Edited version of private advice

Authorisation Number: 1013030162894

Date of advice: 22 June 2016

Ruling

Subject: Wholly owned subsidiaries of an offshore entity

Question 1

Do the wholly owned subsidiaries of an offshore entity (the Entity A) satisfy paragraph 12-402(3)(g) of Schedule 1 to the TAA 1953?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Entity A

The Entity A is a government authority.

The Entity A has a legal personality and independent budget.

The Entity A is attached to a foreign government.

The Entity A may establish officers abroad.

The Entity A aims to develop, invest and manage government reserve funds and other property assigned to it by the government in accordance with the policies, plans and programs approved by the Government.

In order to achieve its mandate, the Entity A specialises in both foreign and domestic investments.

The Entity A is not an Australian resident for income tax purposes.

The Entity A subsidiaries

The Entity A is authorised to incorporate companies and establish investment enterprises.

The Entity A has incorporated a number of wholly owned companies that have made, or will make, investments in Australia (the wholly owned Subsidiaries).

The Entity A's objectives and administrative powers

The Entity A's mission statement states that its mission is to invest, manage and grow Government's reserves to create long term value for the government for future generations.

The Entity A will have all powers and competences necessary to achieve its objectives and in particular the following:

(a)  Proposing the annual general policies for investing the state reserve and implementing them after being approved by the Government.

(b)  Following up execution of the investment programmes and periodically evaluating their outcome.

(c)  Designating the banks and financial institutions by or through which the Government reserve may be invested.

(d)  Determining the types of free currencies, used in valuating the assets in which the Government reserve funds may be invested.

(e)  Buying and selling foreign currencies and metals and investing in them.

(f)   Buying and selling real property inside and outside the country of residence and investing in them.

(g)  Determining the types of investment instruments in which investment may be made.

(h)  Incorporating companies and establishing investment enterprises, individually or with others, or holding shares in existing companies and enterprises in the home land or abroad.

(i)    Concluding agreements, memoranda of understanding, contracts and taking any legal actions necessary to exercise its competence and powers.

(j)    Proposing draft laws and regulations concerning the investment of the Government reserve.

(k)  Representing the Government in all local, regional and international agencies, organisations, conferences, meeting and symposiums concerning the investment of Government reserve.

(l)    Any other tasks assigned to it by the Government.

Board of Directors

The Entity A shall be managed by a Board of Directors which shall consist of a Chairman and Deputy Chairman and a number of members to be appointed by the Government which shall also determine their remunerations.

The Board shall have a Secretary to be selected, and their functions and remunerations to be determined by a resolution of the Board.

The term of membership of the Board will be three years renewable for a similar period or periods.

The Entity A's Board shall have all powers and competence necessary for achieving the Entity's A objectives, and in particular the following:

(a)  Laying down the Entity A's general policies within the framework of the general policy approved by the Government.

(b)  Approving the plan, programmes and projects of the Entity A and following up their execution.

(c)  Setting standards and systems for investing the Government reserves.

(d)  Approving the incorporation of companies, the establishment of investment enterprises or the holding of shares in existing companies or enterprises.

(e)  Adopting the organizational structure of the Entity A and issuing the Entity A's personnel and tender/bid regulations.

(f)   Issuing the internal regulation of Entity A.

(g)  Approving the annual budget and the closing accounts of Entity A.

(h)  Considering the periodical reports and the follow up reports concerning work progress and submitting to the Government an annual report of Entity A's activities.

(i)    Any other works assigned to Entity A by the Government.

The resolutions of the Board shall only be effective if they are approved by the Government.

Governance

The Chairman of the Board shall have the right to sign on behalf of the Entity A and the Board shall have the right to authorize any of its members, the Chief Executive Officer, or any of the Entity A's officers individually or together for signing in some of the affairs specified by the Board.

The Entity A's seal on its papers shall not be valid unless combined with the signature of the Chairman of the Board or the authorised signatory.

The Chief Executive Officer shall represent the Entity A in front of the judiciary and its relation with others.

The Entity A shall have a Chief Executive Officer to be appointed by a decision issued by the Government. The Chief Executive Officer shall within the framework of the general policy of Entity A's implement and manage the Entity A's technical, administrative, financial and legal affairs and in particular shall carry out the following:

(a)  Buying and selling stocks, bonds, bill notes and other securities issuing in or outside the State in accordance with the standards and limits determined by the Board.

(b)  Buying and selling real estates in full or by sharing with others and investing in real estates.

(c)  Linking up cash deposits of all types in the banks and financial institutions in the State or abroad

(d)  Establishing investment portfolios in various investment markets and managing them or delegating the management responsibility to banks or financial institutions.

(e)  Buying and selling foreign currencies.

(f)   Buying and selling gold and precious metals.

(g)  Preparing the studies and recommendations concerning Entity A's activity.

(h)  Preparing a report on the Entity A's activity during the fiscal year and its financial status.

(i)    Proposing the draft regulations for the Entity A.

(j)    Preparing the annual budget proposal and the closing account of the Entity A.

(k)  Following up the investment developments in the world and issuing directions to the concerned departments to respond quickly to such developments.

(l)    Assuming general supervision over the departments belonging to it and revising the annual plan for financial and direct investments and ensuring that it complies with the strategy and the general policy of the Entity A.

(m) Carrying out any other works assigned to it by the Board.

The Chief Executive Officer may delegate some of his powers to any one of the Entity A's officers he chooses.

Funding

The Entity A and it's wholly owned Subsidiaries are, or will be, established using monies assigned to it by the government.

All monetary immovable, and movable assets, the various documents, and lists and deposits of the accounts related to the investment of the Government reserve, shall pass from the Government to the Entity A subject to the situation and conditions determined by the Government.

Economic benefits

All income and gains arising on the investments made by the Entity A (including by the wholly owned Subsidiaries) are for the sole and exclusive benefit of the Government. No person other than the Government has the right to use, enjoy or dispose of the income and gains which arise on such investments by the Entity A.

The Entity A is not established for the principal purpose of funding pensions (including disability and similar benefits) for the citizens or other contributors of Government.

Assumption

For the period of this Private Ruling, each of the wholly owned Subsidiaries will be wholly owned directly or indirectly by Entity A at all times.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 995-1(1)

Taxation Administration Act 1953 section 12-385 of Schedule 1

Taxation Administration Act 1953 section 12-400 of Schedule 1

Taxation Administration Act 1953 section 12-402 of Schedule 1

Taxation Administration Act 1953 section 12-405 of Schedule 1

Taxation Administration Act 1953 section 12-410 of Schedule 1

Reasons for decision

Subdivision 12-H of Schedule 1 to the TAA 1953 deals with the Pay As You Go (PAYG) withholding obligations of a 'managed investment trust' that makes a 'fund payment' to a recipient with an address outside Australia, or if the managed investment trust is authorised to make the payment to a place outside Australia (sections 12-385 and 12-410 of Schedule 1 to the TAA 1953).

A 'fund payment' is defined in section 12-405 of Schedule 1 to the TAA 1953 as that part of the net income of the trust for an income year other than dividends, interest, royalties, a capital gain or capital loss from a CGT asset that is not taxable Australian property or amounts that are not from an Australian source.

Where there is an obligation to withhold, the applicable withholding rate is determined by reference to whether the country or territory in which the recipient's address or place for payment is located is an information exchange country (subsection 12-385(3) of Schedule 1 to the TAA 1953).

Subsection 12-400(1) ofSchedule 1 to the TAA 1953 sets out the requirements to determine whether a particular trust is a 'managed investment trust' in relation to an income year.

Among other requirements, paragraph 12-400(1)(f) of Schedule 1 to the TAA 1953 states:

the trust satisfies, in relation to the income year:

            (i)        if, at the time the payment in made, the trust is registered under section 601EB of the Corporations Act 2001 and is covered by section 12-401 - either or both of the of the widely held requirements in subsections 12-402(1) and 12-402A(1); or

           (ii)        if, at the time the payment is made, the trust is so registered and is not covered by section 401 - either or both of the widely held requirements in subsection 12-402(1A) and 12-402A(1); or

          (iii)        if, at the time the payment is made, the trust is not so registered and is covered by section 12- 401 - the widely held requirements in subsection 12-402(1).

To satisfy subsection 12-402(1) of Schedule 1 to the TAA 1953, subsection 12-402(2) of Schedule 1 to the TAA 1953 prescribes certain calculation rules. One of the rules relates to entities covered by subsection 12-402(3) of Schedule 1 to the TAA 1953.

Under paragraph 12-402(3)(g) of Schedule 1 to the TAA 1953, one such kind of entity is:

an investment entity that satisfies all of these requirements:

            (i)        the entity is wholly-owned by one or more foreign government agencies, or is a wholly-owned subsidiary of one or more foreign government agencies;

           (ii)        the entity is established using only the public money or public property of the foreign government concerned;

          (iii)        all economic benefits obtained by the entity have passed, or are expected to pass, to the foreign government concerned.

Therefore, the wholly owned Subsidiaries of Entity A must meet each of the following requirements to satisfy paragraph 12-402(3)(g) of Schedule 1 to the TAA 1953:

• The entity must be an investment entity
• The entity must be wholly-owned by one or more 'foreign government agencies', or is a wholly-owned subsidiary of one or more foreign government agencies
• The entity must be established using only the public money or public property of the foreign government concerned, and
• All economic benefits obtained by the entity must have passed, or are expected to pass, to the foreign government concerned.

The entity is an investment entity

The Entity A aims to develop, invest and manage Government reserve funds and other property assigned to it by the Government in accordance with the policies, plans and programs approved by the Government.

For this reason, the Entity A (and by extension it's wholly owned Subsidiaries) were established to invest and manage the Government reserve funds and other property assigned to the Entity A.

The common law meaning of 'investment' is essentially the dictionary definition. In Melville v Mutual Life and Citizens Assurance Co Ltd (1980) 31 ALR 649, the Federal Court interpreted subsection 39(2) of the Life Insurance Act 1945 (Cth). Lockhart J stated (at 653):

"Invest" is not defined by the Act. It is defined by the Shorter Oxford English Dictionary, so far as relevant, as meaning: -

"to employ (money) in the purchase of anything from which interest or profit is expected . . . to make an investment . . colloq. to lay out money".

In Inland Revenue Commissioners v Rolls-Royce Ltd [1944] 2 All ER 340, MacNaghten J interpreted a provision in the Finance (No. 2) Act 1939 (UK). His Lordship stated:

The word "investment," though it primarily means the act of investing, is in common use as meaning that which is thereby acquired; and the primary meaning of the transitive verb "to invest" is to lay out money in the acquisition of some species of property...

Businesses consisting wholly or mainly in dealing in or holding investments would, as a general rule, be businesses where money, and nothing but money, is laid out in acquiring the investments.

As the acquisition of assets for money is what each of the wholly owned Subsidiaries of the Entity A will do, they will each be an investment entity.

The entity is wholly-owned by one or more foreign government agencies, or is a wholly-owned subsidiary of one or more foreign government agencies

Subsection 995-1(1) of the Income Tax Assessment Act 1997 states:

foreign government agency means:

(a) the government of a foreign country or of part of a foreign country; or

(b) an authority of the government of a foreign country; or

(c) an authority of the government of part of a foreign country

For the period of this Private Ruling, each of the wholly owned Subsidiaries will be wholly owned directly or indirectly by the Entity A at all times.

The Entity A is a Government Authority.

The Entity A is managed by a Board of Directors which shall consist of a Chairman and Deputy Chairman and a number of members appointed by the Government.

The Entity A shall have a Chief Executive Officer appointed by the Government.

As the Entity A is entirely controlled by the Government and is an authority of the government of a foreign country under paragraph (b) of the definition of 'foreign government agency'.

Accordingly, each of the wholly owned Subsidiaries of the Entity A is wholly-owned by one or more 'foreign government agencies' or is a wholly-owned subsidiary of one or more foreign government agencies.

The entity is established using only the public money or public property of the foreign government concerned

This condition requires that the entity must be established by using public, or governmental, monies or property rather than private funds or property, or funds or property accruing to the benefit of individuals in their private capacity.

All monetary, immovable and moveable assets, the various documents and lists and deposits of the accounts related to the investment of the Government reserve, shall pass from the Government to the Entity A.

It therefore follows that the only funds available to the Entity A to establish its wholly owned Subsidiaries must come from the Government or must be the proceeds of sale of its existing investments or the income generated by such investments.

Accordingly, each of the wholly owned Subsidiaries of the Entity A was established using only the public money or public property of the foreign government.

All economic benefits obtained by the entity have passed, or are expected to pass, to the foreign government concerned

The Entity A's mission statement states that its mission is to invest, manage and grow Government's reserves to create long term value for the Government and future generations.

The Entity A shall aim at developing, investing and managing the Government reserve funds and other property assigned to it by the Government in accordance with the policies, plans and programs approved by the Government.

As the Entity A is entirely funded by the Government and is entirely controlled by the Government it follows that all income and gains arising on the investments made by the Entity A (including by the wholly owned Subsidiaries) are for the sole and exclusive benefit of the Government.

No person other than the Government has the right to use, enjoy or dispose of the income and gains which arise on such investments by the Entity A or it's wholly owned Subsidiaries.

Accordingly, all economic benefits obtained by each of the wholly owned Subsidiaries of Entity A will pass, or are expected to pass, to the Government.

Conclusion

The wholly owned Subsidiaries of the Entity A will satisfy paragraph 12-402(3)(g) of Schedule 1 to the TAA 1953.