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Edited version of your written advice

Authorisation Number: 1051420005393

Date of advice: 31 August 2018

Ruling

Subject: Sovereign immunity

Question 1

Is Central Bank A immune from income tax and withholding tax under the common law doctrine of sovereign immunity on any income and capital gains derived from its current investments in Australian equity securities (including investments in real estate investment trusts (REITs)) as listed in Appendix 1 of the relevant facts and circumstances of this Ruling?

Answer

Yes.

Question 2

Is Central Bank A immune from liability to income tax and withholding tax under the common law doctrine of sovereign immunity on any income and capital gains derived from its future equity investments in Australia (including investments in REITs) when made within the parameters contained in paragraph 19 of the relevant facts and circumstances of this Ruling?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The relevant facts and circumstances of the scheme are as follows:

Central Bank A

Australian investments

Investment management

Current Australian investments

Future Australian investments

Appendices to the relevant facts and circumstances

Appendix 1 – Current Australian equity investments (including investments in REITs) as at 30 June 20XX

Appendix 1 lists Central Bank A’s current Australian equity investments.

Appendix 2 – Future Australian investments

Appendix 2 lists Central Bank A’s approved list of Australian equities (including approved REITs).

Relevant legislative provisions

N/A

Reasons for decision

Question 1

Is Central Bank A immune from income tax and withholding tax under the common law doctrine of sovereign immunity on any income and capital gains derived from its current investments in Australian equity securities (including investments in REITs) as listed in Appendix 1 of the relevant facts and circumstances of this Ruling?

Detailed Reasoning

Sovereign immunity background

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:

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 government or agency of a foreign government

Central Bank A is the Central Bank of Country A, established by an Act in Country A.

The principal object of Central Bank A is to promote monetary stability and financial stability conducive to the sustainable growth of the economy in Country A.

Whilst Central Bank A is not itself a foreign government it does constitute a body corporate (not being a natural person or corporation sole) that is an entity, i.e. an agency or instrumentality of the Government of Country A.

In view of the above, it is considered that Central Bank A is an agency of a foreign government.

Consequently, condition 1 is satisfied.

Condition 2: the monies being invested are and will remain government monies

Under the Act, there shall be a General Reserve Fund which shall include the amount standing to the credit of the General Reserve Fund.

At the end of each financial year, the net profit of Central Bank A is determined after allowing for the expenses of operations. In accordance with the Act, Central Bank A may transfer any amount from the net profit to any contingency reserve, fluctuation reserve or such other reserve as the Board deems prudent or necessary.

The net profit of Central Bank A less any unrealised gains and after transfers under the Act shall be dealt with as follows:

The investment income earned by Central Bank A will increase the foreign reserves amount held by Central Bank A. It will be reinvested as part of the mandates in managing Country A’s foreign reserves and/or will be utilised to support Central Bank A’s general functions.

In view of the above, it is considered that the monies being invested by Central Bank A are and will remain government monies.

Consequently, condition 2 is satisfied.

Condition 3: The income or gain is being derived from a non-commercial activity

As noted in ATO ID 2002/45, whether an operation or activity is a commercial transaction will depend on the facts of each case. As a guide, a commercial transaction is generally considered to be an activity concerned with the trading of goods and services, such as buying, selling, bartering, transportation, and includes the carrying on of a business. A passive investment is more likely to be considered a non-commercial transaction.

In relation to the ownership of shares in a company or other similar equity interests, there will be instances where the extent of the holding gives rise to questions as to whether the interests constitute a passive investment or a commercial investment.

In all circumstances, consideration will be given to factors relating to the influence or control potentially able to be exercised by the investor (or a related party/associate of the investor) in relation to the investment. This includes (but is not limited to) any potential influence or control in relation to day to day management and key business, strategy and financial decisions.

Current Australian investments

Central Bank A’s current Australian equity investments (including investments in REITs) are detailed in Appendix 1 of the relevant facts and circumstances of this Ruling.

The following factors are relevant in determining whether Central Bank A’s current equity investments in Australia are commercial activities:

In view of the above, it is considered that the current investments held by Central Bank A in Australian equities (including investments in REITs) are passive and non-commercial.

Consequently, condition 3 is satisfied.

Conclusion

As the three conditions have been satisfied, Central Bank A is immune from income tax and withholding tax on all income and gains derived from the investments detailed in Appendix 1 of this Ruling pursuant to the common law doctrine of sovereign immunity.

Question 2

Is Central Bank A immune from liability to income tax and withholding tax under the common law doctrine of sovereign immunity on any income and capital gains derived from its future equity investments in Australia (including investments in REITs) when made within the parameters contained in paragraph 19 of the relevant facts and circumstances of this Ruling?

Detailed Reasoning

Sovereign immunity background

Refer to detailed reasoning in Question 1.

Condition 1: A foreign government or agency of a foreign government

As indicated in Question 1, it is accepted that Central Bank A are an agency of the Government of Country A, and therefore condition 1 is satisfied.

Condition 2: the monies being invested are and will remain government monies

As indicated in Question 1, it is accepted that the monies being invested are and will remain government monies, and therefore condition 2 is satisfied.

Condition 3: The income or gain is being derived from a non-commercial activity

Refer to detailed reasoning in Question 1.

Future Australian investments

Central Bank A will invest in Australian equity investments (including investments in REITs).

The following factors are relevant in determining whether Central Bank A’s future equity investments in Australia are commercial activities:

In view of the above, it is considered that the future investments held by Central Bank A in approved Australian equities (including investments in REITs) will be passive and non-commercial.

Consequently, condition 3 is satisfied.

Conclusion

As the three conditions have been satisfied, Central Bank A is immune from income tax and withholding tax on all income and gains derived from future Australian equity investments (including investments in REITs) when made within the parameters contained in paragraph 19 of the relevant facts and circumstances of this Ruling pursuant to the common law doctrine of sovereign immunity.


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