Edited version of your written advice

Authorisation Number: 1051420005393

Date of advice: 31 August 2018

Ruling

Subject: Sovereign immunity

Question 1

Is Central Bank A immune from income tax and withholding tax under the common law doctrine of sovereign immunity on any income and capital gains derived from its current investments in Australian equity securities (including investments in real estate investment trusts (REITs)) as listed in Appendix 1 of the relevant facts and circumstances of this Ruling?

Answer

Yes.

Question 2

Is Central Bank A immune from liability to income tax and withholding tax under the common law doctrine of sovereign immunity on any income and capital gains derived from its future equity investments in Australia (including investments in REITs) when made within the parameters contained in paragraph 19 of the relevant facts and circumstances of this Ruling?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The relevant facts and circumstances of the scheme are as follows:

Central Bank A

1. Central Bank A is the Central Bank of Country A, established by an Act (the Act) in Country A.

2. The principal object of Central Bank A is to promote monetary stability and financial stability conducive to the sustainable growth of the economy of Country A. The primary functions of the Central Bank A are as follows:

● formulate and conduct monetary policy in Country A

● issue currency in Country A

● regulate and supervise financial institutions which are subject to laws enforced by Central Bank A

● provide oversight over money and foreign exchange markets

● exercise oversight over payment systems

● promote a sound, progressive and inclusive financial system

● hold and manage foreign reserves of Country A

● promote an exchange rate regime consistent with the fundamentals of the economy, and

● act as financial advisor, banker, and financial agent of the government.

3. Under the Act, there shall be a General Reserve Fund which shall include the amount standing to the credit of the General Reserve Fund.

4. At the end of each financial year, the net profit of Central Bank A is determined after allowing for the expenses of operations. In accordance with the Act, Central Bank A may transfer any amount from the net profit to any contingency reserve, fluctuation reserve or such other reserve as the Board deems prudent or necessary.

5. The net profit of Central Bank A less any unrealised gains and after transfers under the Act shall be dealt with as follows:

a. Such amount as a Minister of Country A, on the recommendation of the Board, so determines shall be placed to the credit of the General Reserve Fund, and

b. The remainder shall be paid to the Government.

6. The non-commercial foreign investments are carried out to derive income to meet one of Central Bank A’s primary functions under the Act. The Act states that Central Bank A shall at all times hold and manage foreign reserves for the purposes of giving effect to its objects, carrying out its functions under the Act, and maintaining public confidence.

7. The Act states that foreign reserves held and managed consist of the following:

● gold or other precious metals

● foreign currency

● securities of, or guaranteed by governments or international financial institutions

● any readily available drawing facility of such international financial institutions

● bills of exchange, and

● other securities and financial instruments including derivatives.

8. The following table provides how the income supports the central bank functions.

9. Central Bank A is a tax resident of Country A and is exempt from income and supplementary income tax.

Australian investments

Investment management

10. Central Bank A’s investments in Australia are funded from the foreign reserves of the country and managed by the Internal Fund Managers (IFM) and External Fund Managers (EFM). IFM refers to BNM’s staff whose roles are to manage investment strategy of the country’s foreign reserves with the objectives to safeguard its value and optimise its returns. EFM assumes the role of an investment manager for BNM. The relationship between the EFM and BNM are governed by a Discretionary Investment Management Agreement.

11. Central Bank A’s investment mandates to both EFM and IFM are managed against a specified benchmark and intended for medium to long-term investment objectives. Nevertheless, for the purpose of portfolio rebalancing, to outperform the benchmark and meeting income targets, the fund managers are allowed to buy and sell shares/securities or to place and uplift deposits as necessary to meet these objectives. This activity is not for the purpose of making a commercial profit from buying and selling of securities as the investments are not intended to compete with private entities but to carry out its duty as a central bank as defined the Act.

12. There are no interposed entities in Central Bank A’s investments into Australia.

Current Australian investments

13. The current investments in Australian equities (including investments in REITs) are listed in Appendix 1 of the relevant facts and circumstances of this Ruling.

14. All of the Australian investments currently held by Central Bank A meet the following characteristics:

a. Listed on the Australian Securities Exchange (ASX) or another recognised stock exchange

b. Central Bank A holds less than 10% of the equity securities of the issuer

c. Neither Central Bank A nor any related party (including EFM) has involvement in the day to day management of the issuing entity’s business

d. Neither Central Bank A nor any related party (including EFM) has rights to representation on the board of an equity issuer, which includes the board of the corporate trustee of a unit trust in which Central Bank A has acquired units

e. Neither Central Bank A nor any related party (including EFM) has rights to representation on any investor representative or advisory committee (or similar) of any equity issuer, and

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

15. Central Bank A receives dividends and will make gains from the disposal of shares in the Australian equities.

16. Central Bank A receives trust distributions and will make gains from the disposal of units in the Australian REITs.

Future Australian investments

17. Central Bank A will invest in Australian equity investments (including investments in REITs) subject to the following parameters:

a. Contained within Central Bank A’s approved list of Australian equities and REITs (listed in Appendix 2 of the relevant facts and circumstances of this Ruling)

b. Listed on the Australian Securities Exchange (ASX) or another recognised stock exchange

c. Central Bank A holds less than 10% of the equity securities of the issuer

d. Neither Central Bank A nor any related party (including EFM) has involvement in the day to day management of the issuing entity’s business

e. Neither Central Bank A nor any related party (including EFM) has rights to representation on the board of an equity issuer, which includes the board of the corporate trustee of a unit trust in which Central Bank A has acquired units

f. Neither Central Bank A nor any related party (including EFM) has rights to representation on any investor representative or advisory committee (or similar) of any equity issuer, and

g. Central Bank A only holds rights to vote as a shareholder or unitholder (as the case may be) in proportion to its equity interest in the relevant entity.

Appendices to the relevant facts and circumstances

Appendix 1 – Current Australian equity investments (including investments in REITs) as at 30 June 20XX

Appendix 1 lists Central Bank A’s current Australian equity investments.

Appendix 2 – Future Australian investments

Appendix 2 lists Central Bank A’s approved list of Australian equities (including approved REITs).

Relevant legislative provisions

N/A

Reasons for decision

Question 1

Is Central Bank A immune from income tax and withholding tax under the common law doctrine of sovereign immunity on any income and capital gains derived from its current investments in Australian equity securities (including investments in REITs) as listed in Appendix 1 of the relevant facts and circumstances of this Ruling?

Detailed Reasoning

Sovereign immunity background

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 monies invested are and will remain government monies, 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: A foreign government or agency of a foreign government

Central Bank A is the Central Bank of Country A, established by an Act in Country A.

The principal object of Central Bank A is to promote monetary stability and financial stability conducive to the sustainable growth of the economy in Country A.

Whilst Central Bank A is not itself a foreign government it does 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 of Country A.

In view of the above, it is considered that Central Bank A is an agency of a foreign government.

Consequently, condition 1 is satisfied.

Condition 2: the monies being invested are and will remain government monies

Under the Act, there shall be a General Reserve Fund which shall include the amount standing to the credit of the General Reserve Fund.

At the end of each financial year, the net profit of Central Bank A is determined after allowing for the expenses of operations. In accordance with the Act, Central Bank A may transfer any amount from the net profit to any contingency reserve, fluctuation reserve or such other reserve as the Board deems prudent or necessary.

The net profit of Central Bank A less any unrealised gains and after transfers under the Act shall be dealt with as follows:

a. Such amount as a Minister of Country A, on the recommendation of the Board, so determines shall be placed to the credit of the General Reserve Fund, and

b. The remainder shall be paid to the Government.

The investment income earned by Central Bank A will increase the foreign reserves amount held by Central Bank A. It will be reinvested as part of the mandates in managing Country A’s foreign reserves and/or will be utilised to support Central Bank A’s general functions.

In view of the above, it is considered that the monies being invested by Central Bank A are and will remain government monies.

Consequently, condition 2 is satisfied.

Condition 3: The income or gain is being derived from a non-commercial activity

As noted in ATO ID 2002/45, 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 will 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.

In all circumstances, consideration will be given to factors relating to the influence or control potentially able to be exercised by the investor (or a related party/associate of the investor) in relation to the investment. This includes (but is not limited to) any potential influence or control in relation to day to day management and key business, strategy and financial decisions.

Current Australian investments

Central Bank A’s current Australian equity investments (including investments in REITs) are detailed in Appendix 1 of the relevant facts and circumstances of this Ruling.

The following factors are relevant in determining whether Central Bank A’s current equity investments in Australia are commercial activities:

● Listed on the Australian Securities Exchange (ASX) or another recognised stock exchange

● Central Bank A holds less than 10% of the equity securities of the issuer

● Neither Central Bank A nor any related party (including EFM) has involvement in the day to day management of the issuing entity’s business

● Neither Central Bank A nor any related party (including EFM) has rights to representation on the board of an equity issuer, which includes the board of the corporate trustee of a unit trust in which Central Bank A has acquired units

● Neither Central Bank A nor any related party (including EFM) has rights to representation on any investor representative or advisory committee (or similar) of any equity issuer, and

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

In view of the above, it is considered that the current investments held by Central Bank A in Australian equities (including investments in REITs) are passive and non-commercial.

Consequently, condition 3 is satisfied.

Conclusion

As the three conditions have been satisfied, Central Bank A is immune from income tax and withholding tax on all income and gains derived from the investments detailed in Appendix 1 of this Ruling pursuant to the common law doctrine of sovereign immunity.

Question 2

Is Central Bank A immune from liability to income tax and withholding tax under the common law doctrine of sovereign immunity on any income and capital gains derived from its future equity investments in Australia (including investments in REITs) when made within the parameters contained in paragraph 19 of the relevant facts and circumstances of this Ruling?

Detailed Reasoning

Sovereign immunity background

Refer to detailed reasoning in Question 1.

Condition 1: A foreign government or agency of a foreign government

As indicated in Question 1, it is accepted that Central Bank A are an agency of the Government of Country A, and therefore condition 1 is satisfied.

Condition 2: the monies being invested are and will remain government monies

As indicated in Question 1, it is accepted that the monies being invested are and will remain government monies, and therefore condition 2 is satisfied.

Condition 3: The income or gain is being derived from a non-commercial activity

Refer to detailed reasoning in Question 1.

Future Australian investments

Central Bank A will invest in Australian equity investments (including investments in REITs).

The following factors are relevant in determining whether Central Bank A’s future equity investments in Australia are commercial activities:

● Contained within Central Bank A’s approved list of Australian equities and REITs (listed in Appendix 2 of the relevant facts and circumstances of this Ruling)

● Listed on the Australian Securities Exchange (ASX) or another recognised stock exchange

● Central Bank A holds less than 10% of the equity securities of the issuer

● Neither Central Bank A nor any related party (including EFM) has involvement in the day to day management of the issuing entity’s business

● Neither Central Bank A nor any related party (including EFM) has rights to representation on the board of an equity issuer, which includes the board of the corporate trustee of a unit trust in which Central Bank A has acquired units

● Neither Central Bank A nor any related party (including EFM) has rights to representation on any investor representative or advisory committee (or similar) of any equity issuer, and

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

In view of the above, it is considered that the future investments held by Central Bank A in approved Australian equities (including investments in REITs) will be passive and non-commercial.

Consequently, condition 3 is satisfied.

Conclusion

As the three conditions have been satisfied, Central Bank A is immune from income tax and withholding tax on all income and gains derived from future Australian equity investments (including investments in REITs) when made within the parameters contained in paragraph 19 of the relevant facts and circumstances of this Ruling pursuant to the common law doctrine of sovereign immunity.