Edited version of your written advice

Authorisation Number: 1012860684304

Date of advice: 19 August 2015

Ruling

Subject: Doctrine of sovereign immunity

Question 1

Will the Australian Taxation Office (ATO) impose liability to income tax or withholding tax on trust distributions and capital gains on units derived by the entity from its Australian investment in units in wholesale investment funds?

Answer

No

Question 2

Will the ATO impose liability to income tax or withholding tax on income and gains on units derived by the entity from its Australian investment in units in the wholesale fund?

Answer

Yes

Question 3

Will the ATO impose liability to income tax or withholding tax on interest income derived by the entity from its Australian investment in notes and subordinated debt?

Answer

No

This ruling applies for the following periods:

Income year ended 30 June 2016

Income year ended 30 June 2017

Income year ended 30 June 2018

Income year ended 30 June 2019

Income year ended 30 June 2020

The scheme commences on:

During the income year ending 30 June 2016

Relevant facts and circumstances

The following description of the scheme is based on the private ruling application and other correspondence provided by the applicant.

The entity

The entity is a foreign resident company which was incorporated under the Companies Act. The entity is wholly owned by the government. The entity is set up to own and administer assets of the government.

The funds used by the entity to make the Australian investments are from the foreign reserves of government. The money invested in Australian investments is for the purpose of preserving and enhancing government's foreign reserves. The government is and will remain the beneficial owner of the Australian investments and the income earned from the Australian investments.

Australian investments

Units in wholesale funds

The entity has an Australian investment in units in wholesale funds holding less than 10% of the funds and has not appointed any directors to the board of the responsible entity or the trustee of funds.

The entity has no other representations on the board of directors or investment committee and does not influence or participate in any decision-making process in relation to the funds.

Trust distributions and capital gains on units are derived by the entity from its Australian investments in units in wholesale funds.

Units in the wholesale fund

The entity has an Australian investment in units in the wholesale fund holding more than 10% of the fund and has a representative appointed to the investment committee.

Notes and subordinated debt

Interest income is derived by the entity from the notes and subordinated debt.

Relevant legislative provisions

Not applicable

Reasons for decision

Sovereign immunity background

The Foreign States Immunities Act 1985 (Immunities Act) is an Australian Commonwealth Act which reflects a more restrictive view of the common law doctrine of sovereign immunity.

The ATO follows the principles outlined in the Immunities Act which represents Australia's restrictive approach when considering sovereign immunity claims to taxation matters.

Pursuant to this approach, 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 monies being invested in the scheme are and will remain government monies, and

3. the scheme to which the claim applies must not be a commercial transaction.

If these three conditions are satisfied, it has been the long-standing practice of the ATO 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:

a) an independent sovereign state, or

b) 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:

a) is an agency or instrumentality of the foreign State, and

b) is not a department or organ of the executive government of the foreign State.

As noted above, the entity is a foreign resident company which was incorporated under the Companies Act. The entity is wholly owned by the government. The entity is set up to own and administer assets of the government.

Whilst the entity is not a foreign state, as defined by section 3 or the Immunities Act, it 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 government.

In view of the above facts, it is considered that the entity is a separate entity of a foreign state.

Condition 2: the monies being invested in the scheme are and will remain government monies

The funds used by the entity to make the Australian investments are from the foreign reserves of government. The money invested in Australian investments is for the purpose of preserving and enhancing government's foreign reserves. The government is and will remain the beneficial owner of the Australian investments and the income earned from the Australian investments.

In view of the above, it is considered that the monies invested by the entity in the Australian investments are and will remain monies of government.

Condition 3: the scheme to which the claim applies must not be a commercial transaction

An investment undertaken by a foreign government or an agency of a foreign government will generally be accepted as the performance of governmental functions provided that it is within the functions of government. However, it is necessary to establish whether the investment is non-commercial in nature and this will depend on the particular circumstances of the investment.

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 moneys, the income is accepted as being exempt from tax under the common law doctrine of sovereign immunity.

In relation to a 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 the carrying on of a business, but this would depend on the particular circumstances. A portfolio holding in a company (i.e., a holding of 10 per cent or less of the equity in a company) will generally be accepted as a non-commercial activity and any dividends received from such a holding would be exempt from tax.

Whether the entity's Australian investments are non-commercial in nature is discussed below.

Units in wholesale funds

The entity has an Australian investment in units in wholesale funds holding less than 10% of the funds and has not appointed any directors to the board of the responsible entity or the trustee of funds.

The entity has no other representations on the board of directors or investment committee and does not influence or participate in any decision-making process in relation to the funds.

Trust distributions and capital gains on units are derived by the entity from its Australian investments in units in wholesale funds.

In view of the above, it is considered that the entity's Australian Investments in Units in wholesale fund holding less than 10% non-commercial in nature.

Units in the wholesale fund

The entity has an Australian investment in units in the wholesale fund holding more than 10% of the fund and has a representative appointed to the investment committee.

Notes and subordinated debt

Interest income is derived by the entity from the notes and subordinated debt.

As noted above, income derived by a 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, it is considered that the entity's Australian Investment in notes and subordinated debt are non-commercial in nature.

Conclusion

Question 1

As the three conditions are satisfied the ATO will not impose liability to income tax or withholding tax on trust distributions and capital gains on units derived entity from its Australian investment in units in wholesale funds.

Question 2

As the three conditions are not satisfied the ATO will impose liability to income tax or withholding tax on income and gains on units derived the entity from its Australian investment in units in the wholesale fund.

Question 3

As the three conditions are satisfied the ATO will not impose liability to income tax or withholding tax on interest income derived by the entity from its Australian investment in notes and subordinated debt.

Note: In reaching the above conclusion consideration has been given to ATO Interpretative Decision ATO ID 2002/45 Withholding Tax - Sovereign Immunity.