Private ruling: Trust fund interest, dividend and non-share dividend income
Date of advice: 20 March 2019
Published: May 2019
Ruling period: Years ended 30 June 20xx
Date scheme commenced: 1 July 20xx

Ruling: Q1: Is the Trust Fund exempt from liability to withholding tax on interest, dividend and non-share dividend income under paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: Yes. | Q2: Is interest, dividend and non-share dividend income derived by non-assessable and non-exempt income of the Trust Fund under section 128D of the ITAA 1936? | A2: Yes.

Relevant facts and circumstances: The Plans 1. The Plans are defined benefit pension plans that apply to certain employees of the Company and its affiliates including salaried employees within Foreign Country. 2. Eligibility to benefits under the Plans is based on the participant’s age and their continuous service with the company and its affiliates. 3. Participants are eligible for a pension at the normal retirement age. 4. The early pension may be accessed before the participant reaches the normal retirement age, depending on their accumulated years of continuous service and their age. 5. Several different pension options are available to participants of the Plans, including lump sum options, survivor pensions, disability pensions, and spouse benefits. 6. The Company is the sponsor of the Plans and makes contributions to the Plans. All contributions are deposited with the Trust Fund. The Trust Fund 7. The Trustee holds the Trust Fund as a comingled fund in which each separate Plan shall be deemed to have a proportionate undivided interest in the fund, except that each asset identified by the Administrative Committee is allocable to a particular Plan Account. 8. ‘Plan Account’ means the interest of each Plan in the Trust Fund. 9. The Administrative Committee of the Trust Fund has the responsibility of administering each Plan and is deemed for the purposes of the relevant Act to be the Plan administrator and the named fiduciary for Plan administration and for monitoring and collecting contributions. 10. The Investment Committee of the Trust Fund has the responsibility for allocating the assets of the Trust Fund among the separate accounts, for monitoring the diversification of the investments of the Trust Fund, for determining the propriety of investment of the Trust Fund in foreign securities and of maintaining the custody of foreign investments abroad, and for assuring that no Plan violates any provisions of the Act. 11. Contributions shall be designated by the Administrative Committee as allocable, and distributions shall be designated by the Administrative Committee as chargeable to a particular Plan Account. 12. The Trust Fund consists of one or more separate accounts. All separate accounts shall be established by the Trustee at the direction of the Investment Committee. The Investment Committee shall designate assets of the Trust Fund to be allocated to each Separate Account and shall direct the Trustee with respect to any transfer of assets between Separate Accounts. 13. Upon the direction of the Administrative Committee, the Trustee shall periodically determine the value of each Plan Account on such basis as the Trustee and the Administrative Committee shall from time to time agree. 14. The Trustee makes distributions from the Trust Fund to persons, in such amounts, at such times and in such manners as the Administrative Committee or its designee shall from time to time direct pursuant to the service description furnished by the Trustee to the Administrative Committee from time to time. 15. The Trustee may assume until advised to the contrary that each Plan and the Trust Fund is qualified and exempt from taxation under the Code, or under corresponding provisions of relevant tax laws in Country A. 16. The Code provides for tax-deferred retirement savings plans established by an employer, that allow for contributions by the employee, the employer, or both. Other 17. The Trust Fund’s head office is located in Foreign Country and this is where the Administrative Committee and Investment Committee meet. 18. The Trust Fund was established and is maintained only to provide benefits for individuals who are not Australian residents. 19. There is no indication that there is any contemplation of the Trust Fund ending at a defined point in time and there is no expectation that the Plans or the Trust Fund will be discontinued. 20. An amount paid to the Trust Fund or set aside for the Trust Fund has not been and cannot be deducted under the Income Tax Assessment Act (ITAA 1997). 21. A tax offset has not been allowed nor would be allowable for any amount paid to the Trust Fund or set aside for the Trust Fund. 22. The Trust Fund was established in and is a resident of Foreign Country for tax purposes. 23. The Trust Fund is exempt from taxation in Foreign Country. 24. The Trust Fund has received and will receive interest income, along with dividend and non share dividend income from companies who are residents of Australia for tax purposes.

Relevant legislative provisions: Income Tax Assessment Act 1936 subsection 6(1) | 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 Trust Fund is a non-resident The Trust Fund is not a resident of Australia for tax purposes. Therefore, the Fund will satisfy this requirement. The Trust Fund is a superannuation fund for foreign residents Superannuation fund for foreign residents is a defined term in the ITAA 1936. Section 6 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 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 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. Consequently, for the Trust 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 Trust Fund is an indefinitely continuing fund ● The Trust Fund is a provident, benefit, superannuation or retirement fund ● The Trust Fund was established in a foreign country ● The Trust 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 Trust Fund or set aside for the Trust Fund has been or can be deducted under this Act, and ● No tax offsets have been allowed or would be allowable for an amount paid to the Trust Fund or set aside for the Trust Fund. The Trust Fund is an indefinitely continuing fund The Trust Fund includes the comingled assets of the Plans which have been contributed by the Company. There is no indication that there is any contemplation of the Trust Fund ending at a defined point in time and there is no expectation that the Plans or the Trust Fund will be discontinued. Therefore, it is accepted that the Trust Fund is an indefinitely continuing fund. The Trust Fund is a provident, benefit, superannuation or retirement fund ATO Interpretative Decision ATO ID 2009/67 Income Tax: Superannuation fund for foreign residents provides 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 Trust Fund is responsible for managing the funded assets of the Plans. The Plans are pension plans that apply to certain employees of the Company and its affiliates including salaried employees in Foreign Country. Participants are eligible for a pension at the normal retirement age. In some circumstances, the early pension may be accessed before the participant reaches the normal retirement age, depending on their accumulated years of continuous service and their age. The circumstances in which a member of each of the Plans can ordinarily receive funds from the Trust Fund upon retirement from employment are consistent with those of a provident, benefit, superannuation or retirement fund. Furthermore, the other potential avenues for accessing benefits include survivor pensions, disability pensions, single life annuity options and spouse benefits. These contemplated contingencies are considered to be aligned with the purposes of a provident, benefit, superannuation or retirement fund. As both the objective of the Trust Fund and the actual operation of the Trust Fund have the sole purpose of providing retirement benefits or benefits in alignment with other contemplated contingencies via the Plans, the Trust Fund is considered to be a provident, benefit, superannuation or retirement fund. Therefore, the Trust Fund will satisfy this requirement. The Trust Fund was established in a foreign country The Trust Fund was established in Foreign Country. Therefore, the Trust Fund will satisfy this requirement. The Trust Fund was established and maintained only to provide benefits for individuals who are not Australian residents The Trust Fund was established in Foreign Country and operates to provide retirement benefits for its members in Foreign Country. 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 Trust 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 Trust Fund. Therefore, the Trust Fund will satisfy this requirement. The Trust Fund’s 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 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, Taxation Ruling TR 2018/5 Income tax: Central Management and Control test of residency 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 objective of the Trust Fund is to manage the funded assets of the pension plans that apply to certain employees of the Company and its affiliates including salaried employees in Foreign Country. The Trust Fund’s head office is located in Foreign Country and the relevant committees which control and direct the Trust Fund’s operation meet there. Based on the above, it is reasonable to conclude that the central management and control of the Trust Fund occurs in Foreign Country by entities that are not Australian residents. Therefore, the Fund will satisfy this requirement. No amount paid to the Trust Fund or set aside for the Trust 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 Trust Fund or set aside for the Trust 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 Trust Fund or set aside for the Trust Fund. Therefore, the Trust Fund will satisfy this requirement. As all of the above elements have been satisfied, the Trust Fund will be a superannuation fund for foreign residents as defined by section 118-520 of the ITAA 1997. 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 Trust Fund will receive interest income from Australia investments, along with dividend and non-share dividend income from companies who are residents of Australia for tax purposes. Therefore, the Trust Fund will satisfy this requirement. Is exempt from income tax in the country in which the non-resident resides The Trust Fund is exempt from taxation in Foreign Country. Therefore, the Trust Fund will satisfy this requirement. | Detailed Reasoning - Conclusion: As all the requirements of paragraph 128B(3)(jb) of the ITAA 1936 are satisfied, the Trust 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 Trust Fund non-assessable and non-exempt income of the Trust 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 Trust 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. | Detailed Reasoning - Conclusion: The interest, dividend and non-share dividend income derived in Australia by the Trust Fund is not assessable and not exempt income of the Trust Fund under section 128D of the ITAA 1936.

Question 1: Is the Trust Fund exempt from liability to withholding tax on interest, dividend and non-share dividend income under paragraph 128B(3)(jb) of the ITAA 1936?