Edited version of private advice

Authorisation Number: 1051554321891

Date of advice: 2 September 2019

Ruling

Subject: Sovereign immunity and the transitional measures

Question

Is the ordinary and statutory income derived by Entity A as a return on the units it acquired in Entity B before 27 March 2018 not assessable and not exempt income due to the operation of section 880-5 of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A 1997)?

Answer

Yes.

This ruling applies for the following periods:

1 July 2019 to 30 June 2026

The scheme commences on:

1 July 2019

Relevant facts and circumstances

Scheme specified in original private ruling

Entity A

1.       Entity A is a company incorporated in a foreign country.

2.       Entity A is a resident of the foreign country for the purposes of their Income Tax Act.

3.       Entity A is exempt from income tax in the foreign country.

4.       The shares in Entity A are legally and beneficially owned by the Crown. The purchase of the shares in Entity A was funded from the general revenue raised through taxes and other levies.

5.       Entity A is a special purpose entity incorporated for the sole purpose of holding the investments in Entity B. The subscription proceeds for the acquisition of shares in Entity A have been utilised to make these investments.

Corporation A

6.       Corporation A provides investment management services for the Crown and certain other entities designated by the Finance Minister of the foreign country.

7.       Corporation A is authorised to make investment decisions in respect of certain funds which have been specifically allocated for investment.

8.       In accordance with its fiduciary duties, Corporation A is legally obliged to act in the best interests of the Client.

9.       All investments made by Corporation A are made in the name of the Crown acting for its own account or as trustee or bare nominee for the Client. Investments may also be made through special purpose vehicles that are wholly owned by the Crown, such as Entity A.

10.    Corporation A acts as investment manager for Entity A with respect to the investments made by Entity A in Entity B.

Entity B

11.    Company C is an Australian investment management and advisory service firm that establishes and creates value from certain assets.

12.    Entity B was established by Company C to invest in a portfolio of assets in Australia and New Zealand. Entity B comprises of two (2) Australian unit trusts, the units of which are stapled.

13.    Company D is a wholly owned subsidiary of Company C. Company D acts as the asset and fund manager for Entity B. Company D has entered into an asset and fund management agreement with Company E which sets out the management services it provides to Entity B.

14.    Company E is the trustee of both Australian unit trusts.

15.    First unit trust has acquired land that is held for the purpose of deriving rental income. The land is leased to other entities, including the second unit trust, on an arm's length basis.

16.    First unit trust is not a public trading trust under Division 6C of the Income Tax Assessment Act 1936 (ITAA 1936).

17.    Second unit trust undertakes operations on leased land.

Entity B Advisory Boards

18.    In accordance with the Fund Constitution, Company E has established Advisory Boards composed of a number of investors with the highest capital committed for Entity B.

19.    Meetings of the Advisory Boards may be held annually, or when called by Company E or a majority of the Advisory Board, to provide such advice and counsel on matters within the scope and authority of the Advisory Boards as requested by Company E in connection with Entity B's investments, potential conflicts of interest and other Company B matters.

20.    Company E retains ultimate responsibility for all decisions relating to the operation and management of Entity B, including investment decisions.

Entity B Members Resolutions

21.    In accordance with the Fund Constitution, various matters are required to be voted on and approved by Members.

22.    Resolutions requiring unanimous approval by Members include:

a.     Extending the term of the scheme

b.     Amending specific terms of the Constitution

c.      Streaming different types of income

d.     Winding up the scheme.

Entity A investment into Entity B

23.    Corporation A, in its capacity as investment manager for Entity A, has acquired less than 10% of the units in Entity B. Entity A is the legal and beneficial owner of the units in Entity B.

24.    Entity A will derive interest, dividends, fund payments and capital gains from its investment in Entity B.

25.    Corporation A, in its capacity as investment manager for another entity, has acquired a percentage of the units in Entity B. The other entity is the legal and beneficial owner of the units in Entity B.

Side Letter regarding Entity B as amended 21 March 2018 (Amended Side Letter)

26.    The Amended Side Letter provides further detail as to, amongst other matters, the rights of both Entity A and the other entity for who Corporation A acts as investment manager in respect of each entity's investment in Entity B. The parties to the Amended Side Letter are Entity A, Company D and the other entity.

Entity B Advisory Boards - Entity A's rights

27.    Entity A has irrevocably waived any right or entitlement to appoint a member or observer to Entity B's Advisory Boards, or any other committee of investors that is similar to the Advisory Boards, in accordance with the Amended Side Letter.

Entity B Members Resolutions - Entity A's rights

28.    Entity A has the capacity to block Unanimous Resolutions.

Current scheme

Entity A

29.    Entity A is a company incorporated in a foreign country.

30.    Entity A is a resident of the foreign country for the purposes of their Income Tax Act.

31.    Entity A is exempt from income tax in the foreign country.

32.    The shares in Entity A are legally and beneficially owned by the Crown. The purchase of the shares in Entity A was funded from the general revenue raised through taxes and other levies.

33.    Entity A is a special purpose entity incorporated for the sole purpose of holding the investments in Entity B. The subscription proceeds for the acquisition of shares in Entity A have been utilised to make these investments.

Corporation A

34.    Corporation A provides investment management services for the Crown and certain other entities designated by the Finance Minister of the foreign country.

35.    Corporation A is authorised to make investment decisions in respect of certain funds which have been specifically allocated for investment.

36.    In accordance with its fiduciary duties, Corporation A is legally obliged to act in the best interests of the Client.

37.    All investments made by Corporation A are made in the name of either the Crown or Corporation A acting for their own account or as trustee or bare nominee for the Client. Investments may also be made through special purpose vehicles that are wholly owned by the Crown, such as Entity A.

38.    Corporation A acts as investment manager for Entity A with respect to the investments made by Entity A in Entity B.

Entity B

39.    Company C is an Australian investment management and advisory service firm that establishes and creates value from certain assets.

40.    Entity B was established by Company C to invest in a portfolio of assets in Australia and New Zealand. Entity B comprises of two (2) Australian unit trusts, the units of which are stapled.

41.    Company D is a wholly owned subsidiary of Company C. Company D acts as the asset and fund manager for Entity B. Company D has entered into an asset and fund management agreement with Company E which sets out the management services it provides to Entity B.

42.    Company E is the trustee of both Australian unit trusts.

43.    First unit trust has acquired land that is held for the purpose of deriving rental income. The land is leased to other entities, including the second unit trust, on an arm's length basis.

44.    First unit trust is not a public trading trust under Division 6C of the ITAA 1936.

45.    Second unit trust undertakes operations on leased land.

Entity B Advisory Boards

46.    In accordance with the Fund Constitution, Company E has established Advisory Boards composed of a number of investors with the highest capital committed for Entity B.

47.    Meetings of the Advisory Boards may be held annually, or when called by Company E or a majority of the Advisory Board, to provide such advice and counsel on matters within the scope and authority of the Advisory Boards as requested by Company E in connection with Entity B's investments, potential conflicts of interest and other Company B matters.

48.    Company E retains ultimate responsibility for all decisions relating to the operation and management of Entity B, including investment decisions.

Entity B Members Resolutions

49.    In accordance with the Fund Constitution, various matters are required to be voted on and approved by Members.

50.    Resolutions requiring unanimous approval by Members include:

a.     Extending the term of the scheme

b.     Amending specific terms of the Constitution

c.      Streaming different types of income A

d.     Winding up the scheme.

Entity A investment into Entity B

51.    Corporation A, in its capacity as investment manager for Entity A, has acquired less than 10% of the units in Entity B. Entity A is the legal and beneficial owner of the units in Entity B.

52.    Entity A will derive interest, dividends, fund payments and capital gains from its investment in Entity B.

53.    Corporation A, in its capacity as investment manager for another entity, has acquired a percentage of the units in Entity B. The other entity is the legal and beneficial owner of the units in Entity B.

Side Letter regarding Entity B as amended 21 March 2018 (Amended Side Letter)

54.    The Amended Side Letter provides further detail as to, amongst other matters, the rights of both Entity A and the other entity for who Corporation A acts as investment manager in respect of each entity's investment in Entity B. The parties to the Amended Side Letter are Entity A, Company D and the other entity.

Entity B Advisory Boards - Entity A's rights

55.    Entity A has irrevocably waived any right or entitlement to appoint a member or observer to Entity B's Advisory Boards, or any other committee of investors that is similar to the Advisory Boards, in accordance with the Amended Side Letter.

Entity B Members Resolutions - Entity A's rights

56.    Entity A has the capacity to block Unanimous Resolutions.

Additional facts

57.    Entity A acquired its units in Entity B before 27 March 2018.

58.    Entity A applied for a private ruling in relation to its investments in Entity B before 27 March 2018.

59.    The Commissioner made a private ruling before 1 July 2026 confirming income derived from Entity A's units in Entity B was not subject to income tax or withholding tax under the doctrine of sovereign immunity.

60.    The private ruling that issued to Entity A before 1 July 2026 applied during at least part of the period starting on 27 March 2018 and ending before 1 July 2026.

Assumptions

1.       Investors in Entity A will vote to extend the fund life in the future.

2.       A current investor will exit Entity B and as a result, Entity A & another entity will each acquire additional units.

3.       This acquisition will not cause Entity A to hold more than 10% of the units in Entity B.

4.       The acquisition will not result in Entity A obtaining rights to appoint any member or observer to any Entity B Advisory Board.

5.       The acquisition will result in Entity A obtaining additional rights to cast votes at unitholder meetings, but it will not result in Entity A holding sufficient votes to pass or block any unitholder resolution that it could not pass or block with its existing percentage interest.

Relevant legislative provisions

Income Tax (Transitional Provisions) Act 1997 section 880-5

Reasons for decision

Background

Schedule 4 of the Treasury Laws Amendment (Making Sure Foreign Investors Pay Their Fair Share of Tax in Australia and Other Measures) Act 2019 amended the ITAA 1936 and the Income Tax Assessment Act 1997 (ITAA 1997) to improve the integrity of the income tax law to limit access to tax concessions for foreign investors by codifying and limiting the scope of the sovereign immunity tax exemption.

Section 880-1 of the IT(TP)A 1997 provides that the amendments to codify and limit the scope of the sovereign immunity tax exemption apply to the 2019-20 income year and to later income years. However, transitional rules may apply to income derived from investments of a sovereign entity held at the announcement date of the amendments (27 March 2018), subject to the satisfaction of certain requirements.

Transitional provisions

Section 880-5 of the IT(TP)A 1997 provides transitional relief for amounts of ordinary and statutory income derived by a sovereign entity where the following requirements are met:

An amount of ordinary income or statutory income of a sovereign entity for an income year is not assessable income and is not exempt income if:

(a)the amount is a return on an investment asset under a scheme; and

(b) the sovereign entity acquired the investment asset on or before 27 March 2018 under the scheme; and

(c) on or before 27 March 2018, the sovereign entity applied for a private ruling in relation to the scheme; and

(d) before 1 July 2026, the Commissioner gave the entity a private ruling confirming that income from the investment asset was not subject to income tax, or withholding tax, because of the doctrine of sovereign immunity; and

(e) the private ruling applied during at least part of the period:

(i)starting on 27 March 2018; and

(ii)ending before 1 July 2026;

regardless of whether the private ruling started to apply before 27 March 2018, or ceased to apply before 1 July 2026; and

(f)the scheme carried out is not materially different to the scheme specified in the private ruling; and

(g) the income year is:

(i)unless subparagraph (ii) applies - the 2025-26 income year or an earlier income year; or

(ii)if the last income year to which the private ruling relates is a later income year than the 2025-26 income year - that later income year, or an earlier income year.

Analysis

1. An amount of ordinary income or statutory income

Entity A will receive ordinary and/or statutory income as a return on the units it holds in Entity B.

Therefore, this requirement is satisfied.

2. Sovereign entity

A 'sovereign entity' is defined in section 880-15 of the ITAA 1997 as:

(a) a body politic of a foreign country, or a part of a foreign country;

(b) a *foreign government agency;

(c) an entity:

(i) in which an entity covered by paragraph (a) or (b) hold a *total participation interest of 100%; and

(ii) that is not an Australian resident; and

(iii) that is not a resident trust estate for the purposes of Division 6 of Part III of the ITAA 1936.

The Crown is the legal personification of the foreign country and therefore is a body politic of a foreign country, or part of a foreign country.

Entity A is a non-resident company, 100% of the total participation interests in which are held by the Crown. Based on these facts, the Commissioner accepts that Entity A is an entity that satisfies paragraph 880-15(c) of the ITAA 1997.

Therefore, Entity A is a sovereign entity.

3. A return on an investment asset under a scheme

Entity A will, via distributions, receive ordinary and/or statutory income as a return on the units it holds in Entity B under a scheme.

Therefore, this requirement is satisfied.

4. Investment asset acquired on or before 27 March 2018

Entity A acquired the units in Entity B before 27 March 2018.

Therefore, this requirement is satisfied.

It is noted the transitional provisions will not apply in respect of ordinary or statutory income received as a return on any units in Entity B acquired by Entity A after 27 March 2018. This includes those additional units contemplated in the assumptions to this Ruling.

5. Applied for a private ruling on or before 27 March 2018

Entity A applied for a private ruling in relation to its investments in Entity B before 27 March 2018.

Therefore, this requirement is satisfied.

6. Private ruling made before 1 July 2026

A private ruling was made before 1 July 2026. The Commissioner determined in this private ruling that Entity A was 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 units it held in Entity B.

Therefore, this requirement is satisfied.

7. Private ruling applied during the relevant period

The private ruling that issued to Entity A before 1 July 2026 applied during at least part of the period starting on 27 March 2018 and ending before 1 July 2026.

Therefore, this requirement is satisfied.

8. Scheme not materially different

Based on the facts and circumstances of this case, the Commissioner accepts that the scheme carried out is not materially different to the scheme specified in the original private ruling.

Therefore, this requirement is satisfied.

9. Relevant income year

The ruling period of this ruling is 1 July 2019 to 30 June 2026.

Therefore, this requirement is satisfied.

Conclusion

All of the requirements in section 880-5 of the IT(TP)A 1997 are satisfied.