Edited version of private advice

Authorisation Number: 1051684606016

Date of advice: 1 July 2020

Ruling

Subject: Sovereign immunity

Question 1

Is ordinary and statutory income derived by Entity A as a return on its investments as listed in Appendix 1 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

Is ordinary and statutory income derived by Entity A as a return on its investments as listed in Appendix 2 not assessable and not exempt income due to the operation of section 880-105 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Entity A

Entity A is a private company incorporated in Country A and has been a resident of Country A since its incorporation.

Entity A's immediate and ultimate shareholder is a Government owned statutory body corporate.

Entity A manages the Government of Country A's (the "Government") foreign reserves and invests globally in a wide range of asset classes and instruments.

The source of the Government's assets that are managed by Entity A include proceeds from the issuance of Country A Government Securities, Government budget surpluses and proceeds from the Government's land sales.

The funds used by Entity A are from the foreign reserves of Country A, and will remain so for the period that Entity A holds the investment listed in Appendices 1 and 2. The money is invested for the purpose of preserving and enhancing Country A's foreign reserves. As such, the moneys being invested are and will remain funds beneficially owned by the Government.

The Government holds Entity A's Board accountable for the overall portfolio performance. It does not direct or influence Entity A's decisions on individual investments.

Entity A provides monthly and quarterly reports to the Government.

Entity A derives income in the form of interest, dividends, trust distributions and capital gains from its investments.

Entity A does not produce or trade non-financial goods and does not provide services that are not financial services. Entity A does not actively trade in financial assets and liabilities, operate commercially in financial markets or provide services listed in paragraph 880-130(2)(c) of the ITAA 1997.

Previous ruling

Entity A applied for a private ruling in the relevant period in relation to the common law doctrine of sovereign immunity as it applied to the assets listed in Appendix 1 to this Ruling.

A private ruling was granted to Entity A in the relevant period. The Commissioner determined in this private ruling that Entity 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 its investments under the scheme as detailed in the ruling.

Entity A's private ruling issued on applied for a relevant period.

Entity A acquired the investments as listed in Appendix 1 before 27 March 20XX.

For assets managed by Entity A as at a relevant date, Entity A did not own more than 10% equity interest in each of the companies in which it held shares.

Current Australian investments

Entity A has investments in shares in Australian companies and units in Australian trusts which are listed in Appendix 2 to this Ruling.

The Australian investments held by Entity A have the following characteristics:

(a)  The shares in Australian-resident companies or units in Australian-resident managed investment trusts are listed on the Australian Securities Exchange; (ASX)

(b)  Entity A and, to the best of Entity A's knowledge, its sovereign entity group holds less than 10% of the total shares on issue of each Australian company and less than 10% of the total units on issue of each Australian trust;

(c)   Entity A and, to the best of Entity A's knowledge, its sovereign entity group has no involvement in the day to day management of the business of any of the Australian companies or trusts;

(d)  Entity A and, to the best of Entity A's knowledge, its sovereign entity group has no right to appoint a director to the Board of Directors of any of the Australian companies listed in Appendix 2 and has no right to appoint a director to the Board of Directors of any of the trustee companies for the trusts listed in Appendix 2;

(e)  Entity A and, to the best of Entity A's knowledge, its sovereign entity group has no right to representation on any investor representative or advisory committee (or similar) of any of the Australian companies or trusts listed in Appendix 2;

(f)    Entity A and, to the best of Entity A's knowledge, its sovereign entity group has no ability to direct or influence the operation of the Australian company or trust outside of the ordinary rights conferred by the share or unit interest held; and

(g)  Entity A and, to the best of Entity A's knowledge, its sovereign entity group only holds rights to vote as a shareholder or unitholder in proportion to its share interest in the Australian companies or trusts.

Appendices to the relevant facts and circumstances

Appendix 1 - List of Relevant Investments as at 20XX

Appendix 2 - List of Relevant Investments as at 20XX

Relevant legislative provisions

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

Income Tax Assessment Act 1997 section 880-105

Reasons for decision

Question 1

Is ordinary and statutory income derived by Entity A as a return on its investments as listed in Appendix 1 not assessable and not exempt income due to the operation of section 880-5 of the IT(TP)A 1997?

Summary

Ordinary and statutory income derived by Entity A as a return on the investments (as listed in Appendix 1) it acquired before 27 March 20XX is 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 2018 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

Entity A will receive ordinary and/or statutory income as a return on the Australian investments it holds that are listed in Appendix 1.

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.

Entity A is a body politic of a foreign country, or part of a foreign country. Entity A is a non-resident company, 100% of the total participation interests in which are held by the Government. Based on these facts, the Commissioner accepts that Entity A is an entity that satisfies paragraph 880-15(c) of the ITAA 1997.

Therefore, Entity A is a sovereign entity.

3. A return on an investment asset under a scheme

Entity A will, via trust distributions, dividends and capital gains, receive ordinary and/or statutory income as a return on the investments it holds under the scheme specified in the prior private ruling.

Therefore, this requirement is satisfied.

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

Entity A acquired the investments as listed in Appendix 1 before 27 March 20XX.

Therefore, this requirement is satisfied.

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

Entity A applied for a private ruling on 6 June 20XX in relation to the scheme specified in the private ruling that issued on 10 November 20XX.

Therefore, this requirement is satisfied.

6. Private ruling made before 1 July 20XX

This requirement is satisfied.

7. Private ruling applied during the relevant period

This requirement is satisfied.

8. Scheme not materially different

The scheme involving the continuation of Entity A's ownership of the Australian investments listed in Appendix 1 is not materially different to the scheme specified in the prior private ruling.

Therefore, this requirement is satisfied.

9. Relevant income year

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 Entity A from the shares and units it owns in the companies and trusts that are listed in Appendix 1 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 Entity A as a return on its investments as listed in Appendix 2 not assessable and not exempt income due to the operation of section 880-105 of the ITAA 1997?

Summary

Ordinary and statutory income derived by Entity A as a return on the investments as listed in Appendix 2 is not assessable and not exempt income due to the operation of section 880-105 of the ITAA 1997.

Detailed reasoning

Section 880-105 of the ITAA 1997 provides that amounts of ordinary and statutory income derived by a sovereign entity are not assessable and not exempt income if certain conditions are met. Those conditions are listed in subsection 880-105(1) of the ITAA 1997:

(a) the sovereign entity is covered by section 880-125; and

(b) the amount is a return on any of the following kinds of interest that the sovereign entity holds in another entity (the test entity):

(i) a *membership interest;

(ii) a *debt interest;

(iii) a *non-share equity interest; and

(c) the test entity is:

(i) a company that is an Australian resident at the time (the income time) when the amount becomes ordinary or statutory income of the sovereign entity; or

(ii) a *managed investment trust in relation to the income year in which the income time occurs; and

(d) the *sovereign entity group of which the sovereign entity is a member satisfies the portfolio interest test in subsection (4) in relation to the test entity:

(i) at the income time; and

(ii) throughout any 12 month period that began no earlier than 24 months before

that time and ended no later than that time; and

(e) the sovereign entity group of which the sovereign entity is a member does not have influence of a kind described in subsection (6) in relation to the test entity at the income time.

These conditions are considered below.

Entity A is a covered sovereign entity

Section 880-125 of the ITAA 1997 states:

A *sovereign entity is covered by this section if it satisfies all of the following requirements:

(a) the entity is funded solely by public monies;

(b) all returns on the entity's investments are public monies;

(c) the entity is not a partnership;

(d) the entity is not any of the following:

(i) a *public non-financial entity;

(ii) a *public financial entity (other than a public financial entity that only carries on central banking activities).

These conditions are considered below.

Entity A is a sovereign entity

As established in Question 1, Entity A meets the requirements of being a sovereign entity in accordance with section 880-15 of the ITAA 1997 as it is an entity in which the Government, being a body politic of a foreign country, holds a total participation interest of 100%.

Entity A is funded solely by public monies

The phrase 'public monies' is not defined and as such takes its ordinary meaning. In the context of Division 880 of the ITAA 1997, this phrase essentially means monies raised by a foreign government (or part of a foreign government) for a public purpose which form part of the foreign government's (or part of the foreign government's) equivalent to Australia's Consolidated Revenue Fund (Roy Morgan Research Pty Ltd v FC of T & Anor [2011] HCA 35). This would ordinarily include general tax revenue, proceeds from the issue of government bonds, the proceeds of privatisations etc.

The source of the Government's assets managed by Entity A include proceeds from the issuance of Country A Government Securities, Government budget surpluses and proceeds from the Government's land sales.

As such, Entity A is funded solely by public monies.

All returns on Entity A's investments are public monies

The funds used by Entity A are from the foreign reserves of Country A, and will remain so for the period that Entity A holds the investment listed in Appendices 1 and 2. The money is invested for the purpose of preserving and enhancing Country A's foreign reserves.

As such, all returns on Entity A's investments are public monies.

Entity A is not a partnership

Entity A is a private company incorporated in Country A and has been a resident of Country A since its incorporation. It is not a partnership.

As such, it passes this condition.

Entity A is not a public non-financial entity or public financial entity

Subsection 880-130(1) of the ITAA 1997 defines the term public non-financial entity:

An entity is a public non-financial entityif its principal activity is either or both of the following:

(a) producing or trading non-financial goods;

(b) providing services that are not financial services.

Subsection 880-130(2) of the ITAA 1997 defines the term public financial entity:

An entity is a public financial entityif any of the following requirements are satisfied:

(a) it trades in financial assets and liabilities;

(b) it operates commercially in the financial markets;

(c) its principal activities include providing any of the following financial services:

(i) financial intermediary services, including deposit-taking and insurance services;

(ii) financial auxiliary services, including brokerage, foreign exchange and investment management services;

(iii) capital financial institution services, including financial services in relation to assets or liabilities that are not available on open financial markets.

It is noted that subparagraph 880-125(d)(ii) of the ITAA 1997 excludes public financial entities that only carry on central banking activities from being excluded as a covered sovereign entity.

Entity A has the main function of managing the Government of Country A's foreign reserves and currently invests globally in a wide range of asset classes and instruments. Entity A does not produce or trade non-financial goods and does not provide services that are not financial services. Entity A does not actively trade in financial assets and liabilities, operate commercially in financial markets or provide services listed in paragraph 880-130(2)(c) of the ITAA 1997.

As such, Entity A is not a public non-financial entity, nor a public financial entity and passes the condition in paragraph 880-125(d) of the ITAA 1997.

As Entity A satisfies each of the requirements in paragraphs 880-125(a) through (d) of the ITAA 1997, it is a sovereign entity that is covered by section 880-125 of the ITAA 1997 for the purposes of paragraph 880-105(1)(a) of the ITAA 1997.

Entity A's return is received on a relevant interest in the test entities

For an amount of ordinary income or statutory income of a sovereign entity to satisfy paragraph 880-105(1)(b) of the ITAA 1997, it must be a 'return on' a membership interest, debt interest or non-share equity interest held by the sovereign entity in the test entities.

As detailed in paragraph 4.37 of the Explanatory Memorandum to the Making Sure Foreign Investors Pay Their Fair Share of Tax in Australia and Other Measures) Act 2019 ('the EM'), a 'return on' a membership interest for the purposes of paragraph 880-105(1)(b) will include:

1. dividends - including non-share dividends and dividends that pass through a managed investment trust (MIT)

2. interest - including interest that passes through a MIT

3. fund payments made by a MIT (other than fund payments that are attributable to non-concessional MIT income), and

4. revenue gains made on the disposal of an interest in the test entity - including revenue gains that pass through a MIT.

The test entities for the purposes of this ruling are the publicly-traded companies and managed investment trusts listed in Appendix 2 in which Entity A holds shares and units respectively (which meet the requirements of being membership interests as defined by the interaction of sections 960-135 and 960-130 of the ITAA 1997) and pay to Entity A:

·      MIT fund payments, including interest components of trust distributions, and

·      dividends.

As such, Entity A will receive amounts which satisfy the requirements of paragraph 880-105(1)(b) of the ITAA 1997.

Entity A's income is received from Australian resident companies or managed investment trusts

For an amount of ordinary income or statutory income of a sovereign entity to satisfy paragraph 880-105(1)(c) of the ITAA 1997, it must be received from an entity that is either:

(i) a company that is an Australian resident at the time (the income time) when the amount becomes ordinary or statutory income of the sovereign entity; or

(ii) a *managed investment trust in relation to the income year in which the income time occurs.

The test entities which are listed in Appendix 2 are Australian resident companies and a managed investment trusts.

As such, Entity A receives income from entities which satisfy the requirements of paragraph 880-105(c) of the ITAA 1997.

Entity A' sovereign entity group satisfies the portfolio interest test

For an amount of ordinary income or statutory income of a sovereign entity to satisfy paragraph 880-105(1)(d) of the ITAA 1997, the sovereign entity and the sovereign entity group to which it belongs must satisfy the portfolio interest test in relation to the test entity/entities at both the income time and throughout any 12 month period that began no earlier than 24 months before that time and ended no later than that time.

The portfolio interest test is outlined in subsection 880-105(4), which states:

A *sovereign entity group satisfies the portfolio interest test in this subsection in relation to the test entity at a time if, at that time, the sum of the *total participation interests that each *member of the group holds in the test entity:

(a) is less than 10%; and

(b) would be less than 10% if, in working out the *direct participation interest that any entity holds in a company:

(i) an *equity holder were treated as a shareholder; and

(ii) the total amount contributed to the company in respect of *non-share equity interests were included in the total paid-up share capital of the company.

Section 880-20 provides the definition of sovereign entity group. Broadly, sovereign entities of the same foreign government will be members of the same sovereign entity group and sovereign entities of the same part of a foreign government will be members of the same sovereign entity group.

Entity A and its sovereign entity group holds less than 10% of the total shares on issue of each Australian company and less than 10% of the total units on issue of each Australian trust.

Therefore, this condition is satisfied.

Entity A's sovereign entity group does not have influence of a kind described in subsection (6)

For an amount of ordinary income or statutory income of a sovereign entity to satisfy paragraph 880-105(1)(e) of the ITAA 1997, at the income time the sovereign entity group to which the sovereign entity belongs must not have influence over the test entity of a kind described in subsection 880-105(6) of the ITAA 1997.

Subsection 880-105(6) of the ITAA 1997 states:

A *sovereign entity group has influence of a kind described in this subsection in relation to the test entity at a time if any of the following requirements are satisfied at that time:

(a) a *member of the group:

(i) is directly or indirectly able to determine; or

(ii) in acting in concert with others, is directly or indirectly able to determine;

the identity of at least one of the persons who, individually or together with others, make (or might reasonably be expected to make) the decisions that comprise the control and direction of the test entity's operations;

(b) at least one of those persons is accustomed or obliged to act, or might reasonably be expected to act, in accordance with the directions, instructions or wishes of a member of the group (whether those directions, instructions or wishes are expressed directly or indirectly, or through the member acting in concert with others).

As such, there are two distinct sub-tests within the influence test.

Sub-test 1 of the influence test, as contained in paragraph 880-105(6)(a) of the ITAA 1997, assesses whether the sovereign entity group is able to determine the identity of at least one of the persons who, individually or together with others, makes or is reasonably expected to make, decisions comprising the control and direction of the test entity's operations. This includes situations where the sovereign entity group is able to act in concert with others to determine the identity of a relevant decision-maker in the test entity.

Sub-test 1 also extends to situations where the sovereign entity group, in its own right, holds the ability to approve or veto decisions which go to the control or direction of the test entity.

Sub-test 2 of the influence test, as contained in paragraph 880-105(6)(b) of the ITAA 1997, assesses whether at least one of the relevant decision-making persons of the test entity is accustomed or obliged to act, or might reasonably be expected to act, in accordance with the directions, instructions or wishes of the sovereign entity group.

In relation to Entity A's investments in the Australian companies and trusts listed in Appendix 2:

(a)  Entity A and, to the best of Entity A's knowledge, its sovereign entity group has no involvement in the day to day management of the business of any of the Australian companies or trusts

(b)  Entity A and, to the best of Entity A's knowledge, its sovereign entity group has no right to appoint a director to the Board of Directors of any of the Australian companies listed in Appendix 2 and has no right to appoint a director to the Board of Directors of any of the trustee companies for the trusts listed in Appendix 2

(c)   Entity A and, to the best of Entity A's knowledge, its sovereign entity group has no right to representation on any investor representative or advisory committee (or similar) of any of the Australian companies or trusts listed in Appendix 2

(d)  Entity A and, to the best of Entity A's knowledge, its sovereign entity group has no ability to direct or influence the operation of the Australian company or trust outside of the ordinary rights conferred by the share or unit interest held; and

(e)  Entity A and, to the best of Entity A's knowledge, its sovereign entity group only holds rights to vote as a shareholder or unitholder in proportion to its share interest in the Australian companies or trusts.

Based upon the above, the sovereign entity group of Entity A does not have influence of a kind described in subsection 880-105(6) of the ITAA 1997 and will, therefore, satisfy the requirements of paragraph 880-105(1)(f) of the ITAA 1997.

Conclusion

As all of the conditions listed in subsection 880-105(1) of the ITAA 1997 have been satisfied, section 880-105 of the ITAA 1997 will apply to the effect that amounts of ordinary and statutory income derived by Entity A from its investments in the Australian investments listed in Appendix 2 are not assessable and not exempt income for the period from 1 July 20XX to 30 June 20XX.