Edited version of private advice

Authorisation Number: 1052370447811

Date of advice: 6 March 2025

Ruling

Subject: Sovereign immunity

Question 1

Is the ordinary and statutory income derived by the Bank from its interests in the investments listed in Appendix 1 (the Test Entities) not assessable and not exempt income under section 880-105 of the Income Tax Assessment Act 1997 (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

The Bank

1. The Bank is the central bank of Country X. It is a corporation that acts autonomously in achieving its objectives, carrying out its functions and implementing its powers.
2. The Bank is the sole banker of the Country X Government (Government) in its banking activity of Country X currency.
3. The Bank's objectives include:

(a)          Maintaining price stability.

(b)          To assist in other Government objectives such as economic policy

(c)           To boost the financial system's stability and efficiency.

4. The Bank's functions include:

(a)          managing monetary policy

(b)          holding and managing Country X's foreign currency reserves

(c)           supporting the orderly activity of Country X's foreign currency market

(d)          acting as the Government's banker

(e)          issuing currency and regulating and guiding the cash system of the economy, and

5. The Bank consists of a Governor, Committee, and Administrative Body.
6. The Governor is appointed by the Country X Head of State on the recommendation of the government and serves as a Committee chairperson and an Administrative Body member.
7. The Governor also serves as an advisor to the Government on economic matters.
8. The Bank has reporting requirements to the Government and Country X parliament.
9. The Bank is exempt from taxes in Country X.
10. The Bank is required to annually distribute profits to the Government.
11. The Bank cannot generally provide loans to Government to cover expenditure.

Foreign reserves

12. The Bank manages and administers Country X's foreign reserves. The Bank invests the reserves globally, including in Australia.
13. The Bank's investment policy of the reserves, is derived from three objectives:

(a)          Maintaining the reserves' purchasing power.

(b)          Managing the reserves with a high level of liquidity, and

(c)           Achieving an appropriate return on the reserves portfolio.

Australian investments

14. The Bank currently holds investments in a number of different Australian investment types including debt securities and equity investments in various Australian entities.
15. The Bank has previously derived and expects to derive income including interest income, dividend income, trust distributions, MIT fund payments and capital gains (including from trust distributions) from these investments.
16. The Bank also invests in derivatives to hedge (partially or fully) currency risk when purchasing these fixed income instruments. The derivative primarily invested in is foreign exchange swaps (FX swaps).
17. These derivatives are purchased to maintain liquidity in foreign currency, to hedge (partially or fully) currency risk when purchasing fixed income instruments, and as a short-term investment for the Bank's Australian dollar holdings.

Investments in the Test Entities:

18.  The Bank has made investments in debt interests and/or equity interests in the Test Entities.

19. The Bank has invested in Australian equity and debt investments (as detailed in Appendix 1). These investments have the following characteristics:

a.            The Test Entity in which the Bank has invested is listed on the Australian Securities Exchange (ASX), or an Australian State Government debt issuer.

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

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

d.            Neither the Bank nor, to the best of the Bank's knowledge, any members of its sovereign entity group has involvement in the day to day management of the business of the Test Entity.

e.            Neither the Bank nor, to the best of the Bank's knowledge, any members of its sovereign entity group, has the right to appoint a director to the Board of Directors of the Test Entity.

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

h.            The Bank only holds rights to vote in proportion to its membership interest in the investment.

i.              The Bank'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 make decisions that comprise the control and direction of the Test Entity's operations.

j.              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 the Bank, or, to the best of the Bank's knowledge, the Bank's sovereign entity group.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 880

Reasons for decision

Detailed reasoning

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

(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.

The Bank 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;

(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 Bank 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;

(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) 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 a foreign country.

The Bank is the central bank of Country X. It is an independent corporation that acts autonomously in attaining its objectives, discharging its functions and exercising its powers.

As an agency or instrumentality of Country X, the Bank undertakes its activities in accord with its embodying law. Accordingly, the Bank would constitute a body corporate (not being a natural person or corporation sole) that is an entity, i.e. an agency or instrumentality of the Country X.

Therefore, the Bank meets the requirements of being a sovereign entity in accordance with section 880-15 of the ITAA 1936.

The Bank 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'.

In the context of Division 880, LCR 2020/3 provides at paragraph 54, that this phrase essentially means monies of a foreign government (or part of a foreign government) held 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.

The Bank is Country X's central bank. The Australian investments are made when managing and administering the foreign reserves.

Therefore, the Bank is funded solely by public monies.

All returns on the Bank's investments are public monies

The Bank manages and administers Country X's foreign reserves. The Bank invests the reserves globally, including in Australia.

The Bank follows a cautious approach with respect to its management of the reserves, considering three objectives:

(a)          maintaining a high level of liquidity

(b)          minimising the various financial and credit risks, and

(c)           maintaining the purchase power of the reserves and obtaining an adequate return on the investments.

The Bank is required to annually distribute profits to the Government.

The Bank cannot issue loans or shares to be transferred to a non-Government entity. Therefore, all returns on the Bank's investments are public monies.

The Bank is not a partnership

The Bank is an independent corporation that acts autonomously in achieving its objectives, carrying out its functions and implementing its powers. Therefore, it passes this condition.

The Bank 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;

(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) excludes public financial entities that only carry on central banking activities from being excluded as a covered sovereign entity.

The Bank was established for the purpose of carrying on the business of central banking. The Bank satisfies the definition of a public financial entity provided for in subsection 880-130(2). However, subparagraph 880-125(d)(ii) excludes public financial entities that only carry on central banking activities from being excluded as a covered sovereign entity.

Paragraph 81 of the 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, and

•                     providing banking services to government.

The Bank carries out activities including the following:

(a)          managing monetary policy

(b)          holding and managing Country X's foreign currency reserves

(c)           supporting the orderly activity of Country X's foreign currency market

(d)          acting as a banker of the government

(e)          issuing currency and regulating and guiding the cash system of the economy, and

It is considered that the above activities are consistent with the Bank being an entity that only carries on central banking activities. Therefore, the Bank passes the condition in paragraph 880-125(d).

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

The Bank'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 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 Bank currently holds investments in a number of different Australian investment types including debt securities and equity investments in various Australian entities of which the Bank holds membership interests and debt interests. The Bank has previously derived and expects to derive income including interest income, dividend income, trust distributions, MIT fund payments and capital gains (including from trust distributions) from these investments.

Therefore, the Bank will receive amounts which satisfy the requirements of paragraph 880-105(1)(b).

The Bank'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.

The Test Entities are Australian resident companies or managed investment trusts at the relevant times.

Therefore, the Bank receives income from entities which satisfy the requirements of paragraph 880-105(c).

The Bank'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 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), 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 Bank is part of the sovereign entity group of Country X. At the relevant times (as required by paragraph 880-105(1)(d)), the Bank, and its sovereign entity group collectively, holds less than 10% of the total participation interests in each of the Test Entities and the Bank 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 test is satisfied.

The Banks'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 Bank'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 Bank'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 Bank or members of the Bank's sovereign entity group.

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

Conclusion

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

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