Australia Tax Alert - May 15, 2008 - International Tax

By Don Wilson and Alyson Rodi

The Australian Taxation Office (ATO) recently issued three interpretative decisions (ATOIDs) as a result of a Deloitte private ruling application regarding the Australian tax treatment of a Dutch stichting pension fund that is the sole unit holder in an Irish Common Contractual Fund (CCF) investing in Australia. The ATOIDs respond positively in light of the ruling application and, although not legally binding, provide useful guidance on the issues.

A stichting is a pension fund whose purpose is to provide superannuation benefits for non-Australian resident persons on retirement or death. A stichting is exempt from Dutch income tax. A CCF acts as a pooled investment vehicle for the assets of various pension funds and invests these assets on behalf of the funds. A CCF is not a legal entity in Ireland and is not subject to Irish tax.

The ATOIDS follow on the heels of an ATO ruling on Dutch co-operatives. According to that ruling, a Dutch co-op is regarded as a corporate entity that can qualify for the Australian participation exemption on its dividends and on any share disposal capital gains provided the usual qualification rules are satisfied.

According to the new ATOIDs, the ATO considers that:

Interest and dividends paid by Australian residents and ultimately received by a tax-exempt Dutch stichting pension fund as a unit holder in the Irish CCF will be exempt from Australian withholding tax. This is on the basis that the Dutch stichting benefits from the exemption afforded to income derived by a superannuation fund for foreign residents where that income is exempt from income tax in the country in which the nonresident resides (ATOID 2008/61);

Because the Dutch stichting does not carry on business through an Australian permanent establishment, Australia does not have a right to tax the Australian-source business profits the Dutch stichting receives as a unit holder in the Irish CCF under the Australia-Netherlands tax treaty (ATOID 2008/62); and

The Irish CCF is not considered a resident of Ireland for purposes of the Australia-Ireland tax treaty (ATOID 2008/63).

In reaching the above conclusions, the ATO considers that an Irish CCF is “tax transparent” for Australian tax purposes and, in particular, the relationship between the manager, custodian and the unit holder of the CCF constitutes a trust for Australian tax purposes. The ATO’s characterisation of the CCF as tax transparent confirms the use by Dutch pension funds of Irish CCFs as effective pension pooling vehicles. Specifically:

Australia-source income is not taxed in Australia (as a result of a specific interest and dividend withholding tax exemption for foreign superannuation funds under domestic law and protection under the Australia-Netherlands treaty);

The CCF is not taxed in Ireland and is treated as tax transparent in Ireland on the basis that all income and gains are treated as accruing to the ultimate beneficiary; and

The Dutch stichting pension fund is a tax-exempt entity in the Netherlands.

This results in a pension pooling structure for investment into Australia with tax neutrality and minimal drag on the performance.

The ATO is continuing its approach of classifying non-common law foreign entities by examining the legal characteristics of the entity and finding appropriate analogies with recognised common law entities. The recent ATOIDs indicate the willingness of the ATO with respect to the tax transparency of pension pooling structures making investments into Australia. The same analysis potentially could be applied to the characterisation of other common pension pooling vehicles as tax transparent for Australian tax purposes.

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