Edited version of private advice

Authorisation Number: 1051660141398

Date of advice: 21 April 2020

Ruling

Subject: Sovereign immunity and the transitional measures

Question

Is the ordinary and statutory income (including capital gains, dividend income, interest income, and trust income) derived or made by Entity A as a return on the units it acquired in Entity B, before March 2018 not assessable and not exempt income due to the operation of section 880-5 of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A 1997)?

Answer

Yes

This ruling applies for the following periods:

1 July 2019 to 30 June 2026

The scheme commences on:

1 July 2019

Relevant facts and circumstances

Entity A

1.    Entity A is the legal personification of a foreign state.

2.    The Lieutenant Governor is the representative of Entity A in the foreign state.

3.    The Cabinet of the Government of the foreign state exercises the authority and power of the Crown by advising the Lieutenant Governor. Accordingly, the Cabinet is responsible for the ultimate control of Crown entities.

4.    The Minister of Finance is responsible for the management, investment and administration of the Consolidated Fund of the foreign state.

5.    The Consolidated Fund is where all the public money of the foreign state is deposited.

Corporation A

6.    Corporation A is a non-profit Crown Corporation that administers the foreign state's public automobile insurance and injury compensation system. This is a system of basic compulsory automobile insurance for the foreign state's motorists.

7.    Corporation A is also responsible for administration of the relevant Actwhich includes being responsible for operations relating to driver safety, licensing, and vehicle registration.

8.    Corporation A is a statutory corporation without share capital and is governed by legislation.

9.    Corporation A is an agent of Entity A and is controlled by Entity A through the Lieutenant Governor.

10.  Corporation A is exempt from income tax in the foreign country.

11.  The Provincial Government appoints the Board of directors for Corporation A. The Provincial Government also appoints a president and a chief executive officer, who are non-voting members of Corporation A's Board.

12.  Corporations A's Board is responsible to the minister charged with administering the Corporation A Act. This minister is currently the Minister of Crown Services.

13.  Corporation A is required to submit a business plan and an annual report for approval by the Minister each fiscal year.

14.  The chairman of Corporation A's Board is required to report to the Minister of Crown Services after every meeting of the Corporation A Board.

15.  Corporation A is funded by mandatory premiums received from automobile owners and license holders. No individual has any claim to monies they have contributed.

16.  The money that is received in the form of premiums is pooled together and credited to Corporation A's account within the Consolidated Fund. The funds are then invested by Entity A on behalf of the Corporation A.

17.  This money, combined with any investment income is used to carry out Corporation A's functions, including the paying out of compensation and benefits for the automobile insurance system. This insurance system includes a system of universal no-fault compensation for any resident of the foreign state who suffers bodily injury or physical damage to their vehicle in an accident caused by an automobile.

18.  All property of Corporation A, including all monies acquired, administered, possessed, or received by Corporation A and all profits earned by Corporation A, is deemed under the Act to be the property of Entity A for all purposes.

19.  All money not immediately required by Corporation A for its functions must be paid to the Minister for investment, and form part of the Consolidated Fund.

20.  Any money that is required by Corporation A to meet its obligations and administer its functions under the Act is returned to it.

The Investments

21.  Entity A directly holds equity interests issued by Entity B, in the form of stapled units in those funds.

22.  Entity B consists of Australian unit trusts which invest in active Australian assets and non-active assets respectively.

23.  The monies to be invested in Entity B by Entity A are monies deposited with the Minister of Finance by Corporation A and standing to the account of Corporation A in the Consolidated Fund.

24.  Any and all income derived from the investment in Entity B will be credited to the account of Corporation A in the Consolidated Fund.

25.  Entity A will derive trust income, dividend income, interest income, and other income from the units. Entity A will also potentially derive capital gains from the disposing of any of the units.

26.  Within Entity B's governance structure the Investors' Representative Group (IRG) was formed to provide investors with a forum to engage regularly with the Fund Manager on material matters. The IRG's role is solely advisory in nature.

27.  Entity A does not have representation on the IRG, nor does it have influence in any other way over the decision making of Entity B.

28.  No person with decision making capability in Entity B, its trustees or Fund Managers are accustomed or obliged to act, or might reasonably be expected to act, in accordance with the directions, instructions or wishes of Entity A

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 (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 March 2018 under the scheme; and

(c) on or before 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 March 2018; and

(ii) ending before 1 July 2026;

regardless of whether the private ruling started to apply before 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

Entity A will receive ordinary and/or statutory income as a return on the units it holds in Entity B.

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.

A 'foreign government agency' is defined in subsection 995-1(1) ITAA 1997 as:

(a)    the government of a foreign country or part of a foreign country; or

(b)    an authority of the government of a foreign country; or

(c)    an authority of the government of part of a foreign country.

The interests in Entity B are held by the Minister of Finance as representative of Entity A within the Consolidated Fund. The returns on the investment in Entity B are received by the Minister of Finance and credited to the account of Corporation A within the Consolidated Fund. Corporation A is an agent of Entity A, and is held and controlled by Entity A. Entity A is therefore the entity that derives the amounts of income arising from the investment in Entity B.

The reference to the 'part' of a foreign country is a reference to a State or Provincial government within a system with multiple levels of government.

Entity A is the legal personification of the foreign state and therefore is a body politic of a foreign country, or part of a foreign country.

Further, Corporation A is a non-resident company, 100% of the total participation interests in which are held by Entity A. Based on these facts, the Commissioner accepts that Corporation A is an entity that satisfies paragraph 880-15(c) of the ITAA 1997.

Therefore, Entity A is a sovereign entity.

3.    A return on an investment asset under a scheme

Entity A will, via trust distributions, dividends and interest payments receive ordinary income as a return on the units in Entity B. Entity A may also derive statutory income in the form of capital gains from disposing of any units in Entity B.

The word 'scheme' is broadly defined to mean any 'arrangement, scheme, plan, proposal, action, course of action or course of conduct'. The acquisition and holding of the Entity B investment by Entity A on behalf of Corporation A would be deemed a scheme for these purposes.

Therefore, this requirement is satisfied.

4.    Investment asset acquired on or before March 2018

Entity A acquired the units in Entity B on June 2015 and Entity A has not changed, added to or varied its investment in Entity B since this date.

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 any interests/units in Entity B acquired by Entity A after March 2018.

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

Entity A applied for a private ruling on May 2015 in relation to the scheme specified in the private ruling that issued on June 2015.

Therefore, this requirement is satisfied.

6.    Private ruling made before 1 July 2026

A private ruling was made on June 2015. The Commissioner determined in this private ruling that Entity A was 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 units it held in Entity B.

Therefore, this requirement is satisfied.

7.    Private ruling applied during the relevant period

Entity A's private ruling issued on June 2015 and applied for the period between income year ended 30 June 2015 and income year ended 30 June 2019.

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 1 July 2019 to 30 June 2026.

Therefore, this requirement is satisfied.

Conclusion

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

As the conditions of section 880-5 of the IT(TP)A 1997 have been satisfied, the Commissioner will not impose liability to income tax (including capital gains) or withholding tax on Entity A on its interest income, dividend income, trust distributions, and any other income derived from its portfolio investments in Entity B during the period for which the ruling is sought.

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