Edited version of private advice

Authorisation Number: 1052280480033

Date of advice: 31 July 2024

Ruling

Subject: Sovereign immunity

Question

Is the ordinary and statutory income derived by ForCo from its investment in ABC AMIT (the Test Entity) not assessable and not exempt income pursuant to section 880-105 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period:

XX July 20YY to XX June 20YY

The scheme commenced on:

XX July 20YY

Relevant facts and circumstances

Sovereign entity group

1. ForCo is part of a sovereign entity group, which is a sovereign wealth fund incorporated in Country X.
2. ForCo is wholly owned by the Government of Country X and was established for the purposes of managing the country's foreign reserves, with the aim of preserving and enhancing the international purchasing power of the reserves by delivering good long-term returns above global inflation.
3. The Government of Country X does not play a role in the decisions on individual investments that are made by the sovereign entity group, but its role includes:

•         Establishing the overall investment mandate and objectives of the sovereign entity group.

•         Ensuring that the sovereign entity group has a competent board.

•         Systematically reviewing the overall risks of the whole portfolio of assets invested by the sovereign entity group.

•         Deciding how government capital should be allocated among the sovereign entity group.

4. The sovereign entity group is a conservative investor, with a globally diversified portfolio spread across various asset classes.
5. The returns from the assets managed by the sovereign entity group are held in Country X's equivalent of the Australian Consolidated Revenue Fund (CRF).

ForCo

6.    ForCo was incorporated in Country X and is ultimately wholly owned by the Finance Minster for Country X (Finance Minister).

7. Each shareholder between ForCo and the Finance Minster holds 100% of the total paid-up share capital in their respective subsidiary (directly or indirectly).
8. ForCo is not a partnership.
9. No entities within the sovereign entity group have any external third party debt.
10. ForCo's funding is limited to proceeds from the issuance of Government Securities, Government budget surpluses, proceeds from Government's land sale and profits re-invested by the Finance Minster or ForCo.
11. Any profits re-invested by ForCo on behalf of the Finance Minster are accounted for as public monies in Country X's equivalent to Australia's CRF.
12. The activities of ForCo consist solely of holding Australia real estate investments and does not actively trade in any of the investments.
13. ForCo has and will continue to incur incidental operating costs (such as accounting fees, compliance fees etc.) during the income years covered by the ruling.

The investment

14. ForCo holds units in ABC AMIT.
15. ABC AMIT has elected to be treated as an Attribution Managed Investment Trust (AMIT) within the meaning of section 276-10 of the ITAA 1997.
16. To the best of ForCo's knowledge, no other member of Country X's sovereign entity group holds a direct or indirect interest in ABC AMIT other than ForCo's direct interest.
17. Neither ForCo nor any other member of Country X's sovereign entity group have an entitlement to acquire additional units in ABC AMIT.
18. The management of ABC AMIT is undertaken by Entity A as the responsible entity and ForCo is restricted from unduly interfering with or questioning the rights, powers and discretion of Entity A.
19. Under ACB AMIT's Constitution, Entity A has full and complete powers of management of ABC AMIT, including all assets, borrowings and liabilities for the benefit of the unitholders.
20. As a unitholder holding less than 10%, ForCo has the right to vote on certain matters which require unitholder approval. These matters are limited to cancellation or variation of rights attached to units, public quotation of units and approval of proportional takeover bids.
21. ABC AMIT's Constitution states that nothing in this Constitution makes Entity A as the responsible entity the agent of a member nor does it create any relationship other than that or member and responsible entity.
22. There are no separate management committees, investor representative committees or board of directors which allow unitholders of ABC AMIT to nominate and appoint representatives to make decisions that comprise the control and direction of ABC AMIT.
23. There are no other procedures set out in ABC AMIT's Constitution which requires ABC AMIT to follow the directions, instructions or wishes of any of the unitholders.
24. Neither ForCo or any member of Country X's sovereign entity group have entered into or received any side letters, arrangements or agreements in respect of their interest in ABC AMIT.
25. ForCo does not act in concert with any other unitholders of ABC AMIT.
26. All returns of ForCo's investment in ABC AMIT are ultimately provided to the Finance Minister which are held for the benefit of the Government of Country X.
27. The membership interest held by ForCo has the following characteristics:

(a)  The Test Entity in which ForCo has invested is listed on the Australian Securities Exchange (ASX).

(b)  ForCo, and, to the best of ForCo's knowledge, its sovereign entity group, hold collectively less than 10% of the total participation interests in the Test Entity.

(c)   ForCo, and, to the best of ForCo's knowledge, its sovereign entity group, would collectively hold less than 10% of the total participation interests in the Test Entity in the circumstances detailed in paragraph 880-105(4) of the ITAA 1997.

(d)  Neither ForCo nor, to the best of ForCo's knowledge, any members of its sovereign entity group have any involvement in the day-to-day management of the Test Entity.

(e)  Neither ForCo nor, to the best of ForCo's knowledge, any members of its sovereign entity group will have the right to appoint a director to the Board of Directors of the Test Entity.

(f)    Neither ForCo nor, to the best of ForCo's knowledge, any members of its sovereign entity group, holds the right to representation on any investor representative or advisory committee (or similar) of the Test Entity.

(g)  Neither ForCo nor, to the best of ForCo's knowledge, any members of its sovereign entity group, has the ability to direct or influence the operation of the Test Entity outside the ordinary rights conferred by the equity interest held.

(h)  ForCo's interests, when combined with the other interests held within its sovereign entity group, do not provide it or the sovereign entity group an entitlement to either directly or indirectly determine the identity of any person who makes decisions that comprise the control and direction of the Test Entity's operations.

(i)    No person involved in the control and direction of the Test Entity's operations is accustomed or obliged to act in accordance with the directions, instructions or wishes of ForCo, or, to the best of ForCo's knowledge, ForCo's sovereign entity group.

Relevant legislative provisions

Division 880 of the Income Tax Assessment Act 1997

Reasons for decision

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):

(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

(c)   the test entity is:

i.      a company that is an Australia 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.

ForCo is a covered sovereign entity

The sovereign entity must be a covered sovereign entity pursuant to section 880-125 of the ITAA 1997, which 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.

ForCo 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 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 part of a foreign county; 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 of the ITAA 1997 provides than 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.

Broadly, section 960-180 of the ITAA 1997 defines 'total participation interest' as the sum of 'direct' and 'indirect' participation interest. On this basis, the total participation interest of ForCo is held by the Government of Country X as each shareholder between ForCo and the Finance Minister holds 100% of the total paid-up share capital in their respectively subsidiary (directly or indirectly).

The definition of 'foreign government agency' as set out in subsection 995-1(1) of the ITAA 1997, which includes:

... the government of a foreign countryor of part of a foreign country.

The Finance Minister holds 100% of the ownership interest indirectly ForCo on behalf of the Government of Country X, therefore paragraph 995-1(1)(a) of the ITAA 1997 is satisfied and the Government of Country X meets the definition of 'foreign government agency'.

Based on the above facts, ForCo meets the requirements of being a sovereign entity in accordance with section 880-15 of the ITAA 1997 as it is an entity owned by a foreign government agency (under paragraph 880-15(b) of the ITAA 1997) as defined in paragraph 880-15(c) of the ITAA 1997.

Further, ForCo is not an Australian resident and is not a resident trust estate for the purposes of Division 6 of Part III of the ITAA 1936.

Therefore, ForCo meets the definition of 'sovereign entity' under paragraph 880-15(c) of the ITAA 1997.

ForCo is funded solely by public monies

Law Companion Ruling LCR 2020/3 - The superannuation fund for foreign residents withholding tax exemption and sovereign immunity (LCR 2020/3) provides guidance on the term '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 privatisation etc.

ForCo's source of funding comprises of proceeds from the issuance of Government Securities, Government budget surpluses, proceeds from the Government's land sale and any profits reinvested on behalf of the Finance Minister.

The money is held for a public purpose, as the Government of Country X is permitted to access up to 50% of the long-term expected real returns on the net assets managed by the sovereign entity group portfolios in its annual budget and the rest is to be used for the long-term prosperity of Country X.

There is no external debt involved in relation to ForCo's investments. Any profits reinvested by the sovereign entity group on behalf of the Finance Minister are accounted for as public monies in Country X's equivalent to Australia's CRF.

As such, ForCo is funded solely by public monies.

All returns on ForCo's investments are public monies

The activities of ForCo includes the holding of investments, including the units in ACB AMIT. ForCo is ultimately wholly owned by the Finance Minister on behalf of the Government of Country X. Therefore, any income made by ForCo or the subsidiaries between ForCo and the Finance Minister are ultimately owned by the Government of Country X. Accordingly, the monies that are invested by ForCo are and will remain the Government of Country X's monies. No other entity has an entitlement to the returns of ForCo's investments.

No third party debt or equity is being used by the Government of Country X, the subsidiaries between ForCo and the Finance Minister or ForCo to finance the investment in ABC AMIT. Accordingly, the returns derived by ForCo from its investment in ABC AMIT are not being used to pay amounts to entities outside the sovereign entity group. Its investments are funded wholly by capital provided by the Government of Country X plus any returns generated on those investments which are reinvested by the sovereign entity group.

The Government of Country X is allowed to spend up to 50% of the long-term expected real return on the net assets managed by the sovereign entity group (e.g. including the assets held by ForCo) in its annual budget. The annual budget is equivalent to assets held in the CRF and all monies managed by the sovereign group are accounted for in Country X's equivalent to the CRF and therefore, constitute public monies.

Therefore, ForCo satisfies the requirement of paragraph 880-125(b) of the ITAA 1997 that all returns from ForCo's are public monies, as all returns will remain the property of the Government of Country X.

ForCo is not a partnership

ForCo is a private company incorporated in Country X and it is not a partnership under subsection 6(1) of the ITAA 1936. ForCo therefore satisfies this requirement.

ForCo 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.

Law Companion Ruling 2020/3: The superannuation fund for foreign residents withholding tax exemption and sovereign immunity (LCR 2020/3) provides the following examples of public non-financial entities:

• airline corporations;
• postal authorities;
• state water corporations;
• port authorities;
• hospitals;
• schools;
• colleges;
• state electricity corporations; and
• state mining corporations.

ForCo does not provide services or undertake any other activities in Australia other than the holding of equity interests (e.g. units in ABC AMIT). Accordingly, ForCo does not produce or trade non-financial goods or provide non-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 services in relation to assets or liabilities that are not available on open financial markets.

LCR 2020/3 provides the following examples of public financial entities:

• banks;
• deposit taking corporations;
• captive financial institutions;
• pension/superannuation funds;
• insurance corporations;
• entities in the business of investment management;
• entities in the business of share trading; and
• entities in the business of money lending.

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.

ForCo does not engage in the type of financial services outlined in paragraph 880-130(2)(c). ForCo is wholly owned by a subsidiary within the sovereign entity group, a sovereign wealth fund established by the Government of Country X to manage the country's foreign reserves in accordance with the investment mandates and objectives, to achieve long-term returns. ForCo does not provide services or undertake any other activities other than the holding of equity interests in other entities (e.g. units in ABC AMIT). Accordingly, ForCo is not considered to provide the type of financial services contemplated by paragraph 880-130(2)(c) of the ITAA 1997.

Paragraph 880-130(2)(a) captures entities that trade in financial assets and liabilities. Whilst the units in ABC AMIT and other Australian investments may be considered a 'financial asset', ForCo does not trade in any of the investments it holds. Specifically, the original intention of the acquisition of the units in ABC AMIT was for a long-term investment. Therefore, ForCo is not in the business of investing in short term financial assets and liabilities that are held for sale for a profit. Accordingly, ForCo is not considered to undertake the activities contemplated by paragraph 880-130(2)(a) of the ITAA 1997.

Paragraph 880-130(2)(b) captures entities that operate commercially in financial markets. The activity of ForCo consists solely of holding equity interests (e.g. units in ABC AMIT), it does not operate commercially in the financial markets as contemplated by paragraph 880-130(2)(b) of the ITAA 1997.

As such, ForCo does not meet either definition of being a public non-financial or financial entity, satisfying the condition in paragraph 880-125(d) of the ITAA 1997.

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

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

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 Entity.

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.

ABC AMIT, being the Test Entity, is an AMIT which has issued units (a membership interest) to ForCo and in return ForCo receives AMIT fund payments and interest (as stated above ABC AMIT has not derived any non-concessional MIT income).

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

ForCo'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) 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.

ABC AMIT (the Test Entity) is an AMIT for Australian income tax purposes within the meaning of section 276-10 of the ITAA 1997.

Subsection 276-10(1) of the ITAA 1997 provides that a trust is an AMIT in an income year if the trust is a MIT in relation to the income year and other requirements detailed in the subsection are satisfied. Therefore, an AMIT must be a MIT as one of the criteria to be classified as an AMIT.

Further, the EM continues at paragraph 4.29 that the MIT's referred to in subsection 880-105(1) of the ITAA 1997 includes MITs that are AMITs.

As such, ForCo receives income from an entity which satisfies the requirements of paragraph 880-105(1)(c) of the ITAA 1997.

ForCo'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 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 the 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 an 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.

ForCo is part of the sovereign entity group of the Government of Country X. At the relevant times (as required by paragraph 880-105(1)(d) of the ITAA 1997), ForCo, and its sovereign entity group collectively, with respect to its membership interest in the Test Entity, hold less than 10% of the total participation interests in the Test Entity. Further, ForCo, and its sovereign entity group collectively, would hold less than 10% of the total participation interests in the Test Entity in the circumstances detailed in paragraph 880-105(4)(b) of the ITAA 1997.

As such, ForCo's sovereign entity group satisfies the requirements of paragraph 880-105(1)(d) of the ITAA 1997 with respect to the Test Entity.

ForCo's sovereign entity group does not have influence of a kind described in subsection (6)

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) states:

A sovereign entity group has influence of a kind described in this subsection in relation to the test entity at the 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.

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.

ForCo's interest in the Test Entity does not provide it with an entitlement to either directly or indirectly determine the identity of any person who makes decisions that comprise the control and direction of the Test Entity's operations. In addition, ForCo's interests, when combined with the other interests held by members of its sovereign entity group, do not provide an entitlement to either directly or indirectly determine the identity of any person who makes decisions that comprise the control and direction of the Test Entity's operations. Furthermore, ForCo does not hold any veto rights in the Test Entity.

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

Based upon the above, the sovereign entity group of ForCo 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

All conditions of subsection 880-105(1) of the ITAA 1997 have been satisfied, therefore section 880-105 of the ITAA 1997 will apply to the effect that amounts of ordinary and statutory income derived by ForCo from its investment in ABC AMIT / the Test Entity is not assessable and not exempt income.

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