Edited version of private advice

Authorisation Number: 1051752506505

Date of advice: 23 September 2020

Ruling

Subject: Sovereign immunity

Question

Is the ordinary and statutory income derived by Entity A from its interests in the Test Entities not assessable and not exempt income under section 880-105 of the Income Tax Assessment Act 1997 (ITAA 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

Entity A

Entity A is a body politic of a foreign country that controls multiple sovereign wealth funds.

The sovereign wealth funds form part of the funds available to the government of Entity A in implementing government policy and pursuing government objectives. They are created by law.

Entity A is not a partnership under Division 5 of the Income Tax Assessment Act 1936.

Entity A is not a resident trust estate as defined in Division 6 of the ITAA 1936.

Entity A is funded by government surpluses, contributions from the government's central budget, and mining royalties.

Investments

Entity A invests in a combination of Australian equity and debt instruments.

With respect to equity investments, Entity A has equity interests in the Test Entities. All of the Test Entities are Australian Stock Exchange (ASX) listed. The equity investments that Entity A currently has in Australia have the following characteristics:

a.    Entity A and all members of its sovereign entity group hold collectively less than 1% of the total participation interests in each of the Test Entities.

b.    Entity A and all members of its sovereign entity group would hold collectively less than 1% of the total participation interests in the Test Entities in the circumstances detailed in paragraph 880-105(4)(b) of the ITAA 1997.

c.     Neither Entity A, nor any members of its sovereign entity group, has involvement in the day to day management of the business of any of the Test Entities.

d.    Neither Entity A, nor any members of its sovereign entity group, has the right to appoint a director to the Board of Directors of any of the Test Entities.

e.    Neither Entity A, nor any members of its sovereign entity group, holds the right to representation on any investor representative or advisory committee (or similar) of the Test Entities.

f.      Neither Entity A, nor any members of its sovereign entity group, has the ability to direct or influence the operation of the Test Entities outside of the ordinary rights conferred by the interest held.

g.    Entity A's interests in the Test Entities do not provide it with an entitlement to either directly or indirectly determine the identity of any person who make decisions that comprise the control and direction of the Test Entities' operations.

h.    Entity A's interests, when combined with the other interests held within its sovereign entity group, do not provide an entitlement to either directly or indirectly determine the identity of any person who make decisions that comprise the control and direction of the Test Entities' operations.

i.      No person involved in the control and direction of the Test Entities' operations is accustomed or obliged to act in accordance with the directions, instructions or wishes of Entity A or members of Entity A's sovereign entity group.

Entity A also invests in debt interests. These debt investments are issued by the Test Entities and include Australian resident corporations.

With respect to the debt investments, the debt investments do not give Entity A or Entity A's sovereign entity group any influence in the Test Entities potentially of a kind described in subsection 880-105(6) of the ITAA 1997.

Entity A derives dividend income, interest income, capital gains, and MIT fund payments from its interests in Australian resident entities.

Relevant legislative provisions

Division 880 of the Income Tax Assessment Act 1997

Reasons for decision

Question

Is the ordinary and statutory income derived by Entity A from its interests in the Test Entities not assessable and not exempt income under section 880-105 of the ITAA 1997?

Summary

All of the conditions listed in subsection 880-105(1) have been satisfied in relation to Entity A's investments in the Test Entities. As such, section 880-105 will apply to the effect that amounts of ordinary and statutory income derived by Entity A from the Test Entities will be not assessable and not exempt income.

Detailed reasoning

Section 880-105 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):

(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 (thetest 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 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

For an entity to be covered by section 880-125, it must be a sovereign entity. Section 880-15 defines a sovereign entity to be any of the following:

(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) holds 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 Income Tax Assessment Act 1936.

Entity A is a body politic of a foreign country. It is not an Australian resident or a resident trust estate.

As such, Entity A is a sovereign entity under section 880-15, being a body politic of or part of a foreign country.

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, 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.

Entity A is funded by royalties, government surpluses, and contributions from the central budget of the foreign government.

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

All returns on Entity A's investments are public monies

As Entity A constitutes part of the State, all of its investment returns also constitute public monies.

Funds of Entity A are used to implementing government policy and pursuing government objectives.

All returns on Entity A's investments therefore go towards public purposes and are at the government of Entity A's disposal. As such, Entity A satisfies this requirement.

Entity A is not a partnership

Entity A is a part of the State and is not a separate or decentralised entity with its own legal status. It is not a partnership under section 6 of the ITAA 1936. Entity A therefore satisfies this requirement.

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

Subsection 880-130(1) 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) 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.

Based on the circumstances, the Commissioner accepts that Entity A is not either a public non-financial entity or a public financial entity under subsection 880-130(2), being a part of the State and not engaging in the relevant activities outlined in subsection 880-130(1) or paragraph 880-130(2).

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

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), 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.

Entity A invests in the Test Entities which are all Australian resident companies or MITs. Entity A holds both equity and debt interests in the Test Entities. Entity A receives dividend income, interest income, and MIT fund payments from the Test Entities.

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

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), 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.

As previously outlined, the relevant Test Entities are all Australian resident companies and MITs which pay dividend income, interest income, and MIT fund payments to Entity A.

As such, Entity A receives income from an entity which satisfies the requirements of paragraph 880-105(c).

Entity A's 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), the sovereign entity and the sovereign entity group to which it belongs must satisfy the portfolio interest test in relation to the test entity/ies 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.

Based on the facts provided, Entity A, together with its sovereign entity group holds substantially less than 10% of the equity interests in all of the Test Entities. As such, paragraph 880-105(d) of the ITAA 1997 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), 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).

Subsection 880-105(6) 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), 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), 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.

The equity and debt holdings that Entity A's sovereign entity group have in the Test Entities do not give Entity A, directly or indirectly, or acting in concert with others, any ability to appoint, control or influence any person that has the ability to participate in or influence decisions that comprise the control and direction of the Test Entities. There are no rights to appoint directors, management, or any other person in a decision-making capability within the Test Entities. Entity A has no ability to influence or otherwise participate in the decision-making of the Test Entities, or the appointment of persons that do have this capability.

No relevant decision-making person in the Test Entities is accustomed or obliged to act, or might reasonably be expected to act, in accordance with the directions, instructions or wishes of Entity A or any other entity within the sovereign entity group.

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

Conclusion

As all of the conditions listed in subsection 880-105(1) have been satisfied, section 880-105 will apply to the effect that amounts of ordinary and statutory income derived by Entity A from its interests in the Test Entities is not assessable and not exempt income.