Private ruling: Withholding tax
Date of advice: 21 December 2023
Published: 12 February 2024
Ruling period: 1 January 20XX to 31 December 20XX
Date scheme commenced: 1 January 20XX

Ruling: Q1: Is the Fund excluded from liability to withholding tax on interest, dividend and non-share dividend income derived from its Australian investments in accordance with paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: No.

Relevant facts and circumstances: 1. The Trust was established under a Declaration of Trust. 2. The Trust was established for the collective investment of assets of participating tax qualified pension and profit-sharing plans and related trusts, governmental plans and certain other investors. 3. The Trust consists of separate collective investment funds, of which the Fund is one fund. Each Fund is evidenced by a supplement to the Declaration of Trust which describes the Fund's investment objectives and policies. 4. The Trust is a resident of a foreign country and is exempt from income tax in that country. 5. The Trustee holds and administers all money and property contributed to the Trust upon the conditions and terms set out in the Declaration of Trust. Declaration of Trust Eligibility 6. Participation in the Trust is limited to the assets of certain pension plans/tax exempt entities. Admission/Deposit 7. A Participating Plan (an Eligible Plan that has been admitted to the Trust) may acquire a beneficial interest in the Fund by depositing assets with the Trustee. 8. The Trustee credits to the account of each Participating Plan that makes a deposit in the Fund that number of Fund Units that the deposit will purchase at the value, as of such Valuation Date, as of each such Fund Unit in which the Participating Plan will acquire an interest in. Withdrawal 9. A Participating Plan can request a withdrawal from the Fund. The Participating Plan will receive an amount equal to the value of the number of Fund Units withdrawn determined on the Trustee's records as of the applicable Withdrawal Date from the Fund. Units of Participation 10. The beneficial ownership of the Fund is represented by Fund Units, with each unit equal in value to every other Fund Unit of the same tier. Each Fund Unit represents an undivided proportionate interest in all assets of such Fund. 11. Each Fund Unit is entitled to the allocated proportional share of all income, profits, losses and applicable expenses of the Fund. 12. All income the Fund earns is added to the principal of the Fund and invested and reinvested as a part thereof, and expenses, income, losses and profits of the Fund shall be charged or credited to the Fund. 13. The Trustee establishes the initial value of each Fund Unit prior to the admission of the first Eligible Plan. The value of each Fund Unit is determined by adding the value of all Fund assets, subtracting all accrued expenses and liabilities and dividing by the number of Fund Units outstanding. Management Authority 14. The Trustee has exclusive authority to invest or manage the Fund pursuant to the terms of the Investment Guidelines as it has adopted. Management and Administrative Powers 15. The Trustee has the following discretionary powers with respect to the Fund, subject at all times to the Investment Guidelines: a. to invest and reinvest assets in, or to sell or otherwise dispose of any assets ... b. to incur and pay from Fund assets the charges, expenses and taxes ... c. to maintain the indicia of ownership of assets outside X ... Investments and Administration 16. The Fund constitutes a separate sub-trust of the Trust and the Trustee holds, manages, administers, invests, distributes, accounts for, and otherwise deals with the assets of the Fund. 17. The Trustee maintains a separate account for each Participating Plan to reflect the interest of each Participating Plan in the Fund. General 18. The Trustee has all necessary powers to perform all acts that in its judgement are reasonably necessary or desirable for the proper administration of the Trust. These powers include without limitation the following: a. to hold and own all assets and exercise all powers and incidents of ownership, either directly or through nominees, with or without disclosing the Trust; b. to make distributions to the Participating Plans from the assets of the Fund; c. to buy, sell, and deal in any way with the assets of the Trust d. invest all or any portion of the assets of the Trust ... Standard of Care 19. The Trustee will exercise its responsibilities for the exclusive purposes of providing benefits to participants and beneficiaries of the Participating Plans and defraying the reasonable expenses of administering the Trust and the Participating Plans. Termination 20. The Trustee may terminate the Trust by resolution of its Board of Directors. 21. Upon termination, the Trustee shall distribute the net assets of each terminating Fund in proportion to the number of Fund Units in the Fund that each Participating Plan holds. Fund Declaration 22. The Fund consists of multiple Participating Plans. 23. Each of the Participating Plans provides retirement benefits to individuals who are not Australian residents. 24. The Fund holds investments in Australian Unit Trusts.

Relevant legislative provisions: Income Tax Assessment Act 1936 Paragraph 128B(3)(jb) | Income Tax Assessment Act 1997 Section 118-520

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. Section 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 provides an exclusion from withholding tax on 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) of the ITAA 1936 must also be met. Accordingly, for the Fund to be excluded from liability to withholding tax on interest, dividend and non-share dividend income derived from its Australian investments under paragraph 128B(3)(jb) of the ITAA 1936, the Fund must, along with other requirements, be considered a superannuation fund for foreign residents. | Detailed Reasoning - The Fund is a non-resident: The Fund is not a resident of Australia for tax purposes. The Fund was established outside of Australia, and its management is also based outside of Australia. 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 Income Tax Assessment Act 1997 (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 resident; 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 it satisfies all of the following criteria: • 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 the ITAA 1997, 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 - 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. The Fund is governed by the Declaration of Trust and its Investment Guidelines. There is no indication that the Fund is to be wound up in the near future. There is sufficient evidence to accept that the Fund will continue to operate in accordance with the Declaration of Trust and Investment Guidelines. Therefore, the Fund satisfies this requirement. | Detailed Reasoning - Provident, benefit, superannuation or retirement fund: The key issue in this case is if the Fund is a provident, benefit, superannuation or retirement fund. The phrase 'provident, benefit, superannuation or retirement fund' under subparagraph 118-520(1)(a)(ii) of the ITAA 1997 is not defined in either the ITAA 1997 or the ITAA 1936. However, the phrase has been subjected to judicial consideration. In Scott v. FCT (No 2) (1966) 40 ALJR 265; 14 ATD 333, Windeyer J stated (40 ALJR 265 at 278; 14 ATD 333 at 351): 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 common parlance ... I have come to the conclusion that there is no 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 Mahony v Commissioner of Taxation (1967) 41 ALJR 232; (1967) 14 ATD 519, Kitto J stated: 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 employment, 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 in a general sense, but characterised by some specific future purpose. A funeral benefit is a familiar example. In Cameron Brae Pty Limited v FCT (2007) 161 FCR 468; [2007] FCAFC 135; 2007 ATC 4936, 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 (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 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; Mahoney 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). The Fund is a sub-trust of the Trust, which is a resident in a foreign country for tax purposes and is exempt from federal income tax in that country. The Trust, and the Fund as a fund within that Trust, were established for the collective investment and reinvestment of assets of Participating Plans. There are currently multiple participating pension plans investing in the Fund. The Fund does not collect contributions from members of the Participating Plans. However, the Declaration of Trust does allow for a Participating Plan to acquire a beneficial interest in the Fund by transferring assets to the Trustee as instructed by the Participating Plan members, in circumstances where the Participating Plan permits members to direct investment of their accounts. The instructions are limited to the direction of the investment of the member's account and do not amount to the Fund actually collecting the contributions from individual members. Participating Plans then receive Fund Units in the Fund. As per the Facts, the beneficial ownership of the Fund is represented by these Fund Units, with each unit equal in value to every other Fund Unit of the same tier. Each Fund Unit represents an undivided proportionate interest in all assets of the Fund. A Participating Plan can request a withdrawal from the Fund. The Withdrawal Date for any withdrawal request is the Valuation Date, at which time a withdrawing Unit Holder will receive an amount equal to the value of the number of Fund Units withdrawn determined on the Trustee's records as of the applicable Withdrawal Date from the Fund. The Fund itself does not distribute or provide benefits to members of the Participating Plans, and in particular, does not provide benefits to a member upon the member reaching a prescribed age or upon their retirement, death or other cessation of employment. Rather, its purpose and function (as a Fund within the Trust) is to provide for the collective investment and reinvestment of assets that are held by employee benefit plans (such as the Participating Plans). The Fund's sole purpose is therefore not to provide superannuation benefits to members upon reaching a prescribed age or upon death, retirement or other cessation of employment. Rather, its sole purpose is for the collective investment of assets of participating tax qualified pension and profit-sharing plans and related trusts, governmental plans and certain other investors. Therefore, the Fund is not a 'provident, benefit, superannuation or retirement fund' for the purposes of subparagraph 118-520(1)(a)(ii) of the ITAA 1997 and cannot be considered a superannuation fund for foreign residents. As such, the other factors under section 118-520 have not been considered. | Detailed Reasoning - Conclusion: As the Fund is not a superannuation fund for foreign residents, paragraph 128B(3)(jb) of the ITAA 1936 will not apply to exclude it from liability to withholding tax on interest, dividend and non-share dividend income derived from the Fund's investments into Australia.

Does IVA apply to this private ruling?: Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement. | If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax. | We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part. | If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply. | For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidance rule for income tax'.