Private ruling: Foreign superannuation fund - withholding tax exemption
Date of advice: 11 August 2023
Published: 25 September 2023
Ruling period: 1 July 20XX to 30 June 20XX
Date scheme commenced: DD Month 20XX

Ruling: Q1: Is the Fund excluded from liability to withholding tax on its interest, dividend and non-share dividend income derived in respect of assets acquired on or before 27 March 2018 under paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: Yes

Relevant facts and circumstances: Background 1. The Fund is a pension plan for employees in a particular industry located in a specific city in a foreign country. 2. The Fund is a tax-exempt qualified pension plan under the locally applicable legislation, and provided a letter from the relevant tax authority to this effect. 3. The Fund is a defined benefit retirement plan. 4. The central management and control of the Fund is carried out by a Board of Trustees. Board of Trustees 5. The Fund is governed by a Board of Trustees, members of which are elected by various select groups and must fulfil certain criteria in order to be eligible for election. Membership 6. Employees in a particular field of employment for particular employers are Members of the Fund. 7. The commencement date of a Member's employment impacts certain formulas and calculations with regards to provided benefits. Contributions 8. Pensions under the Fund are funded by a combination of contributions and earnings on investments. 9. Contributions from the fund are received from employers, Members and the government. Fund Benefits Retirement Pension 10. Members are eligible for retirement pensions after completing the required number of years of service and reaching the minimum retirement age. 11. The retirement benefit is paid throughout the retired Member's lifetime. 12. The retirement pension is calculated based on a number of factors including years of service and final salary averaged over a set number of years. 13. Benefits receive annual increases to protect against inflation. Disability Pension 14. Disability pensions are offered to Members, including options for Members who are permanently disabled before and after retirement. Death Benefit 15. Following the death of a Member, eligible surviving beneficiaries may receive a death benefit, either in the form of a portion of the deceased member's pension or in a lump-sum amount. Other Information 16. The Fund's application included the following documentation: • Certificate of residency confirming the Fund's tax exempt status in its resident country • Copies of the pension plan documents setting out the rules, formulas and details of benefits provided. • A list of Australian investments • A Statement from the Fund confirming that: - The Fund is an indefinitely continuing fund; - The Fund was established in a foreign country; - The Fund was established, and is maintained, only to provide benefits to 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 is an Australian resident. - An amount paid to the Fund or set aside for the Fund has not been or cannot be deducted under ITAA 1997; - A tax offset has not been allowed or is not allowable for an amount paid to or set aside for the Fund. - The income of the Fund is non-assessable non-exempt income of the Fund because of: i. Subdivision 880-C of the ITAA 1997; or ii. Division 880 of the Income Tax (Transitional Provisions) Act 1997. Australian Investments 17. The Fund provided a list of its Australian Investments. 18. These Australian investments have the following characteristics: • All share investments are listed on the Australian Securities Exchange (ASX) • The Fund holds less than 10% of the total equity interests on issue of each Australian company or trust. • The Fund has no involvement in the day to day management of the business of any of the Australian companies or trusts. • The Fund has no rights to appoint any person to any board, committee or similar, either directly or indirectly, of the Australian company or trust. • 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.

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 is excluded from liability to withholding tax on interest, dividend and non-share dividend income derived in respect of assets acquired on or before 27 March 2018 in accordance with paragraph 128B(3)(jb) of the ITAA 1936. | Detailed Reasoning - Detailed Reasoning: 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) 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: • 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. 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 from 1 July 2019 onwards. These extra requirements apply only to assets which were acquired after 27 March 2018. For the purposes of Question 1, which only considers the Fund's assets acquired on or before 27 March 2018, these extra requirements are not applicable. | Detailed Reasoning - The Fund is a non-resident: The Fund is not a resident of Australia for tax purposes. Therefore, the Fund satisfies 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. Subsection 6(1) 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(1) of the ITAA 1997 sets out the following: superannuation fund for foreign residents has the meaning given by section 118-520. The term 'superannuation fund for foreign residents' is defined in section 118-520 of the ITAA 1997 as follows: | Detailed Reasoning - 118-520 Meaning of superannuation fund for foreign residents: (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; or (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: (a) the Fund is an indefinitely continuing fund (b) the Fund is a provident, benefit, superannuation or retirement fund (c) the Fund was established in a foreign country (d) the Fund was established and maintained only to provide benefits for individuals who are not Australian residents (e) The central management and control of the Fund is carried on outside of Australia by entities none of whom are Australian residents (f) No amount paid to the Fund or set aside for the Fund has been or can be deducted under the ITAA 1997, and (g) 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 term 'indefinitely continuing 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'. The general view is that an indefinitely continuing fund does not have to continue forever, but rather that the governing rules should not fix an express termination date. It is accepted that the Fund satisfies this requirement. | Detailed Reasoning - The Fund is a provident, benefit, superannuation or retirement fund: The phrase 'a provident, benefit, superannuation or retirement fund' under subparagraph 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 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. Likewise, 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 above mentioned 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 death, disability or serious illness. The Fund is a registered pension plan for specific industry employees, established for the sole purpose of providing retirement pension, disability and death benefits to Members and their eligible beneficiaries. The Fund provides benefits for Members calculated per formulas based on a number of factors including the Member's employment start date, their retirement age and years of service. The Fund meets this requirement by providing the following benefits to Members: (a) Lifetime Retirement Pension (b) Disability Benefits (c) Death Benefits It is thus accepted that the Fund is a 'provident, benefit, superannuation or retirement fund' on the basis that the objective of the Fund is to provide superannuation for retired employees eligible under the pension plan. | Detailed Reasoning - The Fund was established in a foreign country: The Fund was established in a foreign country; therefore the Fund satisfies 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 and is maintained only to provide benefits to Members who are not Australian residents. 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 satisfies 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, paragraphs 10 and 11 of 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 central management and control of the Fund is carried out by individuals who are not residents of Australia. It is therefore 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. 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 Pursuant to subsection 118-520(2) of the ITAA 1997, 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 the Act; or (b) a 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 - Conclusion: 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 for the purposes of subparagraph 128B(3)(jb)(i) of the ITAA 1936. | Detailed Reasoning - The income, consisting of interest, dividend or non-share dividend income, is derived by the Fund: Subsection 128B(3CA) of the ITAA 1936, along with paragraph 128B(3)(jb) of the ITAA 1936 requires the superannuation fund for foreign residents to derive the interest, dividends or non-share dividends paid by Australian resident companies. The Fund invests directly into Australia, receiving interest, dividend or non-share dividend income directly from its Australian investments. It will, therefore, derive the relevant income for the purposes of subsection 128B(3CA) of the ITAA 1936 and paragraph 128B(3)(jb) of the ITAA 1936. | Detailed Reasoning - The Fund is exempt from income tax in the country in which the non-resident resides: As per the facts, the Fund is exempt from income tax in its country of residence. Therefore, the Fund will satisfy this requirement. | Detailed Reasoning - Otherwise non-assessable non-exempt: 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. Income derived by the Fund would not be otherwise treated as not assessable and not exempt income by virtue of the above provisions. Accordingly, the above exclusion should not apply to exclude the Fund from entitlement to the withholding tax exemption for superannuation funds for foreign residents. | 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 from withholding tax on interest, dividend and non-share dividend income derived in respect of assets acquired on or before 27 March 2018 under paragraph 128B(3)(jb) of the ITAA 1936.

Is the Fund excluded from liability to withholding tax on interest, dividend and non-share dividend income derived in respect of assets acquired on or before 27 March 2018 under paragraph 128B(3)(jb) of the ITAA 1936?