Edited version of private advice

Authorisation Number: 1051666720497

Date of advice: 27 April 2020

Ruling

Subject: Sovereign immunity transitional provisions

Question 1

Is ordinary and statutory income derived by ForCo from the units it owns in AusTrust and the loans that it has made to AusTrust that were acquired on or before 27 March 20XX, 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

Is ordinary and statutory income derived by ForCo the shares it owns in AusCo and the loans it has made AusCo that were acquired on or before 27 March 2018, non-assessable non-exempt income due to the operation of section 880-5 of the IT(TP)A 1997?

Answer

Yes

Question 3

Will any capital gain arising to ForCo in respect of the units it owns in AusTrust and the loans that it has made to AusTrust 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 4

Will any capital gain arising to ForCo in respect of the shares it owns in AusCo and the loans it has made to AusCo 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 5

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

Answer

Yes

Question 6

Does paragraph 128B(3)(n) of the ITAA 1936 apply to exclude ForCo from liability to withholding tax on income received from AusCo that is non-assessable non-exempt income due to the operation Division 880 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

Sovereign Fund

Sovereign Fund is a sovereign wealth fund established in a foreign State to advance the objectives of the Government of the State and is recognised as a government authority of the State.

The funds used by Sovereign Fund in all of its investments are reserve funds of the State.

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

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

Sovereign Fund is resident in the State for income tax purposes and is not subject to income tax in the State.

Sovereign Fund is not a tax resident in Australia.

The Sovereign Fund Holding Structure

Sovereign Fund is authorised to incorporate companies and establish investment enterprises, individually or with others, to invest in the State and abroad.

HoldingCo

HoldingCo is a company which was not incorporated in Australia.

HoldingCo is a wholly owned subsidiary of Sovereign Fund.

HoldingCo is not tax resident in Australia and is not subject to income tax in the foreign State, whether directly or indirectly.

HoldingCo does not have a permanent establishment in Australia under subsection 6(1) of the ITAA 1936.

HoldingCo owns 100% of ForCo.

ForCo

ForCo is a company which was not incorporated in Australia.

ForCo was established by HoldingCo as a special purpose vehicle to invest in AusTrust and AusCo.

ForCo is not a tax resident of Australia nor does it have a permanent establishment in Australia under subsection 6(1) of the ITAA 1936.

AusTrust

ForCo owns units in AusTrust, an Australian resident trust. It has also made loans to AusTrust.

ForCo's units in AusTrust were acquired before 27 March 2018 and the loans were made before 27 March 2018.

AusCo

ForCo owns shares in AusCo, an Australian resident company. It has also made loans to AusCo.

ForCo's shares in AusCo were acquired before 27 March 2018 and the loans were made before 27 March 2018.

Income received under the scheme

ForCo will receive ordinary and/or statutory income as a return on the equity investments and debt interests in Australia in relation to the investments as set out in the above.

The scheme under which that income is received is not materially different to the scheme specified in the prior private ruling.

Prior private ruling

ForCo was issued with a private ruling on in July 2018, having applied for a ruling before 27 March 2018.

The private ruling confirmed that ForCo 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 its investment in the units of AusTrust and the loans that it has made to AusTrust for the period between 1 July 2017 to 30 June 2019.

The private ruling also confirmed that ForCo 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 its investment in the shares of AusCo and the loans it has made to AusCo for the period between 1 July 2017 to 30 June 2019.

Relevant legislative provisions

Income Tax Assessment Act 1936 paragraph 128B(3)(n)

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

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

Reasons for Decision

Question 1

Is ordinary and statutory income derived by ForCo from the units it owns in AusTrust and the loans that it has made to AusTrust that were acquired on or before 27 March 2018, non-assessable non-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 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 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:

(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 2018 under the scheme; and

(c)   on or before 27 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 27 March 2018; and

(ii)   ending before 1 July 2026;

regardless of whether the private ruling started to apply before 27 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

An amount of ordinary income or statutory income

ForCo will receive ordinary and/or statutory income as a return on the equity investments and debt interests in Australia in relation to the investments in AusTrust.

Therefore, this requirement is satisfied.

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.

Sovereign Fund was established for the purposes of developing, investing and managing the reserve funds of the State. Sovereign Fund is officially recognized as a government body of the State. Further, the policies, strategies and plans implemented by Sovereign Fund must be approved by a government body.

HoldingCo is wholly owned by Sovereign Fund.

HoldingCo is the 100% owner of ForCo.

Based on these facts and circumstances, it is accepted that ForCo is an entity in which a foreign government agency holds a total participation interest (as defined by section 960-180 of the ITAA 1997) of 100%.

ForCo is not an Australian resident and is not a resident trust estate for the purposes of Division 6 of Part III of the ITAA 1936.

As such, ForCo will meet the definition of a 'sovereign entity' by virtue of the operation of paragraph 880-15(c) of the ITAA 1997 and this requirement is, therefore, satisfied.

A return on an investment asset under a scheme

ForCo will receive ordinary and/or statutory income as a return on the equity investments and debt interests in Australia in relation to the investments in AusTrust. A "scheme" is widely defined in subsection 995-1 of the ITAA 1997 to mean any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings, and any scheme, plan, proposal, action, course of action or course of conduct.

Therefore, this requirement is satisfied.

Investment asset acquired on or before 27 March 20XX

ForCo acquired the investments in AusTrust 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 investments acquired by ForCo after 27 March 20XX.

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

ForCo was issued with a private ruling on in July 20XX, having applied for a ruling before 27 March 20XX.

Therefore, this requirement is satisfied.

Private ruling made before 1 July 20XX

A private ruling was issued to ForCo prior to 1 July 20XX. The Commissioner determined in the private ruling that ForCo 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 its investments.

Therefore, this requirement is satisfied.

Private ruling applied during the relevant period

ForCo's private ruling applied for the relevant period.

Therefore, this requirement is satisfied.

Scheme not materially different

The scheme involving the continuation of investments is not materially different to the scheme specified in the private ruling that issued prior to 1 July 20XX. Therefore, this requirement is satisfied.

Relevant income year

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

Therefore, this requirement is satisfied.

Conclusion

As all the requirements in section 880-5 of the IT(TP)A 1997 are satisfied, ordinary and statutory income derived by ForCo from the units it owns that were acquired on or before 27 March 20XX will be non-assessable non-exempt income.

Question 2

Is ordinary and statutory income derived by ForCo the shares it owns in AusCo and the loans it has made AusCo that were acquired on or before 27 March 20XX, non-assessable non-exempt income due to the operation of section 880-5 of the IT(TP)A 1997?

Detailed reasoning

Transitional provisions

The provisions of section 880-5 of the IT(TP)A 1997 are set out above in Question 1.

Analysis

An amount of ordinary income or statutory income

ForCo will receive ordinary and/or statutory income as a return on the equity investments and debt interests in Australia in relation to the investments in AusCo.

Therefore, this requirement is satisfied.

Sovereign entity

The definition of 'sovereign entity' is set out above in Question 1.

As established in Question 1, ForCo will meet the definition of a 'sovereign entity' by virtue of the operation of paragraph 880-15(c) of the ITAA 1997 and this requirement is, therefore, satisfied.

A return on an investment asset under a scheme

ForCo will receive ordinary and/or statutory income as a return on the equity investments and debt interests in Australia in relation to the investments in AusCo. A "scheme" is widely defined in subsection 995-1 of the ITAA 1997 to mean any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings, and any scheme, plan, proposal, action, course of action or course of conduct.

Therefore, this requirement is satisfied.

Investment asset acquired on or before 27 March 20XX

ForCo acquired the investments in AusCo 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 investments acquired by ForCo after 27 March 20XX.

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

ForCo was issued with a private ruling on in July 2018, having applied for a ruling before 27 March 20XX.

Therefore, this requirement is satisfied.

Private ruling made before 1 July 20XX

A private ruling was issued to ForCo prior to 1 July 20XX. The Commissioner determined in the private ruling that ForCo 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 its investments in AusCo.

Therefore, this requirement is satisfied.

Private ruling applied during the relevant period

ForCo's private ruling was issued for the period ending 30 June 20XX.

Therefore, this requirement is satisfied.

Scheme not materially different

The scheme involving the continuation of ForCo's investments in AusCo is not materially different to the scheme specified in the private ruling that was previously issued. Therefore, this requirement is satisfied.

Relevant income year

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

Therefore, this requirement is satisfied.

Conclusion

As all the requirements in section 880-5 of the IT(TP)A 1997 are satisfied, ordinary and statutory income derived by ForCo from the shares it owns in the AusCo that were acquired on or before 27 March 20XX will be non-assessable non-exempt income.

Question 3

Will any capital gain arising to ForCo in respect of the units it owns in AusTrust and the loans that it has made to AusTrust that were 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

The units in AusTrust and loans made to AusTrust 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). ForCo may make a capital gain from the CGT assets it holds in AusTrust (for example on disposal of units) 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 units held by ForCo in AusTrust 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 loans will either be 'debt interests' or, alternatively, 'non-share equity interests' in AusTrust.

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

As all the requirements in section 880-15 of the IT(TP)A 1997 are satisfied any capital gain arising to ForCo in respect of the units it owns in AusTrust and the loans that it has made to AusTrust that were acquired on or before 27 March 20XX will be disregarded.

It is further noted that section 880-20 of the IT(TP)A 1997 similarly applies to disregard any capital loss that ForCo would make on those listed investments.

Question 4

Will any capital gain arising to ForCo in respect of the shares it owns in AusCo and the loans it has made to AusCo that were acquired on or before 27 March 20XX, be disregarded pursuant to section 880-15 of the IT(TP)A 1997?

Detailed reasoning

The provisions contained in section 880-15 of the IT(TP)A 1997 are set out above in Question 3.

Analysis

1. The capital gain arises under a scheme

The shares in AusCo and loans made to AusCo 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). ForCo may make a capital gain from the CGT assets it holds in AusCo (for example on disposal of shares) 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

For similar reasons as set out in Question 3, the shares held by ForCo in AusCo are membership interests for the purpose of the ITAA 1997 and the Commissioner accepts that the loans will either be 'debt interests' or, alternatively, 'non-share equity interests' in AusCo.

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 2, the requirements in paragraphs 880-5(b) to (g) of the IT(TP)A 1997 are satisfied.

Therefore, this requirement is satisfied.

Conclusion

As all the requirements in section 880-15 of the IT(TP)A 1997 are satisfied any capital gain arising to ForCo in respect of the shares it owns in AusCo and the loans that it has made to AusCo that were acquired on or before 27 March 20XX will be disregarded.

It is further noted that section 880-20 of the IT(TP)A 1997 similarly applies to disregard any capital loss that ForCo would make on those listed investments.

Question 5

Does paragraph 128B(3)(n) of the ITAA 1936 apply to exclude ForCo from liability to withholding tax on income from the AusTrust that is non-assessable non-exempt income due to the operation 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.

As established in Question 1, the ordinary and statutory income derived by ForCo as a return on the units it owns in AusTrust and the loans that it has made to AusTrust is considered non-assessable non-exempt income under Division 880 of the IT(TP)A 1997.

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

Question 6

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

Detailed reasoning

The operation of section 128B of the ITAA 1936 and, in particular, paragraph 128B(3)(n) of the ITAA 1936 is set out above in Question 5.

As established in Question 2, the ordinary and statutory income derived by ForCo as a return on the shares it owns in the AusCo and the loans that it has made to AusCo is considered non-assessable non-exempt income under Division 880 of the IT(TP)A 1997.

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