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Edited version of private advice

Authorisation Number: 1051806969501

Date of advice: 4 March 2021

Ruling

Subject: International issues - sovereign immunity

Question 1

Is ordinary or statutory income derived by the Foreign Entity, from its Australian investments listed in Appendix 1 of this Ruling (the Test Entities) not assessable and not exempt income under section 880-105 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Is any capital gain made by the Foreign Entity, in respect of its Australian investments listed in Appendix 1 of this Ruling, disregarded under section 880-115 of the ITAA 1997?

Answer

Yes.

Question 3

Does subsection 840-805(9) of the ITAA 1997 apply to exclude the Foreign Entity from liability to withholding tax on income derived from Australian investments listed in Appendix 1 of this Ruling, that is not assessable and not exempt income due to the operation of Division 880 of the ITAA 1997?

Answer

Yes.

Question 4

Does paragraph 128B(3)(n) of the Income Tax Assessment Act 1936 (ITAA 1936) apply to exclude the Foreign Entity from liability to withholding tax on income derived from Australian investments listed in Appendix 1 of this Ruling, that is not assessable and not exempt income due to the operation of Division 880 of the ITAA 1997?

Answer

Yes.

Question 5

Is the Foreign Entity liable, under subsection 128B(5) of the ITAA 1936, to withholding tax on interest income derived from investments listed in Appendix 2 of this Ruling?

Answer

No.

Question 6

To the extent that the issue of each Australian investment listed in Appendix 3 of this Ruling satisfies the public offer test in subparagraph 128F(1)(d)(i) of the ITAA 1936, does subsection 128F(2) of the ITAA 1936 apply in respect of interest income derived from the Australian investments, resulting in no tax being payable by the Foreign Entity under Division 11A of the ITAA 1936?

Answer

Yes.

Question 7

Is interest income derived by the Foreign Entity, from its Australian investments listed in Appendix 3 of this Ruling, not assessable and not exempt income under section 128D of the ITAA 1936, to the extent that section 128F of the ITAA 1936 applies to the income?

Answer

Yes.

Question 8

If the answer to Question 1 is yes, is the income derived by the Foreign Entity from its Australian investments listed in Appendix 1 of this Ruling considered not assessable and not exempt income for the purposes of applying section 230-30 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Overview of the Foreign Entity

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 the Foreign Country's international reserves, acts as banker to the Government, and functions as a lender of last resort.

The Foreign Entity controls the Foreign Country's monetary system (currency), credit system (interest rates) and foreign exchange system (foreign exchange rates).

The Foreign Country's Constitution (the Constitution) lists all rules concerning the central bank.

Certain articles contained in the Foreign Country's Law (The Law) provide the nature and corporate purpose of the Foreign Entity.

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 of the Foreign Entity

The functions of The Foreign Entity are specifically set out in the Law and the Constitution.

A specific article of the Constitution states that the Foreign Entity will exercise the functions of a central bank, with the basic functions including to:

a. regulate the money supply, international exchanges and credit

b. issue legal tender

c. administer the international reserves

d. be the lender of last resort and banker of the credit institutions, and

e. serve as the government's fiscal agent.

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

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.

A specific article of the Law sets out the functions of the Foreign Entity related to the Government and the actions the Foreign Entity may perform.

Management of the Foreign Entity

The Foreign Entity is governed by a Board of Directors (the Board). The Board was established by specific articles of the Law and Constitution as a monetary, exchange and credit authority, in accordance with the functions assigned to it by law.

A specific article of the Law states that the composition of the Board will consist of seven members.

A specific article of the Law states the members of the Board exclusively represent the general interest of the Foreign Country.

International Reserves and Attributions Regarding Foreign Affairs

A specific article of 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.

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.

A specific article of the Law states that the Board may make available contributions to international financial bodies from the international reserves, provided that such contributions also constitute reserve assets.

For the purposes of the administration of the international reserves, the Foreign Entity has appointed multiple custodial agents. Custodial agents have appointed sub-custodial agents.

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

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

The Board shall determine the criteria which shall guide the decisions taken by the Foreign Entity acting as representative of the State before the various international financial bodies and work in coordination with the general economic policy as well as with the Government's international policy.

Funding and Profits

A specific article of the Law states that the Board will create or increase a monetary and exchange stabilization reserve with the profits of each financial year. The purpose of this reserve shall be to absorb any losses of the Foreign Entity before resorting to the corresponding appropriations.

A specific article of the Law states that the remainder of the Foreign Entity's profits, prior to the appropriation of the reserves shall belong to the Foreign Country. The losses of the period will be covered by the Foreign Country, provided that they cannot be covered by the reserve.

A specific article of the Law states that the profits of the Foreign Entity may not be distributed or transferred to the Foreign Country if the losses of previous years not covered by their reserves have not been fully settled. The net result of the Foreign Entity's operation shall be projected annually and shall be incorporated into the annual budget of the Foreign Country.

For this purpose, the profits that are projected to be received from the Foreign Entity will be incorporated into the annual budget of the Foreign Country; likewise, the necessary appropriations will be made in case a deficit is foreseen for the Foreign Entity and up to the concurrence thereof and of the losses accumulated from previous years.

Overview of Investments

The Foreign Entity's Australian investments consist of various debt interests issued by the Commonwealth of Australia, Australian State government authorities and agencies, and companies listed on the Australian Securities Exchange (ASX).

The Foreign Entity also invests in debt interests issued by foreign governments and supranational entities that are denominated in varying degrees in Australian Dollars.

The Foreign Entity has implemented an Investment Policy, in connection with its administration of the international reserves. The Investment Policy is governed by a set of Investment Guidelines.

The Investment Policy places significant restrictions on the types of investments that are considered eligible investments. Eligible investments do not include equity securities, infrastructure investments, private-equity investments or other types of control-investments.

A portion of the international reserves is administered directly by the Foreign Entity. Another portion is administered by external, global investment managers.

Sovereign Entity Group

For the purpose of applying Division 880 of the ITAA 1997, the Foreign Entity is considered to form part of a sovereign entity group as set out in section 880-20 of the ITAA 1997. The Foreign Entity, as the central bank of the Foreign Country, will form part of a sovereign entity group including the Foreign Country and any entities in which the Government of the Foreign Country either directly or indirectly holds 100% of the participation interests.

Investment in the Test Entities - Appendix 1

The Foreign Entity holds various debt interests in the Test Entities as listed in Appendix 1 of this Ruling.

To the best of the Foreign Entity's knowledge, the debt interests in the Test Entities held by the Foreign Entity as at the relevant time have the following characteristics:

a. The Foreign Entity and all members of its sovereign entity group hold collectively less than 10% of the total participation interests in each of the Test Entities.

b. The Foreign Entity and all members of its sovereign entity group would hold collectively less than 10% of the total participation interests in the Test Entities in the circumstances detailed in paragraph 880-105(4)(b) of the ITAA 1997.

c. Neither the Foreign Entity, nor any members of its sovereign entity group, has involvement in the day to day management of the business of any of the Test Entities.

d. Neither the Foreign Entity, nor any members of its sovereign entity group, has the right to appoint a director to the Board of Directors of any of the Test Entities.

e. Neither the Foreign Entity, nor any members of its sovereign entity group, holds the right to representation on any investor representative or advisory committee (or similar) of the Test Entities.

f. Neither the Foreign Entity, nor any members of its sovereign entity group, has the ability to direct or influence the operation of the Test Entities outside of the ordinary rights conferred by any debt interest held.

g. Voting rights, if any, of debt interests in each investment held by the Foreign Entity, and any members of its sovereign entity group, do not exceed the proportion of debt interests held by the Foreign Entity and any members of its sovereign entity group.

h. The Foreign Entity's interests in the Test Entities, and the interests of any members of its sovereign entity group, do not provide it or them with an entitlement to either directly or indirectly determine the identity of any person who make decisions that comprise the control and direction of the Test Entities' operations.

i. The Foreign Entity's interests, when combined with the other interests held within its sovereign entity group, do not provide an entitlement to either directly or indirectly determine the identity of any person who make decisions that comprise the control and direction of the Test Entities' operations.

j. No person involved in the control and direction of the Test Entities' operations is accustomed or obliged to act in accordance with the directions, instructions or wishes of the Foreign Entity or members of the Foreign Entity's sovereign entity group.

The Foreign Entity is aware of another entity (the Other Entity) that may be a part of the Foreign Entity's sovereign entity group.

To the best of the Foreign Entity's knowledge, the Other Entity holds interests in the five common Test Entities and has a participation interest of less than 0.0005 per cent.

Investment in Foreign Entities - Appendix 2

The Foreign Entity holds various debt interests in the entities listed in Appendix 2 of this Ruling.

Each entity listed in Appendix 2 of this Ruling is a foreign resident.

No entity listed in Appendix 2 of this Ruling carries on a business in Australia at or through a permanent establishment situated in Australia.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 880-105

Income Tax Assessment Act 1997 section 880-115

Income Tax Assessment Act 1997 section 840-805

Income Tax Assessment Act 1997 section 230-30

Income Tax Assessment Act 1936 section 128B

Income Tax Assessment Act 1936 section 128F

Income Tax Assessment Act 1936 section 128D

Reasons for decision

Question 1

Summary

Amounts of ordinary or statutory income derived by the Foreign Entity from its investments listed in Appendix 1 of this Ruling are not assessable and not exempt income as all conditions set out in subsection 880-105(1) of the ITAA 1997 have been satisfied and section 880-105 of the ITAA 1997 applies.

Detailed reasoning

All legislative references in Question 1 refer to the ITAA 1997 unless otherwise specified.

Section 880-105 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):

(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) a *membership interest;

(ii) a *debt interest;

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

(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.

The Foreign Entity is a covered sovereign entity

Section 880-125 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;

(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.

The Foreign Entity is a sovereign entity

For an entity to be covered by section 880-125, it must be a sovereign entity. Section 880-15 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;

(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) 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

Section 960-180 provides that an entity's total participation interest in another entity is the sum of:

(a) the entity's direct participation interest in the other entity at that time; and

(b) the entity's indirect participation interest in the other entity at that time

The Foreign Country is a foreign country.

The Foreign Entity was established as the central bank of the Foreign Country by the Constitution.

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 regime of its own and special nature, and with administrative, patrimonial, and technical autonomy. The Foreign Entity's role is to see to the maintenance of the national currency's acquisitive capacity as provided in the standards set out in the Constitution.

The Foreign Entity's basic functions include: to regulate the money supply, international exchanges, and credit; to issue legal tender; to administer the international reserves; to be the lender of last resort and banker of the credit institutions; and to serve as the Foreign Country's fiscal agent.

Accordingly, the Foreign Entity is an agency of the Foreign Country, having been established by the Foreign Country to undertake central banking activities and to serve as the Foreign Country's fiscal agent.

The Foreign Entity is therefore considered to be 'an authority of the government of a foreign country' as per the definition outlined in paragraph 995-1(1)(b). Therefore, the Foreign Entity is a 'foreign government agency' under paragraph 880-15(b).

As such, the Foreign Entity meets the requirement of being a sovereign entity in accordance with section 880-15.

The Foreign Entity is funded solely by public monies and all returns on the Foreign Entity's investments are 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.

Pursuant to the Law, the Foreign Entity administers the international reserves in accordance with the public interest, to the benefit of the national economy and with the purpose of facilitating the country's payments abroad. This administration includes the management, investment, custody deposit and disposition of reserve assets. The Board may make available contributions to international financial bodies from the international reserves, provided that such contributions also constitute reserve assets.

The monies comprising the international reserves of the Foreign Country are owned and controlled by the Government of the Foreign Country.

Further, the Foreign Entity will be funded through a monetary and exchange stabilization reserve, created out of the profits of the Foreign Entity. The reserve will absorb any losses incurred by the Foreign Entity. Any remaining profits of the Foreign Entity will belong to the Foreign Country. To the extent that the Foreign Entity's losses are not covered by the reserves, they will be covered by the Foreign Country. The net result of the Foreign Entity's operations will be projected annually and incorporated in the Foreign Country's annual Budget Law. Any profits projected to be received by the Foreign Entity will be incorporated into the Foreign Country's annual Budget Law.

It can be concluded based on the facts above that the Foreign Entity is funded solely by public monies and that all returns on the Foreign Entity's investment are public monies.

The Foreign Entity is not a partnership

The Foreign Entity is a public law entity, the legal status of which is defined by the Constitution and the Law and is not a partnership. As such, it passes this condition.

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

Subsection 880-130(1) 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) 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;

(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.

Subparagraph 880-125(d)(ii) states that public financial entities that only carry on central banking activities are not excluded from being a covered sovereign entity.

The Foreign Entity does not undertake any of the activities listed in subsection 880-130(2) and would not be considered a public financial entity. If circumstances arose where the Foreign Entity was considered to be a public financial entity, the Foreign Entity only carries on central banking activities and is therefore not excluded from being a covered sovereign entity.

Paragraph 81 of Law Companion Ruling LCR 2020/3 The superannuation fund for foreign residents withholding tax exemption and sovereign immunity (LCR 2020/3) lists the following as being considered as 'central banking activities':

• monetary policy development

• issuing national currency

• acting as custodian of international reserves

• providing banking services to government.

The Constitution states that the Foreign Entity will exercise the functions of a central bank, with the basic functions to include:

a. regulating the money supply, international exchanges and credit

b. issuing legal tender

c. administering the international reserves

d. being the lender of last resort and banker of the credit institutions, and

e. serving as the government's fiscal agent.

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

The Law sets out the Foreign Entity functions in its capacity as banker and lender of last resort to public and private credit institutions, and will be entitled to:

a. grant transient liquidity support through discounts and rediscounts under conditions determined by the Board

b. act as mediator for external credit lines to be placed through credit establishments, and

c. provide fiduciary, deposit, clearing, and draft services, together with others determined by the Board.

The Law sets out the Foreign Entity's functions in relation to the Government of the Foreign Country:

a. By request from the Government of the Foreign Country, to act as a fiscal agent in the contracting of external and domestic credits and in those operations that are compatible with the Bank's purposes.

b. To grant credits or guarantees in favour of the State under the conditions laid down in the Constitution.

c. Receive funds from the Foreign Country and public institutions in deposit. The Board shall indicate the cases and conditions under which the Foreign Entity may carry out these operations.

d. Serve as a Government of the Foreign Country's agent in the issuance, placement, and administration of public debt securities on the market.

e. To provide the Government of the Foreign Country and other public institutions that the Board may determine the technical assistance required in matters related to the nature and functions of the Foreign Entity.

The above activities are consistent with the Foreign Entity being a public financial entity that only carries on central banking activities. As such, The Foreign Entity passes the condition in paragraph 880-125(d).

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

The 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), 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 membership interest, debt interest or non-share equity interest for the purposes of paragraph 880-105(1)(b) 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 are entities in which the Foreign Entity holds a debt interest and earns returns in the form of interest.

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

The Foreign Entity's income is received from Australian resident companies or managed investment trusts

For an amount of ordinary income or statutory income of a sovereign entity to satisfy paragraph 880-105(1)(c), 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.

At the relevant times, each of the Test Entities listed in Appendix 1 of this Ruling was an ASX Listed Australian resident company.

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

The 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), the sovereign entity and the sovereign entity group to which it belongs must satisfy the portfolio interest test in relation to the test entities 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), 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 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.

The Foreign Entity is part of the sovereign entity group of the Government of the Foreign Country. To the best of the Foreign Entity's knowledge, at the relevant times (as required by paragraph 880-105(1)(d)), the Foreign Entity, and its sovereign entity group collectively, holds less than 10% of the total participation interests in each of the Test Entities. In addition, the Foreign Entity and its sovereign entity group collectively, would hold less than 10% of the total participation interests in the Test Entities in the circumstances detailed in paragraph 880-105(4)(b).

Therefore, the portfolio interest test is satisfied.

The Foreign Entity's sovereign entity group does not have influence of a kind described in subsection (6) in relation to the Test Entities at the income time

For an amount of ordinary income or statutory income of a sovereign entity to satisfy paragraph 880-105(1)(e), 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).

Subsection 880-105(6) 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:

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

(ii) 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.

The Foreign Entity's interests in the Test Entities do not provide it with an entitlement to either directly or indirectly determine the identity of any person who make decisions that comprise the control and direction of the Test Entities' operations. Furthermore, the Foreign Entity's interests, when combined with the other interests held within its sovereign entity group, do not provide an entitlement to either directly or indirectly determine the identity of any person who make decisions that comprise the control and direction of the Test Entities' operations.

Sub-test 2 of the influence test, as contained in paragraph 880-105(6)(b), 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.

No person involved in the control and direction of the Test Entities' operations is accustomed or obliged to act in accordance with the directions, instructions or wishes of the Foreign Entity or members of the Foreign Entity's sovereign entity group.

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

Conclusion

As all of the conditions listed in subsection 880-105(1) have been satisfied, section 880-105 will apply to the effect that amounts of ordinary and statutory income derived by the Foreign Entity from its interests held in the Test Entities are not assessable and not exempt income.

Question 2

Is any capital gain made by the Foreign Entity, in respect of its Australian investments listed in Appendix 1 of this Ruling, disregarded under section 880-115 of the ITAA 1997?

Summary

Any capital gain made by the Foreign Entity in respect of its Australian investments listed in Appendix 1 of this Ruling is disregarded under section 880-115 of the ITAA 1997 as all conditions listed in that section have been satisfied.

Detailed reasoning

All legislative references in Question 2 refer to the ITAA 1997 unless otherwise specified.

Section 880-115 provides that a sovereign entity disregards a capital gain from a CGT event that happens in relation to a CGT asset if:

(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

(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.

As established in Question 1, the Foreign Entity:

a. is covered by section 880-125

b. holds debt interests in the Test Entities, and

c. satisfies the requirements in paragraphs 880-105(1)(c), (d) and (e) in relation to ordinary or statutory income that it will derive from the Test Entity.

As such, the Foreign Entity will be required to disregard any capital gain made in respect of its debt interests in the Test Entities listed in Appendix 1 of this Ruling.

Question 3

Summary

Subsection 840-805(9) excludes the Foreign Entity from liability to withholding tax on income derived from Australian investments listed in Appendix 1 of this Ruling as the income is not assessable and not exempt income due to the operation of Division 880 of the ITAA 1997.

Detailed reasoning

All legislative references in Question 3 refer to the Income Tax Assessment Act 1997 unless otherwise specified.

Subsection 840-805(1) imposes a liability to withholding tax on certain amounts paid by withholding MITs (subsection 840-805(2)), custodians (subsection 840-805(3)), and particular fund payments paid by trusts (subsection 840-805(4)).

Subsection 840-805(9) states that subsections 840-805(2)-(4) do not apply to the extent that the fund payment part relates to an amount that is non-assessable non-exempt income because of Division 880 or Division 880 of the Income Tax (Transitional Provisions) Act 1997.

As stated in Question 1, income derived from investments listed in Appendix 1 of this Ruling is not assessable and not exempt income due to the operation of Division 880.

Therefore, the exclusion from liability under subsection 840-805(9) will also apply to the income derived by the Foreign Entity from the investments listed in Appendix 1 of this Ruling, to the same extent that Division 880 applies.

Question 4

Does paragraph 128B(3)(n) of the ITAA 1936 apply to exclude the Foreign Entity from liability to withholding tax on income derived from Australian investments listed in Appendix 1 of this Ruling, that is not assessable and not exempt income due to the operation of Division 880 of the ITAA 1997?

Summary

As the income derived from investments listed in Appendix 1 of this Ruling is non-assessable and non-exempt income due to the operation of Division 880 of the ITAA 1997, the Foreign Entity will also be excluded from withholding tax on the income due to the operation of paragraph 128B(3)(n) of the ITAA 1936.

Detailed reasoning

All legislative references in Question 4 refer to the ITAA 1936 unless otherwise specified.

Broadly, paragraph 128B(3)(n) provides an exclusion from withholding tax on income that is non-assessable non-exempt income because of Division 880 of the Income Tax Assessment Act 1997 or Division 880 of the Income Tax (Transitional Provisions) Act 1997.

As stated in Question 1, income derived from investments listed in Appendix 1 of this Ruling is non-assessable non-exempt income due to the operation of Division 880 of the ITAA 1997.

Therefore, the exclusion from liability under subsection 128B(3)(n) will also apply to the income derived by the Foreign Entity from the investments listed in Appendix 1 of this Ruling, to the same extent that Division 880 of the ITAA 1997 applies.

Question 5

Is the Foreign Entity liable, under subsection 128B(5) of the ITAA 1936, to withholding tax on interest income derived from investments listed in Appendix 2 of this Ruling?

Summary

The requirements of paragraph 128B(2)(b) have not been satisfied, therefore, the Foreign Entity is not liable under subsection 128B(5) to withholding tax on interest income derived from investments listed in Appendix 2 of this Ruling.

Detailed reasoning

All legislative references in Question 5 refer to the Income Tax Assessment Act 1936 unless otherwise specified.

A non-resident is liable to pay withholding tax under subsection 128B(5) of the ITAA 1936 if the 'non-resident' derives income that consists of interest and if the requirements of subsection 128B(2) of the ITAA 1936 are satisfied in relation to that income.

Subsection 128B(2) of the ITAA 1936 provides that:

Subject to subsection (3), this section... applies to income that:

(a) is derived, on or after 1 January 1968, by a non-resident; and

(b) consists of interest that:

(i) is paid to the non-resident by a person to whom this section applies and is not an outgoing wholly incurred by that person in carrying on business in a country outside Australia at or through a permanent establishment of that person in that country; or

(ii) is paid to the non-resident by a person who, or by persons each of whom, is not a resident and is, or is in part, an outgoing incurred by that person or those persons in carrying on business in Australia at or through a permanent establishment of that person or those persons in Australia.

Subsection 128B(3) lists specific circumstances to which section 128B would not apply. None of the circumstances listed in subsection 128B(3) apply to the Foreign Entity and the income derived from investments listed in Appendix 2 of this Ruling.

Subsection 128B(1A) states:

...A reference to a person to whom this section applies is a reference to the Commonwealth, a State, an authority of the Commonwealth or of a State or a person who is, or persons at least 1 of whom is, a resident.

Section 202A states that a "person" includes a partnership, a company and a person in the capacity of trustee of a trust estate.

All of the investments listed in Appendix 2 of this Ruling are debt interests held in foreign resident entities who do not carry on business in Australia at or through a permanent establishment situated in Australia.

Income derived by the Foreign Entity on the investments listed in Appendix 2 of this Ruling does not satisfy the requirements of subparagraph 128B(2)(b)(i), as no test entity listed in Appendix 2 of this Ruling is a resident of Australia. Therefore, no investment listed in Appendix 2 of this Ruling can be considered a 'person to whom section 128B applies' as per subsection 128B(1A).

Income derived by the Foreign Entity on the investments listed in Appendix 2 of this Ruling does not satisfy the requirements of subparagraph 128B(2)(b)(ii), as no test entity listed in Appendix 2 of this Ruling incurred the interest expense in carrying on business in Australia at or through a permanent establishment situated in Australia.

As the requirements of subsection 128B(2) have not been satisfied in relation to the income derived by the Foreign Entity on the investments listed in Appendix 2 of this Ruling, the Foreign Entity will not be liable to pay withholding tax on the interest income arising from those investments.

Question 6

Summary

The conditions under subsection 128F(1) of the ITAA 1936 have been met, to the extent that the issue of each investment satisfies the public offer test in subparagraph 128F(1)(d)(i) of the ITAA 1936. To the extent that the conditions in subsection 128F(1) are met, section 128F also applies. Subsection 128F(2) provides that tax is not payable under Division 11A in respect of interest to which section 128F applies. Therefore, to the extent that subsection 128F(2) applies, no tax is payable under Division 11A in respect of interest income derived by the Foreign Entity on its Australian investments listed in Appendix 3 of this Ruling.

Detailed reasoning

All legislative references in Question 6 refer to the ITAA 1936 unless otherwise specified.

Subsection 128F(2) provides that tax is not payable under Division 11A in respect of interest to which section 128F applies.

Subsection 128F(1) provides that section 128F applies to interest paid by a company in respect of certain publicly offered debentures and debt interests if:

(a) the company was a resident of Australia when it issued the debenture or debt interest; and

(b) the company is a resident of Australia when the interest is paid; and

(i) is a non-equity share; or

(ii) consists of 2 or more related schemes (within the meaning of the Income Tax Assessment Act 1997) where one or more of them is a non-equity share; or

(iii) is a syndicated loan; or

(iv) is prescribed by the regulations for the purposes of this section; and

(d) either:

(i) the issue of the debenture or debt interest satisfies the public offer test set out in subsection (3) or (4); or

(ii) for a syndicated loan - the invitation to become a lender under the relevant syndicated loan facility satisfies the public offer test set out in subsection (3A).

Section 6 defines a debenture as:

"debenture", in relation to a company, includes debenture stock, bonds, notes and any other securities of the company, whether constituting a charge on the assets of the company or not.

Subsection 128F(3) states:

(3) The issue of a debenture or debt interest by a company satisfies the public offer test if the issue resulted from the debenture or debt interest being offered for issue:

(a) to at least 10 persons each of whom:

(i) was carrying on a business of providing finance, or investing or dealing in securities, in the course of operating in financial markets; and

(ii) was not known, or suspected, by the company to be an associate (see subsection (9)) of any of the other persons covered by this paragraph; or

(b) to at least 100 persons whom it was reasonable for the company to have regarded as either:

(i) having acquired debentures or debt interests in the past; or

(ii) being likely to be interested in acquiring debentures or debt interests; or

(c) as a result of being accepted for listing on a stock exchange, where the company had previously entered into an agreement with a dealer, manager or underwriter, in relation to the placement of debentures or debt interests, requiring the company to seek such listing; or

(d) as a result of negotiations being initiated publicly in electronic form, or in another form, that was used by financial markets for dealing in debentures or debt interests; or

(e) to a dealer, manager or underwriter, in relation to the placement of debentures or debt interests, who, under an agreement with the company, offered the debenture or debt interest for sale within 30 days in a way covered by any of paragraphs (a) to (d).

Subsection 128F(7) states:

Australian public bodies are treated as Australian resident companies

(7) This section applies in relation to a debenture or debt interest issued by:

(a) the Commonwealth, a State or a Territory; or

(b) an authority of the Commonwealth, of a State or of a Territory;

as if the Commonwealth, State, Territory or authority were a company and a resident of Australia.

The company was a resident of Australia when it issued the debenture or debt interest

The entities that issued the debentures listed in Appendix 3 of this Ruling are Australian Government entities (the Government Entities). The Commissioner has determined that each of these entities is considered an Australian resident company for the purposes of section 128F.

The company is a resident of Australia when the interest is paid

As per subsection 128F(7), the Government Entities are treated as Australian residents and will remain Australian residents at all times, including when the return in the form of interest is paid to the Foreign Entity.

The debt interest is a debenture

The debt interests held by the Foreign Entity in the entities listed in Appendix 3 of this Ruling consist of bonds.

This satisfies the definition of a 'debenture' as set out in section 6 of the ITAA 1936.

The issue of the debenture or debt interest satisfies the public offer test

Section 128F will only apply in relation to the debt interests listed in Appendix 3 of this Ruling, to the extent that each debt interest satisfies the public offer test.

The Foreign Entity has satisfied all of the requirements of subsection 128F(1) (aside from the public offer test in subparagraph 128F(1)(d)(i)). Therefore, section 128F applies to interest income derived from the Australian investments listed in Appendix 3 of this Ruling, to the extent that the issue of each investment satisfies the public offer test in subparagraph 128F(1)(d)(i).

As section 128F applies to the interest income, subsection 128F(2) will apply to exclude The Foreign Entity from liability to pay tax under Division 11A on interest income derived from the debentures listed in Appendix 3 of this Ruling, to the extent that the issue of the debentures satisfies the public offer test in subparagraph 128F(1)(d)(i).

Question 7

Summary

To the extent that section 128F of the ITAA 1936 applies to the interest income derived by the Foreign Entity from its Australian investments listed in Appendix 3 of this Ruling, the income will also be not assessable and not exempt income under section 128D of the ITAA 1936.

Detailed reasoning

All legislative references in Question 7 refer to the ITAA 1936 unless otherwise specified.

Section 128D broadly provides that income will be not assessable and not exempt income if withholding tax would have been payable on the income, but for the application of section 128F.

As stated in Question 6, section 128F applies to the interest income derived by the Foreign Entity from the debt interests listed in Appendix 3 of this Ruling (to the extent that the public offer test in subparagraph 128F(1)(d)(i) is satisfied), meaning that no tax is payable on that income under Division 11A. Withholding tax would have been payable on the income, but for the application of section 128F.

Therefore, the interest income derived by the Foreign Entity on its debt interests listed in Appendix 3 of this Ruling will also be considered not assessable and not exempt income under section 128D, to the extent that section 128F applies to the income.

Question 8

Summary

As the answer to Question 1 is yes, the income derived by the Foreign Entity from its Australian investments listed in Appendix 1 of this Ruling is considered not assessable and not exempt income for the purposes of applying section 230-30 of the ITAA 1997.

Detailed reasoning

All legislative references in Question 8 refer to the ITAA 1997 unless otherwise specified.

Subsection 230-15(1) states your assessable income includes a gain you make from a financial arrangement.

Section 230-30 states that, despite section 230-15, a gain made from a financial arrangement will be exempt income or not assessable and not exempt income, to the extent that the gain would be treated as exempt income or not assessable and not exempt income under another provision of "this Act". Subsection 230-45(1) provides the definition of a 'financial arrangement':

(1) You have a financial arrangement if you have, under an arrangement:

(a) a cash settlable legal or equitable right to receive a financial benefit; or

(b) a cash settlable legal or equitable obligation to provide a financial benefit; or

unless:

(d) you also have under the arrangement one or more legal or equitable rights to receive something and/or one or more legal or equitable obligations to provide something; and

(e) for one or more of the rights and/or obligations covered by paragraph (d):

(i) the thing that you have the right to receive, or the obligation to provide, is not a financial benefit; or

(ii) the right or obligation is not cash settlable; and

(f) the one or more rights and/or obligations covered by paragraph (e) are not insignificant in comparison with the right, obligation or combination covered by paragraph (a), (b) or (c).

The right, obligation or combination covered by paragraph (a), (b) or (c) constitutes the financial arrangement.

Subsection 230-45(2) provides the definition of a 'cash settlable':

(2) A right you have to receive, or an obligation you have to provide, a financial benefit is cash settlable if, and only if:

(a) the benefit is money or a money equivalent; or

(b) in the case of a right--you intend to satisfy or settle it by receiving money or a money equivalent or by starting to have, or ceasing to have, another financial arrangement; or

...

Each arrangement covered by Question 1 of this Ruling is a financial arrangement as described by subsection 230-45(1) as each arrangement is a cash settlable legal or equitable right to receive a financial benefit.

Each arrangement covered by Question 1 of this Ruling is a debt interest, in which the Foreign Entity has agreed to provide a sum of money to an entity, for a defined period of time, in exchange for a return of interest payments. The financial benefit is interest income. The financial benefit is cash settlable as the interest income is money or a money equivalent, and therefore satisfies the definition in paragraph 230-45(2)(a).

To the extent that the income derived from the Australian investments listed in Appendix 1 of the Ruling is non-assessable non-exempt income, the income will also be considered not assessable income and not exempt income for the purposes of applying section 230-30.

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