Private ruling: Superannuation fund for foreign residents
Date of advice: 22 November 2017
Published: April 2018
Ruling period: Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 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 Income Tax Assessment Act 1936 ( 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: The Fund 1. The Fund is the pension fund for a Company and its affiliated companies that form part of its economic group. 2. The Fund has its registered office in a country that is not Australia. 3. The Articles of Association of the Fund ( Articles of Association ) refer to the objectives of the Fund. This includes that one of the main objectives is to implement pension benefit arrangements. 4. The Articles of Association sets out the income received by the Fund. Income includes pension premiums, income from investments, voluntary deposits, bequests, gifts, value transfers, income received from reinsurance and other income and other revenue. 5. The Articles of Association sets out the expenditure of the Fund. Expenditure includes payment of pensions or other benefits, value transfers, commutation sums, insurance or reinsurance, administration and management costs. 6. The Articles of Association sets out the principles for the investment policy of the Fund. 7. The Articles of Association state that funds not invested by the Fund are deposited into a financial institution in the name of the Fund. 8. The Fund is managed by a Management Board in accordance with the Articles of Association. These Articles of Association set out its composition, duties and powers. 9. The Articles of Association sets out that an independent group is to conduct internal supervision of the Fund, and supervise the policy of the Management Board and the general course of the business of the Fund. 10. The Articles of Association sets out that an Accountability Body is to be used to represent the members of the participants of the Fund and pension beneficiaries. 11. The Articles of Association provides for the dissolution of the Fund. This includes that the Management Board is authorised to dissolve the Fund. The Fund will be dissolved and its assets will be liquidated if all contracts between the Fund and the Employer have ended, unless the Management Board decides otherwise at such time. The Scheme Rules 12. The Fund operates in accordance with the Scheme Rules for the Fund ( Scheme Rules ). 13. The Scheme Rules set out rules around membership. Membership commences on the date of commencement of employment by the employee with the employer. Membership will end on the death of the member, reaching the Target Retirement Date or earlier Retirement Date or on the member leaving the employer’s employment. Membership can be continued in whole or in part during a period of Occupational Disability without the membership ending. 14. The types of pension entitlements are detailed in the Scheme Rules. 15. The Scheme Rules set out conditions as to what age the members can access a pension from the Fund. The Member may opt to have their retirement pension come into payment earlier or later than the Target Retirement Date, but no earlier than the day on which they reach the age of 60 years and no later than the day on which they reach the age of 70 years. Other 16. The Fund will receive interest, along with dividend and non-share dividend income from companies who are residents of Australia for tax purposes. 17. An amount paid to the Fund or set aside for the Fund has not been and cannot be deducted under the Income Tax Assessment Act 1997 ( ITAA 1997 ). 18. A tax offset has not been allowed nor would be allowable for any amount paid to the Fund or set aside for the Fund. 19. The Fund is not a resident of Australia for tax purposes. 20. The Fund is exempt from taxation in accordance with statute in its country of residence as a tax exempt Pension Fund. 21. The Fund is not fiscally transparent for tax purposes in its country of residence.

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(2) of the ITAA 1936), interest income (subsection 128B(3) 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: (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; | Detailed Reasoning - The Fund is a non-resident: The Fund is not a resident of Australia for tax purposes. Therefore, the Fund will satisfy this requirement. | Detailed Reasoning - The Fund is a superannuation fund for foreign residents: 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 Act 1997. Subsection 995-1 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 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. Consequently, 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 this Act, 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 , 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 Articles of Association of the Fund does set out procedures for the dissolution of the Fund; however neither the Scheme Rules nor the Articles of Association have a termination clause or provide any indication that there is any contemplation of the Fund ending at a defined point in time. Therefore, it is accepted the Fund will continue to operate in accordance with the Scheme Rules and the Articles of Association for an indefinite period of time. 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, 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 ● each 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 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). If a fund provides benefits in other circumstances, it will not satisfy the requirement to be a provident, benefit, superannuation or retirement fund. The purpose of the Fund is set out in the Articles of Association. The main objectives of the Fund are to implement pension contracts to provide pension rights and pension entitlements to the members of the Fund. The Fund attempts to achieve these objectives by making investments to make pension payments available for the benefit of members. The Articles of Association set out the expenditure of the Fund which consists of payments of pensions or other benefits, payments relating to value transfers, payments of commutation sums, expenditure for insurance, administration and management. This expenditure is consistent with the character of a superannuation or retirement fund for the provision of specific retirement benefits and payments to members. The circumstances in which a member of the Fund can receive the funds as provided for in the Articles of Association are clearly consistent with those of a provident, benefit, superannuation or retirement fund. The alternate circumstances of access, being early release of pension entitlements, as identified by the Scheme Rules, align to the contemplated contingencies of a provident, benefit, superannuation or retirement fund. As both the objective of the fund and the actual operation of the fund have the sole purpose of providing retirement benefits or benefits in alignment with other contemplated contingencies, the Fund is considered to be a provident, benefit, superannuation or retirement fund. Therefore, the Fund will satisfy this requirement. The Fund was established in a foreign country The Fund was established in a country that is not Australia. Therefore, the Fund will satisfy this requirement. The Fund was established and maintained only to provide benefits for individuals who are not Australian residents The Fund was established in a country that is not Australia for its members whom primarily constitute the employees and former employees of the Company and companies that form part of its economic group. The Fund operates to provide retirement benefits for its members in the country where it is a resident. 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. 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 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, paragraph 6 of the Draft Taxation Ruling TR 2017/D2 Income tax: Foreign Incorporated Companies: Central Management and Control test of residency ( TR 2017/D2 ) states: Central management and control is the control and direction of a company's operations. The key element 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 registered office of the Fund is in a country that is not Australia. The decision making and management of the Fund is undertaken by the Management Board. The Fund is managed by the Management Board in accordance with the Articles of Association. The Management Board is made up of a mixture of Employer’s members, Employee members and Pension Beneficiary members. The objective of the Fund is to provide pensions to employees and former employees whom are residents in the country that the Fund is a resident of. Based on the above, it is reasonable to conclude that the central management and control of the Fund occurs in the country that is not Australia by entities that are not Australian residents. Therefore, the Fund will satisfy 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 will satisfy this requirement. 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. However, the operation of paragraph 128B(3)(jb) of the ITAA 1936 is extended by subsection 128A(3) of the ITAA 1936 which states: 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. Resultantly, the operation of subsection 128A(3) of the ITAA 1936 may extend the exemption where payments of interest, dividends and non-share dividends are made through an Australian flow through trust or a non-resident trust where the fund is presently entitled to the income. The Fund will receive interest income, along with dividend and non-share dividend income from companies who are residents of Australia for tax purposes. Therefore, the Fund will satisfy this requirement. Is exempt from income tax in the country in which the non-resident resides The Fund is exempt from taxation in accordance with laws in its country of residence as a tax exempt Pension Fund. Therefore, the Fund will satisfy this requirement | Detailed Reasoning - Conclusion: As all the requirements of paragraph 128B(3)(jb) of the ITAA 1936 are satisfied, the Fund will be entitled to an exemption under paragraph 128B(3)(jb) of the ITAA 1936. | 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, 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 ITAA1936.

Question 1: 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?