Private ruling: Withholding tax exemption
Date of advice: 25 September 2020
Published: November 2020
Ruling period: Year ending 30 June 20XX to 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is the Fund excluded from liability to withholding tax on interest, dividend and non-share dividend income derived from its investment in accordance with paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: Yes

Relevant facts and circumstances: The Fund was established in a foreign country and continues to be a resident of the foreign country. The Fund must comply with the pension act and its policy regulation in its foreign country. The Fund's income is exempt from taxation in its foreign country. The primary objective of the Fund us to protect members, former members, pension beneficiaries, and other interested parties. Members can only access benefits under a normal retirement pension, partners pension, orphans' pension, or in situations of occupational disability. Other than on their death, members can only receive a benefit prior to turning 65 in situations of occupational disability. Management of Investments The Fund is actively managed by Fund manager that is also based in the foreign country. The Fund manager performs discretionary portfolio management and provides investment advice. The Fund is invested in Australian assets via a number of Sub Funds. A clause under the general terms and conditions of the management and custody of the Fund says that: the balance of any income or gains derived by Participants (paid, realised or accrued) on Fund Assets and Fund Obligations, as received (or receivable) by the Title Holder on behalf and for the benefit of the Participants , will (when paid, respectively received) be invested in the Fund, whether as premium on existing Participations or in consideration for new Participations to be issued to the relevant Participants as reasonably determined by the Fund Manager, unless a Participant has requested the Title Holder by written notice at least 30 days in advance that he does not wish to invest such balance of income or gains in the Fund (in which case such balance will be transferred to an account in the name of the Participant within 60 days of receipt by the Title Holder). The Fund is financed by the contribution of the employer, self-employed person, members, or other persons that must pay the Fund. The Funds assets consist of contributions, income from investments and other income. The Fund's investment strategy of its Australian assets is to primarily invest in stocks and shares that are listed on the Australian Securities Exchange (ASX), and to hold less than a 10% in any one entity . The total participation interest in the majority of these stocks and shares is less than 1% The Australian equity investments of the Fund have the following characteristics ('Equity Characteristics'): a. All debt and equity investments are listed on the ASX. b. The Fund holds less than 10% of the total equity interests on issue of each Australian company or trust. c. The Fund has no involvement in the day to day management of the business of any of the Australian companies or trusts. d. The Fund has no right to appoint a director to the Board of Directors of the Australian company or equivalent role in a trust. e. The Fund has no right to representation on any investor representative or advisory committee (or similar) of the Australian company, or equivalent role in a trust. f. The Fund has no ability to direct or influence the operation of the Australian company or trust outside of the ordinary rights conferred by the equity interest held.

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

Reasons for decision: Detailed Reasoning - Detailed Reasoning: Broadly, paragraph 128B(3)(jb) of the ITAA 1936 provides an exclusion from withholding tax for interest, dividends and non-share dividends derived by a superannuation fund for foreign residents (subject to the satisfaction of certain conditions). For the exclusion to apply, the interest, dividend and/or non-share dividend income must be: · derived by a superannuation fund for foreign residents (as defined in section 118-520 of the ITAA 1997), and · exempt from income tax in the country in which the superannuation fund for foreign residents arise. Further, from 1 July 2019, the extra requirements in subsection 128B(3CA) of the ITAA 1936 must also be met. Each of the requirements of paragraph 128B(3)(jb) will be considered below. | Detailed Reasoning - The Fund is a non-resident: The Fund is a resident of a foreign state. Therefore, the Fund satisfied this requirement. | Detailed Reasoning - Superannuation fund for foreign residents: Section 118-520 of the ITAA 1997 provides: (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. 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'. In this case, the Fund aims to protect its Members, Former Members, Pension Beneficiates and other interested parties against the financial consequences of old age, invalidity and death. The Fund is financed by contributions of the employer, self-employed Person, member, or other persons that must pay the Fund. There is no indication that there is an intention for the Fund to end at a definite point in time. Therefore, the Fund satisfies the requirement that it must be an indefinitely continuing fund. The phrase 'provident, benefit, superannuation or retirement fund' under subparagraph 118-520(1)(a)(ii) of the ITAA 1997 is not defined in either the ITAA 1997 or the ITAA 1936. 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). 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). The only circumstances that a member of the Fund may directly be able to receive benefits or payments from the Fund are: · Retirement Pension · Partners Pension; · Orphans Pension; or · Occupational Disability Pension. Other than on their death, members can only receive a benefit prior to turning 65 in situations of occupational disability or when eligibility has been reached for a holiday bonus. In addition the Fund's Articles of Association state that its primary objective is to protect Members, Former Members, Pension Beneficiaries and other interested parties in its industry against the financial consequences of old age, invalidity and death. In the circumstances, the Fund has a purpose of providing a pool of assets for use by its members only on their retirement, death or contemplated contingencies such as becoming permanently disabled. As such, the Commissioner accepts that the Fund satisfies the requirement and is a provident, benefit, superannuation or retirement fund. The Fund was established in a foreign country. Therefore, the Fund satisfies this requirement. The Fund was established and is maintained only to provide benefits to individuals who are not Australian residents. Therefore, the Fund satisfies the requirements. 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: 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. The central management and control of the entity is carried on outside Australia by entities none of whom is an Australian resident. Therefore, the Fund satisfies this requirement. The Fund has not and cannot deduct amounts under either the ITAA 1997 or the ITAA 1936 for amounts paid to it. The Fund has not been allowed a tax offset or a tax offset is not allowable for an amount that has been paid to it. Therefore, the Fund satisfies these requirements. As all the above requirements are satisfied, the Fund meets the requirements of being a superannuation fund for foreign residents as defined by section 118-520 of the ITAA 1997. | Detailed Reasoning - The Fund is exempt from income tax in the country in which the non-resident resides: The Fund is exempt from income tax in its country of residence. Therefore, the Fund satisfies this requirement. | Detailed Reasoning - Subsection 128B(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: · The Fund must satisfy the 'portfolio interest test' in relation to the test entity (subsection 128B(3CC) of the ITAA 1936) · The Fund must satisfy the 'influence test' (subsection 128B(3CD) of the ITAA 1936) in relation to the test entity, and · The income cannot otherwise be non-assessable non-exempt income of the Fund because of: a. Subdivision 880-C of the ITAA 1997, or b. Division 880 of the Income Tax (Transitional Provisions) Act 1997 . Each of these requirements is discussed in detail below. 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. The total participation interest in the majority of the Australian investments is less than 1%. The Fund's investment strategy is to hold less than a 10% total participation interest in Australian stocks and shares at all times. The Commissioner is satisfied that the total participation interest the Fund holds in the test entities: · is less than 10% pursuant to paragraph 128B(3CC)(a) at all relevant times; and · would be less than 10% in the circumstances detailed in paragraph 128B(3CC)(b) at all relevant times. The Fund therefore satisfies the 'portfolio interest test' in respect of its current Australian investment. Subsection 128B(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 Fund is 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. This includes situations where the Fund can act in concert with others to determine the identity of a relevant decision-maker in the test entity. Sub-test 1 also extends to situations where the Fund, in its own right, holds the ability to approve or veto decisions which go to the control or direction of the test entity. 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. Relevantly, in respect of the investment listed in the relevant facts and circumstances to this Ruling: · The Fund does not have any involvement in the day to day management of the business of the Australian entity. · The Fund does not have the right to appoint directors to the boards of any of the Australian entities in which it is invested, and none of the directors of these Australian entities acts in accordance with the directions, instructions or wishes of the Fund. · The Fund, and any representative of the Fund, does not have any part of any advisory committee of the Australian entities. · The Fund can only vote as an ordinary shareholder. Based upon the above, the Commissioner accepts that the Fund does not have influence of a kind described in subsection 128B(3CD) of the ITAA 1936. The income received by the Fund will not be 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 . | Detailed Reasoning - Conclusion: The Fund is excluded from withholding tax in relation to interest, dividend and non-share dividend income derived from its current investments under paragraph 128B(3)(jb) of the ITAA 1936.

Other relevant facts: The Fund was established and is maintained to provide benefits for non-residents of Australia. | An amount paid to the Fund or set aside for the Fund has not been or cannot be deducted under the ITAA 1997. | The Fund has not been allowed a tax offset or is not allowable for such an amount | Question 1: Is the Fund excluded from liability to withholding tax on its interest, dividend and non-share dividend income derived in respect of its investment under paragraph 128B(3)(jb) of the ITAA 1936? | Was established and maintained only to provide benefits for individuals who are not Australian residents | Central management and control (CM&C) | The Fund satisfies the 'portfolio interest test' | The Fund satisfies the 'influence test' | Otherwise non-assessable non-exempt