Private ruling: Foreign superannuation fund withholding tax exemption
Date of advice: 23 May 2019
Published: July 2019
Ruling period: 1 January 2013 to 30 June 2019
Date scheme commenced: 1 January 2013

Ruling: Q1: Is the Fund excluded from liability to withholding tax on interest, dividend and non-share dividend income derived from Australia 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 non-assessable and non-exempt income of the Fund under section 128D of the ITAA 1936? | A2: Yes.

Relevant facts and circumstances: 1. The Fund was established in and is a resident of Country A, a foreign jurisdiction. 2. Administration of the Fund is undertaken by an independent state agency and is managed by a Board of Trustees (The Board) whose powers and duties are bound by state legislation. The Board is responsible for the decision making in relation to the Fund which is carried on in Country A. None of the Board member are residents of Australia. 3. The Fund was established to provide benefits for members of the pension plan, none of which are Australian residents. 4. Under the state legislation there is no requirement or expectation for the Fund to be terminated or wound up after a specified period. 5. The pension plan is a defined benefit scheme where the employee member will receive a pension (based on years of service and a calculation of their final average salary) on retirement, and as such the benefits provided under the pension system are determined according to a formula and not directly related to the contributions or investment returns on the contributions. 6. Benefits received by members of the pension plan include withdrawals at retirement age and early retirement, death and disability benefits. The Fund also allows a member to withdraw their contributions on termination of employment and take a lump sum payment, however, in doing so the members forfeit any right to a monthly benefit in future and also face tax consequences. 7. The income of the Fund includes interest and dividends paid by Australia resident ASX listed companies. 8. Income earned by the Fund is exempt from income tax in that foreign jurisdiction. 9. No amount paid to the Fund or set aside for the Fund has not been or cannot be deducted under the ITAA 1936 or Income Tax Assessment Act 1997 (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 128B(3)(jb) | Income Tax Assessment Act 1936 Section 128D | Income Tax Assessment Act 1997 Section 118-520

Reasons for decision: Summary: The Fund is excluded from liability to withholding tax on its interest, dividend and non-share dividend income under paragraph 128B(3)(jb) of the ITAA 1936. | Detailed Reasoning - Detailed reasoning: 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 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 Consequently, the Fund to be excluded from withholding tax on interest and dividend income, it must be established that it: 1. is a non-resident 2. is an indefinitely continuing fund 3. is a provident, benefit, superannuation or retirement fund 4. was established in a foreign country 5. was established and maintained only to provide benefits for individuals who are not Australian residents 6. has its central management and control carried on outside of Australia by entities none of whom are Australian residents 7. does not receive or have amounts set aside for it that have been or can be deducted under the ITAA 1936 and ITAA 1997 8. does not receive or have amounts set aside for it that give rise to a tax offset 9. receives income that consists of interest, or consists of dividends or non-share dividends paid by a company that is an Australian resident, and 10. is exempt from income tax in the country in which the non-resident resides. | Detailed Reasoning - Non-resident: The Fund is a resident of the Country A, a foreign jurisdiction. As such, it will meet this requirement. | Detailed Reasoning - Indefinitely continuing fund: The Fund is an indefinitely continuing fund which was established by state legislation that administers retirement benefits of certain employees of the State. Provident, benefit, superannuation or retirement fund ATO Interpretative Decision ATO ID 2009/67 Income Tax: Superannuation fund for foreign residents (ATO ID 2009/67) 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 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 Fund provides retirement benefits to its members through the administered pension plan upon the satisfaction of eligibility requirements based upon their age and years of service which are paid upon and following retirement. While the Fund provides for withdrawal from the fund prior to retirement, it is heavily dis-incentivised with loss of benefits and taxation upon relevant parts of the withdrawn amounts. The alternate circumstances of access in this case, being death and disability, align to the contemplated contingencies of a provident, benefit, superannuation or retirement fund. As such, element 3 above is satisfied. | Detailed Reasoning - Established in a foreign country: The Fund was established in Country A. As such, this element is satisfied. | Detailed Reasoning - Established and maintained only to provide benefits for individuals who are not Australian residents: The Fund only provides for retirement, disability and death benefits to the employees of Country A, all of whom are not Australian residents. 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 were not established for individuals who are not Australian residents. As such, element 5 above is satisfied. | Detailed Reasoning - Central management and control carried on outside of Australia by entities none of whom are Australian residents: The central management and control of the Fund, is carried on outside Australia by Board of Trustees appointed according to the state legislation, none of whom is an Australian resident. As such, element 6 above is satisfied. | Detailed Reasoning - Does not receive, or have amounts set aside for it, that have been or can be deducted under the ITAA 1997 or that give rise to a tax offset: A statement has been provided by the Fund confirming that no amounts have been paid to the Fund nor set aside to be paid to the Fund that can be deducted under the ITAA 1997 or the ITAA 1936. Further, no amounts have been paid to the Fund or set aside or be paid to the Fund, for which a tax offset has been allowed, or would be allowable, under this Act. As such, elements 7 and 8 above are satisfied. | Detailed Reasoning - Receives income that consists of interest, or consists of dividends or non-share dividends paid by a company that is an Australian resident: The Fund receives Australian sourced income in the form of interest and dividends from Australian resident ASX listed companies. | Detailed Reasoning - Is exempt from income tax in the country in which it resides: The Fund has provided certification that it is exempt from taxation in Country A and that it is considered a resident of that country for its taxation purposes. As such, elements 9 and 10 above are satisfied. Accordingly, the Fund will satisfy the requirements for exclusion from liability to interest, dividend and non-share dividend withholding tax under paragraph 128B(3)(jb) of the ITAA 1936. | Summary: The interest and/or dividend income derived by the Fund is non-assessable and non-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.’ 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 determined in Question 1 above, the Fund, is excluded from liability to interest, dividend and non-share dividend withholding tax under paragraph 128B(3)(jb) of the ITAA 1936 as the Fund is a ‘superannuation fund for foreign residents’ as defined in section 118-520. As paragraph 128B(3)(jb) of the ITAA 1936 is specifically referred to in section 128D of the ITAA 1936 any interest or dividend income derived by the Fund, will be considered not assessable not exempt income under section 128D of the ITAA 1936.