Private ruling: Foreign superannuation funds
Date of advice: 15 April 2019
Published: June 2019
Ruling period: Income year ended 30 June 2019
Date scheme commenced: Income year ended 30 June 2019

Ruling: Q1: Is the Education Fund (the Fund) excluded from liability to withholding tax on its interest, dividend and non-share dividend income under paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: No. | 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 was established in a country outside of Australia and the Fund’s administrator was incorporated in that country. The Fund is in receipt of dividend income from companies who are resident of Australia for tax purposes. The Fund offers savings plans for future educational expenses of a nominated person. The plans allow participants to save for the cost of their nominated persons’ future university or college fees and dormitory accommodation. The amount payable under a plan is calculated based on the age of the nominated person when the plan is purchased. The Fund invests the payments made by participants. A participant can terminate their plan and on termination the Fund will refund the balance of the participant’s plan.


Reasons for decision: Summary: The Fund is not excluded from liability to withholding tax on its interest, dividend and non-share dividend income under paragraph 128B(3)(jb) of the ITAA 1936. | 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(4) of the ITAA 1936), interest income (subsection 128B(5) 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; Whether the Fund is ‘a non-resident that is a superannuation fund for foreign residents’ for the purposes of paragraph 128B(3)(jb) of the ITAA 1936 is considered below. Is the Fund a non-resident? The Fund is not a resident of Australia for tax purposes. Is the Fund 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 (b) it was established, and is maintained at that time, only to provide benefits for individuals who are not Australian residents; and (c) 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: (a) the Fund is an indefinitely continuing fund (b) the Fund is a provident, benefit, superannuation or retirement fund (c) the Fund was established in a foreign country (d) the Fund was established and maintained only to provide benefits for individuals who are not Australian residents (e) the central management and control of the Fund is carried on outside of Australia by entities none of whom are Australian residents (f) no amount paid to the Fund or set aside for the Fund has been or can be deducted under this Act, and (g) no tax offsets have been allowed or would be allowable for an amount paid to the Fund or set aside for the Fund. Except for (b) above, there was no information from your application to indicate that those other elements have not been met. Thus, the only issue that needs to be considered is whether the Fund is a provident, benefit, superannuation or retirement fund. 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. 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 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). If a fund provides benefits in other circumstances, it will not satisfy the requirement to be a provident, benefit, superannuation or retirement fund. In the case of the Fund, it is a savings plan for future educational expenses of a nominated person. It is apparent that the Fund was not created to grant pensions and other benefits to pension beneficiaries and persons with pension entitlements. Furthermore, the circumstances in which a nominated person of a plan can use the benefits provided by the Fund under the plan are clearly inconsistent with those of a provident, benefit, superannuation or retirement fund as they are not provided after attaining a retirement age or ‘contemplated contingencies’ such as death. For example, benefits are payable when the nominated person becomes liable to pay university fees. As both the key objective of the Fund and the true operation of the Fund do not have the sole purpose of providing retirement benefits, the Fund is not considered to be a provident, benefit, superannuation or retirement fund. Therefore, the Fund will not satisfy this requirement of the definition of a superannuation fund for foreign residents. Because the Fund fails to satisfy all of the requirements of the definition of superannuation fund for foreign residents the Fund is not a superannuation fund for foreign residents. Failing this means that the Fund does not satisfy all the requirements of paragraph 128B(3)(jb) of the ITAA 1936. Accordingly, the Fund is not 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? | Summary: Interest, dividend and non-share dividend income derived 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.’ Because dividend and interest income derived by the Fund is subject to withholding tax under subsections 128B(1) and 128B(2) of the ITAA 1936 respectively and is payable, any interest, dividend or non-share dividend income derived by the Fund will be not assessable and not exempt income of the Fund under section 128D of the ITAA 1936.

Question 1: Is the Fund excluded from liability to withholding tax on its interest, dividend and non-share dividend income under paragraph 128B(3)(jb) of the ITAA 1936?