Private ruling: Liability to withholding tax on interest and/or dividend income
Date of advice: 24 May 2019
Published: July 2019
Ruling period: The relevant income year
Date scheme commenced: The commencement of the scheme

Ruling: Q1: Is the Fund 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: Yes | Q2: Is interest and/or dividend income derived from the Fund not assessable and not exempt income of the entity under section 128D of the ITAA 1936? | A2: Yes

Relevant facts and circumstances: The Fund was incorporated in Canada. The Fund’s central management and control is in the foreign jurisdiction. The Fund membership includes active members who are still working and contributing to the Fund, inactive members who are no longer contributing to the Fund but are entitled to receive benefits upon retirement, and retired members and survivors who are currently receiving a pension. The Fund is reviewed by a qualified actuary at least every three years and is subject to the requirements of the applicable laws in the foreign jurisdiction . Participation in the plan is mandatory for all permanent employees of the Employer. Pensionable service is based on a member’s continuous service in a position with the Employer. Pensionable service for part-time employees is pro-rated accordingly. Pensionable service includes service you may have reinstated or transferred into the Fund, and service during which you received Long Term Disability benefits. It does not include service for which you received a refund of contributions. Contributions are made by the employee and the employer. The benefits payable are: ● Normal Retirement Date – age X; ● Unreduced Early Retirement - within certain circumstances an employee may retire before age 65 with no reduction in benefits where certain length of service requirements are met; ● Reduced Early Retirement – Some members may retire at any time after reaching age 55. If they do not meet the rules for Unreduced Early Retirement, their pension will be subject to a reduction; ● Postponed Retirement – Some members may choose to work past the normal retirement date and may continue to contribute to the Fund and accrue benefits until their 65 th birthday. ● Survivor Benefits for spouses; ● Termination Benefits; ● Non-vested Termination – For less than two years of continuous service, the benefit will consist of a refund of the employee’s own contributions (and 50% of the ancillary contributions) to the Fund plus interest. This can be in the form of a taxable lump sum, or tax-free transfer to another registered pension plan, ● Vested Termination – For more than two years of continuous service the benefit is determined according to the Fund formula and must remain locked-in for retirement. This can be in the form of receiving a deferred pension at age 65 or transferring the present value to another recognised pension plan.

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: As all the requirements of paragraph 128B(3)(jb) of the ITAA 1936 are satisfied, the Fund is entitled to an exemption under paragraph 128B(3)(jb) of the ITAA 1936. | Detailed Reasoning - Detailed reasoning: 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 Is the Fund a ‘fund’ and is it an indefinite continuing fund which is a provident, benefit, superannuation or retirement fund? The term 'fund' is not defined in either the ITAA 1997 or the ITAA 1936. Therefore, it should be given its ordinary meaning subject to the context in which it appears and having regard to any relevant case law authorities. The Australian Oxford Dictionary , 2004, Oxford University Press, Melbourne defines the term 'fund' as 1 a permanent stock of something ready to be drawn upon... 2 a stock of money, especially one set apart for a purpose. In Scott v. FC of T (No 2) (1966) 14 ATD 333; (1966) 10 AITR 290 (Scott) , Windeyer J expressed the view that 'fund' in the context of 'superannuation fund' ordinarily meant 'money (or investments) set aside and invested, the surplus income therefrom being capitalised'. Windeyer J's views in Scott were cited with approval by Hill J in Walstern Pty Ltd v. Commissioner of Taxation (2003) 138 FCR 1; 2003 ATC 5076; (2003) 54 ATR 423 who stated that 'for present purposes, the point is the need for "money" or "other property" to constitute a fund'. It is accepted that the Fund will continue to operate in accordance with the rules and regulations for an indefinite period of time. Is the Fund a provident, benefit, superannuation or retirement fund? 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 stated 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. The benefit must be characterised by some future purpose. 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. The Fund provides benefits at retirement to members who are employees who meet certain eligibility criteria for each of the Fund. Upon death, benefits are available to the member or their dependants depending on the situation. A fund member may only receive an early termination payment consisting of their own contributions where employment is terminated with less than two years of continuous service. Therefore, the Fund satisfies the meaning of ‘superannuation fund’ as its sole purpose is to provide a benefit by way of a pension or lump sum (depending on the circumstances) through their investment strategies as outlined Fund’s rules upon retirement, death or impairment. Was the Fund established in a foreign country? The Fund was established in a foreign country. Was the Fund established and is maintained only to provide benefits for individuals who are not Australian residents? The Fund provides benefits to qualifying members who are not Australian residents. It is considered that the possibility of a small number of members being returned residents or becoming Australian residents after ceasing employment is incidental and should not be taken to conclude that the Fund has not been established and is not maintained 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? The Fund’s central management and control is carried on in a foreign country. 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? No amounts have been paid to the Fund, nor set aside to be paid to the Fund, that can be deducted under this Act. Further, no amounts have been paid to the Fund, or set aside or be paid to the Fund, for which a tax offset has been allowed, or would be allowable, under this Act. Consequently, this requirement is satisfied. | Detailed Reasoning - Conclusion: The Fund rules show that the Fund has been established as a genuine pension, superannuation and/or retirement fund solely providing superannuation benefits for non-residents of Australia. It has been set up and maintained outside of Australia by non-residents of Australia. Furthermore, no contributions to the Fund are capable of being claimed as a rebate or deduction under any section of the ITAA 1936 or ITAA 1997. The Fund is exempt from income tax in the country of residence. Therefore, the Fund is entitled to an exemption under paragraph 128B(3)(jb) of the ITAA 1936. | Summary: 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. | 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.’ Dividend and interest income derived by the Fund would be subject to withholding tax under subsections 128B(1) and 128B(2) of the ITAA 1936 respectively, but for the operation of the withholding tax exemption under paragraph 128B(3)(jb) of the ITAA 1936. As paragraph 128B(3)(jb) of the ITAA 1936 is specifically referred to in section 128D of the ITAA 1936 any interest or dividend income derived by the Fund will be considered not assessable not exempt income under section 128D of the ITAA 1936.