| Disclaimer This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law. You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4. |
Edited version of your written advice
Authorisation Number: 1012989124314
Date of advice: 30 March 2016
Ruling
Subject: Sovereign immunity
Question 1
Is entity A immune from income tax or withholding tax on interest income derived from its investments in term deposits and savings accounts held with bank A under the common law doctrine of sovereign immunity?
Answer
Yes.
This ruling applies for the following period
22 December 2015 to 21 December 2020
The scheme commenced on
22 December 2015
Relevant facts and circumstances
Entity A
1. Entity A is the national and central bank of a foreign state and falls under the ownership of the foreign state.
2. Entity A is a legal entity and carries out its activities in accordance with a statute.
3. As prescribed by the statute, certain functions of entity A include the implementing of monetary policy and the holding and managing of foreign reserves.
4. The Board of entity A is appointed by the government of the foreign state.
5. Entity A is required to report to the foreign government on its performance and governance.
6. Entity A is exempt from tax in the foreign state.
7. The initial capital of entity A was provided by the foreign state. Additional capital is provided by the foreign state.
8. The profits of entity A are either transferred to the foreign government or to the capital provision of entity A.
9. Upon dissolution or liquidation, the funds of entity A will be distributed to the foreign state.
10. Entity A cannot act beyond the functions prescribed by the statute and cannot participate or hold shares in any commercial entities.
The interests held with bank A
11. Entity A's interests held with bank A are the investments subject to this Ruling.
12. Entity A's interests held with bank A include savings accounts and term deposits.
13. Entity A derives interest income from these investments held with bank A.
14. The purpose of the investments held with bank A is to preserve and enhance the foreign reserves of the foreign state, and to fulfil the mandate prescribed by the statute.
Relevant legislative provisions
Income Tax Assessment Act 1936 section 128B
Income Tax Assessment Act 1997 section 4-1
Reasons for decision
Question 1
Is entity A immune from income tax or withholding tax on interest income derived from its investments in term deposits and savings accounts held with bank A under the common law doctrine of sovereign immunity?
Detailed reasoning
For Australian income tax and withholding tax purposes, it is accepted that the doctrine of sovereign immunity applies to a foreign government or an agency of a foreign government that engages in governmental functions. This approach is consistent with the decision of the British House of Lords in the case I Congreso del Partido 2 All ER 1064 which held that activities of a trading, commercial or other private law character were not governmental functions.
When determining whether the doctrine of sovereign immunity applies to exempt Australian sourced income and gains 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 invested are and will remain government moneys, and
3. that the income or gain is being derived from a non-commercial activity.
If these three conditions are satisfied, then the income or gains will not be subject to Australian income tax and/or withholding tax.
Condition 1 - that the person making the investment (and therefore deriving the income) is a foreign government or an agency of a foreign government
Entity A is the central bank of the foreign state and is owned by the foreign state. Entity A carries out its activities in accordance with the statute.
As prescribed by the statute, certain functions of entity A include the implementing of monetary policy and the holding and managing of foreign reserves.
The Board of entity A is appointed by the foreign government.
Furthermore, entity A is required to report to the foreign government on its performance and governance.
Given entity A is a state owned, central bank and acts within this capacity, entity A is an agency of a foreign government.
As such, the condition that the person making the investment (and therefore deriving the income) is a foreign government or an agency of a foreign government is satisfied.
Condition 2 - that the moneys invested are and will remain government moneys
As provided above, entity A is a state owned, central bank.
The initial capital of entity A was provided by the foreign state. Additional capital is provided by the foreign government.
As prescribed by the statute, entity A holds and manages foreign reserves. This legislative mandate is in line with the investments subject to this Ruling, being entity A's interests with bank A which include savings accounts and term deposits.
The profits of entity A are either transferred to the foreign government or to the capital provision of entity A.
Upon dissolution or liquidation, the funds of entity A will be distributed to the foreign state.
For the above reasons, the moneys invested by entity A are and will remain the moneys of the foreign state. Accordingly, this condition is satisfied.
Condition 3 - that the income or gain is being derived from a non-commercial activity
Income derived by a foreign government or by any other body exercising governmental functions from interest bearing investments is generally not considered to be income derived from a commercial operation or activity.
In determining whether an investment constitutes a non-commercial activity, it is necessary to consider the nature of the investment and the degree of its actual or potential influence in respect of the financial, operating and policy decisions of any entity related to the investment.
In terms of the investments subject to this Ruling, entity A derives interest income from the savings accounts and term deposits held with bank A. The purpose of these investments is to preserve and enhance the foreign reserves of the foreign state, and to fulfil the mandate prescribed by the statute. Additionally, entity A cannot act beyond the functions prescribed by the statute and cannot participate or hold shares in any commercial entities.
Given entity A's investments are in interest bearing deposits and do not give rise to voting rights or influence in any entity, it follows that the income is being derived from a non-commercial activity. This view is supported by entity A acting in accordance with its legislative mandate.
Therefore, the income being derived from entity A's investments in savings accounts and term deposits held with bank A is from a non-commercial activity. Accordingly, this condition is satisfied.
Conclusion
The three conditions in relation to entity A's investments in savings accounts and term deposits held with bank A are satisfied. Accordingly, entity A is immune from income tax or withholding tax on interest income derived from these investments under the common law doctrine of sovereign immunity.