Private ruling: Superannuation fund for foreign residents - withholding tax exemption
Date of advice: 6 December 2021
Published: March 2022
Ruling period: DDMMYYYY to DDMMYYYY
Date scheme commenced: DDMMYYYY

Ruling: Q1: Is the Fund excluded from liability to withholding tax on its interest, dividend and non-share dividend income derived in respect of its Australian investments under paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 ( ITAA 1936)? | A1: Yes

Relevant facts and circumstances: Foreign Co 1. Foreign Co is a foreign company. 2. Foreign Co entered into a trust agreement (the Trust Agreement), with Trust Co to create the Fund. Trust Co is the trustee of the Fund and acts as custodian of the investment assets. 3. The Fund was created to pool pension plans created by Foreign Co and its affiliates in accordance with Foreign Law 1. The Plans 4. The Fund consists of a number of plans (collectively known as 'the Plans'): 5. The Plans were/are only open to employees of Foreign Co or Foreign Co affiliates. 6. The employees are citizens or residents of Foreign Country. The employees are not Australian citizens. 7. Plan A has had a soft close since DDMMYYYY. That is, it does not accept new members if those members were not employees of Foreign Co before DDMMYYYY. Existing members can continue to earn a pension at a reduced rate or have their pension frozen and their contributions directed to a new fund. Plan A is still continuing at a reduced rate. Plans B, C, and D continue to operate with no intention to close these plans. 8. Employees do not make contributions to the Fund. The contributions to the Fund are made by Foreign Co and its affiliates. 9. The Plans are defined benefit plans. Active employees cannot make withdrawals, borrow, or withdraw funds for reasons of hardship. The only benefit employees receive is a retirement benefit. 10. The Fund is overseen by the Foreign Co Committee (FCC). The FCC is selected by the Chairman of the FCC. The Chairman has been delegated the responsibility by Foreign Co 'for taking all actions concerning the Fund. The FCC is the Plan Administrator of the Fund as described in the Trust Agreement. 11. The Fund uses the commingled assets of the Plans to invest with public fixed income investment managers and public equity investment managers. These investment managers use the funds to invest in publicly traded stocks or index funds which include Australian Investments. The investible funds of the Fund are not commingled with any other investors. 12. Although the Fund uses investment managers to manage the Fund's Australian Investments, the Fund still maintains both legal and beneficial ownership of the Australian Investments. In accordance with their respective agreements the investment managers instruct the custodian (Trust Co) to pay the Fund any income earned from its investments. 13. The Fund does not consist of retirement plans governed by Foreign Law 1. The Trust Agreement Please note all statements in this section are referenced to the Trust Agreement. 14. The Trust Agreement between Foreign Co and Trust Co sets out the investment rules, the trustee's powers and other rules for the plans in the Fund. The rules were drafted in accordance with the Foreign Law 2. 15. The Plan Administrator of the Fund is Foreign Co acting through the FCC. The FCC has the responsibility of administering each Plan, allocating assets from the Fund to each separate plan account, monitoring the investments of the Fund, determining the propriety of investments in foreign securities and maintaining custody of foreign investments abroad, assuring no Plan violates any provision of Foreign Law 2, and appoints and removes Investment Managers. 16. Trust Co will make distributions to the Fund as the FCC directs pursuant to the service description furnished by the FCC. 17. The Fund consists of one or more separate accounts. The accounts are established by Trust Co at the direction of the FCC. 18. Each separate account may have its own investment manager appointed. 19. The FCC has the investment responsibility for assets held in any separate account where an investment manager has not been retained, has been removed or is unable or unwilling to act. 20. Relevantly Trust Co as trustee of the Fund has the following powers: a. To retain the original assets and invest them in bonds, stocks, mortgages, notes, options, futures contracts, options on futures contracts, limited partnership interests, participations, in regulated investment companies, or other property of any kind including real or personal, foreign or domestic property. b. To deposit and withdraw the Funds assets with Trust Co. c. To hold part of the Funds assets in cash without liability for interest. d. To vote or refrain from voting in any corporate securities except in circumstances where that vote would subject to adverse liability under any law. e. To lease any assets of the Fund. f. To borrow money from any lender and to extend or renew any existing indebtedness and to mortgage or pledge any assets of the Fund. g. To sell the assets of the Fund in accordance with industry practice. 21. Trust Co powers are limited as follows: a. The powers of Trust Co are only exercisable for the purpose of providing benefits to the Participants and Beneficiaries under the Plans. b. Trust Co shall diversify its investments c. Regarding its investments Trust Co will follow the investment guidelines established by Foreign Co. d. Foreign Co has the responsibility for the decision to maintain the custody of foreign investments abroad. 22. Trust Co is required to maintain accounts of all investments, receipts and disbursement, including contributions, distributions, purchases, sales and other transactions of the Fund. 23. The Trust Agreement between Trust Co and the FCC can be terminated by actions of the FCC where: a. The plan loses its qualified status under Foreign Law 1. b. Foreign Co's sale or dissolution of the subsidiary responsible for making contributions to the plan account. c. When there are no assets included in the Fund. 24. The FCC cannot direct Trust Co to cause any part of the Fund to be transferred for any purpose other than the exclusive benefit of the participant or beneficiaries of the Plans. 25. The Fund is a trust which is a pension, profit sharing or stock bonus plan qualified under Foreign Law 1.

Relevant legislative provisions: Income Tax Assessment Act 1936 Paragraph 128B(3)(jb) | 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: Broadly, paragraph 128B(3)(jb) of the ITAA 1936 provides an exclusion from withholding tax for interest, dividends and non-share dividends derived by a superannuation fund for foreign residents (subject to the satisfaction of certain conditions). For the exclusion to apply, the interest, dividend and/or non-share dividend income must be: Further, from 1 July 2019, the extra requirements in subsection 128B(3CA) of the ITAA 1936 must also be met. | Detailed Reasoning - The Fund is a non-resident: The Fund is a resident of the Foreign Country. Therefore, the Fund satisfies this requirement. | Detailed Reasoning - The Fund is a superannuation fund for foreign residents: Section 118-520 of the ITAA 1997 provides: (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 is paid to the fund or set aside for the fund has been or can be deducted under this Act; or (b) a *tax offset has been allowed or is allowable for such an amount. The Fund was established to provide retirement benefits to its members. The Fund's Plan A has, as of DDMMYYYY, stopped accepting new members, but Foreign Co continues to make contributions into the Fund on behalf of existing members. Foreign Co has indicated that Plans B, C and D will continue. The Fund continues to qualify as a pension fund in accordance with Foreign Law 1. Additionally, FCC, the plan administrator of the Fund has indicated that there is currently no intention to dissolve the Fund. There is sufficient evidence to accept that the Fund will continue to operate in accordance with the Foreign Law 1 for an indefinite period of time. Therefore, the Fund satisfies this requirement. 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 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 Fund only provides retirement benefits to its members. There are no other benefits provided by the Fund to members and their beneficiaries beyond those as prescribed above. Therefore, the Fund satisfies this requirement. 3. Established in a foreign country The Fund was established in Foreign Country. Therefore, the Fund satisfies this requirement. The Fund was established in Foreign Country for its members, being employees of Foreign Co and its affiliates, to provide retirement benefits. These employees reside in Foreign Country. Therefore, the Fund satisfies this requirement. 5. Central management and control (CM&C) 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: 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. Foreign Co has delegated the responsibility of managing the Fund to the FCC. The FCC manages all actions concerning the Fund. It further provides contributions, deposits and instructions on behalf of the Fund to the custodian Trust Co in accordance with the Trust Agreement. The instructions provided to Trust Co include directions for payments to members, advice on investments and instructions regarding the holding of foreign assets on behalf of the Fund. Additionally, the FCC enters into agreements with investment managers to manage the Fund's debt and equity investments. None of these entities which make decisions with respect to the Fund are Australian residents. Based on the above, it is reasonable to conclude that the central management and control of the Fund occurs outside of Australia by entities that are not Australian residents. Therefore, the Fund satisfies this requirement. The Fund has not and cannot deduct amounts under either the 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. Therefore, the Fund satisfies this requirement. As all of the above requirements are satisfied, the Fund meets the requirements of being a superannuation fund for foreign residents as defined by section 118-520 of the ITAA 1997. | Detailed Reasoning - The income, consisting of interest, dividend or non-share dividend income, is derived by the Fund: In order to be excluded from withholding tax under paragraph 128B(3)(jb) of the ITAA 1936, the interest, dividend and/or non-share dividend income must be derived by a non-resident superannuation fund for foreign residents. Trust Co as custodian of the Fund authorises the assets of the Fund to be invested. These assets are then invested in public debt and equity investments. As per the investment management agreements and the Trust Agreement any income earned from these investments is paid directly to the Fund. The Fund is the legal and beneficial owner of the Australian investments and derives the dividend income from those Australian investments. Therefore, the Fund satisfies this requirement. | Detailed Reasoning - The Fund is exempt from income tax in the country in which the non-resident resides: The Foreign Government has stated that the Fund is a resident for Foreign Country for tax purposes and is exempt from tax in Foreign Country under Foreign Law 1. Therefore, the Fund satisfies this requirement. | Detailed Reasoning - 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: i. The Fund must satisfy the 'portfolio interest test' in relation to the test entity (subsection 128B(3CC) of the ITAA 1936) ii. The Fund must satisfy the 'influence test' (subsection 128B(3CD) of the ITAA 1936) in relation to the test entity, and iii. The income cannot otherwise be non-assessable non-exempt income because of: a. Subdivision 880-C of the ITAA 1997, or b. Division 880 of the Income Tax (Transitional Provisions) Act 1997 . 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 company it invests in. Further, the Fund holds less than 10% of the total participation interests in each Australian company or trust 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 Australian investments. Subsection 128(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 the Funds Australian equity investments: a. All investments are listed on the Australian Securities Exchange (ASX). b. Neither the Fund, nor any related party, has involvement in the day to day management of the business of any of the Australian companies, trusts, or Australian debt issuer. c. Neither the Fund, nor any related party, has the right to appoint a director to the Board of Directors of the Australian company, Australian debt issuer or equivalent role in a trust. d. Neither the Fund, nor any related party, holds the right to representation on any investor representative or advisory committee (or similar) of the Australian company, Australian debt issuer or equivalent role in a trust. e. Neither the Fund, nor any related party, has the ability to direct or influence the operation of the Australian company, Australian debt issuer or trust outside of the ordinary rights conferred by the equity interest held. f. The Fund only holds rights to vote in proportion to its equity interest in each Australian company, trust, or Australian debt issuer. Relevantly, in respect of the Funds debt investments of the relevant facts and circumstances to this Ruling: a. All investments are listed on the ASX. b. The investments are corporate, securitised, index linked and Government bonds and treasuries from which it ordinarily derives income in the form of interest. c. The Fund has no involvement in the day-to-day management of the business of any the Australian debt issuers. d. The Fund has not acquired the right to appoint a director to the Board of Directors of any issuing Australian debt issuer. e. The Fund has not acquired the right to representation on any investor's representative or advisory committee (or similar) of the Australian Debt Issuer. f. The Fund has no ability to direct or influence the operation of the Australian debt issuer outside of the ordinary rights conferred by the debt interest held. g. The Fund has no voting rights in respect of the debt investments held. h. There are no special relationships or arrangements between the Fund, and the issuers of the Australian debt investments held which affect the amount of interest income that is paid from those investments. 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. 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: The Fund is excluded from withholding tax in relation to interest, dividend and non-share dividend income derived from its current Australian investments.

Other relevant facts: 26. The Fund is a resident of Foreign Country for the purposes of taxation in Foreign Country. | 27. The Fund is exempt from taxation in Foreign Country. | 28. The FCC is located outside of Australia and has its meetings outside of Australia. | 29. The Fund will receive interest income from Australian investments, along with dividend and non-share dividend income from companies who are residents of Australia for tax purposes. | 30. Amounts paid to, or set aside for, the Fund have not been and cannot be deducted under the Income Tax Assessment Act 1997 (ITAA 1997). | 31. 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. | 32. The Fund's income from its Australian investments is not non-assessable non-exempt income because of: | 33. The Fund has invested in Australian equity investments. These equity investments have the following characteristics: | b. The Fund holds less than 10% of the total equity interests on issue of each Australian company. | c. The Fund has no involvement in the day-to-day management of the business of any of the Australian companies. | d. The Fund has no right to appoint a director to the Board of Directors of the Australian company. | e. The Fund has no right to representation on any investor representative or advisory committee (or similar) of the Australian company. | f. The Fund has no ability to direct or influence the operation of the Australian company or trust outside of the ordinary rights conferred by the equity interest held. | g. The Fund only holds rights to vote in proportion to its equity interest in each Australian company. | 34. The Fund's debt investments are made up of corporate, securitised, index linked and Government bonds and treasuries from which ordinary income is derived in the form of interest. The debt investments have the following characteristics: | c. The Fund holds less than 10% of the total equity interests on issue of each Australian debt issuer. | d. The Fund has no involvement in the day-to-day management of the business of any the Australian debt issuers. | e. The Fund has not acquired the right to appoint a director to the Board of Directors of any issuing Australian debt issuer. | f. The Fund has not acquired the right to representation on any investor's representative or advisory committee (or similar) of the Australian Debt Issuer. | g. The Fund has no ability to direct or influence the operation of the Australian debt issuer outside of the ordinary rights conferred by the debt interest held. | h. The Fund has no voting rights in respect of the debt investments held. | i. There are no special relationships or arrangements between the Fund, and the issuers of the Australian debt investments held which affect the amount of interest income that is paid from those investments. | Question 1: Is the Fund excluded from liability to withholding tax on its interest, dividend and non-share dividend income derived in respect of its Australian investments under paragraph 128B(3)(jb) of the ITAA 1936? | derived by a superannuation fund for foreign residents (as defined in section 118-520 of the ITAA 1997), and | exempt from income tax in the country in which the superannuation fund for foreign residents arise. | Was established and maintained only to provide benefits for individuals who are not Australian residents | The Fund satisfies the 'portfolio interest test' | The Fund satisfies the 'influence test' | Otherwise non-assessable non-exempt