Private ruling: Withholding tax exemption
Date of advice: 15 September 2020
Published: October 2020
Ruling period: Year end 30 June 20XX to 30 June 20XX
Date scheme commenced: Year end 30 June 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 its Australian investments under paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 ( ITAA 1936)? | A1: Yes.

Relevant facts and circumstances: Background Investment objectives · The Fund holds less than 1% of the total equity interests on issue of each Australian company · The Fund is not involved in the day-to-day management or operations of the Australian company. · The Fund has no right to appoint a director to the Board of Directors of the Australian company. · The Fund has no right to representation on any investor representative or advisory committee (or similar) of the Australian company. · The Fund has no ability to direct or influence the operation of the Australian company outside the ordinary rights conferred by the equity interest held. · The Fund only holds rights to vote in proportion to its equity interest in each Australian company. Other relevant information

Relevant legislative provisions: Section 128B of the ITAA 1936 | Subsection 128B(1) of the ITAA 1936 | Subsection 128B(2) of the ITAA 1936 | Subsection 128B(3) of the ITAA 1936 | Paragraph 128B(3)(jb) of the ITAA 1936 | Subsection 128B(3CA) of the ITAA 1936 | Subsection 128B(3CB) of the ITAA 1936 | Subsection 128B(3CC) of the ITAA 1936 | Subsection 128B(3CD) of the ITAA 1936 | Section 118-520 of the ITAA 1997 | Subsection 880-105(1) of the ITAA 1997

Reasons for decision: Summary: All legislative references are to the Income Tax Assessment Act 1936 unless otherwise specified. Broadly, 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. Further, from 1 July 2019, the extra requirements in subsection 128B(3CA) must also be met. 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 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. 1. The Fund is an indefinitely continuing fund The term '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 Federal Commissioner of Taxation [1966] HCA 48 (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] FCA 1428 who stated that 'for present purposes, the point is the need for 'money' or 'other property' to constitute a fund'. The legislation provides no guidance on the meaning of 'indefinitely continuing'. It is not a technical legal expression, and the ordinary meanings of indefinitely and continuing involve little ambiguity or controversy. The Macquarie Dictionary defines 'indefinitely' and 'continuing' as follows: Indefinite: adjective 1. not definite; without fixed or specified limit; unlimited: an indefinite number 2. not clearly defined or determined; not precise. indefinitely, adverb Continue: verb ( Continued, continuing ) 1. to go forwards or onwards in any course or action; keep on. 2. to go on after suspension or interruption. 3. to last or endure. 4. to remain in a place; abide; stay. 5. to remain in a particular state or capacity The Fund was set up to provide members with a pension benefit upon retirement and is open to new members. There is no evidence to suggest that the Fund will be wound up or will no longer continue in the near future. The Commissioner accepts that in these circumstances, the Fund is an indefinitely continuing fund. Therefore, the Fund satisfies this requirement. 2. Provident, benefit, superannuation or retirement fund 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 stated at ATD 351; AITR 312; ALJR 278 that: There is no definition in the Act of a superannuation fund. The meaning of the term must therefore depend upon ordinary usage, the attributes of a thing thus denominated being those which things ordinarily so described have...the connotation of the phrase in the Act must be determined by one's general knowledge of the extent of the denotation of the phrase in common parlance... 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: There was no definition in the Act of 'a provident, benefit or superannuation fund', and the meaning of the several expressions must therefore be arrived at in light of ordinary usage and with only one piece of assistance to be gathered from the immediate context. Since a fund, if its income was to be exempt under the provision, was separately required to be one established for the benefit of employees, each of the three descriptive words 'provident', 'benefit' and 'superannuation' must be taken to have connoted a purpose narrower than the purpose of conferring benefits, in a completely general sense, upon employees. Precise definition may be difficult, and in any case is unnecessary for present purposes. 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. In Cameron Brae Pty Limited v Commissioner of Taxation [2007] FCAFC 135, the Full Federal Court held that the relevant fund was a superannuation fund for the purposes of former section 82AAE of the ITAA 1936. Jessup J at [106] stated: In answering the question whether the fund was a "superannuation fund" as the term is ordinarily understood, it is, in my view, critical that payments could not have been made out of the fund (other than by way of administration expenses, taxation, etc) save to members of the relevant discretionary class, and save in circumstances which fell within the ordinary understanding of superannuation. A proper characterisation of the fund should, in my view, depend upon the purposes for which the assets and moneys of the fund might have been used rather than upon the quality of the rights of individual members of the fund. If the fund could have been used only to achieve what might be described as a superannuation purpose, I would describe the fund as a "superannuation fund". That a particular member of a discretionary class might not, ultimately, have received any payment, was not, in my view, disqualifying. ATO Interpretative Decision ATO ID 2009/67 Income Tax: Superannuation fund for foreign residents 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). 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. 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). In this instance, the purpose of the Fund is to provide retirement pension, disability, death and survivor benefits to members and their dependents. The Commissioner accepts that the alternate circumstances of access to the funds align to the contemplated contingencies of a provident, benefit, superannuation or retirement fund. 3. The Fund was established in a foreign country The Fund was established in Country A. Therefore, the Fund satisfies this requirement. 4. The Fund was established and maintained only to provide benefits for individuals who are not Australian residents All members of the Fund are residents of Country A. 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 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. The Fund is managed and administered by entities registered in Country A. As a result, these entities determine the high level decisions in respect of the Fund. 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. 6. 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 satisfies this requirement. 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. The income, consisting of interest, dividend or non-share dividend income, is derived by the Fund The Fund directly holds shares in Australian resident companies from which it derives dividend income. Therefore, the Fund satisfies this requirement. The Fund is exempt from income tax in the country in which the non-resident resides The Fund is exempt from income tax in Country A. Therefore, the Fund satisfies this requirement. Additional requirements under Subsection 128B(3CA) 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) to apply from 1 July 2019 onwards. These extra requirements apply only to assets which were acquired after 27 March 2018. These requirements are specified in subsection 128B(3CA) and include: i. The superannuation fund for foreign residents must satisfy the 'portfolio interest test' now contained in subsection 128B(3CC) in relation to the test entity at certain times, and ii. The superannuation fund for foreign residents must not, at the time the income was derived, have influence of a kind described in subsection 128B(3CD) in relation to the test entity, and iii. The income cannot otherwise be non-assessable non-exempt income of the superannuation fund for foreign residents because of: a. Subdivision 880-C of the ITAA 1997, or b. Division 880 of the Income Tax (Transitional Provisions) Act 1997 . The Fund satisfies the 'portfolio interest test' Subsection 128B(3CC) 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. Subsection 128B(3CB) defines the test entity to be either the entity that paid the interest, dividends or non-share dividends or, if subsection 128A(3) applies in relation to a resident trust estate, that trust estate. The Fund holds less than 10% of the total participation interests in each Australian company. As such, the Fund satisfies the portfolio test with respect to its Australian investments from which it derives dividend and interest income. The Fund does not have influence of a kind described in subsection 128B(3CD) in relation to the test entity at the time the income was derived Subsection 128(3CD) 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 subparagraph 128B(3CD)(a), 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. The Fund has confirmed that it does not have the right or ability to appoint a person to a board, committee, or similar either directly or indirectly. The Fund only holds rights to vote in proportion to its equity interest in each Australian company, which is less than 1%. Sub-test 2 of the influence test, as contained in subparagraph 128B(3CD)(b), 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. The Fund has also confirmed that it is not involved in the day-to-day management of the business or companies it has invested in nor it possesses the ability to direct or influence the operation of the companies outside the ordinary rights conferred by the equity interest held. Based upon the above, the Fund does not have influence of a kind described in subsection 128B(3CD). The income received by the Fund is not non-assessable and non-exempt income of the Fund because of Subdivision 880-C of the ITAA 1997 or Division 880 of the Income Tax (Transitional Provisions) Act 1997 Subsection 880-105(1) of the ITAA 1997 has effect from 1 July 2019 and provides that an amount of ordinary or statutory income of a sovereign entity is not assessable and not exempt income if certain conditions are met. The Fund is not a sovereign entity as defined in section 880-15 of the ITAA 1997. As such, the income of the Fund satisfies this requirement. | Detailed Reasoning - Conclusion: As the Fund has met both the pre-existing and extra requirements under paragraph 128B(3)(jb) in relation to its Australian investments, it will be excluded from withholding tax in relation to interest, dividend and non-share dividend income received in respect of those assets.

The Fund is managed and administered by entities located in Country A. | The Fund received contributions from members or their employers and invested them on behalf of the members. | The Fund provides pension benefits upon a member's retirement. The amount of pension is dependent on the value of the contributions and the investment performance of the Fund. | Members may also access their pension savings earlier on medical grounds if the member is unable to continue its occupation and as a result they have stopped working. | Other benefits provided by the Fund include death benefits and survivor pensions to dependents of the members or to the member's estate. | The Fund also provides certain post-employment benefits to members. | Members are able to withdraw their pension savings at soon as they reach retirement age. | The Fund invests in a range of securities to provide long-term capital growth. | The Fund holds X percentage of shares in each Australian resident company. | In respect of the shares held, the following characteristics apply: | The Fund receives dividend income from the Australian resident companies. | The central management and control of the Fund is not in Australia. | The Fund was established and registered in Country A. | The Fund is an indefinitely continuing fund and has no termination date. | No amount paid to the Fund by members or employers contributing to the Fund entitle the member or employer to a tax offset or deduction under Australian income tax