Australian investments, along with dividend and non-share dividend income from companies who are residents of Australia for tax purposes.

Relevant legislative provisions: Income Tax Assessment Act 1936 paragraph 128B(3)(jb)

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 that withholding tax, under section 128B of the ITAA 1936, will not be imposed on: (jb) income that: (i) is derived by a non-resident that is a superannuation fund for foreign resident; and (ii) consists of interest, or consists or 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 requirements for the exemption from withholding tax under paragraph 128B(3)(jb) of the ITAA 1936 will be discussed below. Further, from 1 July 2019, the extra requirements in subsection 128B(3CA) of the ITAA 1936 must also be met. | Detailed Reasoning - The Fund is a non-resident: The Fund is not a resident of Australia for tax purposes. The Fund was established outside Australia, and its management is also based outside Australia. Therefore, the Fund satisfies this requirement. | Detailed Reasoning - Superannuation fund for foreign residents: 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. 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 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 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. | Detailed Reasoning - 1. An indefinitely continuing fund: The Fund, consisting of the assets of the Pension Plan, is governed by legislation and the Pension Plan rules. Entity A, as administrator of the Pension Plan and trustee of the Fund is also created by statute. There is no indication that the Fund is to be wound up in the near future. Its actuary and annual reports have projections for the sustainability of the Fund to meet Pension Plan obligations for the foreseeable future. There is sufficient evidence to accept that the Pension Plan will continue to operate in accordance with the relevant governing statutes and Pension Plan rules, and the Fund will continue indefinitely to meet the obligations to pay benefits under the Pension Plan rules. Further, Entity A provided a letter to the Commissioner, which states that the Fund is an indefinitely continuing fund. Therefore, the Fund satisfies this requirement. 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. ATO Interpretative Decision ATO ID 2009/67 Income Tax: Superannuation fund for foreign residents (ATO ID 2009/67) provides 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). The rules of the Pension Plan provide retirement, disability, death and survivor benefits to members of the Pension Plan and their dependents. The Pension Plan is a defined benefit scheme where the benefits paid to the relevant contributor are calculated based on a number of factors defined by the Pension Plan rules, including salary, credited service, and the age of the member drawing benefits. The accumulation component is subject to the same restrictions with respect to use of and access to the monies as the defined benefit component. The Fund meets this objective by providing benefits to members as follows: (i) Normal retirement pension (ii) Early Retirement (iii) Deferred retirement (iv) Disability retirement. (v) Death and Survivor benefits. There are no benefits provided by the Fund to contributors and beneficiaries beyond those as prescribed above and in the Pension Plan rules. The Commissioner accepts that the alternate circumstances of access to the funds, being incapacity, death, the transfer of funds to another retirement fund, and a cash refund of the commuted value in exceptional circumstances align to the contemplated contingencies of a provident, benefit, superannuation or retirement fund. As both the key objective of the Fund and the operation of the Fund have the sole purpose of providing retirement benefits, the Commissioner accepts the Fund is considered to be a 'provident, benefit, superannuation or retirement fund'. Further, all monies managed by Entity A as trustee of the Fund are used solely for the purposes of administering and paying out benefits under the Pension Plan. Therefore, the Fund satisfies this requirement. The Fund was established in and is a tax resident of a foreign country. Therefore, the Fund satisfies this requirement. The Fund was established in a foreign country for the Pension Plan members, being employees of eligible employers. 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 Pension Plan. Therefore, the Fund satisfies this requirement. 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 Pension Plan and Fund together is a pension scheme established in a foreign country by a combination of statute and the Pension Plan rules. It is administered by the Entity A, with Entity B providing oversight. Entity A's objectives are to act as administrator of the Pension Plan, trustee of the Fund, and to advise and assist Entity B. Its duties include administering the pension plans, establishing investment policies, designing, implementing, and reviewing investment strategy and performance, allocating and investing the assets of the pension plans, providing for the actuarial valuation of the pension plans, and provide reasonable technical and administrative support for Entity B. All of these duties are performed in a foreign country by Entity A's representatives. Entity A is a non-resident company. Entity A's Board and Entity B's Board are composed of non-residents of Australia and all of the decisions are undertaken outside Australia. This is supported by the fact that: • The CEO, CFO and Board of directors are all residents of a foreign country. • All the board meetings are predominantly held in a foreign country and significant management and investment decisions are undertaken in a foreign country. Based on these facts, it is reasonable to conclude that the central management and control of the Fund is not exercised in Australia. Therefore, the Fund satisfies this requirement. The contributors to the Fund, consisting of both the employees and employers, are based in a foreign country and make contributions in respect of the employment undertaken in a foreign country. As the contributors to the Fund are based in a foreign country and make contributions in respect of the employment undertaken in a foreign country, the contributions to the Fund are neither eligible for deductions nor allowed as offsets under the Australian tax rules. On the basis that a deduction or tax offset is not available in Australia for amounts contributed to the Fund, the exclusion from qualification as a superannuation fund in s 118-520(2) of the ITAA 1997 does not apply. Therefore, the Fund satisfies 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. | Detailed Reasoning - Consists of interest or dividend and/or non-share dividend 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 dividend income from its direct Australian investments, which are all Australian resident companies. Therefore, the Fund satisfies this requirement. | Detailed Reasoning - The Fund is exempt from income tax in the country in which the non-resident resides: The Fund is exempt from income tax in its resident country. Further, the Pension Plan provided a letter to the Commissioner, whereby the Revenue Authority of the foreign country confirmed that the Pension Plan, and as such, the Fund, is tax exempt. Therefore, the Fund satisfies this requirement. | Detailed Reasoning - Subsection 128B(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 Fund must satisfy the 'portfolio interest test' in relation to the test entity (subsection 128B(3CC) of the ITAA 1936) • The Fund 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 Fund because of: a. Subdivision 880-C of the ITAA 1997, or b. Division 880 of the Income Tax (Transitional Provisions) Act 1997 . 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 Fund holds less than 10% of the total participation interests in each Australian company. Further, the Fund would hold less than 10% of the total participation interests in each Australian company in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936. The Fund 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). Subsection 128B(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 Fund 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 Fund 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 Fund, 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 Fund. Relevantly, in respect of the investments concerned: (a) All equity investments are listed on the ASX. (b) The Fund holds less than X% of the total equity interests on issue of each Australian company or trust in which it invests. (c) The Fund has no involvement in the day to day management of the business of any of the Australian companies or trusts. (d) The Fund has no right to appoint a director to the Board of Directors of the Australian company or equivalent role in a trust. (e) The Fund has no right to representation on any investor representative or advisory committee (or similar) of the Australian company, or equivalent role in a trust. (f) The Fund has no ability to direct or influence the operation of the Australian company or trust outside of the ordinary rights conferred by the equity interest held. (g) In addition to the above, the Fund does not have the ability to direct or influence the operation of the company or trust, or otherwise provide the Fund with anything that would constitute influence under subsection 128B(3CD) of the ITAA 1936. Based upon the above, the Commissioner accepts that the Fund does not have influence of a kind described in subsection 128B(3CD) of the ITAA 1936. The income received by the Fund 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: Entity A, as trustee of the Fund is excluded from withholding tax under paragraph 128B(3)(jb) of the ITAA 1936 in relation to interest, dividend and non-share dividend income derived in respect of its current investments into Australia.

This ruling applies for the following period : | Central management and control (CM&C) | Subsection 118-520(2) of the ITAA 1997 | The Fund satisfies the 'portfolio interest test' | The Fund satisfies the 'influence test' | Otherwise non-assessable non-exempt