Edited version of your written advice

Authorisation Number: 1012700554652

Ruling

Subject: Sovereign immunity

Question

Will the Commissioner of Taxation impose liability to income tax or withholding tax on the Entity in respect of its income?

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 2015

Year ending 30 June 2016

Year ending 30 June 2017

Year ending 30 June 2018

Year ending 30 June 2019

The scheme commenced on:

1 July 2014

Relevant facts and circumstances

1. The Entity is a statutory body established by the foreign Government to achieve the foreign Government's policy objective.

2. The equity of the Entity is solely contributed by the foreign Government.

3. The Entity's Financial Statements are consolidated to the Financial Statements of the foreign Government.

4. The Entity has the power to act as an agent for the foreign Government.

5. Each financial year the Entity is required to submit a programme of its proposed activities, and estimates of its income and expenditure for the next financial year to the foreign Government.

6. The policy of the Entity is required to be directed toward ensuring that revenue accruing to the Entity from its assets shall be sufficient to meet its recurrent expenditure.

7. The foreign Government may direct as they see fit, either generally or in any particular case, how the Entity exercises or performs any power, functions or duties assigned to it.

8. Any moneys in the hands of the Entity which are not immediately required for the purposes of the Entity may be invested.

9. The foreign Government may, after consultation with the Entity, give the Entity directions requiring the Entity to pay the whole or part of an excess to the foreign Government if in any Financial Year there is an excess of revenue of the Entity over the total sum required by the Entity meet its outgoings.

10. The Entity is exempt from the tax payable by the foreign Government.

11. The aim of the Entity's investment strategy and guidelines is to ensure there is sufficient liquidity to meet the operational needs of the Entity, and to put the rest of the Entity funds into longer term investments in a prudent and diversified manner to enhance long term returns.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 128B

Income Tax Assessment Act 1997 section 4-1

Reasons for decision

Non-resident taxpayers will generally be liable to pay income tax under section 4-1 of the Income Tax Assessment Act 1997 (ITAA 1997) or withholding tax under section 128B of the ITAA Income Tax Assessment Act 1936 (ITAA 1936) on Australian-sourced income, unless an exemption or exclusion applies. The Entity is considered a non-resident taxpayer under subsection 6(1) of the ITAA 1936.

While the taxation legislation does not provide an exemption or exclusion for foreign governments or entities of foreign governments, liability to income tax and withholding tax may not be imposed under the common law doctrine of sovereign immunity.

An entity claiming sovereign immunity must satisfy three conditions:

1. the entity must be a foreign state, or a separate entity of a foreign state

2. the scheme to which the claim applies must not be a commercial transaction, and

3. the monies being invested in the scheme are and will remain government monies.

If these three conditions are satisfied, it has been the long-standing practice of the Commissioner to not impose the entity's liability to income tax and withholding tax in respect of ordinary income and statutory income on the basis that the entity has satisfied the common law doctrine of sovereign immunity.

Condition 1: a 'foreign state' or 'separate entity' of a foreign state

A claim for sovereign immunity may only be made by a 'foreign state' (section 9 of the Immunities Act).

A foreign state is defined in section 3 of the Immunities Act to be a country outside of Australia that is either:

• an independent sovereign state, or

• a separate territory (whether or not it is self-governing) that is not part of an independent sovereign state.

Sovereign immunity also extends to a 'separate entity' of a foreign state pursuant to section 22 of the Immunities Act.

A separate entity of a foreign state is defined in section 3 of the Immunities Act to be a natural person, body corporate or corporation sole that:

• is an agency or instrumentality of the foreign state, and

• is not a department or organ of the executive government of the foreign state.

The Entity is not an independent sovereign state or a separate territory and is therefore not a foreign state. However, it is necessary to consider whether the Entity is a separate entity of a foreign state.

The Entity was established the foreign Government and fulfils the purpose of developing and implementing the policy objectives of the foreign Government in relation to meeting its policy objectives.

Effectively, the foreign Government can control the operation of the Entity at all times.

The granting of power to act as an agent for the foreign Government in certain circumstances adds weight to the argument that the operations of the Entity are directed towards achieving some purpose set out by the foreign Government.

Conclusion

The Entity is acting for a foreign state as the vehicle through which that foreign state achieves its policy objectives. Therefore, the Entity is considered a separate entity of a foreign state. This condition is satisfied.

Condition 2: commercial transaction

Under section 11 of the Immunities Act, a foreign state does not enjoy sovereign immunity in so far as the proceeding concerns a commercial transaction.

Whether an operation or activity is a commercial transaction will depend on the facts of each particular case. As a guide, a commercial transaction 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.

In relation to the holding of shares in a company, there would be instances where the extent of the holding gives rise to questions as to whether it constitutes a passive investment or a commercial investment, but this would depend on the particular circumstances. A portfolio holding in a company or fund (that is, a holding of 10% or less of the equity in a company) will generally be accepted as a non-commercial transaction.

The investments represent part of a diversified global portfolio of long-term investment held by the Entity.

The nature and period to maturity of the investments held by the Entity reflect a desire to hold long term assets with minimal risk to ensure the liquidity of assets required to meet the operational needs of the Entity. The fixed return nature of the investments held is reflective of this, representing little risk of loss of the funds invested.

The investments do not represent the trading of any goods or services, nor do they reflect the activities of carrying on a business beyond passive investment.

Conclusion

The long term, fixed return nature of the investments held by the Entity is not indicative of investments that would be considered a commercial transaction for the purposes of sovereign immunity. This condition is satisfied.

Condition 3: monies are and will remain government monies

In line with the principle that sovereign immunity applies to foreign states performing only governmental functions, an entity claiming sovereign immunity must establish that the monies being invested in the scheme are and will remain government monies.

There is no indication that the funds invested in Australia by the Entity or the income from the investment of those funds in Australia is able to be applied for the benefit of any entity other than the Entity. As such, the monies that are the subject of the scheme will remain monies of Entity. Subsequently, if monies of the Entity remain monies of the foreign Government, this condition will be satisfied.

The equity of the Entity is solely contributed by the foreign Government.

The inclusion of the financial statements of the Entity in the consolidated financial statements of the foreign Government is indicative of the foreign Government maintaining responsibility for the operation and utilisation of the Entity's monies.

Each financial year the Entity must submit a programme of its proposed activities, and estimates of its income and expenditure for the next year to the foreign Government. This indicates that the foreign Government has a vested interest in the way in which the Entity utilises its funds.

The foreign Government has the power to require the Entity to pay funds back to the foreign Government where those funds are in excess of the requirements of the Entity to meet the purpose for which it is operated. In summary, the funds of the Entity are either utilised to fulfil policy objectives of the foreign Government, or are available to be paid to the foreign Government. This is indicative of the monies of the Entity effectively being monies of the foreign Government.

Conclusion

The monies that are invested in Australia and income derived from those investments remain monies of the Entity. Further, it is accepted that the monies of the Entity remain monies of the foreign Government. Therefore, it is accepted that the monies invested in Australia and the income derived from those investments remain monies of the foreign Government. This condition is satisfied.

Summary

As the three conditions are satisfied, the Commissioner will not impose liability to income tax or withholding tax on the entity in respect of its interest income, dividend income and capital gains.