Edited version of private advice

Authorisation Number: 1051682619019

Date of advice: 28 May 2020

Ruling

Subject: Sovereign immunity and the transitional measures

Question 1

Is the ordinary and statutory income derived by Corporation A, as a return on its stapled unit investments in Entity B acquired on or before 27 March 2018 non-assessable non-exempt income pursuant to section 880-5 of the IT(TP)A 1997?

Answer

Yes.

Question 2

Will any capital gain arising to Corporation A in respect of its stapled unit investments in Entity B 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 ITAA 1936 apply to exclude Corporation A 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 ITAA 1997 apply to exclude Corporation A 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 periods:

1 July 2019 to 30 June 2020

1 July 2020 to 30 June 2021

1 July 2021 to 30 June 2022

1 July 2022 to 30 June 2023

1 July 2023 to 30 June 2024

1 July 2024 to 30 June 2025

1 July 2025 to 30 June 2026

The scheme commences on:

1 July 2019

Relevant facts and circumstances

Corporation A

1.    Corporation A is an exempt limited liability company that is ultimately wholly owned by Entity A.

2.    Corporation A was incorporated in 20XX.

3.    Corporation A is wholly owned by Entity C. Entity C is a limited liability company incorporated in Foreign Country. Entity A owns 100% of the shares in Entity C directly.

4.    As noted in Corporation A financial statements, the company acts as a holding company for certain investments.

Entity A

5. Entity A is a government institution established by the Government of a foreign state as per the issuing Law.
6. Entity A was established to invest the Government's financial surplus resources into global investment opportunities and broaden the foreign state's economic platform.
7. The Law states the objectives of Entity A.
8. According to the Law, Entity A has the power to establish companies and corporations engaged in various investments.
9. Corporation A and Corporation B were established by Entity A as separate legal entities to carry out the investment requests of Entity A.
10. Corporation A acts solely on Entity A's orders and does not undertake any investments otherwise than as requested by Entity A, which itself does not undertake any other activities besides investing the Government of the foreign state's financial surplus resources.
11. The Investments
12. In 2008, Corporation A acquired a percentage of the stapled units in unlisted Australian trusts (each of them referred to as a 'Trust' and collectively referred to as 'Entity B'):
13. The trusts are managed investment trusts (MITs).

Reasons for decision

Question 1

Is the ordinary and statutory income derived by Corporation A, as a return on its stapled unit investments in Entity B acquired on or before 27 March 2018 non-assessable non-exempt income pursuant to section 880-5 of the IT(TP)A 1997?

Summary

Ordinary and statutory income derived by Corporation A as a return on the stapled unit investments acquired in Entity B, on or before 27 March 2018 is non-assessable and 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 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:

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 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

1. An amount of ordinary income or statutory income

Corporation A will receive ordinary and/or statutory income as a return on the investments it holds in Entity B.

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) ITAA 1997 as:

(a)    the government of a foreign country or 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.

Entity A is a government institution established by the Government of the Foreign State as per the issuing Law.

Entity A was established for the purposes of developing, investing and managing the reserve fund of the Foreign State.

According to the Law, Entity A has the power to establish companies and corporations engaged in various investments. Corporation A has been established by Entity A as a separate legal entity to carry out the investment requests of Entity A.

Corporation A acts solely on Entity A's orders and does not undertake any investment otherwise than as requested by Entity A, which itself does not undertake any other activities besides investing the Government of the Foreign State's financial surplus resources.

Entity A's ultimate ownership and control of Corporation A means that Corporation A also operates as an agent of the Government. Therefore, Corporation A is considered an agency of a foreign state.

Based on the facts and circumstances of this case, the Commissioner accepts that Entity A and Corporation A meet the conditions of being an agency of a foreign state under paragraph 880-15(b) of the ITAA 1997.

Further, Corporation A is a non-resident company, which is ultimately and wholly owned by Entity A. Based on these facts, the Commissioner accepts that Corporation A satisfies paragraph 880-15(c) of the ITAA 1997.

Therefore, Corporation A is a sovereign entity.

3. A return on an investment asset under a scheme

Corporation A will, via trust distributions, receive ordinary and/or statutory income as a return on the units in Entity B.

A 'scheme' is widely defined in subsection 995-1(1) of the ITAA 1997to 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. The acquisition and holding of the Entity B investments by Corporation A on behalf of Entity A would be deemed a scheme for these purposes.

Therefore, this requirement is satisfied.

4. Investment asset acquired on or before 27 March 2018

Corporation B acquired units that accounted for a percentage interest in Entity B in 2008 and an additional percentage interest was acquired in 2013. In 2017 Corporation B transferred these units in Entity B to Corporation A.

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 any interests/units in Entity B acquired by Corporation A after 27 March 2018.

5. Applied for a private ruling on or before 27 March 2018

Corporation A applied for a private ruling on 21 January 2017 in relation to the scheme specified in the private ruling that issued on 2 February 2017.

Therefore, this requirement is satisfied.

6. Private ruling made before 1 July 2026

A private ruling was made on 2 February 2017. The Commissioner determined in this private ruling that Corporation A 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 units it held in Entity B.

Therefore, this requirement is satisfied

7. Private ruling applied during the relevant period

Corporation A's private ruling issued on 2 February 2017 and applied for the period between income year ended 30 June 2017 and income year ended 30 June 2026.

Therefore, this requirement is satisfied.

8. Scheme not materially different

On the basis that the Government of the Foreign State has been the ultimate owner of Corporation A at all times, the scheme is not considered to be carried out in a manner materially different to the scheme specified in the previous ruling.

Based on the facts and circumstances of this case, the Commissioner accepts that the scheme carried out is not materially different to the scheme specified in the original private ruling.

Therefore, this requirement is satisfied.

9. Relevant income year

The ruling period of this ruling is 1 July 2019 to 30 June 2026.

Therefore, this requirement is satisfied.

Conclusion

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

Question 2

Will any capital gains arising to Corporation A in respect of its stapled unit investments in Entity B acquired on or before 27 March 2018 be disregarded pursuant to section 880-15 of the IT(TP)A 1997?

Summary

Any capital gains received in respect of Corporation A's stapled unit investments in Entity B or any CGT event that happens in relation to a CGT asset, acquired before 27 March 2018 can be disregarded due to the operation of section 880-15 of the IT(TP)A 1997.

Detailed reasoning

Relevant provision

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. Capital gain arises under a scheme

Corporation A has purchased Australian equities in the form of stapled unit investments in Entity B. These 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 stapled unit investments would trigger a CGT event in which Corporation A may make a capital gain under the scheme.

Therefore, this requirement is satisfied.

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

Corporation A holds only membership interests or non-share equity in Australia, in the form of stapled unit investments in Entity B.

Therefore, this requirement is satisfied.

3. Requirements in paragraphs 880-5(b) to (g) are 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 Corporation A 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 provides 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 Corporation A 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, Corporation A, is excluded from liability to withholding tax on its income that it receives from its investments in Entity B under paragraph 128B(3)(n) of the ITAA 1936.

Question 4

Does subsection 840-805(9) of the ITAA 1997 apply to exclude Corporation A 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 Corporation A 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, Corporation A 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.