Edited version of your written advice

Authorisation Number: 1051436242168

Date of advice: 4 October 2018

Ruling

Subject: Sovereign immunity

Question

Is the Foreign Government Department (FGD) immune from liability to income tax and withholding tax under the common law doctrine of sovereign immunity on any interest income derived from its interest-bearing bank deposits in Australia?

Answer

Yes.

This ruling applies for the following period:

1 July 2018 to 30 June 2019

The scheme commences on:

1 July 2018

Relevant facts and circumstances

The FGD

1. The FGD is one of the central agencies of the government of a Foreign Country.

2. The FGD is mandated to oversee and coordinate the effective management of public finance and resources in the Foreign Country.

The FGD’s Australian bank deposits

3. The FGD is proposing to allocate some of its deposited funds into interest-bearing accounts; some at term and some on demand and denominated in either Australian dollars (AUD) or Foreign Country dollars (X) with an Australian bank.

4. The deposited funds were generated from normal government revenue activities.

5. Interest income earned on the deposited funds will be retained in consolidated revenues and form part of the FGD’s cash reserves.

6. The FGD does not carry out any commercial activities in Australia.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 128B

Income Tax Assessment Act 1997 section 4-1

Reasons for decision

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 / 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 provide immunity from income and/or withholding tax in respect of Australian sourced income and gains, 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 being invested are and will remain government moneys, and

3. that the income is being derived from a non-commercial activity.

If these three conditions are satisfied, the Australian sourced income or gains will not be subject to Australian income and/or withholding taxes.

Condition 1: Foreign government or an agency of a foreign government

Based on these facts and circumstances, it is accepted that the FGD is part of the Government of a foreign country.

As such, the condition that the person making the investment (and therefore deriving the income) is a foreign government or an agency of a foreign government is satisfied.

Condition 2: Moneys are and will 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 moneys being invested are and will remain government moneys.

The moneys invested by the FGD were generated from normal government revenue activities and interest income earned on the deposited funds will be retained in consolidated revenues and form part of the FGD’s cash reserves.

Consequently, there is a clear connection between the FGD’s interest-bearing bank deposits in Australia and the foreign country. The funds invested have been sourced from the reserves of the foreign government and any income flowing from the investment will be beneficially owned by the foreign government. As such, it is accepted that the moneys invested are and will remain government moneys.

Condition 3: Non-commercial transaction

When determining whether the doctrine of sovereign immunity applies to provide immunity for Australian sourced income and gains from Australian income tax and/or withholding tax, it is necessary to establish that the income or gain is being derived from a non-commercial activity.

As noted in ATO Interpretive Decision ATO ID 2002/45 Withholding Tax: Sovereign Immunity (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.

On the other hand, income derived by a foreign government or by any other body exercising governmental functions from interest bearing investments or investments in equities is generally not considered to be income derived from a commercial operation or activity.

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.

In relation to this case, the FGD has deposited funds with an Australian bank which bear interest income.

Based on the facts and circumstances, the Commissioner accepts that the interest income derived by the FGD from its interest-bearing bank deposits in Australia is from a non-commercial activity.

Therefore, condition 3 has been satisfied.

Conclusion

The FGD is immune from income tax and withholding tax under the common law doctrine of sovereign immunity on any income and capital gains derived from its interest-bearing bank deposits in Australia.