Edited version of private advice

Authorisation Number: 1051904238307

Date of advice: 30 September 2021

Ruling

Subject: International issues - sovereign immunity

Question

Are the Funds 'covered sovereign entities' under section 880-125 of the ITAA 1997?

Answer

Yes

This ruling applies for the following period:

1 July 20xx to 30 June 20xx

The scheme commences on:

1 July 20xx

Relevant facts and circumstances

ForeignCo

Country X created ForeignCo to manage and invest funds of or belonging to the Country X Government (the Government) or any of its political subdivisions.

ForeignCo's purpose is to manage a diversified global investment portfolio with the primary objective of delivering long term financial returns to provide for Country X's current and future wellbeing. It does not produce or trade in non-financial goods or provide non-financial services.

ForeignCo is a company with necessary and implied powers to accomplish its purpose.

ForeignCo may establish government investment pools consisting of Country X agency funds not required to be deposited in the Country X treasury.

The Funds

ForeignCo manages the Funds that finance various government functions.

Any monies provided to the Funds, or income made on their investments, are ultimately owned by the Government.

Any returns on investment made by the Funds are either reinvested or remitted to the Government for it to distribute to various public institutions in the exercise and execution of government purposes and functions.

The Government is able to call on any monies of the Funds at any time. In the event the Funds are liquidated or dissolved, all assets and monies will flow back to the Government.

The Funds are not a partnership.

The Funds are not residents of Australia for Australian income tax purposes.

ForeignCo is a perpetual entity.

All ForeignCo funds, including the Funds are exempt from Country X taxes.

All earnings or income made by the Funds are ultimately owned by the Government or its political subdivisions.

ForeignCo on behalf of the Funds is not in the business of trading in financial assets or liabilities for commercial profit, and instead is tasked solely with furthering its purpose of serving the State.

ForeignCo is specifically prohibited by law from engaging in commercial banking activity.

Australian Investments

The Funds do not currently hold any direct investments in Australia.

Relevant legislative provisions

Division 880 of the ITAA 1997

Reasons for decision

Question 1

Are the Funds 'covered sovereign entities' under section 880-125 of the ITAA 1997?

Summary

The Funds are covered sovereign entities due to the operation of section 880-125 of the ITAA 1997.

Detailed reasoning

The Funds are covered sovereign entities

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;

(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.

The Funds are sovereign entities

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;

(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.

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.

Country X is an independent, sovereign state. ForeignCo is an investment authority of the Government.

ForeignCo's purpose is to manage a diversified global investment portfolio with the primary objective of delivering long term financial returns to provide for the Country X's current and future wellbeing.

The Funds consist of a number of funds as outlined in the facts under which Country X is the sole owner or beneficiary. These funds all form part of the Country X, and are managed by ForeignCo. As such, the Commissioner accepts that the Funds are part of a foreign state and meet the requirements of being a sovereign entity as defined in section 880-15 of the ITAA 1997.

The Funds are 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 et cetera.

ForeignCo's purpose is to manage and invest Country X's money.

All of the Funds were established by statute, and are funded by way of appropriation from the Country X legislature.

As such, the Funds are funded solely by public monies.

All returns on the Funds' investments are public monies

All returns made on the Funds' investments are ultimately owned by the Government or its political subdivisions. Any returns on investment made by the Funds are either reinvested or remitted to the Government for it to distribute to various public institutions in the exercise and execution of government purposes and functions.

The distributions with respect to each of the Funds are used by the government or governmental entities to provide funding for government purposes and functions.

With respect to the Funds, the Government is able to recall any monies being specifically managed by ForeignCo at any time. In the event ForeignCo or the Funds are to be liquidated or dissolved, all assets and monies will flow back to the Government.

For the reasons outlined, all returns on the Funds' investments are public monies as they are reserved solely to fund governmental functions.

The Funds are not a public non-financial or 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;

(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.

Are the Funds public non-financial entities?

The Law Companion Ruling 2020/3 The superannuation fund for foreign residents withholding tax exemption and sovereign immunity (LCR 2020/3) provides that a public non-financial entity is determined by:

76. Whether an entity is producing or trading non-financial goods and/or providing services that are not financial services is a question of fact.

The Funds do not produce or trade in non-financial goods or provide non-financial services. As such, they are not a public non-financial entity as defined in subsection 880-130(1) of the ITAA 1997.

Are the Funds public financial entities?

ForeignCo manages and administers the Government's investment of the Funds, as well as other funds.

All monies and income gained by the Funds are ultimately returned to the Government for Country X's benefit.

The Funds are not in the business of trading in equity and debt securities with the intent of deriving profits from the buying and selling of securities. The Funds do not trade in financial assets or liabilities for commercial profit. They exist solely for and form part of Country X.

In addition, ForeignCo is specifically prohibited by law from engaging in commercial banking activity.

Based on the circumstances, the Commissioner accepts that the Funds are not either a public non-financial entity or a public financial entity under subsection 880-130(2), being a part of the Government and not engaging in the relevant activities outlined in subsection 880-130(1) or paragraph 880-130(2).

As the Funds satisfy each of the requirements in paragraphs 880-125(a) through (d), they are considered covered sovereign entities under section 880-125 of the ITAA 1997.

Conclusion

As all of the conditions listed in section 880-125 have been satisfied, the Funds are covered sovereign entities for the purposes of Division 880 of the ITAA 1997.

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