Edited version of your written advice

Authorisation Number: 1051184914384

Date of advice: 2 February 2017

Ruling

Subject: Sovereign Immunity

Question

Is the entity immune from income and withholding tax on trust distributions (comprising of interest income, dividend income, rental income and other income, including capital gains) received by it from its proposed unit holdings in Australian trusts and any gains made by it from the disposal of its units in those trusts under the common law doctrine of sovereign immunity?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2017

Year ended 30 June 2018

Year ended 30 June 2019

Year ended 30 June 2020

Year ended 30 June 2021

Year ended 30 June 2022

Year ended 30 June 2023

Year ended 30 June 2024

Year ended 30 June 2025

Year ended 30 June 2026

The scheme commences on:

1 July 2016

Relevant facts and circumstances

The entity

1. The entity is a foreign exempt limited liability company that is ultimately wholly owned by a foreign Government institution ('the institution') established by the laws of a foreign nation, which acts as a holding company for certain investments of the Government of a foreign nation.

2. The institution was established to invest the Government's financial surplus resources into global investment opportunities and broaden the nation's economic platform. The institution's mission statement is to assist the Government in achieving continuous financial success and wealth protection, while sustaining prosperity for the future.

3. The relevant establishing legislation provides that upon the institution's dissolution or liquidation, the Investment fund shall devolve upon the Government in accordance with the conditions stipulated by the law.

4. The establishing legislation also provides the institution with the power to establish companies and corporations engaged in various investments.

5. The entity has been established by the institution as a separate legal entity to carry out the investment requests of the institution.

6. The entity acts solely on the institution's orders and does not undertake any investment otherwise than as requested by the institution, which itself does not undertake any other activities besides investing the Government's financial surplus resources.

7. The entity will acquire X% of the stapled units in X unlisted Australian flow through trusts (each of them referred to as a 'Trust' and collectively referred to as 'the trusts').

8. The trusts only own property located in Australia and are managed investment trusts (MITs).

The Securityholder Committee ('SC')

9. The trust constitutions establish the SC.

10. The role of the SC states that the SC representatives are not responsible for the management of the Trust.

11. The SC is comprised of:

● a nominated representative of each of the Major Securityholders, being the X largest investors and the members holding units valued at $xx or more

● the Independent Representatives, being independent directors of the Manager, and

● one representative of the Remaining Securityholders, being the unitholders that are not Majority Securityholders.

12. The entity will be entitled to a seat on the SC as a Major Securityholder.

13. Each SC representative is entitled to one vote for each security held by their nominating investor. The day to day management of the Fund remains the responsibility of the independent manager.

14. The SC must be convened to approve:

● Special Majority matters that require a resolution by not less than a X% majority of votes cast by members present and entitled to vote at the meeting, and

● Super Majority matters that require a resolution by not less than a X% majority of votes cast by members present and entitled to vote at the meeting.

15. The entity will hold approximately X% of the stapled units in the Trusts therefore the entity's nominated SC representative will be entitled to X% of the votes in the SC when voting on resolutions or procedural matters on which it is entitled to vote. Consequently, the entity will have the ability to veto certain Super Majority matters.

Deed between the manager of the trusts and the entity

16. The entity has entered into a deed with the manager of the trusts.

17. The deed prevents the entity's nominated SC representative (including any alternate) from voting on certain Special Majority and Super Majority matters.

18. The deed also prevents the manager of the trusts from accepting a 'for' or 'against' vote from the entity's nominated representative.

19. The manager of the trusts will only accept an abstention on the specified matters from the entity's nominated representative.

20. The remainder of the matters which are considered by the SC are basic investor protection or administrative matters.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 128B(1)

Income Tax Assessment Act 1936 subsection 128B(2)

Income Tax Assessment Act 1997 section 4-1

Income Tax Assessment Act 1997 subdivision 840-M

Reasons for decision

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 the case 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:

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

2. that the moneys invested are and will remain government moneys, and

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

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

Condition 1: a 'foreign state' or an agency of a foreign state

The institution was established to invest the Government's financial surplus resources into global investment opportunities and broaden the nation's economic platform. The institution's mission statement is to assist the Government in achieving continuous financial success and wealth protection, while sustaining prosperity for the future.

The relevant establishing legislation provides that upon the institution's dissolution or liquidation, the Investment fund shall devolve upon the Government in accordance with the conditions stipulated by the law.

The establishing legislation also provides the institution with the power to establish companies and corporations engaged in various investments.

The entity has been established by the institution as a separate legal entity to carry out the investment requests of the institution.

The entity acts solely on the institution's orders and does not undertake any investment otherwise than as requested by the institution, which itself does not undertake any other activities besides investing the Government's financial surplus resources.

Based on the facts and circumstances of this case, it is accepted that the institution meets the condition of being an agency of a foreign state.

The institution's ultimate ownership and control of the entity means that the entity also operates as an agent of the foreign Government. Therefore, the entity is considered an agency of a foreign state.

Condition 2: monies are and will remain government monies

In line with the principle that sovereign immunity applies to foreign states performing only governmental functions, an entity claiming sovereign immunity must establish that the monies being invested in the scheme are and will remain government monies.

The entity has established that the moneys invested are and will remain government moneys.

As noted above the entity is a wholly owned subsidiary of the institution and acts as a holding company for certain investments of the institution.

As a result of this structure, the entity is directed and operated by the institution who consequently acts on behalf of the foreign Government.

The institution is the beneficial owner of the assets of the entity and therefore it is beneficially entitled to the income.

The only entity that has a beneficial interest in the ownership of the assets of the institution is the Government.

Accordingly, the monies that are invested by the entity are and will remain government monies.

Condition 3: commercial transaction

Whether an operation or activity is a commercial transaction will depend on the facts of each particular case. As a guide, a commercial transaction 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 relation to the holding of shares in a company or units in a trust, there would be instances where the extent of the holding gives rise to questions as to whether it constitutes a passive investment or a commercial investment, but this would depend on the particular circumstances. A portfolio holding in a company or fund (i.e. a holding of 10 per cent or less of the equity in a company) will generally be accepted as a non-commercial transaction.

Is the entity's investment in the trusts a commercial transaction?

In determining whether the income and gains derived by the entity from its investment in the trusts are from a non-commercial activity, it is necessary to consider the nature of the entity's investment including the extent of its holding and the degree of its actual or potential influence in respect of the business decisions of the trusts.

The entity will hold X% of the stapled units in the trusts. This is a non-portfolio holding, however this fact alone is not determinative in this case.

In addition to this holding, the entity will be represented on the SC where their nominated representative will be entitled to X% of the votes.

The SC is not responsible for the management of the trusts.

The SC must be convened to approve Special Majority Matters and Super Majority Matters requiring a X% and X% majority of votes respectively.

The entity, through its holding of X% of the relevant units would have the power to veto Super Majority matters which, as stated, require a X% majority. They are also able to vote on Special Majority matters.

The entity has entered into a deed with the manager of the trusts, preventing its SC representative from voting on specified matters. The manager of the trusts will be prevented from accepting a 'for' or 'against' vote from the entity. They will only accept an abstention on these specific matters.

The remainder of the matters which are considered by the SC are basic investor protection or administrative matters.

When viewed together, the Commissioner accepts that the X% interest in the trusts and representation on the SC do not lead to the conclusion that the investment in the trusts by the entity constitutes a commercial activity.

In view of the above, it is accepted that the income and gains derived by the entity from its investment in the trusts are from a non-commercial activity.

Conclusion

The entity is immune from income and withholding tax on trust distributions (comprising of interest income, dividend income, rental income and other income, including capital gains) received by it from its proposed unit holdings in the trusts and any gains made by it from the disposal of its units in the trusts under the common law doctrine of sovereign immunity.

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