Edited version of your private ruling

Authorisation Number: 1012423176636

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Ruling

Subject: Income and withholding tax

Question 1

Does Article 11 of a particular double tax agreement apply to exempt any interest received by the applicant from an Australian unit trust from taxation in Australia?

Answer

Yes

Question 2

Are the ordinary income, statutory income and capital gains which are derived/received by the applicant, or to which the applicant becomes presently entitled, from its investment in the Australian unit trust exempt from income tax and withholding tax in Australia in accordance with the doctrine of sovereign immunity?

Question 3

Is any ordinary income, statutory income and capital gains derived by the applicant from the sale, disposal or redemption of its interest, or part thereof, in the Australian unit trust exempt from income tax and withholding tax in Australia in accordance with the doctrine of sovereign immunity?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

The scheme commences on:

X December 2012

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Description of the applicant.

1. The applicant is a body which was established under foreign law.

2. The applicant was established solely with government monies. The applicant manages assets purchased with government funds.

3. The applicant's core function is to invest government money.

4. The applicant's income and capital reserves are used to support and supplement governmental functions.

5. The applicant's Board of Directors are appointed by the government. The government also appoints the chairman and deputy chairman.

6. Agreements and other legal documents executed by the applicant are binding on the State.

The Australian unit trust

7. The applicant has applied to acquire units issued by the Australian unit trust. This investment, as a percentage of the total investment in the Australian unit trust is currently less than 10% of the total value the Australian unit trust.

8. The applicant is not entitled to appoint a director to the Australian unit trust or otherwise participate in the management of the Australian unit trust.

9. The applicant will manage its investment in the Australian unit trust only, and will not manage or otherwise be involved in the management of, or exercise any influence over, the Australian unit trust's assets or activities.

10. The Australian unit trust may keep separate accounts of different sources of income, or deductions or credits for tax purposes, and may allocate income, deductions or credits from a particular category or source to particular Members or Classes.

11. The Australian unit trust will distribute an interest component to unit holders, which will be disclosed at item 12-H in the annual tax distribution statements.

Other investments in Australia

12. The applicant has a number of other unrelated investments in Australia. None of those investments constitute the carrying on of a business.

Flow of Funds

13. The flow of funds is as follows:

I. The foreign State transferred assets to the applicant, in accordance with the provisions of the legislation.

II. The applicant generates income from investments in equities and fixed income securities and from alternative investments in real estate, private equity funds and hedge funds. One of the alternative investments is the investment in the Australian unit trust, which is funded with government moneys and/or income derived from the investment of government moneys, which is itself government monies.

III. The applicant will be entitled to distributions of income from the Australian unit trust. The applicant will be entitled to distributions of interest income earned on cash balances held by the Australian unit trust and to distributions in respect of any profits or gains derived by the Australian unit trust on the sale of its assets.

IV. The applicant will also receive the proceeds on sale or redemption of its units in the Australian unit trust.

V. Upon request by the foreign State, the applicant will provide funds to the foreign State.

Relevant legislative provisions

Agreement between the Government of Australia and a particular state for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income Article 11

Reasons for decision

These reasons for decision accompany the Notice of private ruling.

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Question 1 - double tax agreement

Article 11 of a particular double tax agreement provides, inter alia, that interest derived by the Government of a Contracting State, or by any other body exercising governmental functions in, or in a part of, a Contracting State, shall be exempt from tax in the other Contracting State.

The operation of the applicant is governed by legislation, including provisions governing the appointment of the members of the board of directors and the investment activities of the applicant.

The applicant's core function is to invest government monies. Agreements and other legal documents executed by the applicant are generally binding on the foreign government. Accordingly, it is accepted that the applicant is a body which exercises foreign governmental functions.

As the applicant is exercising governmental functions, Article 11 of the double tax agreement provides that interest derived by the applicant in Australia is exempt from tax in Australia.

Questions 2 and 3 - Sovereign Immunity

The Australian Taxation Office (ATO) accepts that certain income derived from within Australia by foreign governments is exempt from Australian tax under the doctrine of sovereign immunity (see ATO ID 2002/45). Income derived by a foreign government from the performance of governmental functions within Australia is exempt from Australian tax. However, income derived from commercial activities which are conducted by a foreign government within Australia are not exempt from Australian tax.

Income derived from an activity undertaken by a foreign government agency may also be accepted as being derived from the performance of governmental functions, provided that:

the activity relates to a function of government,

the agency is owned and controlled by the government, and

the agency does not engage in ordinary commercial activities.

When determining whether sovereign immunity applies in relation 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.

In order to establish whether sovereign immunity applies to exempt income from income tax and withholding tax, the current practice of the ATO requires that the following three requirements be satisfied:

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

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

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

Each of these factors is discussed below.

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

The applicant is the entity making the investment. As discussed above, the applicant's core function is to invest foreign government money and be ready to transfer funds to the government when required. The operation of the applicant governed by legislation,

Accordingly, the applicant is accepted as being an agency of a foreign government.

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

The applicant was established solely with government money. The applicant manages assets purchased with government funds and the applicant was wholly funded by the government.

The applicant's core function is to invest the transferred foreign government funds. The invested funds are ultimately used to fund governmental functions.

The applicant accumulates and invests foreign government moneys, with the assets, income and gains remaining government property.

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

The question of whether an operation or activity is commercial in nature will depend on the facts of each particular case. However, commercial activity is generally concerned with the trading of goods and services or the carrying on of a business.

In contrast, income from interest bearing investments or investments in equities is generally not considered to be income derived from commercial activities. There could however, be instances where the extent of the holding of shares in a company or a managed investment trust or fund would give rise to a question as to whether it constitutes a passive investment or the carrying on of a business.

The Australian unit trust is a managed investment scheme with a diverse portfolio of assets. The applicant is not entitled to appoint a director to the unit trust. As the applicant currently owns less than 10% of the total equity in the unit trust it is not able to control or substantially influence the commercial activities of the unit trust. The investment in the unit trust is separate and unconnected to other investments in Australia.

Generally, income derived from interest bearing investments, investments in equities such as bonds or a portfolio holding in a company or a managed investment trust (i.e. a holding of 10% or less of the equity in a company or managed investment trust) will be accepted as a non-commercial activity. As the investment in the unit trust is less than 10% of the total equity in the unit trust, it is accepted that any income derived by the applicant from the investment, is being derived from a non-commercial activity.

Conclusion

For the reasons set out above, the activity of the applicant in Australia in relation to its passive investment in the unit trust satisfies the requirements of our guidelines in relation to the doctrine of sovereign immunity. Income derived by the applicant from the investment in the unit trust is therefore exempt from Australian income tax and withholding tax in accordance with the doctrine of sovereign immunity.

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