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Edited version of your written advice
Authorisation Number: 1013118509653
Date of advice: 10 November 2016
Ruling
Subject: Doctrine of sovereign immunity
Question
Will the Australian Taxation Office (ATO) impose liability to tax on the passive income derived by the entity from its Australian investments?
Answer
No
Relevant facts and circumstances
The entity is wholly owned by the Government and has been set up by the Government with the sole purpose of managing its money.
The entity on behalf of the Government has invested in portfolio holdings in Australia i.e. a shareholding of less than 10% of the total shares in each investment.
The entity has not appointed a director to the board of directors of any Australian investments and does not have the ability to control or influence any Australian investment.
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 delineated 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. Each of these conditions are discussed below.
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.
The entity is wholly owned by the Government and has been set up by the Government with the sole purpose of managing its money.
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, it is considered that the entity it is a foreign state or a separate entity of a foreign state.
The monies being invested in the scheme are and will remain government monies
Based on the facts, it is considered that the monies being invested by the entity in the scheme are and will remain government monies.
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.
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. There also must be no directors on the board of directors of the company and no ability to control or influence the company's board of directors.
The entity on behalf of the Government has invested in portfolio holdings in Australia i.e. a shareholding of less than 10% of the total shares in each investment.
The entity has not appointed a director to the board of directors of any Australian investments and does not have the ability to control or influence any Australian investment.
In view of the above, it is considered that the entity's Australian investments on behalf of the Government are non-commercial.
Conclusion
As discussed above, the three conditions in relation to the entity's Australian investments on behalf of the Government as listed in Appendix 1 are satisfied.
Accordingly, the ATO will not impose liability to tax on the passive income derived by the entity from its Australian investments.