Private ruling: International issues - foreign entities - foreign superannuation funds
Date of advice: 26 September 2018
Published: November 2018
Ruling period: Year ended 30 June 2017 | Year ended 30 June 2018 | Year ended 30 June 2019
Date scheme commenced: 1 July 2016

Ruling: Q1: Is the Fund excluded from liability to withholding tax on its interest and/or dividend income 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 by the Fund not assessable and not exempt income of the Fund under section 128D of ITAA 1936? | A2: Yes

Relevant facts and circumstances: 1. An institution (the Institution), created under and governed by the laws of a foreign country (the foreign country), established a fund (the Fund) for its employees. 2. A plan (the Plan) details the establishment of the Fund, the benefits provided by the Fund and the rules governing the Fund. Administration of Fund and Plan 3. The Plan states that: a. Administration of the Fund is vested in trustees resident in the foreign country. b. The administrator of the Plan is the Institution, which makes decisions on the operation of the Plan, and may amend or discontinue the Plan as its board (the Board) may determine. c. The Plan is intended to remain indefinitely in force. d. The Board shall consist of official, internal, external and honorary members of the Institution, and the majority of the Board are to be citizens of the foreign country. Membership and Contributions 4. The Plan outlines when a member of the Fund or the Institution is required to contribute to the Fund, and provides for the making of additional voluntary contributions. Entitlement to Benefits 5. The Fund provides benefits on a money purchase basis. 6. All contributions by members and the Institution for the provision of benefits under the Plan are deposited in the Fund, and benefits are paid from the Fund. 7. Under the Plan: a. A member who retires at 65 may be entitled to a pension, and can elect to have early pension payments at age 55; b. A member who becomes permanently and totally disabled may be entitled to receive benefits under a salary plan; c. A member may be entitled to benefits due to termination of continuous service with the Institution where the member: i. has completed an extended period (i.e. ten years) of continuous service with the Institution and upon attaining the age of 45; ii. has made additional voluntary contributions, in which case the member may receive a lump sum return of those contributions. d. In the event of a member’s death, an eligible spouse, beneficiary, dependant or the member’s estate may be entitled to benefits in accordance with the Plan. 8. We were provided a letter issued by the Institution confirming about the Fund: a. The entity is an indefinitely continuing fund and a provident, benefit, superannuation or retirement fund; b. The entity was established in a foreign country; c. The entity was established, and is maintained, only to provide benefits for individuals who are not Australian residents; d. The central management and control of the entity is carried on outside Australia by entities none of whom is an Australian resident; e. An amount paid to the entity or set aside for the entity has not been or cannot be deducted under the ITAA 1997; and f. A tax offset has not been allowed or is not allowable for such an amount. 9. Letters issued by the government of the foreign country confirm that the Fund is a registered pension fund in the foreign country, and is therefore exempt from tax in the foreign country. 10. The Fund invested in Australia by purchasing publicly listed companies shares from the stock exchanges. The Fund invests directly and there are no interposed entities used by the Fund to invest into these Australian assets.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 128B | Income Tax Assessment Act 1936 paragraph 128B(3)(jb) | Income Tax Assessment Act 1936 section 128D | Income Tax Assessment Act 1997 section 995-1 | Income Tax Assessment Act 1997 section 118-520

Reasons for decision: Detailed Reasoning - Detailed reasoning: For the financial years ended 30 June 2008 and onwards, paragraph 128B(3)(jb) 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 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 entity/plan a ‘fund’ and is it an indefinite continuing 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.’ The Fund is a ‘fund’ for the purposes of section 118-520 as money and investments are set aside for a particular purpose. The Institution administers the Plan and maintains the Plan indefinitely. | Detailed Reasoning - Is the entity/plan 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, 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. Perusal of the Plan indicates the Fund is a ‘provident, benefit, superannuation or retirement fund.’ In particular, the Fund provides benefits to employees of the Institution. The Fund is administered by the trustees, but subject to pension benefits laws with respect to the investment of such funds. The benefits are provided on a money purchase basis subject to a minimum guarantee based on earnings and years of service. Under the Plan, participating members generally are only entitled to benefits at age 65 or above or from an earlier retirement date (at least age 55). Otherwise, a member – or eligible spouse, beneficiary, dependant or estate of the member, as the case may be – is entitled to benefits only in specified circumstances, such as on the member becoming permanently and totally disabled or on the death of the member. The entitlement to benefits on termination is based on continuous service with the Institution, and would not be considered inconsistent with the Fund being a ‘provident, benefit or superannuation fund.’ Based on the Plan, the money and investments of the Fund do not appear to be administered for a purpose other than providing the above benefits. Accordingly, the Fund is a ‘provident, benefit, superannuation or retirement fund.’ | Detailed Reasoning - Was the entity/plan established in a foreign country?: According to the Plan, the Institution, created and governed under the laws of the foreign country, established the Fund for its employees. Based on this information, it can reasonably be concluded that the Fund was established in the foreign country. | Detailed Reasoning - Was the entity/plan established and is maintained only to provide benefits for individuals who are not Australian residents?: The Fund is established and maintained to provide benefits for employees of the Institution. Based on this, it can reasonably be concluded that the Fund was established and is maintained only to provide benefits for individuals who are not Australian residents. | Detailed Reasoning - The entity/plans’ 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 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 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 strategic and high level decision making processes and activities of the Fund may be carried out by the trustees or the Board, pursuant to their administrative responsibilities. The trustees are comprised of persons each of whom shall be a resident in the foreign country. The Board shall consist of official, external, internal and honourary members of the Institution. The majority of the Board are to be citizens of the foreign country. Based on the above information, it is reasonable to conclude that the central management and control of the Fund occurs in the foreign country by entities that are not 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 offset has been allowed or is allowable for such an amount? We were provided a letter issued by the Institution confirming that: ● 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. | Detailed Reasoning - Conclusion: As the elements in section 118-520 are satisfied, the Fund is a ‘superannuation fund for foreign residents.’ | Detailed Reasoning - Is the Fund excluded from liability to interest and dividend withholding tax under paragraph 128B(3)(jb)?: Based on the information provided, the other elements in paragraph 128B(3)(jb) are satisfied. Australian interest and dividends are ‘derived’ by a fund that is a non-resident. We were also provided letters issued by the foreign country’s government confirming that the Fund is exempt from tax in the foreign country for the relevant years. Accordingly, income consisting of interest and dividends derived from Australia is excluded from liability to interest and dividend withholding tax under paragraph 128B(3)(jb). | Detailed Reasoning - Question 2: Is interest and/or dividend income derived by the Fund not assessable and not exempt income of the Fund under section 128D of ITAA 1936? | Summary: The interest and/or dividend income derived by the Fund is not assessable and not exempt income of the Fund under section 128D of ITAA 1936. | Detailed Reasoning - Detailed Reasoning: Section 128D 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) respectively, but for the operation of the withholding tax exemption under paragraph 128B(3)(jb). As paragraph 128B(3)(jb) is specifically referred to in section 128D, any interest or dividend income derived by the Fund will be considered not assessable not exempt income under section 128D.

Reasons for decision: Legislative references in this Ruling are to provisions of the ITAA 1936, or to provisions of the ITAA 1997 unless otherwise indicated. | Question 1: Is the Fund excluded from liability to withholding tax on its interest and/or dividend income from Australia under paragraph 128B(3)(jb) of the ITAA 1936?