Private ruling: Liability to withholding tax on interest and/or dividend income under paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 .
Date of advice: 13 May 2019
Published: July 2019
Ruling period: The relevant income year
Date scheme commenced: The commencement of the scheme

Ruling: Q1: Is the Fund 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: Yes | Q2: Is interest and/or dividend income derived from the Fund not assessable and not exempt income of the entity under section 128D of the ITAA 1936? | A2: Yes

Relevant facts and circumstances: The Fund was incorporated in a foreign jurisdiction. The Fund's central management and control is in the foreign jurisdiction. The Fund is sponsored by the Employer. The Fund is established to provide retirement and death benefits to employees and dependants within the Fund. The normal form of benefit is payable as a monthly annuity for life. The benefits payable are: · Normal Retirement Benefits - If employment ends at age 65, an employee can retire with full benefits; · Early Retirement Benefits - If employment ends between ages 55 and 65 and the employee has at least 10 years of vesting service, they can receive an early retirement benefit. This benefit will be reduced in payments begin before age 65 to reflect the fact it will be paid over a longer period; · Postponed Retirement Benefits - if employment ends after age 65, the benefit will be determined using the plan formula and the employee's final average compensation, credited service and offset amount at the actual retirement date; · Vested Benefits - if employment ends before age 65 with at least five years of vesting service, but the employee does not otherwise satisfy the requirements to receive an early retirement benefit, they can receive a vested benefit as early as age 55. This benefit will be determined in the same way as the early retirement benefit and will be reduced if payments begin before age 65. Reductions will be greater than those applied if the employee was eligible for early retirement; · Survivor Benefits for spouses. The Fund is funded entirely by contributions by the Employer as determined by the actuary of the Fund. These contributions are deposited into a trust fund, where they are held solely for the benefit of the participants and their beneficiaries. An employee cannot contribute any additional money to the Fund.

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: As all the requirements of paragraph 128B(3)(jb) of the ITAA 1936 are satisfied, the Fund is entitled to an exemption under paragraph 128B(3)(jb) of the ITAA 1936. | Detailed Reasoning - Detailed reasoning: 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 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 Fund a 'fund' and is it an indefinite continuing fund which is a provident, benefit, superannuation or retirement fund?: The term 'fund' is not defined in either the ITAA 1997 or the ITAA 1936. Therefore, it should be given its ordinary meaning subject to the context in which it appears and having regard to any relevant case law authorities. The Australian Oxford Dictionary , 2004, Oxford University Press, Melbourne defines the term 'fund' as 1 a permanent stock of something ready to be drawn upon... 2 a stock of money, especially one set apart for a purpose. In Scott v. FC of T (No 2) (1966) 14 ATD 333; (1966) 10 AITR 290 (Scott) , Windeyer J expressed the view that 'fund' in the context of 'superannuation fund' ordinarily meant 'money (or investments) set aside and invested, the surplus income therefrom being capitalised'. Windeyer J's views in Scott were cited with approval by Hill J in Walstern Pty Ltd v. Commissioner of Taxation (2003) 138 FCR 1; 2003 ATC 5076; (2003) 54 ATR 423 who stated that 'for present purposes, the point is the need for "money" or "other property" to constitute a fund'. It is accepted that the Fund will continue to operate in accordance with the rules and regulations for an indefinite period of time. | Detailed Reasoning - Is the Fund a provident, benefit, superannuation or retirement fund?: 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 stated 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 case), 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. The benefit must be characterised by some future purpose. 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 Fund provides benefits at retirement to members who are government employees who meet certain eligibility criteria for each of the Plans in the Fund. Upon death, or where the member is partially or completely incapacitated, benefits are available to the member or their dependants depending on the situation. The Fund provides benefits at retirement to members who are employees of Employer. Upon death, benefits are available to the member or their dependants depending on the situation. The term "vesting" refers to the right to benefits when an employee terminates their employment before they are eligible for early or normal retirement (that is, before age 55 or 65). In this circumstance, the member can receive their vested benefit when they reach 55 or at any time after that date, but no later than 65. Therefore, the Fund satisfies the meaning of 'superannuation fund' as its sole purpose is to provide a benefit by way of a pension or lump sum (depending on the circumstances) through their investment strategies as outlined in the various Plan's rules upon retirement, death or impairment. | Detailed Reasoning - Was the Fund established in a foreign country?: The Fund was established in a foreign country. | Detailed Reasoning - Was the Fund established and is maintained only to provide benefits for individuals who are not Australian residents?: The Fund provides benefits to qualifying members who are not Australian residents. It is considered that the possibility of a small number of members being returned residents or becoming Australian residents after ceasing employment is incidental and should not be taken to conclude that the Fund has not been established and is not maintained to provide benefits for non-residents, based on the rules and operation of the Fund. Therefore, the Fund will satisfy this requirement. | Detailed Reasoning - The Fund's central management and control is carried on outside Australia by entities none of whom is an Australian resident?: The Fund's central management and control is carried on in a foreign country. No amount paid to the Fund or set aside for the 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? No amounts have been paid to the Fund, nor set aside to be paid to the Fund, that can be deducted under this Act. 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. Consequently, this requirement is satisfied. | Detailed Reasoning - Conclusion: The Fund rules show that the Fund has been established as a genuine pension, superannuation and/or retirement fund solely providing superannuation benefits for non-residents of Australia. It has been set up and maintained outside of Australia by non-residents of Australia. Furthermore, no contributions to the Fund are capable of being claimed as a rebate or deduction under any section of the ITAA 1936 or ITAA 1997. The Fund is exempt from income tax in the country of residence. Therefore, the Fund is entitled to an exemption under paragraph 128B(3)(jb) of the ITAA 1936. | Summary: The interest, dividend and non-share dividend income derived in Australia 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: '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 or dividend income derived by the Fund will be considered not assessable not exempt income under section 128D of the ITAA 1936.