Private ruling: exemption from withholding tax on interest and dividend income derived from Australia by a non-resident pension or superannuation fund.
Date of advice: 27 July 2017
Published: November 2017
Ruling period: Year ended 30 June 2017 | Year ending 30 June 2018 | Year ending 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 derived from Australia under paragraph 128B(3)(jb) of the ITAA 1936? | A1: No | Q2: Is interest and/or dividend income derived from Australia by the Fund not assessable and not exempt income under section 128D of the ITAA 1936? | A2: No

Relevant facts and circumstances: The applicant has applied for a private ruling for a superannuation fund for foreign residents. The application includes the following documentation: ● Letter from the tax authorities in Country A stating the fund was exempt from income tax in that Country and is also a resident of that Country for the purposes of Country A’s taxation laws. ● A copy of the Trust deed and the rules of the fund which provide details of the establishment of the fund, the benefits provided by the fund, and the rules governing the fund. ● A statement from the trustee of the fund confirming that: − the fund is an indefinitely continuing fund and a provident, benefit, superannuation or retirement fund − the fund was established in a foreign country − the fund was established, and is maintained, only to provide benefits for individuals who are not Australian residents − the central management and control of the fund is carried on outside Australia by entities none of whom is an Australian resident − an amount paid to the fund or set aside for the fund 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. ● A copy of the financial statements of the fund. As we required more recent financial statements of the fund, these were obtained via the funds website. A summary plan description document for the fund was provided. The summary plan description document contains a section stating that in the event that a member’s employment is terminated, a member may request a withdrawal of their contributions and interest immediately upon termination, and alternatively if a member has attained at least 20 years of service they may elect to receive a deferred pension. There are no listed conditions or restrictions. The fund is for members employed in a city in Country A, and that city’s Charter and Administrative code (the Code) was sourced from an external website from Country A. The Funds General Provisions are outlined in the code. A section of the code states that the separate Tiers of the Plan shall be merged together and shall thereafter be the single plan. Another section of the code states that the fund members shall upon termination of employment be entitled to a refund of contributions. The funds financial statements show amounts of refunded contributions.

Relevant legislative provisions: Income Tax Assessment Act 1936 Paragraph 128B(3)(jb) | Income Tax Assessment Act 1936 Section 128D | Income Tax Assessment Act 1997 Section 118-520

Reasons for decision: Summary: Section 128D of the Income Tax Assessment Act 1936 (ITAA 1936) provides that interest and dividend income that is excluded from withholding tax pursuant to paragraph 128B(3)(jb) of the ITAA 1936 is not assessable income. For the financial years ended 30 June 2008 and onwards, paragraph 128B(3)(jb) of the ITAA 1936 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 of the Income Tax Assessment Act 1997 (ITAA 1997) 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 Is the fund a Superannuation 'fund’? and is it an indefinite continuing fund? In order to consider the application of Section 118-520 of the ITAA we must first determine if the fund is a Superannuation 'fund’ and is it an indefinite continuing fund? On consideration of the plan details there is no question that the Fund is a Superannuation 'fund’ that is indefinite and continuing. Is the Fund a provident, benefit, superannuation or retirement fund for the purposes of 118-520 of the ITAA 1997? 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 enunciated 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 (Mahoney), 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 where the benefit must be characterised by some future purpose e.g. a funeral benefit. 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. In the case of the Fund there is a provision that suggests that the Fund has not been established for the sole purpose of meeting one of the specified purposes. The provision is as follows: The summary plan description document contains a section stating that in the event that a member’s employment is terminated, a member may request a withdrawal of their contributions and interest immediately upon termination, and alternatively if a member has attained at least 20 years of service they may elect to receive a deferred pension. There are no listed conditions or restrictions in the summary plan description document. The fund is for members employed in a city in Country A, and that city’s Charter and Administrative code (the Code) was sourced from an external website from Country A The Funds General Provisions are outlined in the code. A section of the code states that the separate Tiers of the Plan shall be merged together and shall thereafter be the single plan. Another section of the code states that the fund members shall upon termination of employment be entitled to a refund of contributions. The funds financial statements show amounts of refunded contributions. It is considered that due to these clauses within the summary plan description document and the code, the Fund will not meet the requirements to be considered a provident, benefit, superannuation or retirement fund. The ability for employees to access their full benefit on cessation of employment without any listed conditions or restrictions is outside of the sole purpose of a fund meeting the definition. Accordingly, Fund is not a superannuation fund for foreign residents and the interest and/or dividend income of the fund is not excluded from withholding tax and will not be non-assessable non-exempt income.