Edited version of private advice

Authorisation Number: 1051744471100

Date of advice: 11 September 2020

Ruling

Subject: International issues - sovereign immunity

Question 1

Is the ordinary and statutory income derived by the Foreign Entity from its Australian investments, not assessable and not exempt income under section 880-105 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Will any capital gain arising to Foreign Entity in respect of the equity investment assets, comprised in Fund 1 be disregarded pursuant to section 880-115 of the ITAA 1997?

Answer

Yes

Question 3

Will Article 11 of the Relevant Tax Treaty exempt the Foreign Entity, from liability to tax in Australia on interest income received from corporate, securitised, index linked and Government bonds and treasuries from which it ordinarily derives income in the form of interest and when made within the 17 parameters contained in paragraph of the relevant facts and circumstances of this Ruling?

Answer

Yes

This ruling applies for the following period:

1 July 2019 to 30 June 2024

The scheme commences on:

1 July 2019

Relevant facts and circumstances

Foreign Entity

1.    Foreign Entity is a resident of Foreign State for Foreign State's tax purposes.

2.    Foreign Entity was established by an act of Foreign State and its activities areexempt from Norwegian tax.

3.    Foreign Entity is a separate legal entity and its issued capital is owned by Foreigns State's government.

4.    Foreign Entity performs public tasks and manages assets on behalf of the Foreign State.

5.    Foreign Entity reports to the relevant government entity of the Foreign State.

6.    Foreign Entity manages Fund 1 and Fund 2. Fund 2 is managed on behalf of the Foreign State.

7.    Monies invested by Foreign Entity are sourced from the Foreign State.

8.    The Governor of the Foreign Entity is responsible for the day to day management of the Foreign Entity.

Fund 2

1.    Fund 2 is the Foreign State's sovereign wealth fund.

2.    The Foreign State Government makes deposits into Fund 2 in accordance with Foreign State policy.

3.    Fund 2 is not currently subject to any liability to make pension payments or distributions.

4.    Fund 2 is governed by the Foreign State legislation and supervised by the Government.

5.    Fund 2 does not have a separate legal personality but rather constitutes a pool of segregated financial assets that the Foreign State is beneficially entitled to. The assets of Fund 2 are deposited in a bank account with Foreign Entity. The net return on Fund 2 investments is credited to the Foreign States bank account with Foreign Entity.

6.    A dedicated asset management department within Foreign Entity manages the assets of the Fund 2.

7.    Assets belong exclusively to the Foreign State where the Foreign Entity makes investments in accordance with the rules laid down by the Government.

8.    In accordance with Foreign Law, the income of the Fund 2 consists of net cash flows from petroleum activities transferred from the central government budget.

9.    The capital in the Fund 2 may only be used for transfers to the government budget by resolution of the Government. The Government cannot fund government expenditure by borrowing from the Fund 2.

10.  The Government is ultimately responsible for the management policy of Fund 2. The management policy states the following:

(a)  Foreign Entity is responsible for managing the Foreign State's deposits in Fund 2. Foreign Entity makes the investment decisions and exercises ownerships rights independently of the Government.

(b)  Foreign Entity has a duty to report and advise the Government on its investment strategy.

(c)   Foreign Entity must invest the funds of Fund 2, in its own name, in financial instruments, real estate, renewable energy infrastructure and cash deposits.

(d)  Foreign Entity cannot hold more than 10 per cent of voting shares in any one company (excluding holdings in listed and unlisted real estate companies and unlisted renewable energy infrastructure companies).

11.  The net return on Fund 2 investments is credited to the Foreign Sate's deposit account so it can be directly reinvested.

12.  Foreign Entity is not remunerated for carrying out the management function of Fund 2 but is entitled to reimbursement of costs it incurs.

13.  Fund 2 management costs are strictly controlled by the Foreign State via the Government.

14.  Foreign Entity is required to submit to the Foreign State a forecast budget of management costs each year for approval.

Foreign Entity's investments in Australia

15.  The Australian equity investments held by Foreign Entity include shares in Australian companies and units in Australian managed investment trusts (MITs) with the following characteristics:

(a)  All investments are listed on the Australian Securities Exchange (ASX)

(b)  Foreign Entity holds less than 10% of the total equity interests on issue of each Australian company / MIT

(c)   Foreign Entity has no involvement in the day to day management of the business of any of the Australian companies / MITs

(d)  Foreign Entity has no right to appoint a director to the Board of Directors of the Australian company or equivalent role in a MIT

(e)  Foreign Entity has no right to representation on any investor's representative or advisory committee (or similar) of the Australian company or MIT

(f)    Foreign Entity has no ability to direct or influence the operation of the Australian company or MIT outside of the ordinary rights conferred by the equity interest held, and

(g)  Foreign Entity only hold rights to vote in proportion to their equity interest in each Australian company or MIT.

16.  Foreign Entity holds Australian debt investments. The debt investments are made in corporate, securitised, index linked and Government bonds and treasuries from which income will be ordinary derived in the form of interest and have the following characteristics:

(a)  All investments are listed on the ASX.

(b)  The Foreign Entity holds less than 10% of the total equity interests on issue of each Australian debt issuer.

(c)   The Foreign Entity has no involvement in the day to day management of the business of any the Australian debt issuers.

(d)  The Foreign Entity has not acquired the right to appoint a director to the Board of Directors of any issuing Australian debt issuer.

(e)  The Foreign Entity has not acquired the right to representation on any investor's representative or advisory committee (or similar) of the Australian Debt Issuer.

(f)    The Foreign Entity has no ability to direct or influence the operation of the Australian debt issuer outside of the ordinary rights conferred by the debt interest held.

(g)  The Foreign Entity has no voting rights in respect of the debt investments held.

(h)  There are no special relationships or arrangements between the Foreign Entity, and the issuers of the Australian debt investments held which affect the amount of interest income that is paid from those investments.

(i)    The Foreign Entity has not entered into its debt investments with Australian organisations for the main purpose of obtaining an advantage by virtue of the operation of Article 11 of the Relevant Tax Treaty.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 880

Income Tax Assessment Act 1997 section 880-105

Income Tax Assessment Act 1997 section 880-115

Reasons for decision

Question 1

Is the ordinary and statutory income derived by Foreign Entity from its Australian investments, not assessable and not exempt income under section 880-105 of the ITAA 1997?

Summary

Ordinary and statutory income derived by Foreign Entity as a return on its Australian investments is not assessable and not exempt income due to the operation of section 880-105 of the ITAA 1997.

Detailed reasoning

Section 880-105 of the ITAA 1997 provides that amounts of ordinary and statutory income derived by a sovereign entity are not assessable and not exempt income if certain conditions are met. Those conditions are listed in subsection 880-105(1) of the ITAA 1997:

(a)  the sovereign entity is covered by section 880-125; and

(b)  the amount is a return on any of the following kinds of interest that the sovereign entity holds in another entity (the test entity):

(i)    *membership interest;

(ii)   a *debt interest;

(iii)  a *non-share equity interest; and

(c)   the test entity is:

(i)    a company that is an Australian resident at the time (the income time) when the amount becomes ordinary or statutory income of the sovereign entity; or

(ii)   a *managed investment trust in relation to the income year in which the income time occurs; and

(d)  the *sovereign entity group of which the sovereign entity is a member satisfies the portfolio interest test in subsection (4) in relation to the test entity:

(i)    at the income time; and

(ii)   throughout any 12-month period that began no earlier than 24 months before that time and ended no later than that time; and

(e)  the sovereign entity group of which the sovereign entity is a member does not have influence of a kind described in subsection (6) in relation to the test entity at the income time.

These conditions are considered below.

Foreign Entity is a covered sovereign entity

Section 880-125 of the ITAA 1997 states:

A *sovereign entity is covered by this section if it satisfies all of the following requirements:

(a)  the entity is funded solely by public monies;

(b)  all returns on the entity's investments are public monies;

(c)   the entity is not a partnership;

(d)  the entity is not any of the following:

(i)    a *public non-financial entity;

(ii)   a *public financial entity (other than a public financial entity that only carries on central banking activities).

These conditions are considered below.

Foreign Entity is a sovereign entity

For an entity to be covered by section 880-125 of the ITAA 1997, it must be a sovereign entity. Section 880-15 of the ITAA 1997 defines a sovereign entity to be any of the following:

(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) holds 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 Income Tax Assessment Act 1936.

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

(a)  the government of a foreign country or of 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.

Foreign Entity conducts central banking activities. It is established by an act Foreign Government and is a resident of Foreign State. Foreign State is a separate legal entity which is wholly owned by the Government.

Fund 2 is the Foreign State's sovereign wealth fund. It receives funds from the surplus wealth generated by Foreign State activities. Fund 2 is governed by the Foreign Law and is owned by the Foreign State. Fund 2 is managed and supervised by the Government.

The Government is a body politic of a foreign country.

Under the Foreign Law, Foreign Entity assumes responsibility for the managing of the funds of Fund 2.

Based on the above facts, Fund 2 is a foreign government agency as defined in subsection 995-1(1) of the ITAA 1997 and is therefore a sovereign entity under paragraph 880-15(b) of the ITAA 1997.

Therefore this requirement is satisfied.

Fund 2 is funded solely by public monies

The phrase 'public monies' is not defined and as such takes its ordinary meaning. In the context of Division 880, this phrase essentially means monies raised by a foreign government (or part of a foreign government) for a public purpose which form part of the foreign government's (or part of the foreign government's) equivalent to Australia's Consolidated Revenue Fund (Roy Morgan Research Pty Ltd v FC of T & Anor [2011] HCA 35). This would ordinarily include general tax revenue, proceeds from the issue of government bonds, the proceeds of privatisations etc.

Fund 2 is a fund under the control of the Government for the benefit of the Foreign State. In accordance with Foreign Law the Government has deposited the funds from Fund 2 with Foreign Entity who is required to invest the funds. The purpose of Fund 2 is to support the funding of pension expenditure.

Fund 2 is funded by the Government which makes deposits into Fund 2.

Fund 2 is therefore funded with public monies.

All returns on Foreign Entity's investments are public monies

Foreign Entity invests the money deposited into its account on behalf of Fund 2 in accordance with the Foreign Law. Under the Management Policy Foreign Entity is required to generate as high a return as possible. The return from these investments is deposited back into the Fund 2 account held with Foreign Entity.

Under Foreign Law, capital from the Fund 2 may only be transferred to the Government budget by resolution of the Government.

Therefore, all returns from Foreign Entity's investments are public monies.

Foreign Entity is not a partnership

Foreign Entity under the Foreign Law has a requirement to hold the funds of Fund 2 in an account within it. Furthermore, it is required to invest those funds on behalf of the Fund 2. Foreign Entity does not own the funds nor does it receive the returns from its investments. Foreign Entity itself was created under Foreign Law which also provides that Foreign Entity is the manager of the Fund 2.

Therefore, Foreign Entity is not a partnership.

Foreign Entity is not a public non-financial entity or public financial entity

Subsection 880-130(1) of the ITAA 1997 defines the term public non-financial entity:

An entity is a public non-financial entity if its principal activity is either or both of the following:

(a)  producing or trading non-financial goods;

(b)  providing services that are not financial services.

Subsection 880-130(2) of the ITAA 1997 defines the term public financial entity:

An entity is a public financial entity if any of the following requirements are satisfied:

(a)  it trades in financial assets and liabilities;

(b)  it operates commercially in the financial markets;

(c)   its principal activities include providing any of the following financial services:

(i)    financial intermediary services, including deposit-taking and insurance services;

(ii)   financial auxiliary services, including brokerage, foreign exchange and investment management services;

(iii)  capital financial institution services, including financial services in relation to assets or liabilities that are not available on open financial markets.

It is noted that subparagraph 880-125(d)(ii) of the ITAA 1997 excludes public financial entities that only carry on central banking activities from being excluded as a covered sovereign entity.

Foreign State is the focus Entity

In this case, given Foreign Entity is investing the assets of the Fund 2 as nominee for the Foreign State, it is considered that the Foreign State has a beneficial interest in the investments that are made in Australia. As such, the Foreign State is considered the sovereign entity and is the focus entity for the application of subsections 880-130(1) and 880-130(2) of the ITAA 1997.

Consequently, even though Foreign Entity invests the funds of Fund 2, the Foreign State is the focus entity for the purposes of determining whether Foreign Entity is a public non-financial entity or a public financial entity.

Public Non-Financial and Public Financial Entity Tests

Fund 2 is owned by the Foreign State. It is funded by the surplus wealth generated by the Foreign State's activities and its purpose is to support the funding of the Foreign State's long-term expenditure for its current and future generations.

In accordance with the Foreign Law and the Management Policy, Foreign Entity is a passive investor and maintains a long-term strategy to its investments. Foreign Entity cannot invest in companies that are excluded by the Government via the investment guidelines it sets out in the Management Policy. Foreign Entity does operate commercially in the financial markets or provide any of the listed financial services.

Foreign Entity was created by the Foreign State legislation, to conduct its central banking activities. Under Foreign Law it is given the responsibility of investing the Fund 2. Foreign Entity does not beneficially own Fund 2 rather Fund 2 is beneficially owned by the Foreign State. Fund 2 is managed by the Government.

In relation to the above, the Foreign State and its manager, the Government, do not produce or trade non-financial goods and do not provide services that are not financial services. The Foreign State and its manager, the Government do not trade in financial assets and liabilities, nor do they undertake the activities listed in paragraph 880-130(2)(c) of the ITAA 1997. Therefore, they do not satisfy the definition of a public non-financial entity nor public financial entity as defined at subsection 880-130(1) and 880-130(2) of the ITAA 1997.

As Foreign Entity satisfies each of the requirements in paragraphs 880-125(a) through (d) of the ITAA 1997, it is considered a sovereign entity that is covered by section 880-125 for the purposes of paragraph 880-105(1)(a) of the ITAA 1997.

Foreign Entity's return is received on a relevant interest in the Test Entities

For an amount of ordinary income or statutory income of a sovereign entity to satisfy paragraph 880-105(1)(b) of the ITAA 1997, it must be a 'return on' a membership interest, debt interest or non-share equity interest held by the sovereign entity in the test entities.

As detailed in paragraph 4.37 of the Explanatory Memorandum to the Making Sure Foreign Investors Pay Their Fair Share of Tax in Australia and Other Measures) Act 2019 (the EM), a 'return on' a membershipinterest for the purposes of paragraph 880-105(1)(b) of the ITAA 1997 will include:

1.    dividends - including non-share dividends and dividends that pass through a managed investment trust (MIT)

2.    interest - including interest that passes through a MIT

3.    fund payments made by a MIT (other than fund payments that are attributable to non-concessional MIT income), and

4.    revenue gains made on the disposal of an interest in the test entity - including revenue gains that pass through a MIT.

The test entities for the purposes of this Ruling are the publicly-traded companies and MITs in which Foreign Entity holds shares and units respectively (these meet the requirements of being membership interests as defined by the interaction of sections 960-135 and 960-130 of the ITAA 1997) and pay to Foreign Entity:

¢MIT fund payments, including interest components of trust distributions, and

¢dividends.

As such, Foreign Entity will receive amounts which satisfy the requirements of paragraph 880-105(1)(b) of the ITAA 1997.

Foreign Entity's income is received from Australian resident companies and MITs

For an amount of ordinary income or statutory income of a sovereign entity to satisfy paragraph 880-105(1)(c) of the ITAA 1997, it must be received from an entity that is either:

               i.         a company that is an Australian resident at the time (the income time) when the amount becomes ordinary or statutory income of the sovereign entity; or

              ii.        a *managed investment trust in relation to the income year in which the income time occurs.

The test entities are Australian resident companies and MITs.

As such, Foreign Entity receives income from entities which satisfy the requirements of paragraph 880-105(1)(c) of the ITAA 1997.

Foreign Entity's sovereign entity group satisfies the portfolio interest test

For an amount of ordinary income or statutory income of a sovereign entity to satisfy paragraph 880-105(1)(d) of the ITAA 1997, the sovereign entity and the sovereign entity group to which it belongs must satisfy the portfolio interest test in relation to the test entity/ies at both the income time and throughout any 12 month period that began no earlier than 24 months before that time and ended no later than that time.

The portfolio interest test is outlined in subsection 880-105(4) of the ITAA 1997, which states:

A *sovereign entity group satisfies the portfolio interest test in this subsection in relation to the test entity at a time if, at that time, the sum of the *total participation interests that each *member of the group holds in the test entity:

(a)  is less than 10%; and

(b)  would be less than 10% if, in working out the *direct participation interest that any entity holds in a company:

i.      an *equity holder were treated as a shareholder; and

ii.     the total amount contributed to the company in respect of *non-share equity interests were included in the total paid-up share capital of the company.

Section 880-20 of the ITAA 1997 provides the definition of sovereign entity group. Broadly, sovereign entities of the same foreign government will be members of the same sovereign entity group and sovereign entities of the same part of a foreign government will be members of the same sovereign entity group. Foreign Entity holds less than 10% of the total shares on issue of each Australian company and less than 10% of the total units on issue of each Australian trust.

As such, Foreign Entity's interest in the test entity satisfies the requirements of paragraph 880-105(1)(d) of the ITAA 1997.

Foreign Entity's sovereign entity group does not have influence of a kind described in subsection 880-105(6) of the ITAA 1997

For an amount of ordinary income or statutory income of a sovereign entity to satisfy paragraph 880-105(1)(e) of the ITAA 1997, at the income time, the sovereign entity group to which the sovereign entity belongs must not have influence over the test entity of a kind described in subsection 880-105(6) of the ITAA 1997.

Subsection 880-105(6) of the ITAA 1997 states:

A *sovereign entity group has influence of a kind described in this subsection in relation to the test entity at a time if any of the following requirements are satisfied at that time:

(a)  a *member of the group:

(iv)  is directly or indirectly able to determine; or

(v)   in acting in concert with others, is directly or indirectly able to determine;

the identity of at least one of the persons who, individually or together with others, make (or might reasonably be expected to make) the decisions that comprise the control and direction of the test entity's operations;

(b)  at least one of those persons is accustomed or obliged to act, or might reasonably be expected to act, in accordance with the directions, instructions or wishes of a member of the group (whether those directions, instructions or wishes are expressed directly or indirectly, or through the member acting in concert with others).

As such, there are two distinct sub-tests within the influence test.

Sub-test 1 of the influence test, as contained in paragraph 880-105(6)(a), assesses whether the sovereign entity group is able to determine the identity of at least one of the persons who, individually or together with others, makes or is reasonably expected to make, decisions comprising the control and direction of the test entity's operations. This includes situations where the sovereign entity group is able to act in concert with others to determine the identity of a relevant decision-maker in the test entity.

Sub-test 1 also extends to situations where the sovereign entity group, in its own right, holds the ability to approve or veto decisions which go to the control or direction of the test entity.

Sub-test 2 of the influence test, as contained in paragraph 880-105(6)(b) of the ITAA 1997, assesses whether at least one of the relevant decision-making persons of the test entity is accustomed or obliged to act, or might reasonably be expected to act, in accordance with the directions, instructions or wishes of the sovereign entity group.

In relation to Foreign Entity's investments in the Australian companies and MITs:

(a)  Foreign Entity has no involvement in the day to day management of the business of any of the Australian companies or trusts.

(b)  Foreign Entity has no right to appoint a director to the Board of Directors of any of the Australian companies listed in Appendix 1 and has no right to appoint a director to the Board of Directors of any of the trustee companies for the trusts.

(c)   Foreign Entity has no right to representation on any investor representative or advisory committee (or similar) of any of the Australian companies or trusts listed.

(d)  Foreign Entity has no ability to direct or influence the operation of the Australian company or trust outside of the ordinary rights conferred by the share or unit interest held.

(e)  Foreign Entity only holds rights to vote as a shareholder or unitholder in proportion to its share interest in the Australian companies or trusts.

Based upon the above, the sovereign entity group of Foreign Entity does not have influence of a kind described in subsection 880-105(6) of the ITAA 1997 and will, therefore, satisfy the requirements of paragraph 880-105(1)(e) of the ITAA 1997.

Conclusion

As all of the conditions listed in subsection 880-105(1) of the ITAA 1997 have been satisfied, section 880-105 of the ITAA 1997 will apply such that amounts of ordinary and statutory income derived by Foreign Entity's from its investments in the Australian investments are not assessable and not exempt income.

Question 2

Will any capital gain arising to Foreign Entity in respect of the equity investment assets, comprised within Fund 2 be disregarded pursuant to section 880-115 of the ITAA 1997?

Detailed Reasoning

Section 880-115 of the ITAA 1997 provides that a capital gain of a sovereign entity from a Capital Gains Tax (CGT) event that happens in relation to a CGT asset is disregarded if the following conditions are met:

(a)  the sovereign entity is covered by section 880-125; and

(b)  the CGT asset is a membership interest, non-share equity interest or debt interest in another entity; and

(c)   the requirements in paragraphs 880-105(1)(c), (d) and (e) would be satisfied, on the assumptions that:

(i)    the capital gain were an amount of ordinary income or statutory income; and

(ii)   the amount mentioned in subparagraph (i) became ordinary income or statutory income of the sovereign entity immediately before the time the CGT event happened; and

(iii) references in those paragraphs to the test entity were references to the other entity mentioned in paragraph (b) of this section.

These conditions are considered below.

1. Foreign Entity is a sovereign entity as covered by section 880-125

As noted in Question 1, Foreign Entity would be considered a sovereign entity for the purposes of section 880-125 of the ITAA 1997.

Therefore, this requirement is satisfied.

2. CGT asset is a membership interest, non-share equity interest or debt interest in another entity

As noted in Question 1 the assets are membership interests in Australian resident companies and MITs.

Therefore, this requirement is satisfied.

3. The requirements of paragraphs 880-105(1)(c) to (e) have been satisfied.

For the reasons outlined in the answer to Question 1, the requirements in paragraphs 880-105(1)(c), (d) and (e) ITAA 1997 are satisfied.

Conclusion

As all the requirements in section 880-115 of the ITAA 1997 are satisfied, Foreign Entity will be entitled to disregard a capital gain in respect to its Australian investments.

Question 3

Will Article 11 of the Relevant Tax Treaty exempt the Foreign Entity, from liability to tax in Australia on interest income received from corporate, securitised, index linked and Government bonds and treasuries from which it ordinarily derives income in the form of interest and when made within the parameters contained in paragraph 17 of the relevant facts and circumstances of this Ruling?

Summary

Article 11 of the Relevant Tax Treaty will exempt Foreign Entity from liability to tax in Australia on current and future interest income received from corporate, securitised, index linked and Government bonds and treasuries from which income will ordinarily be derived in the form of interest and made within the parameters contained in paragraph 17 of this Ruling.

Detailed reasoning

Non-resident taxpayers will generally be liable to pay income tax under section 4-1 of the ITAA 1997 or withholding tax under section 128B of the ITAA 1936 on Australian sourced income, unless an exemption or exclusion applies.

Australia has entered into treaties with many countries to avoid the incidence of double taxation and fiscal evasion. These treaties are commonly referred to as 'double tax agreements' (DTAs).

The primary legislation governing DTAs in Australia is the International Tax Agreements Act 1953 (Agreements Act). Subsection 4(1) of the Agreements Act incorporates the ITAA 1936 and the ITAA 1997 so that those acts are read as one with the Agreements Act. Subsection 4(2) of the Agreements Act effectively overrides the ITAA 1936 and the ITAA 1997 where there are inconsistent provisions (with some limited exceptions).

The DTA between Australia and the Foreign State is the Relevant Tax Treaty. Article 11 of the Relevant Tax Treaty specifically deals with interest. The term 'interest' in Paragraph 5 of Article 11 includes interest from Government securities or from bonds or debentures, whether or not secured by mortgage, interest from any other form of indebtedness, as well as income which is subjected to the same taxation treatment as income from money lent by the law of the Contracting State in which the income arises.

The Foreign Entity's currently has Australian debt investments in corporate, securitised, index linked and Government bonds and treasuries. Article 11 of the Relevant Tax Treaty will apply to these current investments and any future investments when made with the parameters contained in paragraph 17 of this Ruling.

Paragraph 3 of the Relevant Tax Treaty states that interest arising in Australia and beneficially owned by a resident of Foreign State may not be taxed in Australia if the following applies:

(a)  the interest is derived from the investment of official reserve assets by the government of a Contracting State, its monetary institutions or a bank performing central banking functions in that State; or

(b)  the interest is derived by a financial institution which is unrelated to and dealing wholly independently with the payer.

Foreign Entity conducts central banking activities and is a separate legal entity, owned by the Government of the Foreign State. Activities of Foreign Entity are regulated by Foreign Law that states that Foreign Entity shall conduct central banking activities.

Foreign Entity performs public tasks and manages assets on behalf of the Foreign State.

The Foreign Entity manages Fund 2, which is the Foreign State's sovereign wealth fund. The purpose of Fund 2 is to save for future generations of Foreign State's population and create an investment pool. Fund 2 is governed by Foreign Law and management falls under the supervision of the Government.

As such, the interest that the Foreign Entity will derive from their current investments in Australian corporate, securitised, index linked and Government bonds and treasuries will be derived from the investment of official reserve assets by a bank performing central banking functions in Foreign State, on behalf of the Foreign State.

Where the Australian investments fall within the parameters contained in paragraph 17 of the relevant facts and circumstances of this Ruling, including that the Foreign Entity has no special relationships or arrangements with the issuers of any Australian debt investment and does not enter into the investment for the main purpose of obtaining an advantage by virtue of the operation of Article 11 of the Relevant Tax Treaty, paragraph 3 of Article 11 of the Relevant Tax Treaty will apply.

Consequently, interest derived by the Foreign Entity on the Australian investments will not be taxable in Australia by virtue of the operation of paragraph 3 of Article 11 of the Relevant Tax Treaty.

Conclusion

Interest derived by the Foreign Entity on the Australian investments will be exempt from tax in Australia under paragraph 3 of Article 11 of the Relevant Tax Treaty from their current and future investments in Australian corporate, securitised, index linked and Government bonds and treasuries.

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