Edited version of private advice

Authorisation Number: 1051586429548

Date of advice: 26 September 2019

Ruling

Subject: Division 880 of the Income Tax (Transitional Provisions) Act 1997

Question 1

Is the ordinary and statutory income derived by the entity as a return on the Investment not assessable and not exempt income due to the operation of section 880-5 of the IT(TP)A 1997?

Answer

Yes.

Question 2

Will any capital gain arising to the entity from the Investment be disregarded pursuant to section 880-15 of the IT(TP)A 1997?

Answer

Yes.

This ruling applies for the following periods

1 July 20XX to 30 June 20XX

The scheme commences on

1 July 20XX

Relevant facts and circumstances

The entity is a private company incorporated in foreign country and is not a 'resident of Australia' as defined in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936).

The entity is a wholly-owned subsidiary of the foreign government in accordance with a statute which empowers it to perform governmental functions.

The entity was established and is funded with moneys of the foreign government.

The entity is managed and controlled in accordance with the foreign government's laws.

The entity derives Australian sourced income from non-share equity interests (as defined in subsection 995-1(1) of the ITAA 1997) (the Investment) which were issued by an Australian resident entity.

The Investment was acquired by the entity before 27 March 20XX.

The entity applied for a private ruling relating to the doctrine of sovereign immunity before 27 March 20XX in relation to the Investment.

The Commissioner made a private ruling to the entity before 1 July 20XX confirming that income from the Investment was not subject to income tax or withholding tax because of the doctrine of sovereign immunity. The private ruling applied during part of the period between 27 March 20XX and 1 July 20XX.

This scheme is not materially different to the scheme in that private ruling.

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

Relevant legislative provisions

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

Income Tax (Transitional Provisions) Act 1997 section 880-15

Reasons for decision

Question 1

Is the ordinary and statutory income derived by the entity as a return on the Investment not assessable and not exempt income due to the operation of section 880-5 of the 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 years 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

The entity receives income as a return on the Investment. These amounts will include amounts of ordinary income (as defined in subsection 6-5(1) of the ITAA 1997) and/or amounts of statutory income (as defined in section 6-10 of the ITAA 1997).

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.

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 entity is a wholly-owned subsidiary of the foreign government. 100% of the total participation interests (as defined in subsection 995-1(1) and 960-180 of the ITAA 1997) in the entity are therefore held by the foreign government.

The entity is a non-resident company, 100% of the total participation interests in which are held by the foreign government. The entity is therefore a sovereign entity in accordance with paragraph 880-15(c) of the ITAA 1997.

Therefore, this requirement is satisfied.

3. A return on an investment asset under a scheme

The entity receives ordinary and/or statutory income as a return on the Investment under a scheme.

Therefore, this requirement is satisfied.

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

The Investment was acquired by the entity on before 27 March 20XX.

Therefore, this requirement is satisfied.

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

The entity engaged with the Commissioner before 27 March 20XX seeking a private ruling in relation to the Investment.

Therefore, this requirement is satisfied.

6. Private ruling made before 1 July 20XX

The Commissioner made a private ruling to the entity before 1 July 20XX confirming that income from the Investment was not subject to income tax or withholding tax because of the doctrine of sovereign immunity.

Therefore, this requirement is satisfied.

7. Private ruling applied during the relevant period

The private ruling that was made to the entity applied during the relevant period for the purposes of paragraph 880-5(e) of the IT(TP)A 1997.

Therefore, this requirement is satisfied.

8. Scheme not materially different

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

Therefore, this requirement is satisfied.

9. Relevant income year

The ruling period of this ruling is 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 the entity from the Investment be disregarded pursuant to section 880-15 of the IT(TP)A 1997?

Detailed reasoning

Transitional provisions

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 references in those paragraphs to the investment asset were references to the CGT asset)

Analysis

1. The capital gain arises under a scheme

The Investment satisfies 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 entity may make a capital gain from the Investment (for example on disposal) under a scheme.

Should a capital gain arise this requirement will be satisfied.

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

The Investment held by the entity is non-share equity interests (as defined in subsection 995-1(1) of the ITAA 1997).

Therefore, this requirement is satisfied.

3. The requirements in paragraphs 880-5(b) to (g) of the IT(TP)A 1997 are satisfied (on the assumption that references in those paragraphs to the investment asset were references to the CGT asset)

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.

Therefore, this requirement is satisfied.

Conclusion

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