Private ruling: A foreign superannuation fund and exemption from withholding/income tax
Date of advice: 30 January 2018
Published: June 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 Trust excluded from liability to withholding tax on its interest and/or dividend income derived from Australia under paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: No. | Q2: Is interest and/or dividend income derived from Australia by the Trust non-assessable and non-exempt income under section 128D of the ITAA 1936? | A2: No.

Relevant facts and circumstances: The Trust is a group trust arrangement. The Declaration of Trust provides 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 Trust was provided stating 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.

Relevant legislative provisions: 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.

Reasons for decision: Summary: 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 | Detailed Reasoning - Is the Trust a ‘fund’? and is it an indefinitely continuing fund?: On consideration of the relevant facts, circumstances and the constituent documents of the Trust, there is no question that the Trust is a ‘fund’ that is indefinitely continuing. | Detailed Reasoning - Is the Trust 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. The Declaration of Trust identifies that the Trust would not satisfy the requirements to be a ‘provident, benefit, superannuation or retirement fund’. Qualifying Investors in the Trust can include entities that would be unlikely to satisfy the requirements to be ‘provident, benefit, superannuation or retirement such as stock bonus plans, profit sharing plans and collective investment trusts owned by such entities. To satisfy the ‘provident, benefit, superannuation or retirement fund’ requirement 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 ( Scott v. Federal Commissioner of Taxation (No 2) (1966) 14 ATD 333; (1966) 10 AITR 290; 40 ALJR 265, Mahoney v. Commissioner of Taxation (Cth) (1967) 14 ATD 519; (1967) 10 AITR 463; 41 ALJR 232). Stock bonus plans and profit sharing plans do not provide such benefits. As the Trust is not a ‘superannuation fund for foreign residents’ itself, it is not eligible for the exemption in s128B(3)(jb) of the ITAA 1936. | Detailed Reasoning - Do the Funds in the Group Trust Derive the Income?: Since the Trust fails to meet the definition of being a superannuation fund for foreign residents, the only way an exemption can be granted is if it can be shown it is the Funds that actually derive the income, not the group trust. Subsection 128A(3) provides that a beneficiary who is presently entitled to income of a trust estate, which includes interest or dividends, shall be deemed to have derived the income consisting of the interest or dividends at the time they became presently entitled to the income (of the trust estate that includes that interest or dividends). Therefore, under subsection 128A(3) a unit holder in the Trust will only be deemed to have derived the interest and dividends when it is presently entitled to the income from the Trust that includes that interest or dividend income. At the time the liability to withholding arises (when the interest or dividend income is paid from the Australian entities) it is not clear that a unit holder is ‘presently entitled’ to that income for the purpose of s128A(3). The complexity of the investor structure suggested by the Declaration of Trust, coupled with the ability for non-superannuation funds to invest and the commingling of assets between superannuation funds and non-superannuation funds, potentially at multiple levels of investment, makes it difficult for the Commissioner to clearly identify that part of any gross amount of interest or dividends paid to the Trustee is derived by a ‘superannuation fund for foreign residents’ when the amount is paid to the Trustee. Investors appear able to receive income from the Trust in two ways; through distributions made by the Trustee and through the redemption or withdrawal of units held in one or more Funds. No investor in the Trust has any ownership of the assets of the Trust. Each investor has an undivided interest in one or more Funds established by the Trustee within the Trust into which it has made deposits and shares proportionately with all other investors in each Fund the net income, profits and losses thereof (subject to the allo cation of fees and expenses). Distributions are net amounts paid at the discretion of the Trustee. No entitlement to a distribution exists until the trustee resolves to make a distribution. Upon withdrawal of units from a Fund, the Trustee will distribute an amount equal to the number of units withdrawn multiplied by the value of each unit as of the relevant Valuation Date. As the value of the units is dependent on valuations made at particular times, it appears possible that a valuation may not always include all payments received in respect of the assets of the Funds. Further, an investor is not entitled to receive any interest or other income earned on such monies pending payment of the distribution. If an interest or dividend payment was made to the Trustee after the relevant valuation date for withdrawal purposes and prior to the payment of a distribution in respect of those units, the investor is not entitled to that income and it may not be readily ascertainable at that time, whether anyone other than the Trustee has derived that income. Based on the terms of the Declaration of Trust, it is not clear that any investors that would meet the definition of ‘superannuation fund for foreign residents’ would be considered to have derived any interest or dividend income at the time the amount is paid to the Trustee by the Australian withholder. Accordingly the Trust will not be entitled to an exemption under paragraph 128B(3)(jb) of the ITAA 1936. | Detailed Reasoning - Question 2: Section 128D of the 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. As the Trust will not be entitled to an exemption under paragraph 128B(3)(jb) of the ITAA 1936, the interest or dividend income derived by the Trust will not be considered non-assessable and non-exempt income under section 128D of the ITAA 1936.