Edited version of private ruling

Authorisation Number: 1011813479743

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Ruling

Subject: Sovereign Immunity Exemption

Question 1

Is the foreign bank (the Bank) exempt from income tax on its income and capital gains derived from its specified investments in Australian debt and money market instruments under the common law principles of sovereign immunity?

Answer: Yes.

The Bank is exempt from income tax on its income and capital gains derived from its specified investments in Australian debt and money market instruments under the common law principles of sovereign immunity.

This ruling applies for the following periods:

1 July 2009 to 30 June 2010

1 July 2010 to 30 June 2011

1 July 2011 to 30 June 2012

1 July 2012 to 30 June 2013

1 July 2013 to 30 June 2014

The scheme commences on:

1 July 2009

Relevant facts and circumstances

In addition to the private ruling application form, the Bank also provided the following supporting documents:

· the Bank's Act of Incorporation (the Act);

· the Bank's Financial Statements 2009-2010;

· the previous Private Binding Ruling which applied to prior income years in relation to its sovereign immunity exemption for those income years; and,

· the foreign government's Income Tax Ordinance.

The Bank is a foreign central bank and is directly or indirectly wholly owned by its government. As such, the foreign government has exclusive right of ownership (i.e.100 per cent shareholding) of the Bank.

The Bank was established by the Act to carry on the business of central banking. The Act with subsequent amendments governs the Bank's business and functions.

In accordance with the Act, the Bank may only transact business in a certain manner. Under the Act the Bank's business includes but is not limited to:

· accepting monies on deposit;

· purchasing, selling and rediscounting of bills exchange and promissory notes;

· purchasing and selling approved foreign exchange;

· making advances and loans to Local Authorities, scheduled banks or co-operatives banks;

· making advances to the Federal Government or Provincial Governments;

· making advances and loans to institutions or banks, specially established for the purpose of promoting agricultural or industrial development, or for the financing of constructions of houses;

· issuing and purchasing telegraphic transfers, demand drafts and other kinds of remittances;

· purchasing and selling securities of countries whose currency has been declared as approved foreign exchange;

· custody of monies, securities, and other articles of value;

· selling and realisation of all property owned by the Bank;

· acting as agent to the Federal Government, any Provincial Government, or any other Local Authority in certain transactions;

· borrowing monies for the purpose of the business of the Bank;

· making and issuing bank notes; and,

· establishment of credits and giving guarantees.

The Act also outlines the business which the Bank may not transact, specifying that it shall not engage in trade or otherwise have a direct interest in any commercial, industrial or other undertaking except where such interest is acquire in the course of satisfaction of any of its claims, but all such interest shall be disposed of at the earliest possible moment.
The general superintendence and direction of the affairs and business of the Bank is entrusted to the Central Board of Directors, which consists of the Governor, Secretary, Finance Division, Foreign Government and Directors nominated by the Foreign Government. The Central Board of the Bank approves the Bank's investment guidelines.

The Bank appoints fund managers who act on its behalf under these approved guidelines. The guidelines allow fund managers to invest in Australian debt and money market instruments.

The Bank derives incomes and capital gains through specified investments in debt and money market instruments in the Australian market. These specified investments are not of a commercial, business or trading nature.

The Bank is entitled to all interest income or capital gains from the specified investments. The Bank's income from these investments becomes part of the foreign exchange reserves which is ultimately owned by the foreign government. This income is used to support the general government functions.

The Bank:

· does not have any shares, options, rights or convertible instruments in those entities identified in its specified investments;

· has no influence in the operation of the business in which it has specified an investment;

· does not own any debt instruments in Australia; and,

· does not use any special structures (i.e. special purpose vehicles, companies, trusts, etc) for its Australian investments.

Reasons for decision

Question 1

Is the foreign bank (the Bank) exempt from income tax on its income and capital gains derived from its specified investments in Australian debt and money market instruments under the common law principles of sovereign immunity?

Answer: Yes.

The Bank is exempt from income tax on its income and capital gains derived from its specified investments in Australian debt and money market instruments under the common law principles of sovereign immunity.

Detailed reasoning

In accordance with ATO Interpretative Decision ATO ID 2002/45 (ATO ID 2002/45), certain income derived from within Australia by foreign governments is exempt from Australian tax under the international law doctrine of sovereign immunity. In accordance with that doctrine, Australia accepts that any income derived by a foreign government from the performance of governmental functions within Australia is exempt from Australian tax.

An activity undertaken by a foreign government will generally be accepted as the performance of governmental functions provided that the agencies are owned and controlled by the government and do not engage in ordinary commercial activities. This approach is consistent with the decision of the British House of Lords in the case I Congreso del Partido [1981] 2 All ER 1064 which held that activities of a trading, commercial or other private law character were not governmental functions.

When determining whether sovereign immunity applies to a particular operation or activity, it is necessary to establish whether the operation or activity is commercial in nature. Whether an operation or activity is commercial in nature will depend on the facts of each particular case. However, as a guide, a commercial activity is generally an activity concerned with the trading of goods and services, such as buying, selling, bartering and transportation, and includes the carrying on of a business.

Income derived by a foreign government or by any other body exercising governmental functions from interest bearing investments or investments in equities is generally not considered to be income derived from a commercial operation or activity. Accordingly, provided the funds used to make such investments are and remain government monies, the income is accepted as being exempt from tax under the common law doctrine of sovereign immunity.

In summary, ATO ID 2002/45 outlines that in order to establish whether sovereign immunity applies, it is necessary to establish the following:

that the person making the investment (and therefore deriving the income) is a foreign government or an agency of a foreign government;

that the moneys being invested are and will remain government moneys; and

that the income is being derived from a non-commercial activity.

If these three conditions are satisfied, then the relevant income will not be subject to Australian income taxes.

Is the person making the investment (and therefore deriving the income) a foreign government or an agency of a foreign government?

The Bank derives income and capital gains on its investments in Australian debt and money market instruments through its fund managers.

The term 'agency of foreign government' is not defined, however, subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a 'foreign government agency' is:

(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.

The Bank is a foreign central bank incorporated under the Act. In accordance with a section of the Act, the general superintendence and direction of the affairs and business of the Bank is entrusted to a central board of directors, which consists of the Governor, Secretary, Finance Division, foreign government and seven directors nominated by the foreign government.

Furthermore, under another section of the Act, the Bank has the authority to act as agent to the foreign government, any provincial government, or any local authority in certain transactions.

Therefore, it is considered that the Bank is a foreign government agency making the specified investments and deriving income from those investments for the purpose of applying the sovereign immunity exemption.

Are the moneys being invested government moneys and will they remain government moneys?

Pursuant to the Act, no less than fifty one per cent of the Bank's original share capital shall be held by the foreign government.

According to the Act, after making provision for bad and doubtful debts, depreciation in assets and contributions to staff and superannuation funds, a dividend shall be paid to the shareholders out of the Bank's net annual profit. Any surplus remaining thereafter shall be paid to the foreign government.

Since the foreign government has exclusive right of ownership of the Bank, it is evident that the moneys being invested by the Bank are and will remain government moneys.

Is the income derived from non-commercial activity?

The question of whether an operation or activity is commercial in nature will depend on the facts of each particular case, however commercial activity is generally concerned with the trading of goods and services or the carrying on of a business.

In contrast, income from interest bearing investments or investments in equities is generally not considered to be income derived from commercial activities. There could however, be instances where the extent of the holding of shares in a company would give rise to a question as to whether it constitutes a passive investment or the carrying on of a business. The answer to this question would depend on the particular circumstances.

As a guide, income derived from interest bearing investments, investments in equities such as bonds or a portfolio holding in a company (that is, a holding of 10% or less of the equity in a company) will generally be accepted as a non-commercial activity.

In the present case, the Bank has no influence in the operation of the businesses in which it has a specified investment, nor does it own any debt instruments in Australia.

In relation to its specified investment holdings, the Bank does not have any shares, options, rights or convertible instruments in those entities identified. In addition, the Bank does not participate in any boards of directors of those entities.

The Bank's specified investment holdings consist solely of fixed income securities and cash or cash equivalent assets which can be categorised as equity and interest bearing type investments. Therefore, the Bank's specified investment holdings are considered to be of a passive and non-commercial nature.

Conclusion

The Bank demonstrates that:

· it is an agency of a foreign government;

· that the moneys being invested in relation to its specified investments are and will remain government moneys; and

· that the income being derived from its specified investments is from a non-commercial activity.

As such an exemption to income tax under the principles of sovereign immunity is available to income and capital gains derived by the Bank's specified investment holdings.