Private ruling: Withholding taxes
Date of advice: 23 December 2020
Published: March 2021
Ruling period: 1 July 20XX to 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are the Pension Funds excluded from liability to withholding tax on their interest and/or dividend income derived through Entity A from shares and loan notes they hold in Aus Co acquired prior to 27 March 2018 under paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936) for the Ruling period? | A1: Yes. | Q2: Are the Pension Funds excluded from liability to withholding tax on their interest and/or dividend income derived through Entity A from shares and loan notes they hold in Aus Co acquired after 27 March 2018 under paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)? | A2: No.

Relevant facts and circumstances: Entity A is a non-resident trust created under statute. Its trustee is also created under statute. The trust is governed by a Trust Deed. Entity A is mandated to invest the assets of various State, county, authority, district and municipal retirement systems to assist them in meeting their future pension obligations. In accordance with the Trust Deed, Entity A is established, operated and maintained exclusively for the management, investment and reinvestment of funds provided to it by the Pension Funds. There are X participating Pension Funds that contribute funds to Entity A. Each Pension Fund is established by the law of the foreign State for the purposes of providing retirement benefits to public sector employees. All of the participating Pension Funds, although operating independently, are bound together under one uniform retirement law. Entity A is exempt from income tax in the country in which it resides. All the Pension Funds are also exempt from income tax in the country in which they reside. The Trust Deed prohibits any part of its corpus or income belonging to the Pension Funds from being used for or diverted to any purposes other than for the exclusive benefit of the employees or their beneficiaries who are entitled to benefits under the Pension Fund's rules. The Trust Deed prohibits the assignment by the Pension Funds of any of its rights under the Trust Deed in respect of Entity A. The Pension Funds are permitted by statute only to elect to transfer moneys to Entity A, allocate their deposits among the available investment accounts or withdraw them. The Pension Funds and Entity A are indefinitely continuing funds and do not have a termination date. The Pension Funds and Entity A were established in a foreign country under foreign law. Entity A was established and maintained only to provide benefits for the Pension Funds. The Pension Funds were established and are maintained only to provide benefits for individuals who are not Australian residents. The central management and control of Entity A and the Pension Funds are carried on outside Australia by entities none of whom are Australian residents. An amount paid to or set aside for Entity A or the Pension Funds has not been and cannot be deducted under the ITAA 1997 or ITAA 1936, and a tax offset has not been allowed and is not allowable for such an amount. The income received by Entity A and Pension Funds is not 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 . The Pension Funds are entitled to the income of Entity A as it arises to Entity A. Under the Trust Deed, the trustee has exclusive control and management of Entity A. The title to all assets of Entity A shall at all times be vested in the trustee in a fiduciary capacity who have the power to make, retain and sell investments, and to vote directly or give special proxies or powers of attorney for voting or acting with respect to shares or securities which it holds. Rules of the Pension Funds Each of the Pension Funds was established under foreign law by way of trust deed for the benefit of various public sector employees. Membership of the relevant Pension Fund is a mandatory condition of employment. The Pension Funds are funded by a combination of member and employer contributions, as well as the investment income earned on those contributions. The Pension Funds pay the following types of benefits to their members or their dependants. a. Retirement benefit b. Disability benefit c. Death benefit d. Survivor benefit; or e. Return of contributions To be eligible for a retirement benefit, the relevant member must have been employed by the relevant employer and have accrued XX years of service. On reaching XX years of service, the member becomes a vested member. If this condition has been reached but the member is not yet of retirement age, the member will be entitled to retirement benefits on reaching retirement age, subject to staying a member of the relevant Pension Fund. If a member has not accrued the required years of service, and is not a vested member, on termination or the ending of the member's employment, the member has all their contributions returned plus interest. If the received amount is not transferred to another retirement vehicle, it is subject to a significant federal withholding tax. A member leaving a Pension Fund can also transfer their contributions and service credit to a new fund. On doing so, they are no longer a member of the Pension Fund and lose any entitlement to a retirement benefit. Aus Co Aus Co is an Australian resident company that operates a business in Australia. Aus Co has both shares on issue and has also issued loan notes. As at 27 March 2018, Entity A held X% of the Aus Co shares on issue. Two of the Pension Funds have an indirect participation interest in Aus Co of greater than 10%. All other Pension Funds have indirect participation interests in Aus Co of less than 10%. Currently, Entity A holds X% of the shares in Aus Co, having acquired an additional X% interest in Aus Co after 27 March 2018. Aus Co is governed by its Constitution. The rights of the shareholders in Aus Co are also governed by a Shareholder's Agreement (SHA). The Board of Directors is responsible for managing the business of Aus Co and is entitled to exercise all powers of Aus Co that are not required by Aus Co's Constitution or the SHA to be reserved for Shareholders. Under the Constitution and SHA, each shareholder is entitled to appoint a number of Directors to the Aus Co Board depending on their level of shareholding. Entity A under the arrangement has the ability to, and has appointed two directors due its shareholding of X%. Under the SHA, Aus Co also reserves certain matters for the consideration of its shareholders. Entity A has the capacity, due to the size of its shareholding, to block matters requiring a majority of X% and X%. As at 27 March 2018, Entity A held X% of the Aus Co loan notes on issue at a face value of approximately $X. The face value of the total loan notes on issue at the time were $X. After 27 March 2018, Aus Co issued a further $X in loan notes, resulting in the total loan notes on issue being $X. Entity A increased its holding when the loan notes were issued, resulting in it owning X% of the loan notes on issue at a total value of $X. The loan notes are not convertible to ordinary shares or similar. The terms of the loan notes do not give rise to any rights to Entity A other than covenants that may typically arise on a breach of the terms of the debt interest by Aus Co.

Relevant legislative provisions: Income Tax Assessment Act 1936 subsection 128A(3) | Income Tax Assessment Act 1936 paragraph 128B(3)(jb) | Income Tax Assessment Act 1936 subsection 128B(3C) | Income Tax Assessment Act 1936 subsection 128B(3CD) | Income Tax Assessment Act 1936 section 128D | Income Tax Assessment Act 1997 section 118-520

Reasons for decision: Summary: The Pension Funds are excluded from liability to withholding tax on their interest and/or dividend income derived through Entity A from shares and loan notes they hold in Aus Co acquired prior to 27 March 2018. | 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 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 requirements for the exemption from withholding tax under paragraph 128B(3)(jb) of the ITAA 1936 will be discussed below. It should be noted that the Pension Funds are very similar in their operation and operate under a single uniform retirement law. As such, the reasons provided below will be common to all of the Pension Funds, and to the extent a Pension Fund has circumstances unique to it, these will be addressed separately. | Detailed Reasoning - The Pension Funds are non-residents: Each of the Pension Funds is not a resident of Australia for income tax purposes. The Pension Funds were established under foreign law in a foreign state. Therefore, the Pension Funds satisfy this requirement. | Detailed Reasoning - The Pension Funds are superannuation funds for foreign residents: Superannuation fund for foreign residents is a defined term in the ITAA 1936. Subsection 6(1) of the ITAA 1936 states: superannuation fund for foreign residents has the meaning given by subsection 995-1(1) of the Income Tax Assessment Act 1997. Subsection 995-1(1) of the ITAA 1997 sets out the following: superannuation fund for foreign residents has the meaning given by section 118-520. Section 118-520 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 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 Pension Funds to each be considered superannuation funds for foreign residents for the purposes of paragraph 128B(3)(jb) of the ITAA 1936, it must be established that: • each Pension Fund is an indefinitely continuing fund • each Pension Fund is a provident, benefit, superannuation or retirement fund • each Pension Fund was established in a foreign country • each Pension Fund was established and is maintained only to provide benefits for individuals who are not Australian residents • the central management and control of each of the Pension Funds is carried on outside of Australia by entities none of whom are Australian residents • no amount paid to the Pension Funds or set aside for the Pension Funds 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 Pension Funds or set aside for the Pension Funds. | Detailed Reasoning - The Pension Funds are indefinitely continuing funds: 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 on 1 February 2018, www.macquariedictionary.com.au defines 'indefinitely' and 'continuing' as follows: Indefinite: adjective 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 Each of the Pension Funds has provided evidence that they are an indefinitely continuing fund. Each Pension fund continues to have new members. There is no indication that any of the Pension Funds are to be wound up in the near future, and none of the Pension Funds have a termination date. There is sufficient evidence to accept that each of the Pension Funds will continue to operate for an indefinite period of time. Therefore, the Pension Funds satisfy this requirement. | Detailed Reasoning - Each of the Pension Funds 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, 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 guidance establishes 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 Pension Funds provide retirement, disability, death and survivor benefits to members and their dependents. The Pension Funds also provide for the return of contributions to contributors where their membership has not vested, and the transfer of funds to other pension plans upon termination of employment. There are no benefits drawn from the Pension Funds to contributors and beneficiaries beyond those as prescribed above. 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 return of contributions in very limited circumstances, align to the contemplated contingencies of a provident, benefit, superannuation or retirement fund. All monies of the Pension Funds are amounts used solely for the purposes of administering and paying out benefits. Therefore, the Pension Funds satisfy this requirement. | Detailed Reasoning - The Pension Funds was established in a foreign country: Each of the Pension Funds were established in and are tax residents of a foreign State. Therefore, the Pension Funds satisfy this requirement. | Detailed Reasoning - The Pension Funds were established and are maintained only to provide benefits for individuals who are not Australian residents: Each of the Pension Funds was established in a foreign state for its members, being the various classes of public sector employees at various authority levels. Therefore, the Pension Funds will satisfy this requirement. | Detailed Reasoning - Each of the Pension Funds' 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 Pension Funds are all managed by various boards acting as trustees. The boards constitute legal persons in the foreign state and undertake the management and control of the relevant Pension Fund, including its investment strategy, in the foreign state. Based on these facts, it is clear that all of the key functions of each of the Pension Funds are exercised outside of Australia. As such it is reasonable to conclude that the central management and control of each of the Pension Funds is exercised by entities that are not Australian residents. Therefore, the Pension Funds satisfy this requirement. No amount paid to the Pension Funds or set aside for the Pension Funds 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 Pension Funds or set aside for the Pension Funds 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 Pension Funds or set aside for the Pension Funds. Therefore, the Pension Funds satisfy this requirement. | Detailed Reasoning - The Pension Funds derive the relevant income: In order to be excluded from withholding tax under paragraph 128B(3)(jb) of the ITAA 1936, the Pension Funds must derive the relevant interest and dividend income. This requires an examination of any interposed entities. This includes an examination of the relationship between the Pension Funds and Entity A, and what type of relationship this is for Australian tax purposes. In Harmer & Ors v FC of T 91 ATC 5000; (1991) 173 CLR 264 , Justice French stated that a trust is notably a definition of a relationship by reference to obligations. His Honour went on to state that the four essential elements of a trust are: All four elements of a trust are present in the relationship between Entity A, the trustee of Entity A and the beneficiaries of Entity A, being the Pension Funds. Entity A holds legal title to the investment assets held in Australia for the benefit of and on behalf of the Pension Funds. The trust funds are held solely to meet the obligations of the Pension Funds to pay retirement benefits to its members. The trust property consists of the funds provided by the Pension Funds to the trustee of Entity A for investment, and the holding of this property is subject to a personal obligation on the trustee. Therefore, the relationship between the trustee of Entity A and the Pension Funds constitutes a trust relationship. Income received by Entity A is income of a trust estate. It must then be determined whether the Pension Funds derive the relevant income. Relevant to this analysis is subsection 128A(3) of the ITAA 1936 which provides: For the purposes of this Division, a beneficiary who is presently entitled to a dividend, to interest or to a royalty included in the income of a trust estate shall be deemed to have derived income consisting of that dividend, interest or royalty at the time when he or she became so entitled. It is noted there is difficulty in applying subsection 128A(3) of the ITAA 1936 to a non-resident trust estate such as this. In its purest form, subsection 128A(3) of the ITAA 1936 is intended to apply withholding tax to interest, dividends and royalty income of an Australian trust estate to which a non-resident beneficiary is presently entitled. Lindgren J commented on the policy rationale for this provision in ABB Australia Pty Ltd v FC of T 2007 ATC 4765 : 181. The Commissioner responds to this particular submission by suggesting that the purpose of s128A(3) is to catch a situation in which, while the beneficiary presently entitled is a non-resident, arrangements are made to ensure that the trustee is a resident: without the provision, ensuring that the trustee was a resident would provide a simple and straightforward means of escaping liability to withholding tax. ... 184. I accept the Commissioner's submission that s 128A(3) does not tell against the approach outlined above. But for that provision, a non-resident beneficiary presently entitled would not be within subs (1), (2), (2A) or (2B) of s128B where the trustee was a resident. The policy underlying s128A(3) is, as the Commissioner submits, to prevent circumvention of the withholding tax regime by the interposition of a resident trustee between the resident company and the non-resident beneficiary presently entitled. Notwithstanding the above, the Commissioner has accepted that subsection 128A(3) of the ITAA 1936 can apply to deem beneficiaries of non-resident trust estates to have derived the relevant income in limited circumstances. ATO Interpretative Decision ATO ID 2008/61 Withholding Tax Exemption: interest and dividends paid by an Australian resident and received by a Dutch Stichting as unitholder in an Irish Common Contractual Fund (ATOID 2008/61)is an example of this. In this ATOID, an Irish CCF was found to be a trust for Australian income tax purposes. The terms of the deed states that income of the CCF accrued to unitholders as it arose. As such, the unitholder would have a present legal right to demand and receive payment of the income, and therefore was presently entitled to the dividend and interest income received by the CCF. The requirements in subsection 128A(3) were therefore satisfied, and the unitholder was deemed to have derived the income at the time when it became presently entitled. Being an entity entitled to be excluded from withholding tax under paragraph 128B(3)(jb) of the ITAA 1936, the unitholder was subsequently exempt from withholding tax.. As such, the critical factor is to determine whether the Pension Funds are 'presently entitled' to the income of the Fund. | Detailed Reasoning - Present entitlement: The requirement in subsection 128A(3) of the ITAA 1936 of present entitlement to a share of the income of the trust estate refers to a present vested right to demand and receive payment of the whole or part of what has been received by the trustee as income and, retaining that character in the trustee's hands, is legally available to be distributed to those entitled to it as beneficiaries under the trusts. Having considered the circumstances of Entity A, the Pension Funds, and the Trust Deed, the Commissioner accepts that the Pension Funds are presently entitled to the interest and dividend income as it arises to Entity A. As such, for the purposes of Division 11A of the ITAA 1936 these amounts retain their character when the Pension Funds become presently entitled. Therefore, the Pension Funds are deemed to have derived the relevant dividend and interest income for the purposes of Division 11A of the ITAA 1936. As such, the Pension Funds are considered to have derived dividend and interest income for the purposes of determining a withholding tax liability. | Detailed Reasoning - Consists of interest or dividend and/or non-share dividends 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 to the Fund to which the Pension Funds are presently entitled. Entity A, with its presently entitled Pension Fund beneficiaries, will receive interest income from its investment in Aus Co debt interests, along with dividend income from its shareholding in Aus Co. Aus Co is a resident of Australia for tax purposes. Therefore, the Pension Funds satisfy this requirement. | Detailed Reasoning - Is exempt from income tax in the country in which the non-resident resides: Entity A and the Pension Funds are exempt from income tax in the foreign state in which they reside. Therefore, the Pension Funds satisfy this requirement. | Detailed Reasoning - Conclusion: As all the requirements of paragraph 128B(3)(jb) of the ITAA 1936 are satisfied, each of the Pension Funds will be excluded from withholding tax under paragraph 128B(3)(jb) of the ITAA 1936 in relation to dividend and interest returns paid on the shares and loan notes they hold in Aus Co through Entity A acquired prior to 27 March 2018. | Detailed Reasoning - Question 2: Are the Pension Funds excluded from liability to withholding tax on their interest and/or dividend income derived through Entity A from shares and loan notes they hold in Aus Co acquired after 27 March 2018 under paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)? | Summary: The Pension Funds are not excluded from liability to withholding tax on their interest and/or dividend income derived through Entity A from shares and loan notes they hold in Aus Co acquired after 27 March 2018 because of the application of the portfolio and influence tests in subsections 128B(3CC) and 128B(3CD) of the ITAA 1936. | Detailed Reasoning - Subsection 128(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: i. The superannuation fund for foreign residents must satisfy the 'portfolio interest test' in relation to the test entity (subsection 128B(3CC) of the ITAA 1936) ii. The superannuation fund for foreign residents must not, at the time the income was derived, have influence of a kind described in subsection 128B(3CD) of the ITAA 1936 in relation to the test entity, and iii. The income cannot otherwise be non-assessable non-exempt income because of: a) Subdivision 880-C of the ITAA 1997, or b) Division 880 of the Income Tax (Transitional Provisions) Act 1997 . | Detailed Reasoning - The Pension Funds satisfy the 'portfolio interest test': 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. Subsection 128B(3CB) defines the test entity to be either the entity that paid the interest, dividends or non-share dividends or, if subsection 128A(3) of the ITAA 1936 applies in relation to a resident trust estate, that trust estate. Subsection 995-1(1) of the ITAA 1997 defines total participation interest to have the meaning given by section 960-180 of the ITAA 1997, which states: An entity's total participation interest at a particular time in another entity is the sum of: (a) the entity's *direct participation interest in the other entity at that time; and (b) the entity's *indirect participation interest in the other entity at that time. All of the underlying Pension Funds have an indirect participation interest in the Aus Co assets as defined in subsection 960-185(1) of the ITAA 1997 (as they hold the assets through their interest in Entity A). This means that the total participation interest of each of the underlying Pension Funds will be Entity A's participation interest in the Australian company multiplied by the Pension Funds' proportional interest in Entity A. Entity A holds X% of the shares in Aus Co. Of those, it held X% of those shares prior to 27 March 2018. As such, it is only the additional X% of shares acquired after that date that are subject to the additional requirements. Entity A currently holds X loan notes issued by Aus Co with a face value of $X. Prior to 27 March 2018, it held X loan notes with a face value of $X. Only the loan notes acquired after 27 March 2018 are subject to the new rules. When tracing through to the relevant Pension Funds, two of the Pension Funds each have an indirect participation interest greater than 10% in Aus Co. As such, both of these Pension Funds fail the portfolio test. This means that with respect to the additional shares and loan notes acquired after 27 March 2018, to the extent that they are indirectly held by the two Pension Funds, the dividend and interest income derived from those shares and loan notes will not be exempt from withholding tax under paragraph 128B(3)(jb) of the ITAA 1936 as the portfolio test is not satisfied. The Pension Funds do not have influence of a kind described in subsection 128B(3CD) of the ITAA 1936 in relation to the test entity at the time the income was derived Subsection 128(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 Pension Funds are 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. Typically, the Board of Directors are the relevant decision makers for this purpose. Sub-test 1 also includes situations where the Pension Funds are able to act in concert with others to determine the identity of a relevant decision-maker in the test entity. Law Companion Ruling LCR 2020/3 The superannuation fund for foreign residents withholding tax exemption and sovereign immunity (LCR 2020/3) states in paragraph 18 that the phrase 'acting in concert' was considered by Finkelstein J in Papua New Guinea Dockyard Limited v Adams [2005] FCA 413 at [13] 'Many of the important cases that discuss the meaning of acting in concert are helpfully collected by Barrett J in Bateman v. Newhaven Park Stud Ltd (2004) 49 ACSR 597. These cases show that a person, A, will be acting in concert with another person B, if A engages in conduct (act or omission) in consequence of an agreement or understanding between A and B and the conduct is in pursuance of an objective or purpose which is common to both. It is not as is sometimes suggested necessary to show that the common objective or purpose "has some pejorative element [such as] to circumvent the letter, or perhaps even the spirit, of some other statutory obligation or requirement.' Whether the relevant entity in acting in concert with others is able to appoint a Director requires an examination of all the relevant facts and circumstances. There must be some form of arrangement or understanding, whether explicit or otherwise, under which they are acting (or have agreed to act) in pursuing a common objective. There are two examples provided that demonstrate the breadth of the influence test and the 'acting in concert' requirement. Example 2 in LCR 2020/3 describes the situation where two unrelated parties use a common investment manager. 20. A superannuation fund for foreign residents (SFFR) and a sovereign entity (SE) utilise a common investment manager (IM) to invest in an Australian MIT (Aus Trust). 21. Whilst neither individual investment would obtain a right to a seat on an Advisory Board to Aus Trust, the constituent documents of Aus Trust operate such that IM is able to appoint a member to the advisory Board based on the aggregate investment of SFFR and SE. IM has entered into agreements with both SFFR and SE which govern how IM will appoint the Advisory Board member. 22. The Advisory Board is required to approve decisions in relation to the control and direction of Aus Trust's operations. 23. In this scenario, both SFFR and SE have the requisite level of influence for the purposes of the respective influence tests . Similarly, Example 4.7 of the Explanatory Memorandum of Schedule 4 to the Treasury Law Amendments (Making Sure Foreign Investors Pay Their Fair Share of Tax in Australia and Other Measures) Bill 2018 (EM) demonstrates the 'acting in concert' requirement with respect to the influence test: SWF is a covered sovereign entity that has acquired 4 per cent of the issued units of DEF Unit Trust. SWF has engaged an investment manager, IM Co, to manage its investment in DEF Unit Trust. IM Co has also been engaged as investment manager in respect of a 9 per cent investment in the issued units of DEF Unit Trust by SFFR, a superannuation fund for foreign residents unrelated to SWF. DEF Unit Trust is an Australian resident MIT with a small number of investors. Under the constituent documents of DEF Unit Trust, an investor holding 10 per cent or more of the issued units is entitled to appoint an individual to an Advisory Board of DEF Unit Trust. The Board of Directors of DEF Unit Trust cannot make certain decisions in relation to the control and direction of the Trust's operations without the Advisory Board's approval. The constituent documents of DEF Unit Trust operate such that IM Co is entitled to appoint an individual to the Advisory Board of DEF Unit Trust (as it is the investment manager of a combined 13 per cent holding of the issued units of the Trust). In these circumstances, both SWF and SFFR have influence in relation to the DEF Unit Trust of the kind described in the particular influence test relevant to each entity. Therefore, any payments made by DEF Unit Trust to SWF will not be NANE income under Division 880. In addition, the withholding tax exemption in paragraph 128B(3)(jb) of the ITAA 1936 will not apply to SFFR in respect of interest, dividend and non-share dividend income arising from this investment. Relevantly, both of these examples show that where investors aggregate their interests with other investors (typically using a common investment manager) and gain rights, and exercise said rights, to appoint decision-makers in the Test Entity, this is sufficient to find that all the investors satisfy the influence test. The concerted aggregating of the investors' shareholdings in the Test Entity, and the subsequent exercise of an entitlement that only arises because of that aggregation, is an example of entities 'acting in concert' to have the right to determine Board appointees. The Constitution of Aus Co states that the Directors are responsible for managing the business of Aus Co. As such, most decisions that comprise the control and direction of the company are exercised by the Board. Under the Aus Co Constitution, a shareholder is entitled to appoint a number of directors in accordance with the percentage holding of shares on issue in Aus Co. Relevantly, an entity that holds X% of shares may appoint two directors to the Aus Co Board. The Pension Funds, through Entity A hold X% of the ordinary shares in Aus Co. As such, they collectively gain the right to, and have appointed two directors to the board of Aus Co. When looking at the profile of the Pension Funds investing in Aus Co through Entity A, it is only their investment taken in aggregation that allows Entity A to gain the requisite rights to appoint Directors to the Board. But for the aggregation, each of the Pension Funds could not, of themselves, appoint a Director to the Board. The Pension Funds by law either must or have elected to invest with Entity A. As part of this arrangement, the Pension Funds agree to delegate all investment management responsibility to Entity A. They have explicitly agreed to the terms of investing, and the terms of the Trust Deed which 'hand over' all powers with respect to investment to Entity A's trustee. Where Entity A exercises its powers with respect to its investments, it does so on behalf of the Pension Funds, and with a common objective of making profits for its investors. It is pertinent to note that for the Aus Co investment, the rights that Entity A has under the Aus Co Constitution and SHA to appoint Directors only arise because of the Pension Funds' agreement to co-invest and achieve economies of scale. The Pension Funds individually would not obtain these rights but for their choices to invest together. As such, the Pension Funds satisfies sub-test 1 of the influence test, as when acting in concert with other Pension Funds and Entity A, it provides Entity A with the ability to determine the identity of a relevant person, being the two directors, that make decisions that comprise the control and direction of Aus Co. 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 (whether those directions, instructions or wishes are expressed directly or indirectly or through the member acting in concert with others). In addition to the Board of Directors, some matters are reserved for the shareholders. Entity A, by virtue of the combined holdings of the Pension Funds, holds the ability to effectively block matters requiring X% majorities. Where Entity A blocks these resolutions, the Board must implement decisions in accordance with its wishes. As such, this requirement is satisfied. As such, sub test 2 is satisfied with respect to the investment. Entity A, and therefore the underlying Pension Funds, have influence of a kind described in subsection 128B(3CD) of the ITAA 1936. This means that for the Ruling Period, the dividend and interest income derived from the shares and loan notes issued to Entity A on behalf of the Pension Funds after the 27 March 2018 will be subject to dividend and interest withholding taxes. They will not be amounts exempt from withholding tax under paragraph 128B(3)(jb) of the ITAA 1936. The income received by the Pension Funds is not non-assessable and non-exempt income of the Pension Funds because of Subdivision 880-C of the ITAA 1997 or Division 880 of the Income Tax (Transitional Provisions) Act 1997 The income received by Entity A and the Pension Funds is not 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 . This requirement is therefore satisfied. | Detailed Reasoning - Conclusion: As the Pension Funds have influence as defined by subsection 128B(3CD) of the ITAA 1936 with respect to their Aus Co investment, the dividend and interest withholding tax exemptions under paragraph 128B(3)(jb) of the ITAA 1936 will not apply to the dividend and interest income derived from the shares and loan notes issued by Aus Co that the Pension Funds acquired through Entity A after 27 March 2018.

The trustee who holds a legal or equitable interest in the trust property. | The trust property which must be property capable of being held on trust and which includes a chose in action. | One or more beneficiaries other than the trustee. | A personal obligation on the trustee to deal with the trust property for the benefit of the beneficiaries, which obligation is also annexed to the property.