Edited version of private advice

Authorisation Number: 1051918328047

Date of advice: 4 November 2021

Ruling

Subject: International issues - sovereign immunity

Question

Will the Fund be immune from income tax and withholding tax on income derived from its investments listed in Appendix 1 and 2 of this Ruling under the common law doctrine of sovereign immunity for the period ended 30 June 20XX?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Fund

The Fund was established by amendment of the Constitution of the State of the Foreign State (the Constitution).

The Fund does not have its own legal identity.

The Fund consists of a portion of taxation revenue received by the State.

The purpose of the Fund is to conserve and invest the portion of taxation revenue for the benefit of the State.

All income and gains arising on the investments of the Fund are for the sole and exclusive benefit of the State. No person other than the State has the right to use, enjoy or dispose of the income and gains which arise on such investments.

The Company

The Company is a resident of the State and was created under the Laws of the State.

The Company's purpose is to manage and invest the assets of the Fund and other funds designated by law in accordance with the Laws of the State.

The Company is managed by its board of trustees (the Board). Investment authority over the Fund's assets is vested in the Board.

Taxation

The Fund and the company are exempt from all taxes in the State and in the Foreign Country.

Investments

The Fund, through the Company, invests in a wide range of both public and private assets including real estate, bonds, public and private equities, infrastructure and hedge funds.

Appropriation of the Fund's income

Calculation of the Fund's income is governed by the Laws of the State.

The operating budget of the Company is to be funded from the revenue generated from the Fund's investments.

The Company will transfer an amount to the Fund to offset the effect of inflation during that year.

Investments

As at 30 June 20XX, the Fund, through the Company, held a portfolio of equity investments detailed in Appendix 1 and 2 of this Ruling. The equity interests held by the Fund have the following characteristics:

a.    The Fund and all related parties hold collectively less than 10% of the total participation interests in each of the equity issuers.

b.    Each of the investment entities is listed on the Australian Securities Exchange (ASX).

c.     Neither the Fund, nor any related party, has involvement in the day to day management of the business of any of the equity issuers.

d.    Neither the Fund, nor any related party, has the right to appoint a director to the Board of Directors of any of the equity issuers.

e.    Neither the Fund, nor any related party, holds the right to representation on any investor representative or advisory committee (or similar) of the equity issuers.

f.      Neither the Fund, nor any related party, has the ability to direct or influence the operation of the equity issuers outside of the ordinary rights conferred by the interest held.

g.    The Fund only has rights to vote as a shareholder or unit holder, as the case may be, in proportion to their equity interest in the relevant entity.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 128B

Income Tax Assessment Act 1997 section 4-1

Reasons for decision

Question 1

Will the Fund be immune from income tax and withholding tax on income derived from its investments listed in Appendix 1 and 2 of this Ruling under the common law doctrine of sovereign immunity for the period ended 30 June 20XX?

Detailed reasoning

Non-resident taxpayers will generally be liable to pay income tax under section 4-1 of the Income Tax Assessment Act 1997 (ITAA 1997) or withholding tax under section 128B of the ITAA 1936 on Australian-sourced income, unless an exemption or exclusion applies.

Sovereign immunity background

Certain income derived from within Australia by foreign governments is exempt from Australian tax under the international law doctrine of sovereign immunity.

For Australian income tax and withholding tax purposes, it is accepted that the doctrine of sovereign immunity applies to a foreign government or an agency of a foreign government that engages in governmental functions. This approach is consistent with the decision of the British House of Lords in the case I Congreso del Partido [1981] 2 All ER 1064 which held that activities of a trading, commercial or other private law character were not governmental functions.

When determining whether the doctrine of sovereign immunity applies to exempt Australian sourced income and gains from Australian income tax and/or withholding tax, it is necessary to establish the following:

1. That the person making the investment (and therefore deriving the income) is a foreign government or an agency of a foreign government
2. That the monies invested are and will remain government monies, and
3. That the income or gain is being derived from a non-commercial activity.

If these three conditions are satisfied, then the income or gains will not be subject to Australian income tax and/or withholding tax.

Condition 1: A foreign government or agency of a foreign government

A 'foreign government agency' is defined in subsection 995-1(1) 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.

The Fund was established by amendment of the Constitution and is without its own legal identity. The Fund was established by the State to conserve and invest the portion of taxation revenue for the benefit of the State. It is managed by the Company which was created under the Laws of the State. The Fund is considered to be an authority of the government of the State.

The Fund is considered to be an authority of the government of part of a foreign country and is therefore considered a foreign government agency.

As such, the Fund meets this requirement.

Condition 2: The monies being invested are and will remain government monies

The purpose of the Fund is to conserve and invest a portion of taxation revenue for the benefit of the State. All income and gains arising on the investments of the Fund are for the sole and exclusive benefit of the State. No person other than the State has the right to use, enjoy or dispose of the income and gains which arise on such investments.

Accordingly, the monies being invested are, and will remain, government monies.

As such, the Fund meets this requirement.

Condition 3: The income or gain is being derived from a non-commercial activity

As noted in ATO Interpretative Decision ATO ID 2002/45 (Withdrawn) Withholding Tax Sovereign Immunity ('ATO ID 2002/45'), whether an operation or activity is a commercial transaction will depend on the facts of each case. As a guide, a commercial transaction is generally considered to be an activity concerned with the trading of goods and services, such as buying, selling, bartering, transportation, and includes the carrying on of a business. A passive investment is more likely to be considered a non-commercial transaction.

In relation to the ownership of shares in a company or other similar equity interests, there will be circumstances where the extent of the holding gives rise to questions as to whether the interests constitute a passive investment or a commercial investment. Although dependent on each set of circumstances, a portfolio holding in a company (i.e. a holding of 10 per cent or less of the equity in a company) will generally be accepted as a non-commercial activity and any dividends received from such a holding would be immune from tax.

In all circumstances, consideration will be given to factors relating to the influence or control that may be able to be exercised by the investor (or a related party/associate of the investor) in relation to the investment. This includes (but is not limited to) any potential influence or control the investor may have in relation to the day to day management and key business, strategy and financial decisions made by the entity in which the investment is made.

The Fund's investments are all in ASX listed entities in which they hold significantly less than 10 per cent of the equity in the company.

In addition, the Fund has no actual or potential influence in respect of the Australian investments listed in Appendix 1 and 2 of this Ruling.

All of the Fund's equity investments listed in Appendix 1 and 2 of this Ruling have the following characteristics:

a)    Are investments in entities that are publicly listed on the ASX

b)    The Fund, along with any related party, hold a combined total less than 10% of the total equity available in each entity

c)    Neither the Fund, nor any related party, are involved in the day to day management of the issuing entity's business

d)    Neither the Fund, nor any related party, have a right to representation on the board of an equity issuer

e)    Neither the Fund, nor any related party, have a right to representation on any investor representative, advisory committee, or similar, of any equity issuer, and

f)     The Fund only has rights to vote as a shareholder or unit holder, as the case may be, in proportion to its equity interest in the relevant entity.

Based on the facts and circumstances of this case, it is accepted that the Fund's Australian investments listed in Appendix 1 and 2 of this Ruling are non-commercial.

As such, the Fund satisfies this requirement.

Conclusion

The Fund is immune from income tax and withholding tax on all income and gains derived from the Australian investments listed in Appendix 1 and 2 of this Ruling pursuant to the common law doctrine of sovereign immunity.