Private ruling: Foreign Super Fund - Exemption from Income tax/Withholding tax
Date of advice: 5 September 2017
Published: December 2017
Ruling period: Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016 | Year ended 30 June 2017 | Year ending 30 June 2018 | Year ending 30 June 2019 | Year ending 30 June 2020 | Year ending 30 June 2021
Date scheme commenced: 1 July 2013

Ruling: Q1: Is the Plan 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 Plan not assessable and not exempt income under section 128D of the ITAA 1936? | A2: No

Relevant facts and circumstances: The applicant has applied for a private ruling for a superannuation fund for foreign residents. The application includes the following documentation: ● Letter from Foreign Country X tax authorities stating that the Plan is exempt from income tax in the Foreign Country X and is also a resident of the Foreign Country X for the purposes of taxation. ● A statement from the trustee of the fund confirming that: ● the fund is an indefinitely continuing fund and 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 Australia by entities none of whom is an Australian resident, ● an amount paid to the fund or set aside for the fund has not been or cannot be deducted under the Income Tax Assessment Act 1997 (ITAA 1997) and ● a tax offset has not been allowed or is not allowable for such an amount. ● A copy of the Plan Financial Statements for year ended 31 December 2013 (2013 Report). ● A copy of the Plan Financial Statements for year ended 31 December 2014 (2014 Report). ● A copy of the Plan Financial Statements for year ended 31 December 2015 (2015 Report). The Plan is a defined contribution plan established by the Company. Employees of the Company are eligible to participate in the Plan. Generally, participants are eligible to receive Company matching contributions. Generally all full and part-time employees with 12 months of initial service who have 1,000 annual service hours with the Company are eligible to receive benefits. Financial Reports provide that participants may borrow, from their fund accounts; principal and interest is paid rateably through payroll deductions. A Plan Summary Plan Description (the Summary) was obtained via the Plan website. The plan allows participants to contribute a portion of their pay to accounts; the plan also allows Employer to make matching contributions. Participants’ contributions, any employer contributions, and other contributions (such as rollover contributions) are held in separate accounts within a member’s account for bookkeeping purposes. The Summary provides information in relation to Payment to Participant after Termination; payment can be made as soon as administratively practicable after terminating employment with the Company. If the balance is less than the threshold, a lump sum payment will be made to a participant as soon as possible, whether or not making a request for payment. If a request payment made, a participant may elect either (i) to have the lump sum paid directly, (ii) to roll over the lump sum to another qualified plan, or (iii) to roll over a portion of the lump sum payment to another qualified plan and to have the balance of the payment paid directly to a participant. A participant must request payment if the balance in the Plan at the time of payment is greater than the threshold. The Summary provides information in relation to Payment during Employment. Participants may request an in-service payment. Such payments may be for one of the following reasons: ● to pay large uninsured medical expenses ● to prevent eviction from or foreclosure on the principal residence; ● to purchase principal residence; ● to pay for post-secondary education expenses of a participant, spouse, domestic partner or any legal dependent; or ● for any purpose if age fifty (50). The Summary provides information in relation to Loans. It confirms that a participant can obtain a loan from the Plan if actively employed by the Company.

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: 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. 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 | Detailed Reasoning - Is the Plan a ‘fund’? and is it an indefinite continuing fund?: In order to consider the application of Section 118-520 of the ITAA 1997, we must first determine if the Plan is a ‘fund’ and is it an indefinite continuing fund? On consideration of the details of the fund there is no question that the Plan is a ‘fund’ that is indefinite and continuing. | Detailed Reasoning - Is the Plan 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 , 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 case), 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. In this case, it suggests that the Plan has not been established for the sole purpose of meeting one of the specified purposes. The Summary provides that payment can be made as soon as administratively practicable after terminating employment with the Company; the Summary also provides information in relation to Payment during Employment. Participants may request an in-service payment. There are no listed conditions or restrictions in the Summary. Furthermore, participants may borrow money from the Plan. It is considered that due to the abovementioned benefits, the Plan will not meet the requirements to be considered a provident, benefit, superannuation or retirement fund. The lending of money is not in line with the sole purpose of a fund of this nature and does not align with the supply of benefits on reaching a specified condition such as reaching retirement age or due to an unforeseen circumstance such as disablement. The ability for employees to request an in-service payment from profit sharing account and access their full benefit on cessation of employment without any listed conditions or restrictions is outside of the sole purpose of a fund meeting the definition. Accordingly, the Plan is not a superannuation fund for foreign residents and the interest and/or dividend income of the fund is not excluded from withholding tax and will not be non-assessable non-exempt income.