Edited version of private advice

Authorisation Number: 1051570478217

Date of advice: 26 August 2019

Ruling

Subject: Sovereign immunity and the transitional measures

Question

Is the ordinary and statutory income derived by the non-resident entity as a return on investments that were acquired on or before DDMMYY not assessable income 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 period:

1 July 2019 to 30 June 2026

The scheme commences on:

1 July 2019

Relevant facts and circumstances

The scheme that is the subject of this Ruling is described below.

The non-resident entity

1. The non-resident entity is a sovereign wealth fund and was established by the Decree of the President of the foreign country.
2. The main goal of the establishment of the non-resident entity is to accumulate and efficiently manage the foreign country's revenues.
3. The non-resident entity and its assets are wholly owned by the foreign country.
4. In accordance with certain Articles of the foreign country's Statute, the non-resident entity is an extra-budgetary state institution. The non-resident entity is a legal entity and has a number of accounts at banking institutions. The non-resident entity has a seal with the foreign country's State Emblem engraved on it, as well as an appropriate stamp and letterheads.
5. The main responsibility of the non-resident entity is to ensure collection and effective management of foreign currency and other assets that are generated from the implementation of agreements signed, as well as its own activities, in the interest of citizens of the foreign country and their future generations.
6. The non-resident entity has investments in Australian companies.

Management and control of the non-resident entity

7. In accordance with Articles of the foreign country's Statute, the non-resident entity is accountable to the President of the foreign country.
8. The non-resident entity's assets are utilised in accordance with the main directions (program) approved by the President of the foreign country.
9. The Board exercises general control over the accumulation and spending of the non-resident entity's assets.
10. Members of the Board are approved by the President of the foreign country and are comprised of representatives of relevant state bodies and public organisations, as well as of other persons.
11. Every year the draft budget of the non-resident entity, having been prepared in coordination and on a consistent basis with the preparation of the draft State Budget for the foreign country, shall be submitted by the Executive Director of the foreign country to the Board, who in turn, submits it to the President of the foreign country for consideration.
12. Final coordination of the non-resident entity's budget with the State Budget shall take place after both documents comprising draft consolidated government revenues and expenditures have been considered by the President of the foreign country preceding submission of the draft State Budget submission to the Parliament.

Capital/money contributions into the non-resident entity

13. The non-resident entity's revenue sources are mainly comprised of the revenues generated from implementation of the agreements in the foreign country, as well as other agreements with state bodies and investors.
14. The non-resident entity receives ongoing contributions from a number of different sources.

Use of the non-resident entity's assets

15. Utilisation of the non-resident entity's assets shall be carried out in accordance with the program to be approved each year through the President of the foreign country.
16. The non-resident entity's assets may be used for solving the most important nationwide problems, and for construction and reconstruction of strategically significant infrastructure facilities, for the purpose of the country's socio-economic progress.
17. The non-resident entity's assets may neither be used for lending to government bodies, public and non-public enterprises (organisations), nor as collateral for debts (commitments, guarantees) or other liabilities of any entity under jurisdiction of the foreign country.
18. The non-resident entity is not in the business of money lending.

Re-establishment and Liquidation of the non-resident entity

19. Re-establishment and liquidation of the non-resident entity shall be carried out by decree by the President of the foreign country under Articles within the Regulations.
20. On liquidation or re-establishment of the non-resident entity under Articles within the Regulations, any remaining moneys and/or assets will remain assets of the government of the foreign country.

Investments

21. The non-resident entity's investment portfolio is managed in accordance with the guidelines approved by the President of the foreign country. These guidelines are set out in the rule document of the non-resident entity.
22. The guidelines set the general principles of the non-resident entity's asset management framework.
23. An Investment Policy is also produced and approved annually by the President of the foreign country. The Investment Policy defines the objectives, forecasted size, currency composition, strategic asset allocation, benchmarks and risk limits for the non-resident entity's investment portfolio.
24. All investments are held through a global custodian. An Australian banking institution is appointed as the Australian custodian. All assets are held by the bank in Australia to the order of the global custodian.
25. The non-resident entity's investment portfolio is predominantly allocated to assets denominated in different foreign currencies.
26. The non-resident entity's investment portfolio is managed by external managers. Benefits brought about by the use of external managers include market expertise, specific industry experience and regional presence adding value to the investment portfolio.
27. The Investment Policy of the external managers involved in the management of the non-resident entity's assets is reflected in their respective agreements signed between the non-resident entity and the external manager.
28. The non-resident entity's externally managed equity portfolio is rebalanced quarterly to track the World Index, including constituent weights of Australian investments. Its holding of Australian investments reflects the same proportion that the Australian investment form part of the World Index.
29. The Australian investments held by the non-resident entity on DDMMYY have the following characteristics:

(a)  Investments listed on the Australian Securities Exchange (ASX)

(b)  The non-resident entity holds less than 10% of the total investment on issue of each Australian company

(c)  The non-resident entity has no involvement in the day to day management of the business of any of the Australian companies

(d)  The non-resident entity has no right to appoint a director to the Board of Directors of any issuing Australian company

(e)  The non-resident entity has no right to representation on any investor representative or advisory committee (or similar) of any issuing Australian company

(f)   The non-resident entity has no ability to direct or influence the operation of the Australian company outside of the ordinary rights conferred by the interest held, and

(g)  The non-resident entity only holds rights to vote in proportion to its interest in the Australian company.

30. The non-resident entity acquired its assets on or before DDMMYY.
31. The non-resident entity applied for a private ruling in relation to its investments before DDMMYY.
32. The Commissioner made a private ruling before 1 July 2026 confirming income derived from the non-resident entity's investments was not subject to income tax or withholding tax under the doctrine of sovereign immunity.

33.  The private ruling that issued to the non-resident entity before 1 July 2026 applied during at least part of the period starting on DDMMYY and ending before 1 July 2026.

34.  The scheme carried out is not different to the scheme specified in the private ruling.

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 Income Tax Assessment Act 1936 (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, the transitional rules may apply to income derived from investments of a sovereign entity held at the announcement date of the amendments (DDMMYY), 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 DDMMYY under the scheme; and

(c) on or before DDMMYY, 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 DDMMYY; and

(ii)ending before 1 July 2026;

regardless of whether the private ruling started to apply before DDMMYY, 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

The non-resident entity will receive ordinary and/or statutory income as a return on their investments in Australia and investments held in Australian companies.

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.

A 'foreign government agency' is defined in subsection 995-1(1) of the ITAA 1997 as:

(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.

The non-resident entity is an extra-budgetary state agency of the foreign country. The non-resident entity was established by a Decree of the President of the foreign country and accountable to the President. The non-resident entity is a legal entity and its assets are wholly owned by the foreign country.

The non-resident entity is responsible for the collection and effective management of foreign currency and other assets that are generated from the implementation of agreements signed as well as its own activities, in the interest of citizens of the foreign country and their future generations.

Based on the above facts, the non-resident entity is a foreign government agency as defined in subsection 995-1(1) of the ITAA 1997 and is therefore a sovereign entity under paragraph 880-15(b) of the ITAA 1997.

Therefore, this requirement is satisfied.

3. A return on an investment asset under a scheme

The non-resident entity will receive ordinary and/or statutory income as a return on their investments held under a scheme.

Therefore, this requirement is satisfied.

4. Investment asset acquired on or before DDMMYY

The non-resident entity acquired their investment assets on or before DDMMYY.

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 investments acquired by the non-resident entity after DDMMYY.

5. Applied for a private ruling on or before DDMMYY

The non-resident entity applied for a private ruling before DDMMYY.

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 the non-resident entity 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 their investments.

Therefore, this requirement is satisfied.

7. Private ruling applied during the relevant period

The non-resident entity's private ruling issued before 1 July 2026 and applied during at least part of the period starting on DDMMYY and ending before 1 July 2026.

Therefore, this requirement is satisfied.

8. Scheme not materially different

The scheme is not materially different to the scheme specified in the private ruling that issued.

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.