Private ruling: Income tax – Exempt income
Date of advice: 21 March 2018
Published: July 2018
Ruling period: Income year ended 30 June 20XX | Income year ended 30 June 20XX | Income year ended 30 June 20XX | Income year ended 30 June 20XX | Income year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is the income of Entity U assessable income under subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Is the income of Entity U assessable income under subsection 6-10(5) of the ITAA 1997? | A2: No. | Q3: Is a net capital gain made by Entity U assessable income pursuant to section 102-5 of the ITAA 1997? | A3: No. | Q4: Are gains made by Entity U from financial arrangements assessable income under subsection 230-15(1) of the ITAA 1997? | A4: No. | Q5: Are gains from the disposal or redemption by Entity U of traditional securities assessable income under subsection 26BB(2) of the Income Tax Assessment Act 1936 (ITAA 1936)? | A5: No. | Q6: Is the income of Entity U assessable income under subsection 97(3) of the ITAA 1936? | A6: No. | Q7: Is Entity U liable to withholding tax under section 128B of the ITAA 1936 on interest, dividend or royalty income it derives from Australia? | A7: No. | Q8: Is Entity U liable to withholding tax pursuant to section 840-805 of the ITAA 1997? | A8: No.

Relevant facts and circumstances: 1. Article 22 of the United Nations (UN) Charter provides that the General Assembly of the UN may establish such Subsidiary Organs as it deems necessary for the performance of its functions. 2. The Pension Fund was established by the General Assembly of the UN in 1949 to provide retirement, death, disability and related benefits for the staff of the UN. The UN is itself a member of the Pension Fund. 3. The most recent version of the Pension Fund’s Regulations is contained in Document No. JSPB/G.4/Rev. 21 dated 1 January 2017 titled ‘Regulations, Rules and Pension Adjustment System of the United Nations Joint Staff Pension Fund’ (The Pension Fund’s Regulations). 4. As stated in Article 21 of the Pension Fund’s Regulations, every full-time member of the staff of each member organisation shall become a participant in the Pension Fund, provided that participation is not expressly excluded by the terms of the staff member’s appointment. He or she will also be subject to the Pension Fund’s Regulations. 5. Under Article 4(a) of the Pension Fund’s Regulations, The Pension Fund is administered by the United Nations Joint Staff Pension Board, a staff pension committee for each member organisation, and a secretariat to the Board and to each such committee. 6. Article 5 states that the Board shall consist of twelve members appointed by the United Nations Staff Pensions Committee, four of whom shall be from the members and alternate members elected by the General Assembly, four from those appointed by the Secretary-General, and four from those elected by the participants in service in the UN; in addition to twenty one members appointed by the staff pension committees of the other member organisations in accordance with the Rules of Procedure of the Pension Fund. 7. Article 18 states that the assets shall be the property of the Fund and shall be acquired, deposited and held in the name of the UN, separately from the assets of the UN, on behalf of the participants and beneficiaries of the fund. 8. Article 19 states that the investment of the assets of the Fund shall be decided upon by the Secretary-General after consultation with an Investments Committee and in light of observations and suggestions made from time to time by the Board on the investments policy. 9. The Pension Fund holds a diversified portfolio of assets with the majority of the Pension Fund’s investments being transferable securities, including publicly traded shares and bonds. 10. The Pension Fund does not hold, either directly or indirectly, controlling interests in the entities in which it invests. 11. The Pension Fund does not hold any direct real property assets in Australia. 12. The Pension Fund is not a resident of Australia for income tax purposes and does not have permanent establishment in Australia. 13. The central management and control of the Pension Fund is carried on outside Australia by individuals who are non-residents of Australia for taxation purposes.

Relevant legislative provisions: Income Tax Assessment Act 1936 subsection 26BB(2) | Income Tax Assessment Act 1936 section 128B | Income Tax Assessment Act 1997 subsection 6-5(3) | Income Tax Assessment Act 1997 subsection 6-10(5) | Income Tax Assessment Act 1997 subsection 97(3) | Income Tax Assessment Act 1997 section 102-5 | Income Tax Assessment Act 1997 subsection 230-15(1) | Income Tax Assessment Act 1997 section 840-805

Reasons for decision: Summary: Is the income of the Pension Fund assessable income under subsection 6-5(3) of the ITAA 1997? Subsection 6-5(3) of the ITAA 1997 states that if you are a foreign resident, your assessable income includes the ordinary income you derived directly or indirectly from all Australian sources during the income year, and the other ordinary income that a provision includes in your assessable income for the income year on some basis other than having an Australian source. Paragraph 1 of Article 105 of the UN Charter states that the UN shall enjoy in the territory of each of its Members such privileges and immunities as are necessary for the fulfilment of its purposes. Section 7(a) of The Convention on the Privileges and Immunities of the United Nations (‘the Convention’) provides that the UN, its assets, income and other property shall be exempt from all direct taxes excluding charges for public utility services. Taxation Ruling TR 92/14 Income tax: taxation privileges and immunities of prescribed International Organisations and their staff (TR 92/14) describes the operation of privileges and immunities relating to taxation that apply to International Organisations and persons working for these organisations. Paragraph 20 of TR 92/14 states that all privileges and immunities of International Organisations and their staff are now governed by the International Organisations (Privileges and Immunities) Act 1963 (the Act) and the Regulations of the particular International Organisation made under that Act. The Regulations of the UN under the Act are the United Nations (Privileges and Immunities) Regulations 1986 (the Regulations). Regulation 3(a) defines international organisations to which the Act applies to include organs of, or offices within, an organisation that is so declared. Regulation 5(1) states that the United Nations has the privileges and immunities specified in paragraphs 1,2, 3, 4, 5, 6, 7, 9, 10, 11 and 12 of the First Schedule of the Act. Paragraph 7 of the First Schedule of the Act provides the exemption of the organisation from the liability to pay or collect taxes other than duties on the importation or exportation of goods and of the income, property, assets and transactions of the organisation from such taxes. The Pension Fund is not a resident of Australia for tax purposes. Foreign residents are liable for taxation on any ordinary Australian sourced income. However, as an Organ of the UN, the Pension Fund is exempt from liability to taxation on Australian income. Therefore, the income of the Pension Fund is not assessable income under subsection 6-5(3) of the ITAA 1997. Is the income of the Pension Fund assessable income under subsection 6-10(5) of the ITAA 1997? Answer Subsection 6-10(5) of the ITAA 1997 states that if you are a foreign resident, your assessable income includes your statutory income from all Australian sources, and other statutory income that a provision includes in your assessable income on some basis other than having an Australian source. The Pension Fund is not a resident of Australia for tax purposes. However, as an Organ of the UN, the Pension Fund is exempt from liability to taxation on Australian income. Therefore, the income of the Pension Fund will not be assessable income under subsection 6-10(5) of the ITAA 1997. Is a net capital gain made by the Pension Fund assessable income pursuant to section 102-5 of the ITAA 1997? Section 102-5 of the ITAA 1997 states that your assessable income includes your net capital gain (if any) for the income year. Foreign residents are subject to capital gains tax (CGT) in Australia in limited circumstances. The Pension Fund is not a resident of Australia for tax purposes. However, as an Organ of the UN, the Pension Fund is exempt from liability to taxation on Australian income. Therefore, a net capital gain made by the Pension Fund will not be assessable income pursuant to section 102-5 of the ITAA 1997. Are gains made by the Pension Fund from financial arrangements assessable income under subsection 230-15(1) of the ITAA 1997? Subsection 230-15(1) of the ITAA 1997 states that your assessable income includes a gain you make from a financial arrangement. ‘Financial arrangement’ for the purposes of this section includes any of the circumstances outlined in sections 230-45 to 230-55 of the ITAA 1997 . Examples of a financial arrangement includes a cash settlable legal or equitable right to receive a financial benefit; a cash settlable legal or equitable obligation to provide a financial benefit; or a combination of one or more such rights and/or one or more such obligations. You are also considered to have a financial arrangement if you have an equity interest. The Pension Fund is not a resident of Australia for tax purposes. However, as an Organ of the UN, the Pension Fund is exempt from liability to taxation on Australian income. Therefore, gains made by the Pension Fund for financial arrangements are not assessable income under subsection 230-15(1) of the ITAA 1997. Are gains from the disposal or redemption by the Pension Fund of traditional securities assessable income under subsection 26BB(2) of the ITAA 1936? A traditional security is defined under subsection 26BB(1) and can be summarised as a security that is not issued at a discount of more than 1.5%, does not bear deferred interest and is not capital indexed. A traditional security may be, for example, a bond, a debenture, a deposit with a financial institution or a secured or unsecured loan. Subsection 26BB(2) of the ITAA 1936 states that where a taxpayer disposes of a traditional security or a traditional security of a taxpayer is redeemed, the amount of any gain on the disposal or redemption shall be included in the assessable income of the taxpayer of the year of income in which the disposal or redemption takes place. The Pension Fund holds a diversified portfolio of assets with the majority of the Pension Fund’s investments being transferable securities, including publicly traded shares and bonds. The Pension Fund is not a resident of Australia for tax purposes. However, as an Organ of the UN, the Pension Fund is exempt from liability to taxation on Australian income. Therefore, gains from the disposal or redemption by the Pension Fund of traditional securities are not assessable under subsection 26BB(2) of the ITAA 1936. Question 6 Is the income of the Pension Fund assessable income under subsection 97(3) of the ITAA 1936? Answer Where a beneficiary of a trust is presently entitled to a share of the net income of the trust estate and not under a legal disability, under section 97 of the ITAA 1936, the assessable income of the beneficiary shall include that income. Subparagraph 97(3)(c)(ii) of the ITAA 1936 applies to a beneficiary who is a non-resident at the end of the year of income; and the beneficiary is an organisation the income of which is exempt from tax by virtue of a regulation in force under the International Organisations (Privileges and Immunities) Act 1963 . Subsection 97(3) of the ITAA 1936 states that the beneficiary is, for the purposes of the application of this Division in relation to that beneficiary in relation to that year of income, a beneficiary to whom this subsection applies. The Pension Fund is not a resident of Australia for tax purposes. However, as an Organ of the UN, the Pension Fund is exempt from liability to taxation on Australian income. Therefore, any Australian sourced income the Pension Fund receives as the beneficiary of a trust estate under section 97 of the ITAA 1936 will be exempt from Australian taxation. Is the Pension Fund liable to withholding tax under section 128B of the ITAA 1936 on interest, dividend or royalty income it derives from Australia? Answer Generally, an unfranked dividend, interest or royalty paid from Australia is subject to Australian withholding tax under section 128B of the ITAA 1936 if it is derived by a non-resident. The Pension Fund is not a resident of Australia for tax purposes. However, as an Organ of the UN, the Pension Fund is exempt from liability to taxation on Australian income. Therefore, the Pension Fund is exempt from liability to withholding tax on interest, dividend and royalty income derived from Australia. Is the Pension Fund liable to withholding tax pursuant to section 840-805 of the ITAA 1997? Answer Section 840-805 of the ITAA 1997 relates to liability for managed investment trust withholding tax. Subsection 840-805(1) states that you are liable to pay income tax at the rate declared by the Parliament on the amount identified in subsections (2), (3) or (4) as the fund payment part if that subsection applies to you. Subsections (2), (3) and (4) apply to amounts that are paid from a trust that is a withholding MIT; an amount you are paid from a custodian; or you are a beneficiary of a trust that is not a withholding MIT or a custodian and are presently entitled to a share of the income or capital of the trust, respectively. These sections apply if you are a foreign resident when you are paid the amount or when you become entitled to the amount. The Pension Fund is not a resident of Australia for tax purposes. However, as an Organ of the UN, the Pension Fund is exempt from liability to taxation on Australian income. Therefore, the Pension Fund is exempt from liability to withholding tax under section 840-805 of the ITAA 1997.

The scheme commences on: 1 July 20XX Relevant facts and circumstances