Private ruling: Exemption from withholding tax for a superannuation fund for foreign residents
Date of advice: 3 May 2019
Published: June 2019
Ruling period: 1 July 2015 to 30 June 2016 | 1 July 2016 to 30 June 2017 | 1 July 2017 to 30 June 2018 | 1 July 2018 to 30 June 2019
Date scheme commenced: 1 July 2015

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 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: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. The Fund 1. The Fund is the retirement pension plan for public employees in the foreign country. 2. The Fund’s retirement plan provides lifetime benefits to members who meet the requirements. 3. The Fund is a separate public entity to provide retirement, disability and death benefits to members. 4. The Fund is governed by Federal and State laws in the foreign country. 5. The Fund’s Board is responsible for administering the pension plan in accordance with applicable laws, protecting the assets and the interests of the plan beneficiaries. 6. The Fund’s Board of Retirement is also responsible for establishing policies governing the administration of the retirement plan and managing the investments of the systems assets. 7. The Fund’s Board consists of eleven members who operate in accordance with by-laws and policies and under the authority of the Constitution of the foreign country. 8. The members of the Fund’s Board carry out their responsibilities in the foreign country. 9. The Fund works to provide members and participating employers with cost-effective benefits, to prudently manage investment of the plan funds and to provide superior service to its members. 10. A letter from the Treasury Department of the foreign country certifies that the Fund is a resident and exempt from taxation in the foreign country. Plan Description 11. The Fund’s plan is a defined benefit pension plan. Funding is based on a cost sharing principle through employee and employer contribution rates, which are determined annually. 12. Certain districts participate in the Fund’s pension plan. Employees who work in retirement-eligible positions are members of the Fund and earn credit toward retirement and other benefits. Plan Membership 13. The Fund has two membership types which are based on job classifications. 14. Membership with the Fund requires appointment to a permanent full-time position. Membership is continuous until termination and is mandatory for eligible employees. 15. Membership in the Fund is effective on the first day of the pay period following the hire date. Payroll deductions for retirement contributions will begin and service credit will be earned for each hour worked. 16. Every Fund member belongs to a Tier based on what employer they worked for and when they entered the Fund’s membership. Contributions 17. Employee and employer contributions provide funding for the benefits paid to current retirees, future retirees and other qualified recipients under the Fund’s plan. 18. Employee contribution rates are set annually and are affected by changes in the normal costs of funding the plan, assumed interest rates, cost-of-living benefits, changes in the level of benefits and the life expectancy actuarial tables. 19. Employee contributions are made through regular bi-weekly or monthly payroll deductions and are deducted on a pre-tax basis. 20. Employer contribution rates are set annually and can vary from year to year depending on the level of established benefits, rate of return on investments and the cost of administering benefits. 21. The contributions made by the employers are based on membership type, Tier and salary. Members do not benefit from employer contributions until retirement. 22. Employer contributions are not refundable. If a member terminates their employment and elects to receive a lump sum payment, they will not receive employer contributions made on their behalf. Leaving Employment 23. If a member terminates their employment, they are required to make a choice regarding their retirement benefits. A member can either: ● Defer membership ● Establish with another retirement system ● Withdraw retirement contributions, or ● Retire. 24. Where a member elects to end the Fund’s membership and withdraw their contributions, their refund may be paid as a lump sum. This amount does not include employer contributions. In relation to withdrawn amounts, the Fund is required to withhold: ● Federal income tax, and ● State income tax. 25. If a member is under the age of 59½ years when they choose to withdraw their contributions upon termination, both Federal and State Governments may assess penalties for the ‘early withdrawal from their retirement account’. Benefits Provided 26. A member is vested when they earn a right to receive a monthly retirement benefit upon retirement eligibility. A member becomes vested after accumulating a number of years of service credit. Some types of service credit purchases also count toward meeting the plan’s vesting requirements. 27. Vested benefits are guaranteed and once earnt, the benefits cannot be reduced or taken away. The monthly retirement allowance is calculated at the time of retirement based on a formula that incorporates consideration of age, years of service credit and the employee’s highest average monthly salary. 28. All members are entitled to Death Benefits. An appropriate benefit will be paid to a member’s designated beneficiary or beneficiaries. Retirement Eligibility 29. Members may retire upon meeting the following minimum eligibility requirements based on their membership type and their relevant Tier. 30. Deferred members can retire when they become eligible. The retirement allowance benefits vary for deferred members based on their Tier and vesting status. 31. Vested members become eligible to receive a retirement benefit allowance when they would have become eligible to retire had they remained in service. 32. Service credit will be calculated as at the deferred membership date and will not earn service credit during deferred membership, however age and service percentage factors will increase up to a certain age determined by Tier and membership status. Once this age factor cap is determined, the deferred member will not benefit unless they continue to work for a reciprocal agency and are receiving salary increases. 33. Benefits are effective on the day or after the application to retire. Retirement applications must be received no earlier than 60 days before the effective date of retirement and no later than the effective date of retirement. 34. Non vested members who elect to defer membership are usually only eligible to receive a lump sum payment of employee contributions and interest on deposit with the Fund. There are circumstances that could allow members to become eligible for a retirement benefit allowance upon meeting certain eligibility requirements.: Disability Retirement 35. If an active member of the Fund has an illness or injury and is severe enough to either force them to stop working or is permanent, the member may apply for Disability Retirement. 36. The Board will determine whether a member is capable of substantially performing the duties of the position. If the Board determines eligibility, the member will be granted a disability retirement benefit. Investments 37. The Fund collects regular contributions from the Fund’s members and Participating Employers and invests those funds all over the world. The contributions and the earnings from these investments give the Fund the ability to pay the retirement benefits to its members. 38. The members of the Board are ultimately responsible for diversifying the Fund’s investment assets. The Board members ensure that investments are made in a variety of securities, in an assortment of companies, and in a range of regions of the world. 39. The Fund invests in a diverse group of investments called ‘asset classes’ in order to minimize risk while maximising return. 40. The Fund has a large investment portfolio and has hired investment managers, who are experts in particular asset classes, to make their investments decisions. Investment managers have individual contracts with the Fund and invest in a manner consistent with the Fund’s investment policies. 41. All Australian investments made by the investment managers on the Fund’s behalf are made with the Fund as the direct beneficial owner. 42. Australian investments made by the investment managers on the Fund’s behalf derive interest and dividend income directly for the Fund’s benefit.

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(1) of the ITAA 1936), interest income (subsection 128B(2) 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; The Fund is a non-resident The Fund is not a resident of Australia for tax purposes. Therefore, the Fund will satisfy this requirement. The Fund is a superannuation fund for foreign residents Superannuation fund for foreign residents is a defined term in the ITAA 1936. Subsection 6(1) 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(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 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. 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 the ITAA 1997, 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 , [Online], viewed on 1 February 2018, www.macquariedictionary.com.au defines ‘indefinitely’ and ‘continuing’ as follows: Indefinite: adjective 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 Rules do not set out procedures for the dissolution of the Fund or have a termination clause or provide any indication that there is any contemplation of the Fund ending at a defined point in time. As the Rules have been established through legislation, any change to the Rules would require amendments to be legislated. Therefore, it is accepted that the Fund will continue to operate in accordance with the Rules for an indefinite period of time, satisfying this requirement. 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 ● 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 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). The Fund is the retirement pension plan for public employees in a foreign country who work for a number of the public employers. The Fund’s retirement plan provides lifetime benefits to members of the retirement system. The payment of retirement benefits is allowed upon members reaching the specified retirement ages and years of service. Therefore, the core purpose of the Fund is to provide retirement benefits. If a member terminates their employment with a Participating Employer, a member can either: ● Defer membership (leave contributions on deposit and remain a Fund member), ● Establish reciprocity with another retirement system (while becoming a deferred Fund member), ● Withdraw retirement contributions (ending Fund membership), ● Retire. Where a member elects to end Fund membership and withdraw their contributions, their refund may be paid to them as a lump sum. The Fund is required to withhold federal and state income tax from the distribution. If a member is under the age of 59½ years when they choose to withdraw their contributions upon termination, both Federal and State Governments may assess penalties for the ‘early withdrawal from their retirement account’. The Commissioner accepts that the alternate circumstances of access in this case, being, disability, death and termination of employment align to the contemplated contingencies of 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 foreign country. 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 foreign country for its members who are all employed within a certain district. The Fund has two membership types which are based on job classifications. 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 Funds’ 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, paragraphs 10 and 11 of Taxation Ruling TR 2018/5 Income tax: central management and control test of residency (TR 2018/5) 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 Fund’s Board is responsible for administering the pension plan in accordance with applicable laws, protecting the assets of the pension plan and the interests of the plan beneficiaries. The Fund’s Board is also responsible for establishing policies governing the administration of the retirement plan and managing the investments of the systems assets. The Fund’s Board consists of nine members and two alternate members. The Board operate under authority granted by the Constitution of the foreign country. All Board members serve for a three-year term. The members of the Fund Board carry out their responsibilities in the foreign country. Based on this, 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. 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. As all of 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 for the purposes of subparagraph 128B(3)(jb) of the ITAA 1936. 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. The Fund will derive interest income from Australian sources, 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 the foreign country. Therefore, the Fund will satisfy this requirement. 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 - 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. 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 ITAA 1936.