Private ruling: International issues – Foreign entities – Foreign superannuation funds
Date of advice: 26 March 2019
Published: May 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
Date scheme commenced: 1 July 20XX

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 was established in and is a resident of a country that is not Australia. 2. The Trustee of the Fund was established in, and has its registered office in, a country that is not Australia, where the Trustee’s Board meets. 3. The Trustee’s Board consists of directors appointed by the Fund. 4. The governing documents of the Fund are the Rules and Deeds. 5. The principal sponsoring employer is located in a country that is not Australia. 6. An administrator has been appointed by the Trustee to administer the Fund on a day to day basis. The administrator is based in a country that is not Australia. 7. The Fund is a defined benefit pension scheme which delivers a specified income for life based on a member’s pensionable salary and length of pensionable service for employees and former employees and their dependants. In order to provide these benefits contributions are required from members and from the employer. If these monies are insufficient, from time to time, the employer is required to make additional contributions to the Fund to cover the anticipated cost of paying future benefits. 8. The purpose of the Fund is to provide defined benefits to its members in the event of retirement, death and ill-health. The payment of retirement benefits to the members is allowed upon members reaching the specified retirement age. Further, the Fund only allows for transfers to another pension scheme, or to a member’s own registered personal pension plan. Besides early retirement or early access of which access is still capped at above 50 years, ill-health and death benefits, there are no provisions for members to access funds prior to retirement. 9. The Fund is closed to new members. However, it does not have a fixed or specified life and is intended to remain in place to continue to pay these pensions and benefits to its existing members. 10. The Fund has confirmed the below: ● An amount paid to the entity or set aside for the entity has not been or cannot be deducted under the ITAA 1997, and ● A tax offset has not been allowed or is not allowable for such an amount. Investments 11. The investment objective of the Fund is to maintain an investment portfolio with appropriate liquidity which will generate investment returns to meet, together with future contributions, the benefits payable under the Trust Deed and Rules as they fall due. 12. The Trustee has appointed a number of Investment Managers to manage the Fund’s assets. These investments are beneficially held by the Fund. 13. The Fund derives interest and dividend income paid by Australian companies. 14. All of the Fund’s Australian investments are listed stocks and bonds.

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 includes: (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, an entity which is resident of and exempt from tax in a country that is not Australia, derives interest and dividends paid by Australian companies. As such, the key consideration in determining whether the Fund is exempt from liability to withholding tax is whether the Fund is a non-resident that is a superannuation fund for foreign residents for the purposes of paragraph 128B(3)(jb)(i) of the ITAA 1936. Non-resident that is a superannuation fund for foreign residents The Fund is not a resident of Australia for tax purposes. As such, it satisfies the first requirement of paragraph 128B(3)(jb)(i) of the ITAA 1936. The term ‘superannuation fund for foreign residents’ is a defined term in the ITAA 1936. Section 6 of the ITAA 1936 states: superannuation fund for foreign residents has the meaning given by subsection 995-1(1) of the Income Tax Assessment 1997. Subsection 995-1(1) of the ITAA 1997 sets out that: superannuation fund for foreign residents has the meaning given by section 118-520. Section 188-520 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 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. 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 23 October 2017, www.macquariedictionary.com.au defines ‘indefinitely’ and ‘continuing’ as follows: Indefinite: 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 Fund was established to provide defined benefits to its members. Although the Fund is closed to new members, it does not have a fixed or specified life and is intended to remain in place to continue to pay these pensions and benefits to its existing members. Therefore, this requirement is satisfied. 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 ( Cameron Brae ), 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 passages 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 purpose of the Fund is to provide defined benefits to its members in the event of retirement, death and ill-health. The payment of retirement benefits to the members is allowed upon members reaching the specified retirement age. Further, the Fund only allows for transfers to another pension scheme, or to a member’s own registered personal pension plan. Besides early retirement or early access of which access is still capped at above 50 years, ill-health and death benefits, there are no provisions for members to access funds prior to retirement. The Commissioner accepts that the alternate circumstances of access in this case align to the contemplated contingencies of a provident, benefit, superannuation or retirement fund. As per the decision in Cameron Brae, the purpose of the Fund is solely to achieve a superannuation purpose and it is therefore considered a provident, benefit, superannuation or retirement fund. The Fund was established in a foreign country The Fund was established in a country that is not Australia. Therefore, the Fund satisfies this requirement. The Fund was established and maintained only to provide benefits for individuals who are not Australian residents The Fund was established as a retirement system providing defined benefits to employees, former employees and their dependants of the employer. It was not established and is not maintained to provide benefits to Australian residents. 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. As such, this requirement is satisfied. 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 is administered and controlled in a country that is not Australia, with the registered office in a country that is not Australia where the Board meets. This is also the location of the administration of the Fund. As such, there is no suggestion that the central management and control of the Fund resides in Australia. Therefore, the Fund satisfies 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 satisfies this requirement. As the above requirements have been met, the Fund is a superannuation fund for foreign residents as defined by section 118-520 of the ITAA 1997 and is non-resident that is a superannuation fund for foreign residents for the purposes of paragraph 128B(3)(jb)(i) of the ITAA 1936. | Detailed Reasoning - Conclusion: As all the requirements of paragraph 128B(3)(jb) of the ITAA 1936 are satisfied, the Fund will be entitled to the exemption under paragraph 128B(3)(jb) of the ITAA 1936 in relation to the interest, dividend and non-share dividend income that it derives from Australia. | 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 - Answer: Yes. | 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 but for paragraph 128B(3)(jb) of the ITAA 1936, 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.