Private ruling: Foreign Super Fund - Exemption from Income tax/Withholding tax
Date of advice: 11 July 2017
Published: November 2017
Ruling period: Year ended 30 June 2017 | Year ended 30 June 2018 | Year ended 30 June 2019 | Year ended 30 June 2020 | Year ended 30 June 2021
Date scheme commenced: 1 July 2016

Ruling: Q1: Is the trustee excluded from liability to withholding tax on its interest and/or dividend income derived from Australia under paragraph 128B(3)(jb) of the ITAA 1936? | A1: No. | Q2: Is interest and/or dividend income derived from Australia by non-assessable and non-exempt income under section 128D of the ITAA 1936? | A2: No.

Relevant facts and circumstances: The applicant has applied for a private ruling for a superannuation fund for foreign residents. The application includes the following documentation: ● Letter from the country’s tax authorities stating the fund was exempt from income tax in that country. ● A copy of the Trust deed and the rules of the fund which provide details of the establishment of the fund, the benefits provided by the fund, and the rules governing the fund. ● A statement from the trustee of the fund confirming that: ● the fund is an indefinitely continuing fund and a provident, benefit, superannuation or retirement fund, ● the fund was established in a foreign country, ● the fund was established, and is maintained, only to provide benefits for individuals who are not Australian residents, ● the central management and control of the fund is carried on outside Australia by entities none of whom is an Australian resident, ● an amount paid to the fund or set aside for the fund has not been or cannot be deducted under the ITAA 1997 and ● a tax offset has not been allowed or is not allowable for such an amount. ● A copy of the financial statements of the fund. ● A copy of the latest plan documents has been provided for the two sub plans of the master trust. ● Article X of both plan documents provides conditions for which a member of the fund can receive a refund of their benefit on severance of employment. ● Article X.1.1 states: Severance from Employment. If the Participant experiences a Severance from Employment, whether voluntary or involuntary, for any reason other than Retirement or Disability, then his or her Accounts shall be paid by the method of a single lump sum distribution. ● Article Y of the plan documents allows for the withdrawal of amounts from certain accounts without meeting a condition of release. Members cannot access their 401(k) Accounts or Company Accounts without meeting the age of 59 ½ or from becoming disabled. ● Article Y.2 states: Withdrawal from Individual Retirement Account. As of any Valuation Date, a Participant may withdraw from his or her Individual Retirement Account all or any part of the value thereof specified in his or her instructions to the Plan Administrator. ● Article Y.3 states: Withdrawal from After Tax Savings Account. As of any Valuation Date, a Participant may withdraw from his or her After Tax Savings Account all or any part of the value thereof specified in his or her instructions to the Plan Administrator. Such withdrawal shall be made in the following order: a) first, from the contributions made to such Account prior to January 1, 1987; b) second, pro rata from the contributions made to such Account and the earnings credited to such Account after December 31, 1986; and c) third, from the earnings credited to such Account prior to January 1, 1987. ● Article Y.4 states: Withdrawal from Rollover Accounts. As of any Valuation Date, a Participant may withdraw from his or her Rollover Accounts all or any portion of the difference between the then outstanding balance of any loans from such Rollover Accounts under Article 10 and the value of such Rollover Accounts specified in his or her instructions to the Plan Administrator. ● Article Z outlines the provisions for allowing loans to members of the fund. Members can apply at any time for a loan but can only have a maximum of two loans at one time. The total amount they can borrow is up to a maximum of $50,000 or 50% of the combined value of their accounts (whichever is smallest). These loans have a maximum loan term of 60 months and are repaid by deducting equal amounts through payroll.

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: Section 128D of the Income Tax Assessment Act 1936 (ITAA 1936) provides that interest and dividend income that is excluded from withholding tax pursuant to paragraph 128B(3)(jb) of the ITAA 1936 is not assessable income. 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 Income Tax Assessment Act 1997 (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 entity in question a 'fund’? and is it an indefinite continuing fund?: In order to consider the application of Section 118-520 of the ITAA we must first determine if the entity is a 'fund’ and is it an indefinite continuing fund? On consideration of the plan details there is no question that the entity is a 'fund’ that is indefinite and continuing. | Detailed Reasoning - Is the entity a provident, benefit, superannuation or retirement fund for the purposes of 118-520 of the ITAA 1997?: 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 enunciated 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), 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 where the benefit must be characterised by some future purpose e.g. a funeral benefit. 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. In the case of the entity there a three provisions that show the Fund has not been established for the sole purpose of providing a benefit on meeting one of the required conditions. The provisions are as follows: | Detailed Reasoning - Severance of employment: On the cessation of their employment an employee who is a member can request a refund of their benefit amount from the entity without meeting any other condition of release. The amount is paid out as a lump sum amount. | Detailed Reasoning - Withdrawals: Members can withdraw amounts from their Individual Retirement Account, After Tax Savings Account and their Rollover Accounts without meeting a condition of release. They cannot access amounts from their main 401(k) accounts or Company Accounts without first meeting the age of 59 ½ or by becoming disabled. | Detailed Reasoning - Loans: Members can apply to borrow an amount from the fund. There is a set limit on this amount and only two loans can exist at once but there are no other conditions which dictate when a loan can be taken. These loans are then repaid through deductions from the member’s remuneration each week/fortnight/month. It is considered that due to these clauses within the plan documentation the Fund will not meet the requirements to be considered a provident, benefit, superannuation or retirement fund. The lending of money from a fund to its members, the allowance for access to benefits on cessation of employment and the ability for members to withdraw money at any time does not align with the sole purpose of a superannuation fund which is the supply of benefits on fulfilling a specified condition such as reaching retirement age or due to an unforseen circumstance such as disablement. Accordingly, the entity is not a superannuation fund for foreign resident and the interest and/or dividend income of the fund is not excluded from withholding tax and will not be non-assessable non-exempt income.