Edited version of your written advice

Ruling

Subject: Sovereign immunity

Question 1

Is the foreign government entity entitled to an exemption from liability to income tax under the doctrine of sovereign immunity in respect of distributions from its unit holdings in widely held Australian managed investment funds or unit trusts where each unit holding is less than 10% of the total units in each fund or unit trust?

Answer

No

This ruling applies for the following periods:

1 July 2013 to 30 June 2014

1 July 2014 to 30 June 2015

1 July 2015 to 30 June 2016

1 July 2016 to 30 June 2017

1 July 2017 to 30 June 2018

1 July 2017 to 30 June 2019

The scheme commences on:

During the period 1 July 2013 to 30 June 2014

Relevant facts and circumstances

The scheme that is the subject of this ruling is set out below.

The foreign government entity is a defined pension plan established under foreign law for foreign government employees.

Contributions to the fund are made by members of the fund (foreign government employees), the foreign government employer and the foreign government as required by law.

Members of the foreign government entity are required under the foreign law to contribute a percentage of their salary.

Legislation governing the foreign government entity requires that all assets of the foreign government entity be held in trust for the exclusive benefit of members of the foreign government entity and may not be diverted.

All contributions and investment returns become part of the trust administered by the Board of Trustees for the sole and exclusive benefit of members.

The benefits provided by the foreign government entity include retirement and related disability and death benefits.

Legislation governing the foreign government entity provides for the withdrawal of all accumulated contributions by a member who is absent from service except by death or retirement.

The foreign government entity has invested in several widely held Australian managed investment funds or unit trusts and each of its holdings is less than 10% of the total units on issue in each Australian fund or unit trust.

Reasons for decision

For Australian income tax purposes it is accepted that the doctrine of sovereign immunity applies to foreign governments or an agency of a foreign government that engage in governmental functions. 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.

To establish whether the doctrine of sovereign immunity applies to exempt Australian sourced income and gains of a foreign government or agency of a foreign government from Australian income tax and/or withholding tax, it is necessary to establish the following:

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.

If these three conditions are satisfied, the Australian sourced income or gains will not be subject to Australian income and/or withholding taxes.

Condition 1 - foreign government or agency of a foreign government

An investment undertaken by a foreign government or agency of a foreign government will generally be accepted as the performance of governmental functions provided that it is within the functions of government.

It is accepted that the foreign government entity is a foreign government or an agency of a foreign government.

Condition 2 - government moneys

The following indicate that the moneys invested by the foreign government entity are not and will not remain the moneys of a foreign government or an agency of a foreign government:

• legislation governing the foreign government entity requires that all assets of the foreign government entity be held in trust for the exclusive benefit of members of the foreign government entity and may not be diverted;

• members of the foreign government entity are required under the foreign law to contribute a percentage of their salary;

• all contributions to the foreign government entity and investment returns become part of the trust administered by the Board of Trustees for the sole and exclusive benefit of members of the foreign government entity;

• legislation governing the foreign government entity provides for the withdrawal of all accumulated contributions by a member of the foreign government entity who is absent from service except by death or retirement; and

• each member of the foreign government entity that has contributed funds to the foreign government entity is entitled to receive payments from the foreign government entity in the circumstances specified in the relevant legislation.

Accordingly, the foreign government entity does not satisfy the second condition that the moneys invested are and will remain government moneys.

Condition 3 - non-commercial activity

In view of the conclusion on condition 2, it is unnecessary to consider condition 3.

Conclusion

As all the conditions for exemption to liability to income tax under the doctrine of sovereign immunity are not satisfied the foreign government entity is not exempt from income tax on distributions made in respect of its unit holdings in widely held Australian managed investment funds or unit trusts where each unit holding is less than 10% of the total units in each fund or unit trust.