Private ruling: International issues - foreign entities – superannuation fund for foreign residents
Date of advice: 4 May 2018
Published: July 2018
Ruling period: 1 July 2017 to 30 June 2019
Date scheme commenced: 1 July 2017

Ruling: Q1: Is the Fund a ‘superannuation fund for foreign residents’ as defined in section 118-520(1) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes | Q2: Is the trustee of the Fund excluded from liability to withholding tax on interest and/or dividend income derived by the Fund from Australia under paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)? | A2: Yes | Q3: If the Fund is excluded from liability to interest and/or dividend withholding tax under paragraph 128B(3)(jb) of the ITAA 1936, is interest and/or dividend income derived by the trustee of the fund, in its capacity as trustee of The Fund, not assessable and not exempt income of the Fund under section 128D of the ITAA 1936? | A3: Yes

Relevant facts and circumstances: 1. The Fund is a resident of country A, a foreign jurisdiction. Income earned on funds belonging to The Fund is exempt from income tax in that jurisdiction. 2. The fund is an independent state agency and is subject to legislative and executive department budgetary review and comment. It is managed by a board of directors whose powers and duties are bound by a Code. 3. The Fund was established to provide benefits for members of The Fund, none of which are Australian residents. The members of The Fund are all employees of various state agencies in country A. 4. The Fund consists of defined benefit pension systems (Systems) and defined contribution plans (Plans). All these Systems and Plans are defined as pension (and other employee benefit) trust funds, which are fiduciary funds. 5. Under the Code there is no requirement for The Fund to be terminated or wound up after a specified period. 6. All the Systems administered by the Fund are defined benefit schemes where the employee member will receive a pension (based on years of service and a calculation of their final average salary) on retirement. 7. Benefits received by members of The Fund include withdrawals at retirement age and early retirement due to disability. The systems and plans also allow a member to withdraw their contributions on termination of employment, or if they are experiencing hardship, in doing so, the members forfeit any right to the employer contributions and also face tax penalties. 8. All of the systems and plans allow a member to withdraw their contributions on termination of employment, or if the member is experiencing hardship. However, the member then forfeits any right to the employer contributions and also faces tax penalties. 9. The central management and control of The Fund is carried on outside Australia by entities none of whom is an Australian resident. 10. The income of The Fund includes interest and/or dividends paid by a resident of Australia and that income is exempt from income tax in the Fund’s country of residence, country A. 11. No amount paid to The Fund or set aside for The Fund has not been or cannot be deducted under the ITAA 1936 or 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 qualifies as a ‘superannuation fund for foreign residents’ as defined in subsection 118-520(1) of the Income Tax Assessment Act 1997 (ITAA 1997). Further, the trustee of the fund, in its capacity as trustee of The Fund, is excluded from liability to withholding tax on interest and/or dividend income derived by The Fund under paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936). | Detailed Reasoning - Detailed reasoning: 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 The term 'indefinitely continuing fund' in subparagraph 118-520(1)(a)(i) of the ITAA 1997 is undefined. The Macquarie Dictionary defines 'indefinite' as: 1. not definite; without fixed or specified limit; unlimited. 2. not clearly defined or determined; not precise. The Fund was established as a retirement office to administer the systems, plans and programs under a Code. Under the Code there is no requirement for The Fund to be terminated or wound up after a specified period. Therefore, The Fund is a fund that is considered to be indefinitely continuing for the purposes of subparagraph 118-520(1)(a)(i) of the ITAA 1997. All the Systems administered by the Fund are defined benefit schemes where the employee member will receive a pension (based on years of service and a calculation of their final average salary) on retirement. The terms and conditions of all the Systems and Plans are subject to the same overriding application of the Code and operate conditionally on the provisions in the Code therefore the overall operation and purpose of the Fund as set out in the Code, is sufficient for The Fund to be considered to be a ‘provident, benefit, superannuation or retirement fund’. The fund was established in a foreign jurisdiction and the members of The Fund are all employees of various agencies in that jurisdiction, therefore The Fund was established to provide benefits for members none of which are Australian residents. The central management and control of The Fund is carried on outside Australia by entities none of whom is an Australian resident. With respect to subsection 118-520(2), an amount paid to The Fund or set aside for The Fund has not been or cannot be deducted under the ITAA 1936 or ITAA 1997 and a tax offset has not been allowed or is not allowable for such an amount. Therefore, The Fund meets the definition of ‘superannuation fund for foreign residents’ under section 118-520 of the ITAA 1997. | Summary: The Trustee in its capacity as the trustee of the Fund, is excluded from liability to interest and/or dividend withholding tax under paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936). | Detailed Reasoning - Detailed reasoning: Paragraph 128B(3)(jb) of the ITAA 1936 which is cited below excludes certain 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 Fund is exempt from taxation in Country A, and is a resident of that country for taxation purposes. The Trustee in its capacity as the trustee of the Fund confirmed the Fund will derive interest and/or dividend income from Australia, and as discussed earlier in Question 1 the Fund is a ‘superannuation fund for foreign residents’ as defined in section 118-520. Accordingly, the Trustee in his capacity as the trustee of the Fund, is excluded from liability to interest and/or dividend withholding tax under paragraph 128B(3)(jb) of the ITAA 1936. | Summary: The interest and/or dividend income derived from Australia by the trustee of the fund, in its capacity as trustee of 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. Dividend and interest income derived by the Fund from Australia 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 discussed in Question 2 above, the trustee of the Fund, is excluded from liability to interest and/or 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. Accordingly, 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.