| Disclaimer This edited version has been archived due to the length of time since original publication.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: 1013044155543
Date of advice: 9 August 2016
Ruling
Subject: Sovereign Immunity
Question
Is Entity A exempt from Australian income and withholding taxes under the doctrine of sovereign immunity for:
(a) interest received, and
(b) gains from the disposal of,
interest bearing debt issued by Entity B?
Answer
Yes.
This ruling applies for the following period:
Income year ended XXXX
The scheme commences on:
Income year ended XXXX
Relevant facts and circumstances
1. Entity A is wholly-owned by the government.
2. Entity A has, and will only receive money from the government, government agencies, or other entities wholly-owned by the government.
3. Entity A has, and will only disburse money to the government, government agencies, or other entities wholly-owned by the government.
4. On liquidation of Entity A, all the moneys will be repaid to the government, government agencies, or other entities wholly-owned by the government.
5. Entity A is not in the business of money-lending.
6. Entity A will invest in unsecured interest bearing debt of Entity B.
Relevant legislative provisions
Income Tax Assessment Act 1936 section 128B
Income Tax Assessment Act 1997 section 4-1
Reasons for decision
Is Entity A exempt from Australian income and withholding taxes under the doctrine of sovereign immunity for:
(a) interest received, and
(b) gains from the disposal of,
interest bearing debt issued by Entity B?
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 [1981] 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 wholly-owned by the government.
In view of the above, it is considered that Entity A meets the condition that the person making the investment (and therefore deriving the income) is a foreign government or agency of the government.
Condition 2 - that the moneys invested are and will remain government moneys
Entity A has, and will only receive money from the government, government agencies, or other entities wholly-owned by the government. Further, on liquidation of Entity A, all the moneys will be repaid to the government, government agencies, or other entities wholly-owned by the government.
In view of the above, it is considered that the moneys invested by Entity A, are and will remain, the moneys of the foreign government. Therefore, this condition is satisfied.
Condition 3 - that the income or gain is being derived from a non-commercial activity
Generally, interest income derived by a foreign government or by any other body exercising governmental functions from interest bearing investments is not considered to be income derived from a commercial operation or activity.
In determining whether Entity A's investment into Entity B constitutes non-commercial activity, it is necessary to consider the nature and extent of the investment.
Based on the facts above, it is accepted that the investment into Entity B by the Entity A by way of unsecured interest bearing debt is a non-commercial activity.
Conclusion
As discussed above, the three conditions in relation to Entity A's investment in debt issued by Entity B are satisfied. Accordingly, pursuant to the doctrine of common law doctrine of sovereign immunity, Entity A will be immune from income and withholding tax on interest received, and gains from the disposal of, interest bearing debt issued by Entity B.