One Is the Fund excluded from liability to withholding tax on its interest, dividend and non-share dividend income derived from its Investments under paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)?
No This ruling applies for the following period : 1 July 20xx to 30 June 20xx The scheme commences on: 1 July 20xx
Fund 1. The Fund's principal purpose is to manage and invest its members' savings for their retirement. 2. The Fund is a defined contribution superannuation fund. It provides superannuation services and in certain circumstances (subject to the Board approval and meeting applicable requirements) may provide limited pre-retirement benefits (such as housing, medical and education assistance) to its members. 3. A Fund member is a person who was a member of the Fund in respect of whom contributions were or were required to be made by law until they are no longer required to be given. 4. Generally, a person must be admitted as a Fund member upon commencement of employment in Country X. 5. The Fund is controlled by the Board, which is a statutory body corporate originally established under law. 6. The Board must keep and administer the Fund. 7. The functions of the Board include: a. collecting and managing contributions b. holding, investing and managing the funds c. developing and offering financial products and services, and
d. conducting education and information programs to encourage people to make informed and appropriate arrangements for income after they retire 8. The Board must credit to the Fund all amounts paid to or recovered by the Board as mandated contributions, additional contributions or penalty amounts, interest, profits and other returns from investments or assets of the Board, the amounts paid to the Board as fees or charges for services provided by the Board in relation to the Fund, the amounts in surplus in another fund that are to be transferred to the Fund, the amounts that are required to be paid to the Fund, amounts to the Board for the purposes of the Fund, and any amounts paid to the Board that are not required to be paid to another fund. 9. The Board establishes an account which consists of two sub-accounts for each Fund member. 10. The Board must credit the following to the member's accounts: a. member's contributions (at least 70% of contributions to a member's preserved entitlement) b. other payers' contribution
c. amounts calculated using the crediting rate in relation to increases (if any) in the value of the Fund assets since the last determination at the end of each financial year, and d. penalty amounts. 11. Amounts may be debited from a member's preserved and general entitlements (being broadly amounts withdrawn or deducted from the member's respective entitlements and fees and charges payable by the member). 12. The Board may make rules (and must publicise these rules) making provision for the withdrawal of the amounts of the Fund members' general entitlement by way of assistance for medical expenses, education expenses, funeral expenses and other matters in respect of the Fund member concerned and in respect of the member's parents, spouse or children or by way of housing assistance. 13. The Board is subject to the investment guidelines. The Board has authority to invest contributions received from members into various asset classes. 14. The sources of the funds held by the Fund are: a. Contributions from employers and employees b. Investment income (e.g. interest, dividends, rent, capital gains) c. Miscellaneous fees and charges on withdrawals.
15. Contributions from employers and employees are mandatory in accordance with section 37 of the Act and referred to as 'mandated contributions'. 16. A Fund member may make additional contributions, and may give a written direction to their employer to deduct additional amounts from their wages in order to pay that amount as additional contributions. Persons other than a Fund member may also make additional contributions for a Fund member, but only with the approval of the Board. Management of Investments 17. The Board's investments, as administrator of the Fund, consist of various asset classes, including local and foreign equities, term deposits, government securities such as bonds and treasury bills, direct property and commercial lending. 18. The Fund invests its funds directly on behalf of its own members and does not commingle its funds with any other investor. Termination of the Fund 19. Any winding up of the Fund would necessarily require and occur in accordance with passing a law. 20. The Fund has provided a statement that it is an indefinitely continuing fund. Benefits provided The key benefits provided by the Fund are:
a. Normal retirement: a pension to be paid upon reaching normal retirement age, which is to be paid from the whole of the preserved entitlement at the date of withdrawal. b. Disability: a member becomes physically or mentally incapacitated from engaging in any further employment may receive a pension, which is to be paid from the whole of the preserved and general entitlements at the date of withdrawal. c. Death (including Survivorship) Benefits, which is to be paid from the preserved and general entitlements. 21. A Fund member may also withdraw their benefits if they are to permanently leave Country X. A small percentage are Australian residents who are primarily expatriates of Country X that have retained their accounts with the Fund. 22. An amount may not be withdrawn from the Fund member's preserved or general entitlement unless the Board, on application, authorises the withdrawal. 23. A Fund member may seek early withdrawal for medical, education, funeral and other expenses.
24. Withdrawals are allowable, on application, for first home buyers for the purchase or construction of a dwelling in Country X for use by the member as a residence for the member or their family. 25. The Fund's education assistance covers secondary and tertiary studies and students that attend special schools. The Fund only assists accredited institutions and courses that are examinable and may result in the attainment of an academic certificate. The Fund also provides for textbooks, accommodation and meal costs. Overseas education assistance is also provided. 26. Local education assistance withdrawals are restricted to assistance for Fund members and their immediate family members and are only available from a member's general entitlement. Other relevant facts 27. The Fund has not and cannot deduct amounts under either the Income Tax Assessment Act 1997 (ITAA 1997) or the ITAA 1936 for amounts paid to it. 28. The Fund has not been allowed a tax offset or a tax offset is not allowable for an amount that has been paid to it. 29. The Board is a resident of Country X for tax purposes. 30. The incomes of the Board and of the Fund are not subject to tax in Country X.
31. The Country X Tax Authority confirmed the Fund's income of is exempt income, which includes the Fund's income earned in Country X and income arising out of overseas investments. 32. Income of the Fund is not non-assessable non-exempt income because of: a. Subdivision 880-C of the ITAA 1997, or b. Division 880 of the Income Tax (Transitional Provisions) Act 1997 . Australian investments Australian unit trust investments 33. The Fund holds investments in Trust A and Trust B (collectively, The Building Fund), which are managed by the Trustee. Other investments 34. The Fund also has a portfolio of various Australian assets that are managed on behalf of the Fund by the Manager. 35. Neither of the above funds are Australian funds nor Australian unit trusts. 36. The Fund entered into an IMA with the Manager. 37. Under the IMA, the Fund has appointed the Manager and as agent of the Board to invest and manage the Portfolio. 38. The duties of the Manager are stipulated in the IMA. Broadly, the Manager must invest and manage the Portfolio and confer at regular intervals with the Fund in relation thereto.
39. Investment instructions are included in the IMA, whereby the Manager may only invest in the assets stipulated in the IMA. 40. Further, the Manager is subject to investment restrictions pursuant to the IMA, including that equity investments will be less than 10%. 41. For the purposes of carrying out its functions and duties pursuant to the IMA, the Manager has the powers of a natural person to deal with the Portfolio and to do all things and execute all documents necessary for the purpose of managing the Portfolio. 42. The Portfolio may be invested with funds managed by the Manager on behalf of other persons. The Fund consents to the Manager acting in the acquisition and disposal of assets on behalf of other persons and authorises the Manager to deal with the Portfolio and any other funds managed by the Manager as an undivided whole. 43. The Fund has invested in Australian equity investments. These equity investments have the following characteristics: a. All investments are listed on the ASX. b. The Fund holds less than 10% of the total participation interests in each Australian company, trust or REIT.
c. The Fund would hold less than 10% of the total participation interests in each Australian company, trust or REIT in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936. d. Neither the Fund, nor any related party of the Fund, has involvement in the day-to-day management of the business of any of the Australian companies, trusts or REITs. e. Neither the Fund, nor any related party of the Fund, has the right to appoint a director to the Board of Directors of the Australian company or equivalent role in a trust or REIT. f. Neither the Fund, nor any related party of the Fund, holds the right to representation on any investor representative or advisory committee (or similar) of the Australian company, or equivalent role in a trust or REIT. g. Neither the Fund, nor any related party, has the ability to direct or influence the operation of the Australian company, trust or REIT outside of the ordinary rights conferred by the equity interest held. h. The Fund only holds rights to vote in proportion to its equity interest in each Australian company, trust or REIT.
Income Tax Assessment Act 1936 paragraph 128B(3)(jb)
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 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. The Fund is a non-resident The Commissioner has determined from the facts and circumstances that the Fund is not a resident of Australia. Therefore, the Fund satisfies this requirement. 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 is 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. An indefinitely continuing fund The Fund was established as a defined contribution benefit plan. The Fund has provided a statement that it is an indefinitely continuing fund. Therefore, the Fund satisfies this requirement. 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. ATO Interpretative Decision ATO ID 2009/67 Income Tax: Superannuation fund for foreign residents
(ATO ID 2009/67) provides guidance on the meaning of the phrase 'provident, benefit, superannuation or retirement fund': None of the four descriptors 'provident', 'benefit', 'superannuation' or 'retirement fund' in subparagraph (a)(ii) of the definition of 'superannuation fund for foreign residents' in section 118-520 of the ITAA 1997 are defined. The terms have, however, been the subject of judicial consideration. The courts have held that for a fund to be a 'provident, benefit, superannuation or retirement fund', the fund 's sole purpose must be to provide superannuation benefits, that is, benefits to a member upon the member reaching a prescribed age or upon their retirement, death or other cessation of employment ( Scott v. FC of T (No 2) (1966) 14 ATD 333; (1966) 10 AITR 290, per Windeyer J; Mahony v. FC of T (1967) 14 ATD 519, per Kitto J; Walstern Pty Ltd v. Commissioner of Taxation (2003) 138 FCR 1; 2003 ATC 5076; (2003) 54 ATR 423, per Hill J and Cameron Brae Pty Ltd v. Federal Commissioner of Taxation (2007) 161 FCR 468; 2007 ATC 4936; (2007) 67 ATR 178, per Stone and Allsop JJ).
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). Broadly, the Fund provides benefits to members as follows: a. Normal retirement: a pension to be paid upon reaching normal retirement age. b. Disability: a member becomes physically or mentally incapacitated from engaging in any further employment may receive a pension. c. Death (including Survivorship) Benefits. A Fund member may also withdraw their benefits if they are to permanently leave Country X. A member's entitlements are determined and calculated by law. An amount may not be withdrawn from the Fund member's preserved or general entitlement unless the Board, on application, authorises the withdrawal. The Board must authorise the withdrawal if the amount is payable. The Fund member may seek early withdrawal for medical, education, funeral and other expenses. The Fund member may also seek early withdrawal for housing financial assistance and education.
It is considered that the connection of the withdrawal of funds for the purposes of financing education from the general account to the provision (by the Fund) for the retirement or death of a member is too remote given that the benefits can be accessed at any time, to benefit someone that may not be the Fund member and possibly many years before the prescribed age of retirement. That is, the specific purposes of these withdrawals are too remote from the broad statement of intention of assisting members prepare for retirement or enhancing their post-retirement lifestyle. Therefore, it is necessary to consider whether the withdrawal of funds from the general account are benefits received by members for provident or benefit purposes, and therefore that the Fund is a provident or benefit fund. At a broad level, such a purpose must be to provide a provision against contemplated contingencies or the payment of benefits on some defined occurrence such as sickness, accident, old age or death.
The terms 'provident' and 'benefit' may refer to funds that have features including medical, funeral, sickness, hospital and dental cover. Withdrawals for these reasons are to address a future need or contingency (as in the High Court case of Mahony referred to above). However, these benefits do not appear to include the funding of a member's education or their family's education. Education withdrawals (including for tuition in domestic and foreign schools, and accommodation for the latter) may assist members with preparing for retirement and enhancing the value of life post-retirement but they only do so in an indirect way and are more related to improving their pre-retirement lifestyle. Withdrawals may also go to the member's children's education, which has no bearing on the member's retirement nor is it strictly for their benefit. While education may potentially improve the employment prospects of members or the member's family, they do not address a member's future need or contingency. Therefore, the statutory definition does not cover withdrawals for education.
It should be noted that housing withdrawals, as a percentage of total assets, have generally occurred to a lesser extent than education withdrawals historically. However, it is considered that housing withdrawals, like education withdrawals, do not address a member's future need or contingency. Therefore, for the purposes of subparagraph 118-520(1)(a)(ii) of the ITAA 1997, the Commissioner does not consider the benefits of the Fund align with the sole purpose of providing retirement benefits or benefits in other allowable contemplated contingencies. As such, the Fund is not considered to be a 'provident, benefit, superannuation or retirement fund'. Established in a foreign country The Fund was established in Country X. Therefore, the Fund satisfies this requirement. Was established and maintained only to provide benefits for individuals who are not Australian residents The Fund was established for the principal purpose of the Fund is to manage and invest the Fund members' savings for their retirement. The employers and their employees reside in Country X.
A small percentage are Australian residents who are primarily expatriates of Country X that have retained their accounts with the Fund. 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. However, it should not be concluded that the Fund, in this case, has been established and is maintained only to provide benefits for Australian residents, based on the rules and operation of the Fund. Therefore, the Fund satisfies this requirement. 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 (TR 2008/9) 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 Board exercises the CM&C of the Fund. The Board members are not Australian residents. Therefore, the Fund satisfies this requirement. Subsection 118-520(2)
The Fund has not and cannot deduct amounts under either the ITAA 1997 or the ITAA 1936 for amounts paid to it. The Fund has not been allowed a tax offset or a tax offset is not allowable for an amount that has been paid to it. Therefore, the Fund satisfies these requirements. Conclusion As all of the above requirements are not satisfied, the Fund does not meet the requirements of being a superannuation fund for foreign residents as defined by section 118-520 of the ITAA 1997. The Fund is exempt from income tax in the country in which the non-resident resides The incomes of the Board and of the Fund are not subject to tax in Country X. The Country X Tax Authority confirmed that the Fund's income of is exempt income, which includes the Fund's income earned in Country X and income arising out of overseas investments. Therefore, the Fund satisfies this requirement. Subsection 128B(3CA) of the ITAA 1936 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. Generally, these extra requirements apply to income derived from 1 July 2019. Relevantly: • The Fund must satisfy the 'portfolio interest test' in relation to the test entity (subsection 128B(3CC) of the ITAA 1936) • The Fund must satisfy the 'influence test' (subsection 128B(3CD) of the ITAA 1936) in relation to the test entity, and • The income cannot otherwise be non-assessable non-exempt income of the Fund 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) of the ITAA 1936 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. The Fund has less than a 10% direct participation interest in The Building Fund. With regards to its Manager investments, the Manager is subject to investment restrictions pursuant to the IMA, including that equity investments in an entity will be less than 10%. The Fund holds less than 10% of the total participation interests in each Australian company, trust or real estate investment trust (REIT). Further, the Fund would hold less than 10% of the total participation interests in each Australian company, trust or REIT in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936. The Fund therefore satisfies the 'portfolio interest test' in respect of its Investments. The Fund satisfies the 'influence test' Subsection 128B(3CD) of the ITAA 1936 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 paragraph 128B(3CD)(a) of the ITAA 1936, 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. 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 Fund. Relevantly, in respect of the Investments of the relevant facts and circumstances to this Ruling: a. All investments are listed on the Australian Securities Exchange (ASX).
b. The Fund holds less than 10% of the total participation interests in each Australian company, trust or real estate investment trust (REIT). c. The Fund would hold less than 10% of the total participation interests in each Australian company, trust or REIT in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936. d. Neither the Fund, nor any related party of the Fund, has involvement in the day-to-day management of the business of any of the Australian companies, trusts or REITs. e. Neither the Fund, nor any related party of the Fund, has the right to appoint a director to the Board of Directors of the Australian company or equivalent role in a trust or REIT. f. Neither the Fund, nor any related party, holds the right to representation on any investor representative or advisory committee (or similar) of the Australian company, or equivalent role in a trust or REIT. g. Neither the Fund, nor any related party, has the ability to direct or influence the operation of the Australian company, trust or REIT outside of the ordinary rights conferred by the equity interest held.
h. The Fund only holds rights to vote in proportion to its equity interest in each Australian company, trust or REIT. Based upon the above, the Commissioner accepts that the Fund does not have influence of a kind described in subsection 128B(3CD) of the ITAA 1936. 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 . Conclusion As subparagraph 118-520(1)(a)(ii) of the ITAA 1997 has not been satisfied, the Fund is not excluded from withholding tax in relation to interest, dividend and non-share dividend income derived from its current investments (including those listed in Appendix 1 to the relevant facts and circumstances of this Ruling) under paragraph 128B(3)(jb) of the ITAA 1936.