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Edited version of your written advice
Authorisation Number: 1051288781138
Date of advice: 29 September 2017
Ruling
Subject: Sovereign Immunity
Question 1
Will the non-resident entity be immune from income tax and withholding tax on income and gains derived from its investments into Australia under the doctrine of sovereign immunity?
Answer
Yes.
Question 2
Will the non-resident entity be immune from income tax and withholding tax under the common law doctrine of sovereign immunity on income and gains derived from its future publicly listed equity investments in Australia when made within the parameters contained in paragraph 13 of the relevant facts and circumstances of this Ruling?
Answer
Yes.
This ruling applies for the following periods:
Year ended 20XX to Year ended 20XX
The scheme commences on:
20XX
Relevant facts and circumstances
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 foreign 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.
5. The Board of the non-resident entity is appointed by the government of the foreign state.
6. The non-resident entity issue reports on the financial situation of the non-resident entity including policy information as required by statute.
7. The non-resident entity is exempt from tax in the foreign state.
8. The profit of the non-resident entity will be transferred to the foreign state in accordance with the foreign statute.
9. 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.
10. The administration of the international reserves involves the administration of the international reserves in accordance with underlying investment criteria and policy.
11. The international reserves belong to the foreign state and any profit generated upon the reserves will be transferred to the foreign state in accordance with the foreign statute.
12. The non-resident entity’s Australian investments are in publicly listed equities and all follow the below parameters:
a. A holding of less than 10% of the equity securities of the issuer
b. Neither the non-resident entity nor any related party has any involvement in the day to day management of the issuing entity’s business
c. Neither the non-resident entity nor any related party has any right to representation on the board of an issuer, which includes the board of the corporate trustee of a unit trust
d. Neither the non-resident entity nor any related party has any right to representation on any investor representative or advisory committee (or similar) of any issuer, and
e. The non-resident entity only has rights to vote as a shareholder or unitholder (as the case may be) in proportion to its equity interest in the relevant entity.
13. The non-resident entity will invest in Australian publicly listed equities in the future subject to the following parameters:
a. All investments will be listed on the Australian Securities Exchange (ASX)
b. The investments will be shares, stapled securities or units in Real Estate Investment Trusts (REITs)
c. The non-resident entity will acquire less than 10% of the total equity interests of each Australian company/trust/REIT
d. The non-resident entity will have no involvement in the day to day management of the business of any of the Australian companies/trusts/REITs
e. Neither the non-resident entity nor any related party will acquire the right to appoint a director to the Board of Directors of any issuing Australian company, or equivalent role in a trust or REIT
f. Neither the non-resident entity nor any related party will acquire the right to representation on any investor representative or advisory committees (or similar) of any issuing Australian company, or equivalent role in a trust or REIT
g. Neither the non-resident entity nor any related party will have any ability to direct or influence the operation of the Australian company outside of the ordinary rights conferred by the equity interest held, and
h. The non-resident entity will only have rights to vote in proportion to its equity interest in each Australian company/trust/REIT.
Relevant legislative provisions
Income Tax Assessment Act 1936 section 128B
Income Tax Assessment Act 1997 section 4-1
Income Tax Assessment Act 1997 subsection 995-1(1)
Reasons for decision
Question 1
Will the non-resident entity be immune from income tax and withholding tax on income and gains derived from its investments into Australia under the doctrine of sovereign immunity?
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:
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 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. 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 non-resident entity issues reports 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 and policy.
The monies in the central bank were originally funded from the foreign state. Any profits made by the non-resident entity are distributed to the foreign state.
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’s Australian investments are in publicly listed equities and all follow the below parameters:
a. A holding of less than 10% of the equity securities of the issuer
b. Neither the non-resident entity nor any related party has any involvement in the day to day management of the issuing entity’s business
c. Neither the non-resident entity nor any related party has any right to representation on the board of an issuer, which includes the board of the corporate trustee of a unit trust
d. Neither the non-resident entity nor any related party has any right to representation on any investor representative or advisory committee (or similar) of any issuer, and
e. The non-resident entity only has rights to vote as a shareholder or unitholder (as the case may be) in proportion to its equity interest in the relevant 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 and gains derived from the above mentioned investments under the common law doctrine of sovereign immunity.
Question 2
Will the non-resident entity be immune from income tax and withholding tax under the common law doctrine of sovereign immunity on income and gains derived from its future publicly listed equity investments in Australia when made within the parameters contained in paragraph 13 of the relevant facts and circumstances of this Ruling?
Detailed Reasoning
Conditions 1 and 2
As outlined in the detailed reasoning for Question 1, it is accepted that the non-resident entity is an agency of a foreign government and the monies to be invested are and will remain government monies.
Condition 3
Future investments
The non-resident entity will invest in Australian publicly listed equities in the future subject to the following parameters:
a. All investments will be listed on the ASX
b. The investments will be shares, stapled securities or units in REITs
c. The non-resident entity will acquire less than 10% of the total equity interests of each Australian company/trust/REIT
d. The non-resident entity will have no involvement in the day to day management of the business of any of the Australian companies/trusts/REITs
e. Neither the non-resident entity nor any related party will acquire the right to appoint a director to the Board of Directors of any issuing Australian company, or equivalent role in a trust or REIT
f. Neither the non-resident entity nor any related party will acquire the right to representation on any investor representative or advisory committees (or similar) of any issuing Australian company, or equivalent role in a trust or REIT
g. Neither the non-resident entity nor any related party will have any ability to direct or influence the operation of the Australian company outside of the ordinary rights conferred by the equity interest held, and
h. The non-resident entity will only have rights to vote in proportion to its equity interest in each Australian company/trust/REIT.
Based on the above characteristics, the Commissioner accepts that the income and gains to be derived from the non-resident entity’s future public equity investments in Australia, when made within the parameters set out above will be from a non-commercial activity. Accordingly, this condition is satisfied.
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