Disclaimer
This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of your written advice

Authorisation Number: 1013038295914

Date of advice: 22 June 2016

Ruling

Subject: Sovereign Immunity

Question 1

Is the non-resident entity immune from Australian income tax and withholding tax under the common law principle of sovereign immunity in respect of any income, including capital gains, from the following Australian investments:

Answer

Yes.

This ruling applies for the following periods

Year ending 30 June 2017

Year ending 30 June 2018

Year ending 30 June 2019

The scheme commenced on

1 July 2016

Relevant facts and circumstances

The non-resident entity

1. The non-resident entity is the national and central bank of a foreign state.

2. The non-resident entity is a legal entity and carries out its activities in accordance with a statute.

3. The purpose of the activity of the non-resident entity is the maintenance of the national currency.

4. The highest body of management of the non-resident entity is the Board of Directors.

5. The Board of Directors of the non-resident entity issue reports on financial policies, the international reserves and on the financial situation of the non-resident entity.

6. The non-resident entity is exempt from tax in the foreign state.

7. The profit of the non-resident entity will be transferred to the foreign state after accounting for reserves and prior year losses.

8. As a central bank, the non-resident entity carries out functions as prescribed by statute including administering the foreign state's currency and the administration of the international reserves.

9. The administration of the international reserves involves the administration of the international reserves in accordance with underlying investment criteria.

10. The international reserves belong to the foreign state and are accounted for as assets in the non-resident entity balance sheet.

The non-resident entity Australian Investments

11. The non-resident entity's Australian investments are made up of the following:

12. The non-resident entity intends to invest funds from the international reserves in:

13. Cash and term deposits include cash held in Australian demand deposit accounts and term deposit accounts.

14. Financial futures derivatives are held in the form of Australian government futures held for interest rate risk management.

15. The foreign currency transactions will involve acquiring Australian dollar financial assets and the purchase and sale of Australian currency for the purpose of management of foreign reserves. These financial assets will include various certificates, notes/bills, bonds/notes, and bonds with limited embedded optionality. In respect of these financial assets:

16. The debt obligations are primarily fixed rate bonds issued by the Australian Government, government agencies and private financial institutions. The debt obligations also include fixed rate bonds, denominated in Australian dollars, issued by supranationals, foreign governments and private entities.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 128B

Income Tax Assessment Act 1997 section 4-1

Reasons for decision

Question 1

Is the non-resident entity immune from Australian income tax and withholding tax under the common law principle of sovereign immunity in respect of any income, including capital gains, from the following Australian investments:

Detailed reasoning

For Australian income tax and withholding tax purposes, it is accepted that the doctrine of sovereign immunity applies to a foreign government or an agency of a foreign government that engages in governmental functions. This approach is consistent with the decision of the British House of Lords in I Congreso del Partido [1981] 2 All ER 1064 which held that activities of a trading, commercial or other private law character were not governmental functions.

When determining whether the doctrine of sovereign immunity applies to exempt Australian sourced income and gains from Australian income tax and/or withholding tax, it is necessary to establish the following:

If these three conditions are satisfied, then the income or gains will not be subject to Australian income tax or withholding tax.

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 non-resident entity is the central bank of the foreign state and is owned by the state. The non-resident entity carries out its activities in accordance with a foreign statute.

The purpose of the activities of the non-resident entity is to see to the maintenance of the national currency. The functions of the non-resident entity will be exercised in a manner conducive to the general economic policy of the foreign state.

The Board of Directors of the non-resident entity issues reports on financial policies, the international reserves and on the financial situation of the non-resident entity.

Given the non-resident entity is a state owned, central bank, which is accountable to the state, and acts within this capacity, the non-resident entity is an agency of a foreign government.

As such, the condition that the person making the investment, and therefore deriving the income, is a foreign government or an agency of a foreign government is satisfied.

Condition 2 - that the moneys invested are and will remain government moneys

As a central bank, one of the functions of the non-resident entity is to administer the foreign state's international reserves.

The administration of the foreign state's international reserves is in accordance with statute and in accordance with specified investment criteria.

Any profits made by the non-resident entity are distributed to the foreign state.

The international reserves belong to the foreign state and are accounted for as assets in the non-resident entity's balance sheet.

For the above reasons, the moneys invested by the non-resident entity are, and will remain, the moneys of the foreign state. Consequently, this condition is satisfied.

Condition 3 - that the income or gain is being derived from a non-commercial activity

In determining whether an investment constitutes a non-commercial activity, it is necessary to consider the nature of the investment and the degree of its actual or potential influence in respect of the financial, operating and policy decisions of any entity related to the investment.

The non-resident entity currently has funds from the international reserves invested in:

The non-resident entity intends to invest funds from the international reserves in:

Income derived by a foreign government or by any other body exercising governmental functions from interest bearing investments is generally not considered to be income derived from a commercial operation or activity.

Cash and term deposits include cash held in Australian demand deposit accounts and term deposit accounts.

The Financial futures derivatives are held in the form of Australian government futures. The financial futures derivatives are held as part of the non-resident entity's interest rate risk management, in particular, to manage interest risk associated with the non-resident entity's holdings of fixed income instruments denominated in Australian currency.

The foreign currency transactions will involve acquiring Australian dollar financial assets which will form part of the non-resident entity's international reserves and the purchase and sale of Australian currency for the purpose of management of foreign reserves. These financial assets will include various certificates, notes/bills, bonds/notes, and bonds with limited embedded optionality. In respect of these financial assets:

Debt obligations held by the non-resident entity are primarily fixed rate bonds issued by the Australian Government, government agencies and private financial institutions. The debt obligations also include fixed rate bonds, denominated in Australian dollars, issued by supranationals, foreign governments and private entities.

The nature and scale of the non-resident entity's investment of its international reserves in the above mentioned assets is not indicative of a commercial activity. The investments set out above do not give rise to voting rights or influence in any entity. The investments are of a passive nature made in accordance with the legislative mandate of the non-resident entity.

Therefore, the income being derived from the non-resident entity's Australian investments is from a non-commercial activity. Accordingly, this condition is satisfied.

Conclusion

The three conditions in relation to the non-resident entity Australian investments are satisfied. Consequently, the non-resident entity is immune from income tax or withholding tax in relation to income derived from the above mentioned investments under the common law doctrine of sovereign immunity.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).