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Edited version of private ruling

Authorisation Number: 1011823921172

Ruling

Subject: Sovereign immunity

Issue

Is the foreign housing authority exempt from income tax including withholding taxes from income derived in Australia according to the doctrine of sovereign immunity?

Decision

The foreign housing authority is exempt from income tax including withholding taxes from income derived in Australia according to the doctrine of sovereign immunity.

Facts

The foreign housing authority was established as a statutory body by legislation.

Documents provided:

Reasons for Decision

Certain income derived from within Australia by foreign governments is exempt from Australian tax under the international law doctrine of sovereign immunity. In accordance with that doctrine, Australia accepts that any income derived by a foreign government from the performance of governmental functions within Australia is exempt from Australian tax. An activity undertaken by a foreign government will generally be accepted as the performance of governmental functions provided that the agencies are owned and controlled by the government and do not engage in ordinary commercial activities. This approach is consistent with the decision of the British House of Lords in the case I Congreso del Partido 2 All ER 1064 which held that activities of a trading, commercial or other private law character were not governmental functions.

When determining whether sovereign immunity applies to a particular operation or activity, it is necessary to establish whether the operation or activity is commercial in nature. Whether an operation or activity is commercial in nature will depend on the facts of each particular case. However, as a guide, a commercial activity is generally an activity concerned with the trading of goods and services, such as buying, selling, bartering and transportation, and includes the carrying on of a business.

Income derived by a foreign government or by any other body exercising governmental functions from interest bearing investments or investments in equities is generally not considered to be income derived from a commercial operation or activity. Accordingly, provided the funds used to make such investments are and remain government moneys, the income is accepted as being exempt from tax under the common law doctrine of sovereign immunity.

In relation to a holding of shares in a company, there would be instances where the extent of the holding gives rise to questions as to whether it constitutes a passive investment or the carrying on of a business, but this would depend on the particular circumstances. A portfolio holding in a company (that is, a holding of 10% or less of the equity in a company) will generally be accepted as a non-commercial activity and any dividends received from such a holding would be exempt from tax.

In summary, to establish that sovereign immunity applies to exempt income tax including dividend and interest withholding tax from income derived in Australia, it is necessary to establish the following:

If these three conditions are satisfied, then the dividend and interest income will not be subject to Australian income taxes, including withholding taxes.

Condition 1

That the person making the investment (and therefore deriving the income) is a foreign government or an agency of a foreign government.

The foreign housing authority has provided evidence in its annual reports and its legislation that it is a government controlled body providing public housing for low income residents and that it is the beneficial owner of the assets and that any income derived from these assets are used to provide funds for the public housing purpose.

Condition 2

That the moneys being invested are and will remain government moneys.

The foreign housing authority has provided in its legislation that the moneys invested are and will remain government moneys. The entity is responsible to the government for the control and management of all funds invested. The public housing programme is funded by internally generated funds.

Condition 3

That the income is being derived from a non-commercial activity.

In accordance with the facts provided the entity's investments in Australia are considered to be of a passive and non-commercial nature.

Accordingly, an exemption under the doctrine of sovereign immunity for income tax including dividend and interest withholding tax is available.

Note: On 20 April 2011, the Assistant Treasurer released a consultation paper that sets out the proposed options to legislate into the tax laws the tax treatment of sovereign investments. The legislation of this tax treatment will clarify and provide certainty as to the Australian tax consequences for certain investments made by foreign governments and the withholding obligations for Australian residents. Submissions will be published in due course.

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