Edited version of private advice

Authorisation Number: 1051604682769

Date of advice: 6 November 2019

Ruling

Subject: Sovereign immunity

Question

Is ForCo immune from income tax and withholding tax under the common law doctrine of sovereign immunity on any income and capital gains derived from its investment in AusTrust?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 2017

Year ended 30 June 2018

Year ended 30 June 2019

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Sovereign Fund

1.    The Sovereign Fund is a resident in a foreign State for income tax purposes and is not subject to income tax in that State.

2.    The Sovereign Fund was established with the objective of developing, investing and managing the State reserve funds and other property assigned to it.

3.    The Sovereign Fund has the power to and has established a number of entities that will hold the Sovereign Fund's investments.

4.    The Sovereign Fund is recognised as a government authority of the State, the Sovereign Fund has its own legal personality and an independent budget.

5.    The Sovereign Fund is operated in accordance with the annual general policies approved by a government body of the State, and a government body of the State approves the Sovereign Fund's annual budget.

6.    The Sovereign Fund is managed by its own Board, consisting of a Chairman, a Deputy Chairman and a number of Members.

7.    The Sovereign Fund is based in a country that is not Australia and may establish offices abroad.

8.    The Sovereign Fund was established using assets assigned to it by a government body of the State. All monetary, immovable and movable assets of the State reserve passed from a government body of the State to the Sovereign Fund. Additionally, no personal monies of any individual have been contributed to the Sovereign Fund.

9.    The income generated by the Sovereign Fund on the investment of the State reserve funds is re-invested by the Sovereign Fund or distributed to the Government of the State.

10.  The funds of the Sovereign Fund will be withdrawn in limited circumstances as determined by a government body of the State.

11.  No distributions of income or gains from the Sovereign Fund have been made or can be made to any person other than the Government of the State.

ForCo

12.  ForCo is a wholly-owned subsidiary of the Sovereign Fund that was incorporated in a country that is not Australia.

13.  ForCo is not subject to income tax in the State.

14.  ForCo is a special purpose vehicle established by the Sovereign Fund and holds the Sovereign Fund's investment in AusTrust, as well as several other investments.

15.  ForCo subscribed for X% of units in AusTrust. This level of ownership is less than a 10% portfolio holding in AusTrust. No further equity has been issued to ForCo since this time.

16.  ForCo does not have an Australian tax file number, maintain an office in Australia or engage in any trade or business in Australia.

AusTrust

17.  AusTrust was established as a core wholesale unlisted trust, allowing institutional investors to benefit from exposure to a portfolio across Australia.

18.  AusTrust is an open-ended Australian unit trust that is a registered managed investment scheme and is also a managed investment trust for Australian tax purposes.

19.  The Trustee is responsible for managing AusTrust.

20.  The Trustee holds all investments in AusTrust as legal owner and all investments must be registered in the name of the Trustee.

21.  Per the Constitution of AusTrust, the Trustee has established a Committee for the purpose of protecting investor rights.

22.  Neither the Sovereign Fund, nor ForCo, nor any related party of the Sovereign Fund, is entitled to appoint a member to the Committee for AusTrust.

23.  The investment in AusTrust has been made in accordance with the Sovereign Fund's overarching guidelines, principles and under the oversight of the Sovereign Fund's Board of Directors, Executive Committee and other relevant governance arms.

24.  AusTrust holds interests in various assets across states in Australia.

25.  By way of the investment in AusTrust, ForCo expects to receive the following returns:

-  managed investment trust fund payments

-  capital gains, and

-  returns of capital.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 128B

Reasons for decision

Question 1

Is ForCo immune from income tax and withholding tax under the common law doctrine of sovereign immunity on any income and capital gains derived from its investment in AusTrust?

Answer

Yes

Detailed reasoning

For Australian income tax and withholding tax purposes, it is accepted that the doctrine of sovereign immunity applies to a foreign government or an agency of a foreign government that engages in governmental functions. This approach is consistent with the decision of the British House of Lords in the case I Congreso del Partido [1981] 2 All ER 1064 which held that activities of a trading, commercial or other private law character were not governmental functions.

When determining whether the doctrine of sovereign immunity applies to provide immunity from Australian income tax and/or withholding tax on Australian sourced income and gains, it is necessary to establish the following:

1.    that the person making the investment (and therefore deriving the income) is a foreign government or an agency of a foreign government,

2.    that the moneys invested are and will remain government moneys, and

3.    that the income or gain is being derived from a non-commercial activity.

If these three conditions are satisfied, then the income or gains will not be subject to Australian income tax and/or withholding tax.

Condition 1: A foreign government or agency of a foreign government

ForCo is a wholly-owned subsidiary of the Sovereign Fund, which is an agency of the State. ForCo was incorporated in a country that is not Australia and is a special purpose vehicle established by the Sovereign Fund to hold the Sovereign Fund's investment in AusTrust.

As ForCo is not a foreign government, it is required to be an agency of a foreign government in order to satisfy this requirement.

In the context of sovereign immunity, it is considered that an entity which is wholly owned by a foreign government is an 'agency of a foreign government' where that entity is performing a function for the public advantage and executes a function in the public interest and is not a private body established for private profit.

The Sovereign Fund was established for the purposes of developing, investing and managing the reserve funds of the State. The Sovereign Fund is recognised as a government body of the State. Further, the policies, plans and programs implemented by the Sovereign Fund are approved by a government body of the State. The Sovereign Fund therefore meets the requirements of 'an agency of a foreign government'.

The investment in AusTrust by ForCo has been made in accordance with the Sovereign Fund's overarching guidelines, principles and under the oversight of the Sovereign Fund's Board of Directors, Executive Committee and other relevant governance arms. Given the direct line of ownership between the Sovereign Fund and the ultimate investment into Australia, the transaction entered into by ForCo is sufficiently connected to, and controlled by, the Sovereign Fund.

Based on these facts and circumstances, it is accepted that ForCo is an agency of the Government of the State for sovereign immunity purposes.

Condition 2: The monies being invested are and will remain government monies

In line with the principle that sovereign immunity applies to foreign states performing only governmental functions, an entity claiming sovereign immunity must establish that the monies being invested are and will remain government monies.

The Sovereign Fund was established by the State with the objective of developing, investing and managing the State reserve funds and other property assigned to it by a government body of the State.

All monetary, immovable and movable assets of the State reserve passed from a government body of the State to the Sovereign Fund. Additionally, no personal monies of any individual have been contributed to the Sovereign Fund.

The income generated by the Sovereign Fund on the investment of the State reserve funds is either re-invested by the Sovereign Fund or distributed to the Government of the State. The funds of the Sovereign Fund will be withdrawn in limited circumstances as determined by a government body of the State. No distributions of income or gains from the Sovereign Fund have been made or can be made to any person other than the Government of the State.

Accordingly, there is a clear connection between the Sovereign Fund's funding and the State. The funds invested in AusTrust have ultimately been sourced from the reserves of the State and all income and gains from the investments that are subject of this ruling will be beneficially owned by the State.

It is considered that the money being invested by ForCo is and will remain government money.

Given the above factors, the Commissioner accepts that ForCo satisfies this requirement.

Condition 3: The income or gain is being derived from a non-commercial activity

When determining whether the doctrine of sovereign immunity applies to provide immunity for Australian sourced income and gains from Australian income tax and/or withholding tax, it is necessary to establish that the income or gain is being derived from a non-commercial activity.

As noted in ATO Interpretive Decision ATO ID 2002/45 Withholding Tax: Sovereign Immunity (ATO ID 2002/45), whether an operation or activity is a commercial transaction will depend on the facts of each case. As a guide, a commercial transaction is generally considered to be an activity concerned with the trading of goods and services, such as buying, selling, bartering, transportation, and includes the carrying on of a business. A passive investment is more likely to be considered a non-commercial transaction.

In relation to the ownership of shares in a company or other similar equity interests, there will be instances where the extent of the holding gives rise to questions as to whether the interests constitute a passive investment or a commercial investment.

In all circumstances, consideration will be given to factors relating to the influence or control potentially able to be exercised by the investor (or a related party/associate of the investor) in relation to the investment. This includes (but is not limited to) any potential influence or control in relation to day to day management and key business, strategy and financial decisions.

ForCo holds X% of the units in AusTrust and has held this amount since subscription. No further equity has been issued to ForCo since this time. This level of ownership is less than a 10% portfolio holding in a company or trust said to be 'generally accepted as a non-commercial activity' in ATO ID 2002/45.

Neither the Sovereign Fund, nor ForCo, nor any related party of the Sovereign Fund has the capacity to exert influence or control in respect of this investment.

Based on the above factors, the Commissioner accepts that ForCo's investment in AusTrust outlined in the relevant facts and circumstances of this Ruling are passive investments, and non-commercial activities, satisfying this condition.

Conclusion

As the three conditions have been satisfied, ForCo is immune from Australian income tax and withholding tax on all income and gains derived from its investments in Australia in AusTrust under the common law doctrine of sovereign immunity.