Edited version of private advice

Authorisation Number: 1051613363226

Date of advice: 28 February 2020

Ruling

Subject: Sovereign immunity - transitional measures

Question

Is the ordinary and statutory income derived by the foreign entity as a return on its Australian Investments acquired before 27 March 2018 not assessable and not exempt income due to the operation of section 880-5 of the IT(TP)A 1997?

Answer

Yes.

This ruling applies for the following period:

1 July 2019 to 30 June 2026

The scheme commences on:

1 July 2019

Relevant facts and circumstances

The Foreign Entity

1.               The foreign entity is the central bank of the foreign country. The foreign entity is the exclusive issuer of the foreign country's legal tender; administers their international reserves; acts as banker to the Government, and; functions as a lender of last resort.

2.               The foreign entity controls the foreign country's monetary system (currency), credit system (interest rates) and foreign exchange system (foreign exchange rates).

3.               The foreign country's Constitution lists all rules concerning the central bank.

4.               Certain articles contained in the foreign country's Law provide the nature and corporate purpose of the foreign entity.

5.               According to a specific article of the Law, for the foreign entity to fulfil the achievement of its purpose, the Board of Directors (Board) will adopt specific inflation targets, use the policy instruments in its charge and make recommendations conducive to that same purpose.

6.               The Congress of the foreign country stipulates the law that regulates the activities of the foreign entity. The foreign entity must report to the Congress of the foreign country on the execution of the policies for which it is responsible. This includes the execution of the monetary, exchange, and credit policies, a report on the policy for the administration and composition of the international reserves, and of the financial situation of the foreign entity and its perspectives.

7.               A specific article of the Law states that the foreign entity is exempt from stamp duty, income tax and supplementary taxes in the foreign country.

Functions

8.               The functions of the foreign entity and its Board are specifically set out in the Law and the Constitution.

9.               A specific article of the Constitution states that the foreign entity will exercise the functions of a central bank including administering the international reserves, and being the lender of last resort and banker of the credit institutions.

All of these functions will be exercised in co-ordination with the general economic policy.

10.            A specific article of the Law sets out the functions of the foreign entity in its capacity as banker and lender of last resort to public and private credit institutions with all entitlements determined by the Board.

11.            In relation to the functions related to the Government, the Law sets out the duties the foreign entity may perform.

International Reserves and Attributions Regarding Foreign Affairs

12.            The Law states that the foreign entity shall administer the international reserves in accordance with the public interest, to the benefit of the national economy and with the purpose of facilitating the foreign country's payments abroad.

13.            Administration includes the management, investment, custody deposit and disposition of reserve assets. The investment of these assets shall be made subject to the security, liquidity and profitability criteria in assets denominated in freely convertible reserve currency or in gold.

14.            The Board may make available contributions to international financial bodies from the international reserves, provided that such contributions also constitute reserve assets.

15.            For the purposes of the administration of the international reserves, the foreign entity has appointed a number of custodial agents. Custodial agents have appointed sub-custodial agents.

16.            A specific article of the Law states that the Government and other State authorities cannot dispose of the reserves for different purposes.

17.            The foreign entity will act as a communication channel with other international financial agencies and will develop with institutions and other institutions abroad, the relations arising from its central banking functions or facilitating international payment and credit operations.

18.            The Board shall determine the criteria which shall guide the decisions taken by the foreign entity.

Management

19.            The management of the foreign entity is governed by the Board. The Board was established by the Constitution as a monetary, exchange and credit authority, in accordance with the functions assigned to it by law.

20.            The Law states that the composition of the Board will consist of the Minister, the Governor of the foreign entity and other members that may be appointed according to the Law.

21.            The members of the Board exclusively represent the general interest of the Nation.

Australian Investments

22.            The foreign entity has invested in Australia.

23.            The foreign entity's investments in Australia as at 27 March 2018 consist of the following:

a) Cash and term deposits

b) Financial futures derivatives

c) Foreign currency transactions, and

d) Debt obligations issued by the Australian Government, Government Authorities and agencies or other Australian entities.

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

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

26.            The foreign currency transactions will involve acquiring Australian dollar financial assets which will form part of the foreign 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 certificate of deposit, commercial paper, discount notes/bills, zero coupon bonds/notes, fixed and floating rate coupon bonds/notes, inflation linked bonds/notes and bonds with embedded optionality limited to callable and puttable options.

27.            Debt obligations held by the foreign entity are primarily fixed rate bonds issued by the Australian Government, government agencies and private financial institutions.

Additional facts

28.            The foreign entity acquired the Australian Investments before 27 March 2018.

29.            The foreign entity applied for a private ruling in relation to its investments on a specified date.

30.            The Commissioner made a private ruling on a specified date confirming income derived by the foreign entity was not subject to income tax or withholding tax under the common law principle of sovereign immunity in respect of any income, including capital gains from the following Australian Investment types:

a) Cash and term deposits

b) Financial futures derivatives

c) Foreign currency transactions, and

d) Debt obligations issued by the Australian Government, Government Authorities and agencies or other Australian entities.

The private ruling that issued to the foreign entity applied for a certain period.

Relevant legislative provisions

Income Tax (Transitional Provisions) Act 1997 section 880-5

Reasons for decision

Background

Schedule 4 of the Treasury Laws Amendment (Making Sure Foreign Investors Pay Their Fair Share of Tax in Australia and Other Measures) Act 2019 amended the ITAA 1936 and the Income Tax Assessment Act 1997 (ITAA 1997) to improve the integrity of the income tax law to limit access to tax concessions for foreign investors by codifying and limiting the scope of the sovereign immunity tax exemption.

Section 880-1 of the IT(TP)A 1997 provides that the amendments to codify and limit the scope of the sovereign immunity tax exemption apply to the 2019-20 income year and to later income years. However, transitional rules may apply to income derived from investments of a sovereign entity held at the announcement date of the amendments (27 March 2018), subject to the satisfaction of certain requirements.

Transitional provisions

Section 880-5 of the IT(TP)A 1997 provides transitional relief for amounts of ordinary and statutory income derived by a sovereign entity where the following requirements are met:

An amount of ordinary income or statutory income of a sovereign entity for an income year is not assessable income and is not exempt income if:

(a)the amount is a return on an investment asset under a scheme; and

(b) the sovereign entity acquired the investment asset on or before 27 March 2018 under the scheme; and

(c) on or before 27 March 2018, the sovereign entity applied for a private ruling in relation to the scheme; and

(d) before 1 July 2026, the Commissioner gave the entity a private ruling confirming that income from the investment asset was not subject to income tax, or withholding tax, because of the doctrine of sovereign immunity; and

(e) the private ruling applied during at least part of the period:

(i)starting on 27 March 2018; and

(ii)ending before 1 July 2026;

regardless of whether the private ruling started to apply before 27 March 2018, or ceased to apply before 1 July 2026; and

(f)the scheme carried out is not materially different to the scheme specified in the private ruling; and

(g) the income year is:

(i)unless subparagraph (ii) applies - the 2025-26 income year or an earlier income year; or

(ii)if the last income year to which the private ruling relates is a later income year than the 2025-26 income year - that later income year, or an earlier income year.

Analysis

1. An amount of ordinary income or statutory income

The foreign entity will receive ordinary and/or statutory income as a return on its Australian Investments.

Therefore, this requirement is satisfied.

2. Sovereign entity

A 'sovereign entity' is defined in section 880-15 of the ITAA 1997 as:

(a) a body politic of a foreign country, or a part of a foreign country;

(b) a *foreign government agency;

(c) an entity:

(i) in which an entity covered by paragraph (a) or (b) hold a *total participation interest of 100%; and

(ii) that is not an Australian resident; and

(iii) that is not a resident trust estate for the purposes of Division 6 of Part III of the ITAA 1936.

The foreign entity is the central bank of the foreign country and controls their monetary system, credit system, foreign exchange system and is the exclusive issuer of the foreign country's legal tender. The foreign entity administers the foreign country's international reserves, acts as banker to their Government, and functions as a lender of last resort.

The foreign entity is a legal entity of the public law, which will continue functioning as a state-owned body of the constitutional rank, with a legal regimen of its own and special nature, and with administrative, patrimonial and technical autonomy.

As the foreign entity is a state owned, central bank, and is accountable to the state, the foreign entity is considered to be an agency of a foreign government.

Therefore, the foreign entity is a sovereign entity.

3. A return on an investment asset under a scheme

The foreign entity will receive ordinary and/or statutory income as a return on its Australian Investments it holds under a scheme.

Therefore, this requirement is satisfied.

4. Investment asset acquired on or before 27 March 2018

The foreign entity acquired its Australian Investments before 27 March 2018.

Therefore, this requirement is satisfied.

It is noted the transitional provisions will not apply in respect of ordinary or statutory income received as a return on its Australian Investments acquired by the foreign entity after 27 March 2018.

5. Applied for a private ruling on or before 27 March 2018

The foreign entity applied for a private ruling on a specific date in relation to the scheme specified in the private ruling that issued.

Therefore, this requirement is satisfied.

6. Private ruling made before 1 July 2026

A private ruling was made on a specific date. The Commissioner determined in this private ruling that the foreign entity was 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 their Australian Investments.

Therefore, this requirement is satisfied.

7. Private ruling applied during the relevant period

The foreign entity's private ruling issued on a specific date and applied for a specific period.

Therefore, this requirement is satisfied.

8. Scheme not materially different

Based on the facts and circumstances of this case, the Commissioner accepts that the scheme carried out is not materially different to the scheme specified in the original private ruling.

Therefore, this requirement is satisfied.

9. Relevant income year

The ruling period of this ruling is for a specified period.

Therefore, this requirement is satisfied.

Conclusion

All the requirements in section 880-5 of the IT(TP)A 1997 are satisfied.

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