Edited version of private advice

Authorisation Number: 1051790126569

Date of advice: 15 December 2020

Ruling

Subject: Sovereign immunity

Question

Is ForeignCo a 'covered sovereign entity' under section 880-125 of the ITAA 1997?

Answer

Yes. This Ruling concerns only whether ForeignCo is a covered sovereign entity under section 880-125 of the ITAA 1997 and does not consider whether section 880-105 of the ITAA 1997 (or any other provision) applies to any investments of ForeignCo because it has no relevant investments at the date of this Ruling.

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

ForeignCo is a public institution owned, established and supervised by the Government of Country X (the Government).

The Government wholly owns ForeignCo. ForeignCo wholly owns SubCo. The SubCo CEO reports to ForeignCo's Managing Director and Group CEO.

ForeignCo manages a global investment portfolio in a wide range of asset classes.

ForeignCo's primary objective is to invest funds and deliver sustained long-term financial returns so the government can provide for Country X's current and future welfare. ForeignCo receives its funds from the Government's financial surplus to its budgetary and other funding requirements.

ForeignCo is the Government's sovereign wealth fund. ForeignCo was established by the Government to invest its surplus financial resources through globally diversified asset classes and active investment management strategies and to assist the Government in achieving continuous financial success and wealth protection, while sustaining prosperity for the future.

The Government's laws and regulations require entities such as SubCo (and the companies they have the power to establish), to exercise independent power as separate legal entities when conducting their business and governing their corporate affairs.

ForeignCo's Articles of Association provide it has the power to borrow money however it has made no such borrowings.

Any monies given to ForeignCo, or income made by ForeignCo, are ultimately owned by the Government. The Government is able to recall any monies of ForeignCo at any time. At the time of SubCo's dissolution or liquidation, the investment fund shall devolve upon the Government in accordance with the conditions stipulated by the law, as would apply to ForeignCo.

ForeignCo wholly owns SubCo2. SubCo2 operates a public bonds program. The proceeds raised from the public bonds program can only be used for SubCo2 and its consolidated subsidiaries, joint operations and equity accounted investees. None of this third party debt funding forms part of ForeignCo's monies.

ForeignCo is not a partnership.

ForeignCo is not a resident of Australia for income tax purposes.

ForeignCo is not in the business of trading in equity and debt securities with the intent of deriving profits from the buying and selling of securities.

Australian investments

ForeignCo's investment decisions are based solely on economic objectives.

ForeignCo (as a standalone entity) does not currently own any direct investment holdings in Australia.

Relevant legislative provisions

Division 880 of the Income Tax Assessment Act 1997 (ITAA 1997)

Reasons for decision

Summary

ForeignCo is a covered sovereign entity due to the operation of section 880-125 of the ITAA 1997.

Detailed reasoning

ForeignCo 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.

ForeignCo 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.

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.

Section 960-180 provides that an entity's total participation interest in another entity is the sum of:

(a) the entity's direct participation interest in the other entity at that time; and

(b) the entity's indirect participation interest in the other entity at that time.

The Government is an independent, sovereign state. ForeignCo is the Government's investment authority.

ForeignCo is supervised by the Government and has its primary objective as investing funds and delivering sustained long-term financial returns so the government can provide for Country X's current and future welfare.

As ForeignCo is an investment authority of the government of a foreign country (or part of a foreign country), it is a foreign government agency and meets the requirements of being a sovereign entity as defined in section 880-15 of the ITAA 1997.

ForeignCo 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.

ForeignCo's primary objective is to invest funds and deliver sustained long-term financial returns so the Government can provide for Country X's current and future welfare. ForeignCo receives its funds from the Government's financial surplus to its budgetary and other funding requirements.

As such, ForeignCo is funded solely by public monies.

All returns on ForeignCo's investments are public monies

ForeignCo manages and administers the Government's investments.

Any monies given to ForeignCo, or income made by ForeignCo, are ultimately owned by the Government. The Government is able to recall any monies of ForeignCo at any time. In the event ForeignCo is liquidated or dissolved, all assets and monies will flow back to the Government.

Therefore, all returns on ForeignCo's investments are public monies.

ForeignCo is not a public non-financial or financial entity

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

An entity is a public non-financial entity if 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 entity if 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.

Is ForeignCo a public non-financial entity?

The Draft Law Companion Ruling 2019/D4 The superannuation fund for foreign residents withholding tax exemption and sovereign immunity (LCR 2019/D4) provides that a public non-financial entity is determined by:

70. Whether an entity is producing or trading non-financial goods and/or providing services that are not financial services is a question of fact.

ForeignCo does not produce or trade in non-financial goods or provide non-financial services. As such, it is not a public non-financial entity as defined in subsection 880-130(1).

Is ForeignCo a public financial entity?

ForeignCo was established to be a sovereign wealth fund so the Government can provide for Country X's current and future welfare. All monies and income gained by ForeignCo are ultimately returned to the Government for this purpose. A genuine sovereign wealth fund like ForeignCo does not trade in financial assets and liabilities but rather to benefit the obligations owed to a foreign government.

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

As ForeignCo satisfies each of the requirements in paragraphs 880-125(a) through (d) it is considered a sovereign entity that is covered by section 880-125.

Conclusion

As all of the conditions listed in section 880-125 have been satisfied, ForeignCo is a covered sovereign entity for the purposes of Division 880.