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Ruling
Subject: Sovereign immunity
Question
Will income derived by the foreign government from passive investments in Australia, including passive investments in Australian MITs and other unit trusts, be exempt from Australian income and withholding tax under the international law doctrine of sovereign immunity, notwithstanding the fact that the foreign government may derive some Australian income from non-passive investments.?
Answer
Yes. The income derived by the foreign government from passive investments in Australia, including passive investments in Australian MITs and other unit trusts, be exempt from Australian income and withholding tax under the international law doctrine of sovereign immunity, notwithstanding the fact that the foreign government may derive some Australian income from non-passive investments
This ruling applies for the following periods:
1 July 2004 to 30 June 2015
The scheme commences on:
1 July 2004
Relevant facts and circumstances
The foreign government has established the facts by providing its constitution annual reports sin establishing a wholly owned and controlled entity as fund manager to hold its investments in Australia.
Relevant legislative provisions
Taxation Administration Act 1953 Subsection 15-15(2)
Reasons for decision
In order to establish whether sovereign immunity applies to exempt Australian sourced income from income tax including withholding tax, it is necessary to establish the following conditions required in ATOID 2002/45:
1. that the person making the investment (and therefore deriving the income) is a foreign government or an agency of a foreign government;
2. that the moneys being invested are and will remain government moneys; and
3. that the income is being derived from a non commercial activity.
Condition 1 - that the person making the investment (and therefore deriving the income) is a foreign government or agency of a foreign government
The foreign government has provided evidence which demonstrates that it is exercising governmental functions and it's the beneficial owner of the income from its investments in Australia held by an entity which is owned and controlled by the foreign government.
Condition 2 - that the moneys being invested are and will remain government moneys
The foreign entity has provided evidence that the moneys being invested are and will remain government money.
Condition 3 - that the income is being derived from a 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.
For the reasons set out above, the income derived by the foreign government in Australia in relation to its passive investments satisfy the requirements of the international law doctrine of sovereign immunity and should therefore be exempt from Australian income and withholding tax notwithstanding the fact that the foreign government has and will in future derive part of its Australian income from a non-passive investments which will not be exempt.