1 Is the Foreign Trust excluded 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)?
Yes. Question 2 Is interest, dividend and non-share dividend income derived by the Foreign Trust non-assessable and non-exempt (NANE) income under section 128D of the ITAA 1936? Answer Yes. This ruling applies for the following periods : Year ending 30 June 20XX Year ending 30 June 20XX The scheme commences on: 1 January 20XX
Background 1. The Foreign Trust was established in the XX Country via trust agreement dated XX between Foreign Co as the Company and Trust Company as the Trustee (Trust Agreement). 2. The Company was incorporated on XX in XX Country, and is a publicly traded company. The Company is a resident of the XX Country. 3. The Trustee is a banking corporation headquartered in XX Country. 4. The current constituent document for the Foreign Trust is the Trust Agreement. 5. The recitals to the Trust Agreement provide that: • with respect to each Plan for which this agreement is adopted by the Company as the funding medium, the Company appoints the Trustee as trustee under the Trust Agreement • the Company and Trustee intend and agree that the Trustee is a 'directed trustee' with respect to the operation, maintenance and investment of the Foreign Trust, except to the extent the Trustee has expressly accepted responsibility for the management of the Foreign Trust assets under the Trust Agreement, and
• the Foreign Trust consists of all assets held by the Trustee as at the date of the Trust Agreement, or thereafter acquired by the Trustee, with respect to a Plan for which this agreement is adopted as a funding medium. 6. The term 'Plan' is defined in the Trust Agreement as meaning a retirement plan which has been established by the Company, or by a subsidiary or affiliate (collectively referred to as the 'Company'), and for which the Trust Agreement has been adopted as the funding medium. 7. The retirement plans that were established by the Company and for which the Trust Agreement has been adopted as the funding medium are: • The Foreign Co Pension Plan (Pension Plan), and • The Foreign Co Retirement Plan (Retirement Plan) (collectively referred to as the 'Plans'). 8. The Foreign Trust was established and is maintained only to provide benefits for individuals who are not Australian residents. The Plans 9. The Plans are defined benefit pension plans that apply to certain employees of the Company, including salaried and hourly employees in XX Country.
10. The Company is the sponsor of the Plans and makes contributions to the Plans. The contributions are actuarially determine based on life expectancies, earnings, and credited service of all the Plans' participants and the benefits they are expected to earn during employment with the Company. All contributions are deposited with the Foreign Trust. Eligibility 11. Eligibility to benefits under the Plans is based on the participant's age and their years of continuous service with the Company. 12. Continuous service is generally calculated from the time a person commences their employment with the Company until the person has a break in service. A person is considered to have a break in service when they: • voluntarily quit the Company • are discharged, or • are laid off or are on a leave of absence for a period of more than two years. 13. Participants are eligible for a pension at the normal retirement age. The normal retirement date is the first day of the month coinciding with or following the participant's 65 th birthday and completion of one year of continuous service.
14. The early pension may be accessed before the participant reaches 65 years of age, depending on their accumulated years of continuous service and their age. 15. A person is eligible for an early full pension where they have: • 15 or more years of continuous service and are at least 62 years of age • 25 or more years of continuous service and are at least 60 years of age, or • 30 or more years of continuous service regardless of their age. 16. A person is eligible for an early reduced pension between the ages of 60 and 62 if they have accrued at least 15 years of continuous service. The pension is actuarily reduced in order to compensate for them receiving payments earlier than normal retirement age. Benefits 17. Several different pension options are available to participants of the Plans, including: • lump-sum options • survivor pensions • deferred vested pensions • disability pensions • single life annuity options, and • spouse benefits.
18. Benefits payable under the Plans are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, charge, garnishment, execution, or levy of any kind, either voluntary or involuntary, including any such liability which is for alimony or other payments for the support of a spouse (or former spouse) or other relative, prior to the benefit actually being received by the person entitled to the benefit under the terms of the Plan. 19. The pension benefits under the Plans are insured by the Government of XX Country. Therefore, if the Plans terminate without enough money to pay all benefits, the Government of XX Country will pay pension benefits. The Foreign Trust 20. The recitals to the Trust Agreement provide that the Company appoints: • the Administrative Committee as the fiduciary which has the responsibility for administering the Plan, and • the Investment Committee as the fiduciary which has the responsibility for Plan investments. 21. The Foreign Trust's head office is located in XX Country, and this is where the Administrative Committee and Investment Committee meet.
22. Other relevant terms are defined in the Trust Agreement as: • Beneficiary means a person designated to receive a benefit under a Plan after the death of a participant. • Participant means a person who is an employee or former employee of the Company and who is or was actually participating in a Plan. • Plan Account means the interest of each plan in the Foreign Trust. Assets 23. The Trustee holds the Foreign Trust as a comingled fund or comingled funds in which each separate Plan is be deemed to have a proportionate undivided interest in the fund or funds in which it participates. 24. Any income, appreciation or depreciation and expenses attributable to a particular Plan Account or to an identified asset thereof, is allocated or charged to that Plan Account. 25. The Foreign Trust consists of one or more separate accounts. All Separate Accounts are established by the Trustee at the discretion of the Investment Committee. The Investment Committee designates assets of the Foreign Trust to be allocated to each Separate Account and directs the Trustee with respect to any transfer of assets between Separate Accounts.
26. Neither the Company, the Administrative Committee nor the Investment Committee shall direct the Trustee to cause any part of the Foreign Trust to be diverted to any purpose other than the exclusive benefit of the Participants and Beneficiaries. The Trustee 27. The Trust Agreement provides that the powers of the Trustee shall be exercisable for the exclusive purpose of providing benefits to the Participants and Beneficiaries under the Plans 28. The Trustee shall maintain accounts of all investments, receipts and disbursements, including contributions, distributions, purchases, sales and other transactions of the Foreign Trust. 29. The Trustee may resign at any time, or the Investment Committee may remove the Trustee, by written notice. Where the Trustee resigns or is removed, the Investment Committee shall appoint the successor trustee and the Trustee shall deliver the assets of the Foreign Trust to the Trustee. The successor trustee shall have all the powers given to the originally named Trustee. Contributions 30. The Trust Agreement provides that the Administrative Committee has the sole responsibility to:
• collect and monitor contributions • determine whether the contributions comply with the provisions of the Plan • determine whether the contributions are adequate to meet or discharge any liabilities under the Plans, and • to direct the Trustee with respect to any legal claim of a Plan for delinquent contributions. 31. The Trustee is to hold and safekeep all cash (or other property acceptable to the Trustee) contributed to the Foreign Trust with respect to each Plan, and is to act solely as directed by the Administrative Committee with respect to the collection of contributions to the Foreign Trust. Distributions 32. The Trust Agreement provides that the Trustee shall make distributions from the Foreign Trust to such persons, in such amounts (but not exceeding the then value of the Plan Account to which the distribution is chargeable), at such times and in such manner as the Administrative Committee directs pursuant to the service description furnished by the Trustee to the Administrative Committee from time to time.
33. Any interest of a Participant or Beneficiary in the Foreign Trust or any Plan or any distribution therefrom shall not be subject to the claim of any creditor, any spouse for support, or to legal process, and may not be voluntarily or involuntarily alienated or encumbered. Termination 34. The Trust Agreement provides that the agreement shall terminate with respect to a Plan: • by action of the Company responsible for making contributions to the Plan Account • by the Plan's loss of its qualified status, or • the Company's sale or dissolution of the subsidiary / affiliate responsible for making contributions to the Plan Account. 35. Upon termination with respect to a Plan, the Trustee shall distribute the Plan Account in the manner directed by the Investment Committee. Tax status 36. The Foreign Trust was established in and is a resident of the XX Country for tax purposes. 37. The Foreign Trust is a trust forming part of a pension plan which is exempt from taxation in XX Country. Other relevant facts
38. The Foreign Trust's central management and control is carried on outside Australia by entities none of whom are Australian residents. 39. There is no indication that there is any contemplation of the Foreign Trust ending at a defined point in time and there is no expectation that the Plans or the Foreign Trust will be discontinued. 40. The Foreign Trust has received and will receive interest, dividend and non-share dividend income from companies who are residents of Australia for tax purposes. 41. An amount paid to the Foreign Trust or set aside for the Foreign Trust has not been and cannot be deducted under the Income Tax Assessment Act 1997 (ITAA 1997). 42. A tax offset has not been allowed nor would be allowable for any amount paid to the Foreign Trust or set aside for the Foreign Trust. 43. The income of the Foreign Trust is not NANE income because of either Subdivision 880-C of the ITAA 1997, or Division 880 of the Income Tax (Transitional Provisions) Act 1997 . The Foreign Trust's Australian investments
44. The Foreign Trust's Australian investments are listed at Appendix 1 to the relevant facts and circumstances of this ruling and include: • equity investments in Australian resident companies, and • debt security issued by Australian resident companies. 45. To the best of the Foreign Trust's knowledge, the investments held by the Foreign Trust have the following characteristics: • all securities are listed on the Australian Securities Exchange (ASX) or another recognised stock exchange • the Foreign Trust holds less than 10% of the total participation interests on issue in each of the entities • the Foreign Trust has no involvement in the day-to-day management of any of the entities • the Foreign Trust has no right to representation on the board of directors, or any investor representative or advisory committee (or similar) of any of the entities • the Foreign Trust has no ability to direct or influence the operation of the entities outside the ordinary rights conferred by the interest held
• the Foreign Trust's interests do not provide it with an entitlement to either directly or indirectly determine the identity of any person who makes decisions that comprise the control and direction of the entities' operations • the Foreign Trust only holds rights to vote in proportion to its equity interests and has no rights in respect of the debt investments held, and • there are no special relationships or arrangements between the Foreign Trust and the issuers of the Australian debt investments held which affect the amount of interest income that is paid from those investments. Appendix 1: Australian investments Investment name Investment type Income type AUD value Date acquired Participation interest ABC Pty Ltd Shares Dividends $XX XX <10% DEF Pty Ltd Shares Dividends $XX XX <10% GHI Pty Ltd Corporate Bond Interest $XX XX <10% JKL Pty Ltd Corporate Bond Interest $XX XX <10%
Income Tax Assessment Act 1936 Paragraph 128B(3)(jb)
Question 1 Is the Foreign Trust excluded from liability to withholding tax on interest, dividend and non-share dividend income under paragraph 128B(3)(jb) of the ITAA 1936? Summary The requirements of paragraph 128B(3)(jb) of the ITAA 1936 are satisfied. Therefore, the Foreign Trust is excluded from liability to withholding tax on its interest, dividend and non-share dividend income derived from its Australian investments listed at Appendix 1 to the facts and circumstances of this ruling under paragraph 128B(3)(jb) of the ITAA 1936. 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. Broadly, paragraph 128B(3)(jb) of the ITAA 1936 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 non-resident that is 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. Except where the transitional rules in Schedule 3 to the Treasury Laws Amendment (Making Sure Foreign Investors Pay Their Fair Share of Tax in Australia and Other Measures) Act 2019 (Amendment Act)apply, from 1 July 2019, the extra requirements in subsection 128B(3CA) of the ITAA 1936 must also be met. Schedule 3 of the Amendment Act amended the ITAA 1936 to improve the integrity of the income tax law to limit access to tax concession for foreign investors. For superannuation funds for foreign residents, this was achieved by limiting the withholding tax exemption to interest, dividend and non-share dividend income derived from an entity in which the superannuation fund has a portfolio-like interest. The amendments to limit the withholding tax exemption apply to income that is derived by a superannuation fund on or after 1 July 2019. Paragraph 128B(3)(jb) of the ITAA 1936
The term 'superannuation fund for foreign residents' is defined in section 118-520 of the ITAA 1997 as follows: Meaning of superannuation fund for foreign residents (1) A fund is a superannuation fund for foreign residents at a time if: (a) at the 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 deducted under this Act; or (b) a tax offset has been allowed or is allowable for such an amount.
Consequently, for the Foreign Trust to be excluded from withholding tax on interest and dividend income that it derives from investments into Australia under paragraph 128B(3)(jb) of the ITAA 1936, it must be established that the Foreign Trust: i. is an indefinitely continuing fund ii. is a provident, benefit, superannuation or retirement fund iii. was established in a foreign country iv. was established and maintained only to provide benefits for individuals who are not Australian residents v. has its central management and control carried on outside of Australia by entities none of whom are Australian residents vi. does not receive or have amounts set aside for it that have been or can be deducted under the ITAA 1936 or the ITAA 1997 vii. does not receive or have amounts set aside for it that give rise to a tax offset viii. receives income that consists of interest, or consists of dividends or non-share dividends paid by a company that is an Australian resident, and ix. is exempt from income tax in the country in which the non-resident resides. These requirements are considered below. i.
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 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. 3. ...money resources. In Scott v Commissioner of Taxation (No 2) (1966) 40 ALJR 265 ( 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; who stated that 'for present purposes, the point is the need for "money" or "other property" to constitute a fund'.
The Foreign Trust was established as a comingled fund in which each separate Plan is deemed to have a proportionate undivided interest. The Foreign Trust is responsible for managing the assets of the Plans, for the sole purpose of providing retirement benefits or benefits in alignment with other contemplated contingencies via the Plans. The Foreign Trust is therefore a 'fund' within the ordinary meaning of the term. Neither the ITAA 1936 or the ITAA 1997 provide guidance on the meaning of 'indefinitely continuing', however, the ordinary meanings of 'indefinitely' and 'continuing' involve little ambiguity or controversy. The Australian Oxford Dictionary defines the 'indefinitely' as '1. for an unlimited time...2. in an indefinite manner' and 'continuing' as '...persist in, maintain, nonstop'. The terms of the Trust Agreement do not require the Foreign Trust to be terminated or wound up after a specified period. Rather, the Foreign Trust will only be terminated in the specific circumstances outlined above at Fact 40.
In addition, there is no indication that there is any contemplation of the Foreign Trust ending at a defined point in time and there is no expectation that the Plans or the Foreign Trust will be discontinued. Therefore, it is accepted that the Foreign Trust is an indefinitely continuing fund. ii. 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 1936 or the ITAA 1997. The phrase, however, has been subject to judicial consideration. In Scott , Windeyer J stated 278: There is no definition in the Act of a superannuation fund. The meaning of the term must therefore depend upon ordinary usage...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, Kitto J stated at 232:
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 recognized 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 characterized by some specific future purpose. A funeral benefit is a familiar example.
In Cameron Brae Pty Limited v FCT (2007) 161 FCR 468, 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 stated at 506: 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) refers to these authorities and provides the following guidance on the meaning of the phrase: 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). The relevant authorities therefore establish that in order 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 contemplated contingencies (such as death, disability or serious illness).
The Foreign Trust is responsible for managing the funded assets of the Plans. The Plans are pension plans that apply to certain employees of Company, which include salaried and hourly employees in XX Country. Participants are eligible for a pension at the normal retirement age of 65. In some circumstances, the early pension may be accessed before the participant reaches the age 65, depending on their accumulated years of continuous service and their age. The circumstances in which a member of each of the Plans can ordinarily receive funds from the Foreign Trust upon retirement from employment are clearly consistent with those of a provident, benefit, superannuation or retirement fund. Further, the alternative circumstances of access available to Participants and Beneficiaries, which include survivor pensions, disability pensions, single life annuity options and spouse benefits, are considered to align with the contemplated contingencies of a 'provident, benefit, superannuation or retirement fund' as outlined in the relevant judicial decisions and ATO ID 2009/67.
As both the objective of the Foreign Trust and the actual operation of the Foreign Trust have the sole purpose of providing retirement benefits or benefits in alignment with other contemplated contingencies via the Plans, the Foreign Trust is considered to be a provident, benefit, superannuation or retirement fund. It is therefore reasonable to conclude that the Foreign Trust satisfies this requirement. iii. Established in a foreign country The Foreign Trust was established in XX Country. Therefore, the Foreign Trust was established in a foreign country and this requirement is satisfied. iv. Was established and maintained only to provide benefits for individuals who are not Australian residents The Foreign Trust was established and is maintained to provide benefits to the Participants and Beneficiaries of the Plans, who are or were employees of the Company, all of whom are not Australian residents. Therefore, the Foreign Trust satisfies this requirement. v. Central management and control is carried on outside Australia by entities none of whom is an Australian resident
The Foreign Trust's head office is located in XX Country and this is where the Administrative Committee and Investment Committee meet. In addition, the Company has advised that the Foreign Trust's central management and control is carried on outside of Australia by persons none of whom is a resident of Australia. Based on the above, it is reasonable to conclude that the central management and control of the Foreign Trust occurs outside of Australia by entities that are not Australian residents. Therefore, the Foreign Trust satisfies this requirement. vi. Does not receive, or have amounts set aside for it, that have been or can be deducted under the ITAA 1936 or ITAA 1997 The Company has advised that no amounts that have been paid to the Foreign Trust, or have been set aside to be paid to the Foreign Trust, have or can be deducted under the ITAA 1936 or ITAA 1997. Therefore, the Foreign Trust satisfies this requirement. vii. Does not receive, or have amounts set aside for it, that give rise to a tax offset.
The Company has advised that no amounts that have been paid to the Foreign Trust, or set aside to be paid to the Foreign Trust, are amounts for which a tax offset has been allowed, or would be allowable, under the ITAA 1936 or the ITAA 1997. Therefore, the Foreign Trust satisfies this requirement. viii. Receives income that consists of interest, or consists of dividends or non-share dividends paid by a company that is an Australian resident The Foreign Trust receives Australian sourced income in the form of interest and dividends from the entities listed at Appendix 1 to the facts and circumstances of this ruling, which are Australian resident companies. Therefore, the Foreign Trust satisfies this requirement. ix. Is exempt from income tax in the country in which it resides The Foreign Trust is exempt from tax in the country in which it resides. Therefore, the Foreign Trust satisfies this requirement. Conclusion As all of the above requirements are satisfied, the Foreign Trust meets the requirements of being a 'superannuation fund for foreign residents' as defined by section 118-520 of the ITAA 1997.
The Foreign Trust therefore meets the requirements of paragraph 128B(3)(jb) of the ITAA 1936. As outlined above, due the operation of the Schedule 3 of the Amendment Act, in order to be excluded from liability to withholding tax under paragraph 128B(3)(jb) of the ITAA 1936, the additional requirements in subsection 128B(3CA) of the ITAA 1936 must also be met. Relevantly: i. the Foreign Trust must satisfy the 'portfolio interest test' in relation to the entities (subsection 128B(3CC) of the ITAA 1936) ii. the Foreign Trust must satisfy the 'influence test' (subsection 128B(3CD) of the ITAA 1936) in relation to the entities, and iii. the income cannot otherwise be NANE income because of: a. Subdivision 880-C of the ITAA 1997, or b. Division 880 of the Income Tax (Transitional Provisions) Act 1997 . i. The Foreign Trust satisfies the 'portfolio interest test' in relation to the entities Subsection 128B(3CC) of the ITAA 1936 states: (3CC) 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. As outlined at Appendix 1 to the facts and circumstances of this ruling, the Foreign Trust holds less than 10% of the total participation interests in the entities. Further, the Foreign Trust would hold less than 10% of the total participation interests in the circumstances detailed at paragraph 128B(3CC)(b) of the ITAA 1936. As such, it is reasonable for the Commissioner to conclude that the Foreign Trust satisfies the 'portfolio interest test' in respect of its Australian investments listed at Appendix 1 to the facts and circumstances of this ruling. ii. The Fund satisfies the 'influence test' in relation to the entities Subsection 128B(3CD) of the ITAA 1936 states the following:
(3CD) 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 paragraph 128B(3CD)(a) of the ITAA 1936, assesses whether the foreign superannuation 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 foreign superannuation fund is able to act in concert with others to determine the identity of a relevant decision-maker in any of the entities. Sub-test 1 also extends to situations where the foreign superannuation fund, in its own right, holds the ability to approve or veto decisions which go to the control or direction of any of the entities. Law Companion Ruling LCR 2020/3 - The superannuation fund for foreign residents withholding tax exemption and sovereign immunity (LCR 2020/3) provides examples and guidance on the 'influence test' and states the following at paragraphs 11 to 13 with respect of sub-test 1:
11. Whether the relevant entity is able to determine the identity of (to settle or decide upon, to choose or appoint) one of those persons is a question of fact. The phrase 'able to' focuses on the relevant entity's capacity or power. The sub-test is therefore not limited to situations where the entity has already determined, or intends to determine, the identity of one of the relevant decision makers. A right to determine will be sufficient for the requisite level of influence to exist. 12. The relevant entity will not be 'able to' determine, as a matter of fact, where it has irrevocably and unconditionally waived its rights by way of a legally enforceable agreement. 13. The sub-test also extends to situations where the relevant entity has the indirect capacity to determine the identity of one of the relevant decision makers. This may occur, for example, where the relevant entity controls another entity and that other entity holds the right to determine the decision-maker's identity.
Sub-test 2 of the influence test, as contained in paragraph 128B(3CD)(b) of the ITAA 1936, 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 Foreign Trust. LCR 2020/3 provides the following guidance at paragraph 29 in respect of sub-test 2: 29. The three matters ('accustomed', 'obliged' or 'might reasonably be expected to') are not a composite phrase denoting a single test; they comprise different considerations each of which is sufficient to establish influence: • Whether a person is 'accustomed' to act in accordance with the directions, instructions or wishes of the relevant entity requires an analysis of past facts. This necessitates an examination of any discernible pattern of the person following the directions, instructions or wishes given by the relevant entity. • Whether a person is 'obliged' to act in accordance with the directions, instructions or wishes of the relevant entity depends upon a formal or informal obligation existing at the relevant time.
• Whether a person 'might reasonably be expected' to act in accordance with the directions, instructions or wishes of the relevant entity requires a prediction as to future events and a consideration as to the objective likelihood of those future events occurring. This requires a consideration of all of the facts and circumstances impacting upon the relationship between the two parties. The following are relevant in determining whether the Foreign Trust satisfies the 'influence test' in respect of its Australian investments listed at Appendix 1 to the facts and circumstances of this ruling: • the Foreign Trust has no direct or indirect involvement in the day-to-day management of the business of any of the entities • the Foreign Trust has no direct or indirect right to appoint a director to the Board of Directors, or any investor representative or advisory committee (or similar) of any of the entities • the Foreign Trust has no direct or indirect ability to direct or influence the operation of the entities outside the ordinary rights conferred by the interest held
• the Foreign Trust's interests do not provide it with an entitlement to either directly or indirectly determine the identity of any person who makes decisions that comprise the control and direction of the entities' operations, and • no person involved in the control and direction of the entities' operations is accustomed or obliged to act in accordance with the direct or indirect directions, instructions or wishes of the Foreign Trust. Based on the above, the Commissioner has determined that it is reasonable to conclude that the Foreign Trust does not have influence over the entities listed at Appendix 1 to the facts and circumstances of this ruling of the kind described in subsection 128B(3CD) of the ITAA 1936. Therefore, the Fund satisfies this requirement. iii. the income derived by the Fund cannot otherwise be non-assessable none-exempt (NANE) income. The income of the Foreign Trust is not NANE income because of subdivision 880-C of the ITAA 1997. Therefore, the Foreign Trust satisfies this requirement. Question 2
Is interest, dividend and non-share dividend income derived by the Foreign Trust NANE income under section 128D of the ITAA 1936 Summary The interest, dividend and non-share dividend income derived by the Foreign Trust is NANE income under section 128D of the ITAA 1936 due to the application of paragraph 128B(3)(jb) of the ITAA 1936. 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 Foreign Trust 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. The interest, dividend and non-share dividend income derived in Australia by the Foreign Trust is not assessable and not exempt income of the Foreign Trust under section 128D of the ITAA 1936.