Edited version of private advice

Authorisation Number: 1051726009080

Date of advice: 28 July 2020

Ruling

Subject: Sovereign immunity transitional provisions

Question 1

Is the ordinary and statutory income derived by Entity A from the units and/or debt interests it owns in Hold Trust A that were acquired on or before 27 March 2018 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 Entity C from the units and/or debt interests it owns in the in Hold Trust B 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 Entity A in respect of the units and/or debt interests it owns in the Hold Trust A that were acquired on or before 27 March 2018, be disregarded pursuant to section 880-15 of the of the IT(TP)A 1997?

Answer

Yes.

Question 4

Will any capital gain arising to Entity C in respect of the units and/or debt interests it owns in the Hold Trust B that were acquired on or before 27 March 2018, be disregarded pursuant to section 880-15 of the of the IT(TP)A 1997?

Answer

Yes.

Question 5

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

Answer

Yes.

Question 6

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

Answer

Yes.

Question 7

Does subsection 840-805(9) of the Income Tax Assessment Act 1997 (ITAA 1997) apply to exclude Entity C from liability to withholding tax on income from Hold Trust B 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:

Year ended 30 June 2020

Year ended 30 June 2021

Year ended 30 June 2022

Year ended 30 June 2023

Year ended 30 June 2024

Year ended 30 June 2025

Year ended 30 June 2026

The scheme commences on:

1 July 2019

Relevant facts and circumstances

Entity B

1. Entity B is a sovereign wealth fund.
2. The funds used by Entity B in all of its investments are reserve funds of the State. Additionally, no personal monies of any individual have been contributed to Entity B.
3. The income generated by Entity B on the investment of the State reserve funds is either re-invested by Entity B or distributed to the Government.
4. No distributions of income or gains from Entity B have been made or can be made to any person other than the Government.
5. Entity B is resident in the State for income tax purposes and is not subject to income tax.
6. Entity B is not a tax resident in Australia. In particular, Entity B has neither its central management and control in Australia nor is Entity B's voting power controlled by Australian residents.

Entity B Holding Structure

7. For the purposes of its investment in Project, Entity B has established the following entities:

Entity A

Entity D

Entity C

A Holding

8. A Holding is a limited liability company incorporated pursuant to the regulations of the Financial Centre.
9. A Holding is the global holding platform for investments made by Entity B.
10. A Holding is a resident of State for income tax purposes.
11. A Holding is exempt from taxation in State.
12. A Holding is wholly-owned by Entity B.
13. A Holding owns B Holding, which is the 100% owner of Entity C.
14. A Holding is not a tax resident of Australia nor does it have a permanent establishment in Australia under subsection 6(1) of the Income Tax Assessment Act 1936.

Entity A

15. Entity A is a company incorporated in the Country A.
16. Entity A is a wholly-owned subsidiary of A Holding. Entity A was established by A Holding as a special purpose vehicle to hold Entity B's investment in Project.
17. Entity A is not a tax resident in Australia and is not subject to income tax in State, whether directly or indirectly.
18. Entity A is not a tax resident of Australia nor does it have a permanent establishment in Australia under subsection 6(1) of the ITAA 1936.
19. Entity A owns a percentage of the units in Hold Trust A.
20. Entity A owns 100% of the units in Entity D.
21. Entity A has no other Australian investments aside from its investment in Project.
22. Entity A is not in the business of money lending. However, Entity A has provided an interest bearing investor loan to Hold Trust A which has been entered into on ordinary commercial terms.

Entity C and Entity D

23. Entity C is a company incorporated in Country A.
24. Entity C is a special purpose vehicle established by Holding B to be the trustee of the Entity D.
25. Entity D is a unit trust, the trustee of which is Entity C. Entity C is not a tax resident in Australia and is not subject to income tax in State, whether directly or indirectly.
26. All of the units in Entity D are owned by Entity C.
27. Entity C and Entity D are not tax residents of Australia nor do they have a permanent establishment in Australia under subsection 6(1) of the ITAA 1936
28. In its capacity as trustee of Entity D, Entity C owns a percentage of the units in Hold Trust B.
29. Entity C does not hold any other Australian investments as trustee for Entity D aside from the investment in Project.

Income received under the scheme

30. Entity A 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 the Hold Trust A.
31. Entity C, as trustee for Entity D, 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 the Hold Trust B.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 128B

Income Tax Assessment Act 1997 section 840-805

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 Entity A from the units and/or debt interests it owns in the Hold Trust A 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 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 (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

Entity A 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 the Hold Trust A.

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) 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

Entity B was established for the purposes of developing, investing and managing the reserve funds of the State. Entity B is officially recognised as a government body. The policies, strategies and plans implemented by Entity B must be approved by the government body.

Entity A is 100% owned by Holding A, which is 100% owned by Entity B.

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

Entity A 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, Entity A will meet the definition of a 'sovereign entity' by virtue of operation of paragraph 880-15(c) of the ITAA 1997.

Therefore, this requirement satisfied.

3. A return on an investment asset under a scheme

Entity A will receive ordinary and/or statutory income as a return on the investment assets (units in trusts and debt interests) under a scheme. A 'scheme' is widely defined in subsection 995-1(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. The scheme set out in the ruling issued to Entity A is a relevant scheme involving the income derived on Entity A's:

·        interest held in the Hold Trust A; and

·        The loans made to the Hold Trust A.

Therefore, this requirement is satisfied.

4. Investment asset acquired on or before 27 March 2018

Entity A acquired the investments in the Hold Trust A before 27 March 2018.

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 Entity A after 27 March 2018.

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

The Commissioner accepts that you applied for a private ruling before 27 March 2018.

Therefore, this requirement is satisfied.

6. Private ruling was made before 1 July 2026

The Commissioner determined in the 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 in the Hold Trust A.

Therefore, this requirement is satisfied.

7. Private ruling applied during the relevant period

Entity A's private ruling was issued and applied for the relevant period.

8. Scheme not materially different

The scheme involving the continuation of Entity A's investments in the Hold Trust A is not materially different to the scheme specified in the private ruling that issued.

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

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 units it owns in Hold Trust A and the loans that it has made to Hold Trust A that were acquired on or before 27 March 2018 will be non-assessable non-exempt income.

Question 2

Is ordinary and statutory income derived by Entity C, as trustee for Entity D, from the units and/or debt interests it owns in the in the Hold Trust B 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

Transitional provisions

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

Analysis

1. An amount of ordinary income or statutory income

Entity C, as trustee for, Entity D 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 the Hold Trust B.

Therefore, this requirement is satisfied.

2. Sovereign entity

The definitions of 'sovereign entity' and 'foreign government agency' are set out above in Question 1.

All the units of Entity D are owned by Entity A, which as determined above in Question 1 is a wholly-owned subsidiary of Entity B.

Entity C, the corporate trustee of Entity D, is 100% owned by B Holding. B Holding is 100% owned by A Holding.

On these facts and circumstances, it is accepted that Entity C and Entity D are entities which a foreign government agency holds a total participation interest (as defined by section 960-180 of the ITAA 1997) of 100%.

Neither entity is an Australian resident and neither entity is a resident trust estate for the purposes of Division 6 of Part III of the ITAA 1936.

As such, Entity C and Entity D will meet the definition of 'sovereign entity' by virtue of the operation of paragraph 880-15(c) of the ITAA 1997.

Therefore, this requirement is satisfied.

3. A return on an investment asset under a scheme

Entity C, as trustee for Entity D, will receive ordinary and/or statutory income as a return on the investment assets (units in trusts and debt interests) under a scheme. The definition of a 'scheme' is considered above in Question 1. The scheme set out in the ruling issued to Entity C, as trustee for, Entity D is a relevant scheme involving the income derived on:

·        interest held in the Hold Trust B; and

·        The loans made to the Hold Trust B.

Therefore, this requirement is satisfied.

4. Investment asset acquired on or before 27 March 2018

Entity C, as trustee for Entity D, acquired its units and debt interests in the Hold Trust B before 27 March 2018.

Therefore, this requirement is satisfied.

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

The Commissioner accepts that you applied for a private ruling before 27 March 2018 and, therefore, this requirement is satisfied.

6. Private ruling made before 1 July 2026

The Commissioner determined in the private ruling that Entity C as trustee for Entity D 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 the Hold Trust B.

Therefore, this requirement is satisfied.

7. Private ruling applied during the relevant period

The private ruling issued to and applied for the relevant period.

Therefore, this requirement is satisfied.

8.     Scheme not materially different

The scheme involving the continuation of Entity C's investments in the Hold Trust B, as trustee for Entity D, is not materially different to the scheme specified in the private ruling that issued.

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

As all the requirements in section 880-5 of the IT(TP)A 1997 are satisfied, ordinary and statutory income derived by Entity C, as trustee for Entity D, from its units and debt interests in the Hold Trust B that were acquired on or before 27 March 2018 will be non-assessable non-exempt income.

Question 3

Will any capital gain arising to Entity A in respect of the units and/or debt interests it owns in the Hold Trust A that were acquired on or before 27 March 2018, be disregarded pursuant to section 880-15 of the 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 the Hold Trust A and interest bearing investor loans made to the Hold Trust A 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 these assets would trigger a CGT event in which Entity 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 of 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, which 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 Entity A in the Hold Trust A 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 will either be 'debt interests' or, alternatively, 'non-share equity interests' in the Hold Trust A.

Therefore, this requirement is satisfied.

3.     The requirements in paragraphs 880-5(b) to (g) of the IT(TP)A 1997 have been 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

As all the requirements in section 880-15 of the IT(TP)A 1997 are satisfied, any capital gain arising to Entity A in respect of the units and debt interests it owns in the Hold Trust A that were acquired on or before 27 March 2018 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 Entity A would make on those listed investments.

Question 4

Will any capital gain arising to Entity C, as trustee for Entity D, in respect of the units and/or debt interests it owns in the Hold Trust B that were acquired on or before 27 March 2018, be disregarded pursuant to section 880-15 of the 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 units in the Hold Trust B and interest bearing investor loans made to the Hold Trust B 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 these assets would trigger a CGT event in which Entity C, as trustee for Entity D, may make a capital gain under the scheme.

Therefore, this requirement is satisfied.

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

The legislative provisions that define 'membership interest' are set out above in Question 3.

These provisions lead to the conclusion that the units held by Entity C, as trustee for Entity D, are membership interests for the purpose of the ITAA 1997.

The legislative provisions that define 'debt interest' and non-share equity interest are set out above in Question 3.

The Commissioner accepts that the Shareholder Loans will either be 'debt interests' or, alternatively, 'non-share equity interests' in the Hold Trust B.

Therefore, this requirement is satisfied.

3.     The requirements in paragraphs 880-5(b) to (g) of the IT(TP)A 1997 have been satisfied.

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.

Conclusion

As all the requirements in section 880-15 of the IT(TP)A 1997 are satisfied any capital gain arising to Entity C, as trustee for Entity D, in respect of the units and debt interests it owns in the Hold Trust B that were acquired on or before 27 March 2018 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 Entity C, as trustee for Entity D, would make on those listed investments.

Question 5

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

Detailed Response

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 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) 1997.'

As established in Question 1, the ordinary and statutory income derived by Entity A as a return on the units and debt interests it owns the Hold Trust A is considered non-assessable non-exempt income under Division 880 of the IT(TP)A 1997.Therefore, Entity A is excluded from liability to withholding tax on its income that it receives from the Hold Trust A under paragraph 128B(3)(n) of the ITAA 1936.

Question 6

Do subparagraph 128B(3)(n) of the ITAA 1936 and subsection 840-805(9) of the ITAA 1997 apply to exclude Entity C, in its capacity as trustee for Entity D, from liability to withholding tax on income from Hold Trust B that is non-assessable non-exempt income due to the operation of Division 880 of the IT(TP)A 1997?

Detailed Response

Exclusion under paragraph 128B(3)(n) of the ITAA 1936

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 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) 1997.'

As established in Question 1, the ordinary and statutory income derived by Entity C, in its capacity as trustee for Entity D, as a return on the units and debt interests it owns the Hold Trust B is considered non-assessable non-exempt income under Division 880 of the IT(TP)A 1997.

Therefore, Entity C, in its capacity as trustee for Entity D, is excluded from liability to withholding tax on its income that it receives from the Hold Trust B under paragraph 128B(3)(n) of the ITAA 1936.

Question 7

Does subsection 840-805(9) of the Income Tax Assessment Act 1997 (ITAA 1997) apply to exclude Entity C, in its capacity as trustee for Entity D, from liability to withholding tax on income from Hold Trust B that is non-assessable non-exempt income due to the operation of Division 880 of the IT(TP)A 1997?

Detailed Response

Exclusion under 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 in accordance with subsections 840-805(2), (3) and (4) of the ITAA 1997.

Subsection 840-805(9) of the ITAA 1997 notes that subsections 840-805(2), (3) and (4) of the ITAA 1997 do not apply to you if the payments made 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 Entity C, as trustee for Entity D, as a return on the units and debt interests it owns in the Hold Trust B is considered non-assessable non-exempt income under Division 880 of the IT(TP)A 1997.

Therefore, Entity C, as trustee Entity D, 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.