Edited version of private advice

Authorisation Number: 1051582907258

Date of advice: 24 September 2019

Ruling

Subject: Sovereign immunity-withholding tax-transitional provisions

Question 1

Is ordinary and statutory income derived by the Foreign Entity as a return on the investments that were acquired on or before 27 March 2018 non-assessable non-exempt income due to the operation of section 880-5 of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A 1997)?

Answer

Yes.

Question 2

Will any capital gain arising to the Foreign Entity in respect of listed equity investment assets comprised within the Fund 2 that were acquired on or before 27 March 2018 be disregarded pursuant to section 880-15 of the IT(TP)A 1997?

Answer

Yes.

Question 3

Does paragraph 128B(3)(n) of the Income Tax Assessment Act 1936 (ITAA 1936) apply to exclude the Foreign Entity from liability to withholding tax on income that is non-assessable non-exempt income due to the operation of Division 880 of the IT(TP)A 1997?

Answer

Yes.

Question 4

Does subsection 840-805(9) of the Income Tax Assessment Act 1997 (ITAA 1997) apply to exclude the Foreign Entity from liability to withholding tax on income that is non-assessable non-exempt income due to the operation of Division 880 of the IT(TP)A 1997?

Answer

Yes.

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Foreign Entity

Foreign Entity is a resident of Foreign State for Foreign State's tax purposes.

Foreign Entity was established by an act of the Foreign State and its activities are exempt from the Foreign State's tax.

The Foreign Entity is a separate legal entity and its issued capital is owned by the Foreign State.

Foreign Entity performs public tasks and manages assets on behalf of the Foreign State.

Foreign Entity invests in Australia via its Foreign Fund.

The Foreign Entity may buy and sell debt instruments that are issued or guaranteed by the Foreign State.

The Foreign Entity's manages the Foreign exchange reserves for Foreign State.

The Governor of the Foreign Entity is responsible for the day to day management of the Foreign Entity.

The Foreign State government entrusts the Foreign Entity to manage two funds: Fund 1 and Fund 2 in accordance with Foreign State law.

Fund 2

Fund 2 is the Foreign State's sovereign wealth fund where surplus wealth is held.

The purpose of Fund 2 is to save for future generations of the Foreign State population.

Fund 2 is not currently subject to any liability to make pension payments or distributions.

Fund 2 is governed by legislation and its management falls under the supervision of the Foreign State.

Fund 2 does not have separate legal personality but rather constitutes a pool of segregated financial assets that the Foreign State is beneficially entitled to.

A dedicated asset management department within the Foreign Entity manages the assets of Fund 2.

Assets belong exclusively to the Foreign State where the Foreign Entity makes investments in accordance with the rules laid down by legislation.

The Foreign State is ultimately responsible for the Management Mandate of Fund 2.

The net return on Fund 2 investments is credited to the Foreign Entity's deposit account so that it can be directly reinvested.

The Foreign Entity is not remunerated for carrying out the management function of Fund 2 but is entitled to reimbursement of costs it incurs.

Fund 2 management costs are strictly controlled by the Foreign State.

The Foreign Entity is required to submit to the Foreign State a forecast budget of management costs each year for approval.

Foreign Entity previous private ruling

Foreign Entity has a previous private ruling relating to sovereign immunity.

The private ruling applied within the income tax years prescribed at subsection 880-5(e) of the IT(TP)A 1997.

Foreign Entity's investments in Australia

Foreign Entity acquired the investments listed in its previous private ruling before 27 March 2018.

Foreign Entity derives interest, dividends, trust distributions, and capital gains from its investment in Australia.

The current scheme is not materially different to the scheme specified in the previous private ruling.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 128B

Income Tax Assessment Act 1997 section 840-805

Income Tax (Transitional Provisions) Act 1997 section 880

Reasons for decision

Question 1

Is ordinary and statutory income derived by the Foreign Entity as a return on the investments that were acquired on or before 27 March 2018 non-assessable non-exempt income due to the operation of section 880-5 of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A 1997)?

Detailed reasoning

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 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 20XX-XX 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 20XX), 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 20XX under the scheme; and

(c)  on or before 27 March 20XX, the sovereign entity applied for a private ruling in relation to the scheme; and

(d)  before 1 July 20XX, 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 20XX; and

(ii)  ending before 1 July 20XX;

regardless of whether the private ruling started to apply before 27 March 20XX, or ceased to apply before 1 July 20XX; 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 20XX-XX 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 20XX-XX income year - that later income year, or an earlier income year.

Analysis

1.    An amount of ordinary income or statutory income

Foreign Entity through Fund 2 will receive ordinary and/or statutory income as a return on the equity investments and debt interests in Australia.

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.

Foreign Entity is a foreign resident created by the Foreign State by force of law. Under the Statute, Foreign Entity is a separate legal entity, owned by Foreign State.

Fund 2 is the Foreign State's sovereign wealth fund. It receives funds from the surplus wealth generated by Foreign State. Fund 2 is governed by the Foreign State legislation. Fund 2 is managed and supervised by the Foreign State.

The primary role of Foreign Entity is to manage the funds of Fund 2.

Therefore, Foreign 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 Foreign Entity will receive ordinary and/or statutory income as a return on the investment assets (shares in companies, units in trusts and debt investments) under a scheme.

Therefore, this requirement is satisfied.

4.    Investment asset acquired on or before 27 March 20XX

Foreign Entity acquired the Australian investments on or before 27 March 20XX.

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 assets acquired by Foreign Entity after 27 March 20XX.

5.    Applied for a private ruling on or before 27 March 20XX

Foreign Entity applied for a private ruling in relation to the scheme on or before 27 March 20XX.

Therefore, this requirement is satisfied.

6.    Private ruling made before 1 July 20XX

A private ruling was issued to Foreign Entity in respect of a withholding tax exemption for sovereign immunity before 1 July 20XX.

Therefore, this requirement is satisfied.

7.    Private ruling applied during the relevant period

Foreign Entity's private ruling applied during the relevant legislated period.

Therefore, this requirement is satisfied.

8.    Scheme not materially different

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

Therefore, this requirement is satisfied.

9.    Relevant income year

The ruling period of this ruling is 1 July 20XX to 30 June 20XX.

Therefore, this requirement is satisfied.

Conclusion

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

Question 2

Will any capital gain arising to Foreign Entity in respect of listed equity investment assets comprised within the Fund 2 acquired on or before 27 March 20XX be disregarded pursuant to section 880-15 of the IT(TP)A 1997?

Detailed Reasoning

Section 880-15 of the IT(TP)A 1997 provides that a capital gain of a sovereign entity from a Capital Gains Tax (CGT) event that happens in relation to a CGT asset is disregarded if the following conditions are met:

(a)  the capital gain arises under a scheme; and

(b)  the CGT asset is a membership interest, non-share equity interest or debt interest in another entity; and

(c)  the requirements in paragraphs 880-5(b) to (g) are satisfied (on the assumption that reference in those paragraphs to the investment asset were references to the CGT asset).

Analysis

1.    The capital gain arises under a scheme

Foreign Entity as part of its management of Fund 2, purchases Australian equities. The assets satisfy the definition of CGT assets in section 108-5 of the ITAA 1997 (which includes any kind of property, or, a legal or equitable right which is not property).

The disposal of the equity investment assets would trigger a CGT event in which the Foreign Entity may make a capital gain under the scheme.

Therefore, Foreign Entity satisfies this requirement.

2.    CGT asset is a membership interest, non-share equity interest or debt interest in another entity

The CGT assets that are covered by this private ruling are either membership interests or non-share equity interests in a company or trust.

Therefore, Foreign Entity satisfies this requirement.

3.    The requirements of paragraphs 880-5(b) to (g) have been satisfied.

For the reasons outlined in the answer to Question 1, the requirements in paragraphs 880-5(b) to (g) of the IT(TP)A 1997 are satisfied.

Conclusion

All the requirements in section 880-15 of the IT(TP)A 1997 are satisfied.

Question 3

Does paragraph 128B(3)(n) of the ITAA 1936 apply to exclude the Foreign Entity from liability to withholding tax on income that is non-assessable non-exempt income due to the operation of Division 880 of the IT(TP)A 1997?

Detailed reasoning

Section 128B of the ITAA 1936 imposes liability to withholding tax on income derived by a non-resident that consists of dividend income (subsection 128B(1) of the ITAA 1936), interest income (subsection 128B(2) of the ITAA 1936) as well as other income prescribed in that section.

Subsection 128B(3) of the ITAA 1936 notes that section 128B of the ITAA 1936 will not apply to prescribed categories of income. Relevantly, paragraph 128B(3)(n) of the ITAA 1936 states that this includes 'income that is non-assessable non-exempt income because of Division 880 of the ITAA 1997 or Division 880 of the IT(TP)A 1997.'

The income derived by Foreign Entity as a return on its Australian investment assets is considered non-assessable non-exempt income under Division 880 of the IT(TP)A 1997.

Therefore, Foreign Entity is excluded from liability to withholding tax on its interest and/or dividend income under paragraph 128B(3)(n) of the ITAA 1936.

Question 4

Does subsection 840-805(9) of the ITAA 1997 apply to exclude the Foreign Entity from liability to withholding tax on income that is non-assessable non-exempt income due to the operation of Division 880 of the IT(TP)A 1997?

Detailed reasoning

Subject to subsection 840-805(9) of the ITAA 1997, subsection 840-805(1) of the ITAA 1997 imposes a liability for MIT withholding tax on amounts paid to you in accordance with subsections 840-805(2), (3) and (4) of the ITAA 1997. Subsection 840-805(9) of the ITAA 1997 states that subsections 840-805(2), (3) and (4) of the ITAA 1997 do not apply to you if the payments made to you relate to an amount that is non-assessable non-exempt income because of:

(a)  Division 880 of the ITAA 1997, or

(b)  Division 880 of the IT(TP)A 1997.

The income derived by Foreign Entity as a return on its Australian investment assets is considered non-assessable non-exempt income under Division 880 of the IT(TP)A 1997. As such, Foreign Entity is excluded from liability to withholding tax on amounts it receives under subsections 840-805(2), (3) and (4) of the ITAA 1997 in accordance with subsection 840-805(9) of the ITAA 1997.