Edited version of private advice

Authorisation Number: 1051587765167

Date of advice: 30 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 Income Tax (Transitional Provisions) Act 1997 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 2019 to 30 June 2026

The scheme commences on

1 July 2019

Relevant facts and circumstances

1. The entity was established by a foreign government in accordance with a statute to perform governmental functions.
2. The entity is a non-resident company, 100% of the total participation interests in which are held by the foreign government.
3. The entity was established with moneys of the foreign government.
4. The entity receives money from the foreign government to invest on its behalf.
5. The entity is managed and controlled in accordance with foreign government laws.
6. The entity acquired shares in an Australian company, units in an Australian unit trust and made loans to the Australian unit trust (collectively, the Investment) before March 2018.
7. The entity receives ordinary income and statutory income from the Investment.
8. The entity applied for a private ruling relating to the doctrine of sovereign immunity before March 2018 in relation to the Investment.
9. The Commissioner made a private ruling to the entity before 1 July 2026 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 March 2018 and 1 July 2026.
10. This scheme is not materially different to the scheme in that private ruling.
11. The ruling period of this ruling is to 30 June 2026.

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 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 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 (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 March 2018 under the scheme; and

(c) on or before 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 March 2018; and

(ii)ending before 1 July 2026;

regardless of whether the private ruling started to apply before 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

The entity receives ordinary and statutory income from the Investment. 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 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 assets under a scheme. Therefore, this requirement is satisfied.

4. Investment asset acquired on or before March 2018

The entity acquired the Investment before March 2018. Therefore, this requirement is satisfied.

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

The entity engaged with the Commissioner before March 2018 seeking a private ruling in relation to an exemption on withholding tax for the interest income, dividend income and trust distributions from the Investment. Therefore, this requirement is satisfied.

6. Private ruling made before 1 July 2026

The Commissioner made a private ruling to the entity before 1 July 2026 confirming immunity from income tax and withholding tax on income received from the Investment under 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 2026. 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 units, shares, and 'Shareholder Loans' made as the Investment 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 entity may make a capital gain from the CGT assets it holds 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

A 'membership interest' is defined in subsection 995-1(1) of the ITAA 1997 to take its meaning from section 960-135 of the ITAA 1997. Section 960-135 of the ITAA 1997 states:

If you are a *member of an entity:

(a) each interest, or set of interests, in the entity; or

(b) each right, or set of rights, in relation to the entity;

by virtue of which you are a member of the entity is a membership interest of yours in the entity.

Note:

In conjunction with subsection 960-130(3), this means that a debt interest is not a membership interest.

A 'member' of an entity is defined in subsection 995-1(1) of the ITAA 1997 to take its meaning from section 960-130 of the ITAA 1997. Section 960-130 of the ITAA 1997 provides that a member of a company is a member or stockholder of the company and a member of a trust (except a public trading trust) is a beneficiary, unitholder or object of the trust.

The combination of the preceding provisions leads to the conclusion that the shares and units held by the entity as part of the Investment are membership interests for the purpose of the ITAA 1997.

A 'debt interest' is defined in subsection 995-1(1) of the ITAA 1997 to take its meaning from Subdivision 974-B of the ITAA 1997. A non-share equity interest is defined in subsection 995-1(1) of the ITAA 1997 to mean an equity interest in a company that is not solely a share.

The Commissioner accepts that the 'Shareholder Loans' made as part of the Investment will either be 'debt interests' or, alternatively, 'non-share equity interests'. 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.