Private ruling: Exemption to withholding tax and whether their interest and/or dividend income is non-assessable and non-exempt income
Date of advice: 5 July 2018
Published: September 2018
Ruling period: Year ending 30 June 20xx
Date scheme commenced: 1 July 20xx

Ruling: Q1: Is the Fund exempt from liability to withholding tax on interest, dividend and non-share dividend income under paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: Yes | Q2: Is interest, dividend and non-share dividend income derived by the Fund not assessable income of the Fund under section 128D of the ITAA 1936? | A2: Yes

Relevant facts and circumstances: 1. The Fund forms part of the public sector pension scheme under the Scheme’s Regulations in Country A. 2. The Scheme is a tax approved occupational pension scheme under the Act in Country A. 3. The Scheme was established in accordance with statute to provide death and retirement benefits for all eligible members. 4. The Fund administers the Scheme on behalf of participating public sector employers. 5. All active members of the Fund are required to make pension contributions as defined in the Scheme’s Regulations. 6. The Fund’s Strategy Statement sets out the financial responsibilities of the Fund. 7. The purpose of the Fund is to invest monies to pay Scheme benefits and other costs as defined in the Scheme’s Regulations. 8. The Fund’s aim is long-term solvency and employers’ contributions are set to ensure that liabilities can be met over the long term. 9. The Committee has responsibility for all matters relating to the management and administration of the Fund. The Committee meets formally at least quarterly and is supported by two independent advisors and is responsible for determining the investment strategy and policy. 10. Eligible employees will automatically become a member of the Scheme. 11. The following benefits are available under the Fund: ● Retirement pension ● Survivor’s pension ● Children’s pension ● Tax free lump sums on retirement ● Lump sum death benefits ● Deferred benefits, refunds or transfers of pension rights ● Pension and lump sums payable on premature retirement due to ill health and early retirement/redundancy. 12. The Scheme Rules provide for an early retirement scheme. Other 13. The Fund’s head office is located in Country A. 14. The Fund was established and is maintained only to provide benefits for individuals who are not Australian residents. 15. An amount paid to the Fund or set aside for the Fund has not been and cannot be deducted under the Income Tax Assessment Act 1997 (ITAA 1997). 16. A tax offset has not been allowed nor would be allowable for any amount paid to the Fund or set aside for the Fund. 17. The Fund is not a resident of Australia for tax purposes. 18. The Fund is exempt from taxation in accordance with Country A’s legislation. 19. The Fund will receive interest income, along with dividend and non-share dividend income from companies who are residents of Australia for tax purposes.

Relevant legislative provisions: Income Tax Assessment Act 1936 subsection 6(1) | Income Tax Assessment Act 1936 paragraph 128B(3)(jb) | Income Tax Assessment Act 1936 section 128D | Income Tax Assessment Act 1997 section 118-520 | Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision: Summary: Section 128B of the ITAA 1936 imposes liability to withholding tax on income derived by a non-resident that consists of dividend income (subsection 128B(1) of the ITAA 1936), interest income (subsection 128B(2) of the ITAA 1936) as well as other income prescribed in that section. Subsection 128B(3) of the ITAA 1936 notes that section 128B of the ITAA 1936 will not apply to prescribed categories of income. Relevantly, paragraph 128B(3)(jb) of the ITAA 1936 states: (jb) income that: (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; | Detailed Reasoning - The Fund is a non-resident: The Fund is not a resident of Australia for tax purposes. Therefore, the Fund will satisfy this requirement. | Detailed Reasoning - The Fund is a superannuation fund for foreign residents: Superannuation fund for foreign residents is a defined term in the ITAA 1936. Section 6 of the ITAA 1936 states: superannuation fund for foreign residents has the meaning given by subsection 995-1(1) of the Income Tax Assessment Act 1997. Subsection 995-1 of the ITAA 1997 sets out the following: superannuation fund for foreign residents has the meaning given by section 118-520. Section 118-520 of the ITAA 1997 states the following: (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 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, for the Fund to be considered a superannuation fund for foreign residents for the purposes of paragraph 128B(3)(jb) of the ITAA 1936, it must be established that: ● The Fund is an indefinitely continuing fund ● The Fund is a provident, benefit, superannuation or retirement fund ● The Fund was established in a foreign country ● The Fund was established and maintained only to provide benefits for individuals who are not Australian residents ● The central management and control of the Fund is carried on outside of Australia by entities none of whom are Australian residents ● No amount paid to the Fund or set aside for the Fund has been or can be deducted under this Act, and ● No tax offsets have been allowed or would be allowable for an amount paid to the Fund or set aside for the Fund. | Detailed Reasoning - The Fund is an indefinitely continuing fund: The Fund’s aim is long-term solvency and employers’ contributions are set to ensure that liabilities can be met over the long term. There is no indication that there is any contemplation of the Fund ending at a defined point in time. Therefore, it is accepted that the Fund is an indefinitely continuing fund. | Detailed Reasoning - The Fund is a provident, benefit, superannuation or retirement fund: ATO Interpretative Decision ATO ID 2009/67 Income Tax: Superannuation fund for foreign residents (ATO ID 2009/67) provides 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 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 Scheme was established in accordance with statute to provide death and retirement benefits for all eligible members. The circumstances in which a member of the Fund can receive benefits are clearly consistent with those of a provident, benefit, superannuation or retirement fund. The alternate circumstances of access, being early retirement/redundancy, death and illness benefits all align to the contemplated contingencies of a provident, benefit, superannuation or retirement fund. As both the objective of the Fund and the actual operation of the Fund have the sole purpose of providing retirement benefits or benefits in alignment with other contemplated contingencies, the Fund is considered to be a provident, benefit, superannuation or retirement fund. Therefore, the Fund will satisfy this requirement. | Detailed Reasoning - The Fund was established in a foreign country: The Fund was established in Country A. Therefore, the Fund will satisfy this requirement. | Detailed Reasoning - The Fund was established and maintained only to provide benefits for individuals who are not Australian residents: The Fund was established in Country A for its members. The Fund operates to provide retirement benefits for its members in Country A. It is considered that 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, in this case, has not been established and is not maintained only 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: 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 in respect of the central management and control ( CM&C ) of a superannuation fund: 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. Furthermore, Taxation Ruling TR 2018/5 Income tax: Central Management and Control test of residency (TR 2018/5) states: 10. Central management and control refers to the control and direction of a company’s operations. It does not refer to a physical location in which the control and direction of a company is located, and may ultimately be exercised in more than one location. 11. The key element in the control and direction of a company’s operations is the making of high-level decisions that set the company’s general policies, and determine the direction of its operations and the type of transactions it will enter. The Committee is located in Country A and has responsibility for all matters relating to the management and administration of the Fund. The Committee meets formally at least quarterly and is supported by two independent advisors. The objective of the Fund is to provide pensions to employees and former employees of participating public sector employers and other organisations in Country. Based on the above, it is reasonable to conclude that the central management and control of the Fund occurs in Country A by entities that are not Australian residents. Therefore, the Fund will satisfy this requirement. 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 An amount paid to the Fund or set aside for the Fund has not been and cannot be deducted under the ITAA 1997. A tax offset has not been allowed nor would be allowable for any amount paid to the Fund or set aside for the Fund. Therefore, the Fund will satisfy this requirement. | Detailed Reasoning - Consists of interest or dividend and/or non-share dividends paid by a company that is a resident: Paragraph 128B(3)(jb) of the ITAA 1936 will only apply to interest, or to dividends and non-share dividends paid by Australian resident companies. 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. Therefore, the Fund will satisfy this requirement. Is exempt from income tax in the country in which the non-resident resides The Fund is exempt from taxation in accordance with Country A’s legislation. Therefore, the Fund will satisfy this requirement. | Detailed Reasoning - Conclusion: As all the requirements of paragraph 128B(3)(jb) of the ITAA 1936 are satisfied, the Fund will be entitled to an exemption under paragraph 128B(3)(jb) of the ITAA 1936. | Detailed Reasoning - Question 2: Is interest, dividend and non-share dividend income derived by the Fund not assessable and not exempt income of the Fund under section 128D of the ITAA 1936? | Detailed Reasoning - Answer: Yes. | 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. Section 128D of the ITAA 1936 provides that, inter alia , where withholding tax would be payable but for the operation of paragraph 128B(3)(jb) of the ITAA 1936, the income is not assessable income and is not exempt income. The interest, dividend and non-share dividend income derived by the Fund from its Australian investments will not be assessable income or exempt income under section 128D of the ITAA 1936 because the aforementioned income: ● would have been subject to withholding tax; and ● is not exempt from withholding tax under any provision other than paragraph 128B(3)(jb) of the ITAA 1936. | Detailed Reasoning - Conclusion: 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.