Private ruling: Exemption from withholding tax for superannuation funds for foreign residents
Date of advice: 12 April 2021
Published: June 2021
Ruling period: 1 July 2014 to 30 June 2024
Date scheme commenced: 1 July 2014

Ruling: Q1: Is the Fund excluded from liability to withholding tax on interest, dividend and non-share dividend income derived in respect of its current investments in Australian resident entities under paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: Yes | Q2: Is the 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: The Fund was established in a country outside of Australia (Country A) and its operation is governed by the Regulation. The purpose of the Fund is to provide pension benefits to its members and their surviving dependants. The Fund does not provide benefits as a result of events other than old age retirement, disability or death. The incomes received by the Fund include contributions paid by employees and the employer and income from investments of the Fund. The amounts held in the Fund are not used for any purpose other than providing pension benefits to members and their beneficiaries under the Fund and paying the reasonable expenses of administering the Fund. The Fund is managed by a Board which is made up of nominated persons none of whom are Australian residents. The Fund's Australian investments The Fund legally and beneficially owns its investments in Australian resident entities. The Fund will receive interest income from Australia, along with dividend and non-share dividend income from entities who are Australian resident for tax purposes. In respect of each of the Australian resident entities to which the Fund has invested: (a) The Fund holds less than 10% of the total participation interests in each entity and has never held more than a 10% participation interest. (b) The Fund will hold less than 10% of the total participation interests in each entity in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936. (c) Neither the Fund, nor any related party of the Fund, has involvement in the day to day management of the business of any of the Australian investments. (d) Neither the Fund, nor any related party of the Fund, holds any right to appoint a person to a board, committee or similar, either directly or indirectly, of any of the Australian investments. (e) Neither the Fund, nor any related party, holds the right to representation on any investor representative or advisory committee (or similar) of any of the Australian investments. (f) Neither the Fund, nor any related party, has the ability to direct or influence the operation of any of the Australian investments outside of the ordinary rights conferred by the equity interest held. (g) The Fund has not entered into or received any side letters, arrangements or agreements. (h) The Fund does not hold any veto rights on security holder votes. Additional facts The Fund is not a resident of Australia for tax purposes. The Fund is exempt from taxation in the Fund's country of residence. The Fund has not and cannot deduct amounts under either the Income Tax Assessment Act 1997 (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. The income of the Fund is not non-assessable non-exempt income of the Fund because of either: • Subdivision 880-C of the ITAA 1997, or • Division 880 of the Income Tax (Transitional Provisions) Act 1997 .


Reasons for decision: Summary: The Fund is excluded from liability to withholding tax on interest, dividend and non-share dividend income derived from its current investments in Australian resident entities in accordance with paragraph 128B(3)(jb) of ITAA 1936. | 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(4) of the ITAA 1936), interest income (subsection 128B(5) 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; | Detailed Reasoning - Note:: See subsection (3CA) for extra requirements relating to this paragraph. These requirements of paragraph 128B(3)(jb) of the ITAA 1936 are considered below. Subparagraph 128B(3)(jb)(i) of the ITAA 1936 | Detailed Reasoning - Is the Fund a non-resident?: The Commissioner has determined from the facts and circumstances that the Fund is not a resident of Australia. Therefore, the Fund satisfies this requirement. | Detailed Reasoning - Is the Fund a superannuation fund for foreign residents?: 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 satisfy the requirements set out in section 118-520 of the ITAA 1997. 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 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 Fund 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 23 October 2017, www.macquariedictionary.com.au defines 'indefinitely' and 'continuing' as follows: Indefinite: 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 Although the Regulation that governs the Fund does not have an automatic termination clause or provide any indication that there is any contemplation of the Fund ending at a specific point in time, it appears that it is the Fund's intention to be an entity that is indefinitely continuing. Therefore, it is accepted the Fund will continue to operate in accordance with the pension regulations in the Fund's country of residence for an indefinite period of time. Therefore, the Fund satisfies this requirement. | Detailed Reasoning - Is the Fund a provident, benefit, superannuation or retirement 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. 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). 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 objective of the Fund is to provide pension benefits to its members. The Fund meets this objective by granting benefits in case of old age and death in accordance with the rules set by the Fund. Furthermore, there are no circumstances outside of these under which a member can obtain benefits from the Fund. The circumstances in which a member of the Fund can receive the funds as provided in the rules set by the Fund are clearly consistent with those of a provident, benefit, superannuation or retirement fund as they are only provided after attaining a retirement age or 'contemplated contingencies' such as death. The Fund does not provide benefits as a result of events other than old age retirement, disability or death. As both the key objective of the Fund and the true operation of the Fund have the sole purpose of providing retirement benefits, the Fund is considered to be a provident, benefit, superannuation or retirement fund. Therefore, the Fund will satisfy this requirement. | Detailed Reasoning - Was the Fund established in a foreign country?: The Fund was established in Country A. Therefore, the Fund will satisfy this requirement. | Detailed Reasoning - Was the Fund established and maintained only to provide benefits for individuals who are not Australian residents?: The Fund is a pension fund that was established in Country A and operates to provide retirement benefits for its members in that country. It is considered that the possibility of a very small number of members being returned residents or becoming Australian residents after ceasing membership in the Fund 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. | Detailed Reasoning - Is the Fund's central management and control 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, paragraph 10 and 11 of the 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 was established in Country A. The decision making and management of the Fund is undertaken by the Board. The Fund is managed by the Board in accordance with the rules set by the Fund. The Board is made up of persons none of whom are Australian residents. The objective of the Fund is to provide pensions to its member. Based on the above, it is reasonable to conclude that the central management and control of the Fund occurs in Country A 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 1936 or 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 1936 or 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. The Fund has also confirmed that no amount paid to the Fund can be deducted under ITAA 1997 or ITAA 1936. Therefore, the Fund will satisfy this requirement. Subparagraph 128B(3)(jb)(ii) of the ITAA 1936 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 receive interest income from Australia, 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. Subparagraph 128B(3)(jb)(iii) of the ITAA 1936 The Fund is exempt from taxation in accordance with the income tax legislation of the Fund's country of residence. Therefore, the Fund will satisfy this requirement. 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 . 1. The Fund satisfies the 'portfolio interest test' 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 Fund holds less than 10% of the total participation interests in each Australian entity to which the Fund has invested. Further the Fund would hold less than 10% of the total participation interests in each entity in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936. The Fund therefore satisfies the 'portfolio interest test' in respect of its current investments in Australian resident entities. 2. The Fund satisfies the 'influence test' 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 is able to 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 each of the Australian entities to which the Fund has invested as listed in the Appendix in paragraph 15 of the relevant facts and circumstances of this private ruling: (a) The Fund holds less than 10% of the total participation interests in each entity and has never held more than a 10% participation interest. (b) The Fund will hold less than 10% of the total participation interests in each entity in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936. (c) Neither the Fund, nor any related party of the Fund, has involvement in the day to day management of the business of any of the Australian investments. (d) Neither the Fund, nor any related party of the Fund, holds any right to appoint a person to a board, committee or similar, either directly or indirectly, of any of the Australian investments. (e) Neither the Fund, nor any related party, holds the right to representation on any investor representative or advisory committee (or similar) of any of the Australian investments. (f) Neither the Fund, nor any related party, has the ability to direct or influence the operation of any of the Australian investments outside of the ordinary rights conferred by the equity interest held. (g) The Fund has not entered into or received any side letters, arrangements or agreements. (h) The Fund does not hold any veto rights on security holder votes. 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. 3. Otherwise non-assessable non-exempt 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: Having regard to the requirements of paragraph 128B(3)(jb) of the ITAA 1936, the Fund is excluded from withholding tax in relation to interest, dividend and non-share dividend income derived from its current investments in Australian resident entities. | Summary: Interest, dividend and non-share dividend income derived by the Fund is 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 as follows: '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.' Dividend and interest income derived by the Fund would be subject to withholding tax under subsections 128B(1) and 128B(2) of the ITAA 1936 respectively, but for the operation of the withholding tax exemption under paragraph 128B(3)(jb) of the ITAA 1936. As paragraph 128B(3)(jb) of the ITAA 1936 is specifically referred to in section 128D of the ITAA 1936 any interest, dividend or non-share dividend income derived by the Fund will be not assessable and not exempt income under section 128D of the ITAA 1936.