Edited version of your written advice

Authorisation Number: 1013114082095

Date of advice: 27 October 2016

Ruling

Subject: Sovereign Immunity

Question 1

Is the foreign bank (the Bank) immune from income tax and withholding tax under the common law doctrine of sovereign immunity on any income and capital gains derived from:

a) its investments in Australian equity securities (including investments in unit trusts) held at a date in 20XX outlined in the table attached to the Private Ruling Application

b) its investments in Australian debt securities held at a date in 20XX outlined in the table attached to the Private Ruling Application

c) its future investments in Australian equity securities (including investments in unit trusts) inside the parameters contained in paragraph 14 of the scheme to which this Ruling relates, and

d) its future investments in Australian debt securities inside the parameters contained in paragraph 16 of the scheme to which this Ruling relates.

Answer

Yes.

This ruling applies for the following periods:

Year ending 31 March 20XX

Year ending 31 March 20XX

Year ending 31 March 20XX

The scheme commences on:

20XX calendar year

Relevant facts and circumstances

The Bank

1. In accordance with the Law, the Bank is the central bank of the foreign government. The Bank shall, under the leadership of the foreign government, formulate and implement monetary policy, prevent and mitigate financial risks, and maintain financial stability.

2. As per the Law, the objective of the monetary policy is to maintain the stability of the value of the currency and thereby promote economic growth.

3. Pursuant to the Law the Bank assumes various non-commercial functions commonly assumed by a central bank.

4. The Bank obtains its operational costs out of the treasury of the foreign government, according to the budgetary legislation of the foreign government.

5. The Law provides that all capital of the Bank is funded by the foreign government and owned by the foreign government.

6. All income or gains, being income or gains from the investments of the foreign exchange reserves of the foreign government, belongs to the foreign government, and will form part of the balance of payment of the foreign government.

7. As an integral part of the foreign government, the Bank is the sole beneficial owner of all the assets under its custody.

Investment activities of the Bank

8. In performing its official responsibilities as a central bank, the Bank invests a portion of the foreign exchange reserves of the foreign government in investments made in Australia or with Australian residents, being:

a. bank deposits, deposits in banks in the interbank market, debt instruments

b. equities including depositary receipts

c. management investment funds or unit trusts, and

d. foreign exchange or any other financial or derivative transactions.

9. The Bank's investments in Australian equity securities at a date in 20XX have been provided in table form. This table forms part of the scheme to which this ruling relates.

10. The Bank's investments in Australian debt securities at a date in 20XX have been provided in table form. This table forms part of the scheme to which this ruling relates.

11. Other than the investments outlined above, the Bank has no other investments in Australia.

12. The Bank is not in the business of trading securities.

13. All of the equity securities the Bank held at a date in 20XX have the following characteristics:

a. Listed on the Relevant Stock Exchange (RSX)

b. The Bank holds less than XX% of the equity securities of the issuer

c. The Bank does not have involvement in the day to day management of the issuing entity's business

d. The Bank does not have the right to representation on the board of an equity issuer, which includes the board of the corporate trustee of a unit trust in which the Bank has acquired units

e. The Bank does not have the right to representation on any investor representative or advisory committee (or similar) of any equity issuer, and

f. The Bank only has rights to vote as a shareholder or unitholder (as the case may be) in proportion to its equity interest in the relevant entity.

14. The Bank will invest directly in equity securities in Australia subject to the following parameters:

a. All equity securities will be listed on the RSX or another recognised stock exchange

b. The Bank will acquire less than XX% of the equity securities of any issuer

c. The Bank will not have involvement in the day to day management of any issuing entity's business

d. The Bank will not have the right to representation on the board of an equity issuer, which includes the board of the corporate trustee of a unit trust in which the Bank has acquired listed units

e. The Bank will not have the right to representation on any investor representative or advisory committees (or similar) of any equity issuer, and

f. The Bank will only have rights to vote as a shareholder or unitholder (as the case may be) in proportion to its equity interest in the relevant entity.

15. All of the debt securities the Bank held at a date in 20XX have the following characteristics:

a. The debt securities provide no rights to representation, no voting rights, and no ability to influence the security issuer or its business

b. All debt securities have been issued by either the Australian Government, an Australian State Government owned issuer or a corporate entity listed on the RSX or another recognised stock exchange

c. The debt securities have broad financial covenants, and do not allow the Bank to have any influence or control over the debt issuer's management. The covenants are typically industry standard and include leverage, compliance with laws, and reporting

d. The securities do not provide any right or option for conversion to equity at any time, and

e. The Bank has not negotiated the terms of the debt securities and they have been purchased on a 'take it or leave it' basis as part of a public offering.

16. The Bank will invest directly in debt securities in Australia subject to the following parameters:

a. The debt security will provide no rights to representation, no voting rights, and no ability to influence the security issuer or its business

b. All debt securities will be issued by either the Australian Government, an Australian State Government owned issuer or a corporate entity listed on the RSX or another recognised stock exchange

c. The debt securities will have broad financial covenants, and will not allow the Bank to have any influence or control over the debt issuer's management. The covenants will be typically industry standard and include leverage, compliance with laws, and reporting

d. The securities will not provide any right or option for conversion to equity at any time

e. The Bank will not negotiate the terms of the debt securities and they will be purchased on a 'take it or leave it' basis as part of a public offering.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 128B

Income Tax Assessment Act 1997 section 4-1

Reasons for decision

Question

Is the Bank immune from income tax and withholding tax under the common law doctrine of sovereign immunity on any income and capital gains derived from:

a) its investments in Australian equity securities (including investments in unit trusts) held at a date in 20XX outlined in the table attached to the Private Ruling Application

b) its investments in Australian debt securities held at a date in 20XX outlined in the table attached to the Private Ruling Application

c) its future investments in Australian equity securities (including investments in unit trusts) inside the parameters contained in paragraph 14 of the scheme to which this Ruling relates, and

d) its future investments in Australian debt securities inside the parameters contained in paragraph 16 of the scheme to which this Ruling relates.

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 [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 - Is the person making the investment (and therefore deriving the income) a foreign government or an agency of a foreign government?

As the Bank is not a foreign government, it is required to be an agency of a foreign government in order to fulfil Condition 1.

While the term 'agency of a foreign government' is not defined, subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a 'foreign government agency' is:

(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.

In the context of sovereign immunity, it is considered that an entity which is wholly owned by a foreign government is an 'authority' where that entity is performing a function for the public advantage and executes a function in the public interest and not a private body established exclusively for private profit.

This is consistent with the judicial decisions in cases such as the High Court decisions in Committee of Direction of Fruit Marketing v Australian Postal Commission (1980) 144 CLR 577, Commissioner of Taxation v Bank of Western Australia; State Bank of New South Wales (1995) 96 ATC 4009 and SGH Ltd v Commissioner of Taxation (2002) ATC 4366, which considered the term 'authority' in the context of the State. The courts held that if a corporation is discharging governmental functions for the State, then the corporation is the State. On the other hand, if the intention is for the corporation to perform its functions independently of, and not as an instrument of the State, the corporation is not the State.

The Bank is the central bank of the foreign country, as stated in the Law.

The Law states that the Bank shall act consistently with the objectives set by the foreign government.

The Law states that the person(s) in control of the day to day activities of the Bank shall be appointed by government officials of the foreign government.

Based on the facts, it is considered that the Bank, which was established by the foreign government, is an 'authority' as it is performing a function in the interests of the public.

Accordingly, the Bank is an 'agency of a foreign government'.

Given the above factors, the Commissioner accepts that the Bank satisfies this requirement.

Condition 2 - Are the moneys being invested government moneys and will they remain government moneys?

In line with the principle that sovereign immunity applies to foreign states performing only governmental functions, an entity claiming sovereign immunity must establish that the monies being invested are and will remain government monies.

The Law states that all capital of the Bank is funded by the foreign government and owned by the foreign government.

All income or gains from the investments that are the subject of this ruling, being income or gains from the investments of the foreign exchange reserves of the foreign government, belong to the foreign government.

It is considered that the money being invested by the Bank is and will remain government money.

Given the above factors, the Commissioner accepts that the Bank satisfies this requirement.

Condition 3 - Is the income derived from non-commercial activity?

Whether an operation or activity is a commercial transaction will depend on the facts of each case. As a guide, a commercial transaction is generally considered to be an activity concerned with the trading of goods and services, such as buying, selling, bartering, transportation, and includes the carrying on of a business. A passive investment is more likely to be considered a non-commercial transaction.

In relation to the ownership of shares in a company or other similar equity interests, there would be instances where the extent of the holding gives rise to questions as to whether the interests constitute a passive investment or a commercial investment. A determination of commerciality will depend on the particular circumstances. In ATO Interpretative Decision ATOID 2002/45 Sovereign Immunity, a holding of less than XX% is generally considered to be indicative of a passive investment.

In all circumstances, consideration will be given to factors relating to the influence and control, particularly in relation to day to day management and key business, strategy and financial decisions, which is exercised by the investor in relation to the acquired company or similar equity investment.

Current investments

The Bank currently holds a number of investments in Australia. These consist of;

● Debt securities

● Listed equities, and

● Real property investment vehicles such as listed real estate investment trusts.

A comprehensive list of investments held at a date in 20XX is attached to the private ruling application.

The following factors are considered relevant as to determining whether the Bank's investments in Australia are commercial transactions:

Equity investments

● Listed on the Relevant Stock Exchange (RSX) or another recognised stock exchange

● The Bank holds less than XX% of the equity securities of the issuer

● The Bank has no involvement in the day to day management of the issuing entity's business

● The Bank has no right to representation on the board of an equity issuer, which includes the board of the corporate trustee of a unit trust in which the Bank has acquired units

● The Bank has no right to representation on any investor representative or advisory committee (or similar) of any equity issuer, and

● The Bank only has rights to vote as a shareholder or unitholder (as the case may be) in proportion to its equity interest in the relevant entity.

Debt investments

● The debt securities provide no rights to representation, no voting rights, and no ability to influence the security issuer or its business

● All debt securities have been issued by either the Australian Government, an Australian State Government owned issuer or a corporate entity listed on the RSX or another recognised stock exchange

● The debt securities have broad financial covenants, and do not allow the Bank to have any influence or control over the debt issuer's management. The covenants are typically industry standard and include leverage, compliance with laws, and reporting

● The securities do not provide any right or option for conversion to equity at any time, and

● The Bank has not negotiated the terms of the debt securities and they have been purchased on a 'take it or leave it' basis as part of a public offering.

The above factors demonstrate that the Bank's current investments are passive investments, and therefore non-commercial activities, satisfying this condition.

Further investments

The Bank will make further investments into Australia in the future. These investments are subject to the following parameters:

Equity investments

● All equity securities will be listed on the RSX or another recognised stock exchange

● The Bank will acquire less than XX% of the equity securities of any issuer

● The Bank has no involvement in the day to day management of any issuing entity's business

● The Bank will not have the right to representation on the board of an equity issuer, which includes the board of the corporate trustee of a unit trust in which the Bank has acquired listed units

● The Bank will not have the right to representation on any investor representative or advisory committees (or similar) of any equity issuer, and

● The Bank will only have rights to vote as a shareholder or unitholder (as the case may be) in proportion to its equity interest in the relevant entity.

Debt investments

● The debt security will provide no rights to representation, no voting rights, and no ability to influence the security issuer or its business

● All debt securities will be issued by either the Australian Government, an Australian State Government owned issuer or a corporate entity listed on the RSX or another recognised stock exchange

● The debt securities will have broad financial covenants, and will not allow the Bank to have any influence or control over the debt issuer's management. The covenants will be typically industry standard and include leverage, compliance with laws, and reporting

● The securities will not provide any right or option for conversion to equity at any time, and

● The Bank will not negotiate the terms of the debt securities and they will be purchased on a 'take it or leave it' basis as part of a public offering.

The parameters given above as to The Bank's future investments into Australia demonstrate they will be passive investments, and therefore satisfy the requirement of being a non-commercial activity.

Given the above factors, the Commissioner accepts that the Bank satisfies this requirement.

Conclusion

As the three conditions have been satisfied, the Bank will be immune from income taxes and withholding taxes on all income and gains it derives from its current investments in Australia, as well as its proposed investments subject to the detailed parameters, under the common law doctrine of sovereign immunity.