Edited version of private advice

Authorisation Number: 1052011005708

Date of advice: 27 July 2022

Ruling

Subject: Sovereign immunity

Question 1

Is the ordinary and statutory income derived by ForCo from its investment in MIT 1 not assessable income and not exempt income under section 880-105 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Is the ordinary and statutory income derived by ForCo from its investment in MIT 2 not assessable income and not exempt income under section 880-105 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period:

1 July 20xx to 30 June 20xx

The scheme commences on:

1 July 20xx

Relevant facts and circumstances

1.    Country X is an independent, sovereign state.

2.    The Agency is one of the departments of the Government of Country X (the Government).

3.    The Agency is not a separate entity from the Government.

4.    The Agency does not have an Australian tax file number, maintain an office or engage in any trade or business in Australia.

5.    The Agency's objective is to propose and outline the public financial policy for Country X, and to make plans related to financial affairs that guarantee the achievement of the social and economic development plan's objectives.

6.    The Agency is competent in, for example, but not limited to:

(a)  preparing financial studies and research that are required to outline and develop financial policy for Country X

(b)  granting, managing and supervising the Government bank accounts

(c)   controlling and supervising the asset management and the Government's properties in Country X

(d)  managing and liquidating the funds that devolve upon Country X by virtue of laws and court judgments

7.    The Agency's responsibilities also include:

(a)  identifying and investing in suitable private unlisted companies, and

(b)  exiting investments having regard to the prevailing commercial factors at the time.

8.    The Agency is exempted from all fees and taxes in Country X.

9.    The Agency must not take a controlling interest in companies that it invests in and does not work with these companies as a business partner.

10.  The Agency receives the Government's revenues and funds and disperses these funds to other Government departments as well as investing surplus funds for the benefit of Country X's people.

11.  The existing portfolio of the Agency currently lies with non-controlling interests in the banking, industrial oil and gas, and transportation sectors.

HoldCo

12.  To facilitate and exercise the governmental functions bestowed upon it, the Agency incorporated HoldCo, which is legally domiciled in Country X.

13.  HoldCowas incorporated under the Country X Law.

14.  HoldCodoes not have an Australian tax file number, maintain an office or engage in any trade or business in Australia.

15.  The Agency holds 100% of the shares in HoldCo. HoldCowholly-owns ForCo.

16.  HoldCo'sgovernance and management is carried out by its manager(s) as elected by the shareholders.

17.  HoldCoshareholders have elected one Manager to oversee the management of the company.

18.  HoldCohas been wholly capitalised and funded by the Agency. The funds used for capitalisation and ongoing financing are from the general pool of Government finances that are managed by the Agency.

19.  HoldCois a holding entity for the Agency.

ForCo

20.  ForCo is an incorporated entity wholly owned by HoldCo, which in turn is ultimately wholly owned by the Agency. ForCo is therefore indirectly wholly owned by the Agency.

21.  The governance and management of ForCo is carried out by its manager(s) as elected by the shareholders.

22.  The sole shareholder of ForCo, HoldCo, elected a chairman for ForCo.

23.  ForCo is wholly capitalised and funded by HoldCo from funds allocated to HoldCo by the Agency.

24.  Surplus income derived by ForCo is distributed to HoldCo and subsequently to the Agency for use by the Government.

25.  ForCo shares are not explicitly precluded from being transferred or issued to non-government entities. However, there is currently no intention by the Agency or HoldCo to transfer or issue any shares of ForCo to non-government entities.

26.  ForCo does not have an Australian tax file number, maintain an office or engage in any trade or business in Australia.

27.  ForCo does not produce or trade non-financial goods.

28.  ForCo does not provide services that are not financial services.

29.  ForCo 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.

The investment - MIT 1

30.  The Agency, through ForCo, acquired an interest in MIT 1. ForCo was issued with units in MIT 1.

31.  ForCo has a total participation interest in MIT 1 of substantially less than 10%. ForCo's voting power as a unitholder in MIT 1 is proportional to its unitholding.

32.  MIT 1 is an Australian resident trust. It is an unlisted, open ended single pooled fund which provides investors with the opportunity to invest in a diversified portfolio of real estate assets.

33.  MIT 1 has been managed as a Managed Investment Trust (MIT) and will continue to be managed as a MIT for Australian tax purposes.

34.  ForCo receives income from its investment in MIT 1 in the form of MIT fund payments and capital gains.

35.  ForCo is not represented on the board of directors of the trustee and/or the responsible entity of MIT 1.

36.  MIT 1 does not have an investor advisory committee.

37.  No member of ForCo's sovereign entity group, including HoldCo and the Agency, have representation on the board of directors of the trustee and/or the responsible entity of MIT 1. Neither the Agency, HoldCo nor ForCo will exert actual or potential influence over MIT 1's operations or investments.

38.  ForCo does not have any special rights issued with respect to its unit holding in MIT 1, so it cannot:

(a)  Interfere with any of the MIT Trustee's rights, powers, authorities or discretions

(b)  Exercise a right, power or privilege in respect of MIT 1's assets or lodge a caveat or other notice affecting or encumbering those assets or otherwise claim any interest in those assets

(c)   Require any Assets be transferred to itself as unitholder, or

(d)  Give any directions to the MIT trustee if it would require the MIT 1 Trustee to do or omit to do anything that may result in the exercise of any of the MIT 1 Trustee's discretions or the determination of any matter that requires the Trustee's approval.

39.  ForCo has no ability to block or veto unitholder resolutions.

40.  No other entity of the Government other than ForCo has an interest in MIT 1.

The investment - MIT 2

41.  The Agency, through ForCo, acquired an interest in MIT 2. ForCo was issued with units in MIT 2. ForCo holds less than 10% of the participation interests in MIT 2.

42.  MIT 2 is an Australian resident trust. It is an unlisted, close-ended fund which provides investors with the opportunity to invest in a special purpose trust (Holding Trust).

43.  MIT 2 has been managed as a MIT and will continue to be managed as a MIT for Australian tax purposes.

44.  ForCo receives income in the form of MIT fund payments and capital gains from its investment in MIT 2.

45.  ForCo is not represented on the board of directors of the trustee and/or the responsible entity of MIT 2.

46.  Neither HoldCo, ForCo or any other member of ForCo's sovereign entity group have representation on the board of directors of the trustee and/or the responsible entity of MIT 2. As such neither the Agency, HoldCo nor ForCo will exert actual or potential influence over MIT 2's operations or investments.

47.  MIT 2 does not have an investor advisory committee.

48.  ForCo does not have any special rights with respect to its unit holding in MIT 2. ForCo's voting power as a unitholder in MIT 2 is proportional to its unitholding.

49.  A unitholder in MIT 2 has no right or entitlement to, and must not:

(a)  Interfere with any of the Trustee's rights, powers, authorities or discretions

(b)  Exercise a right, power or privilege in respect of the Assets or lodge a caveat or other notice affecting or encumbering the assets or otherwise claim any interest in the Assets

(c)   Require any Assets be transferred to that unitholder, or

(d)  Give any directions to the Trustee if it would require the Trustee to do or omit to do anything that may result in the exercise of any of the Trustee's discretion or the determination of any matter that requires the Trustee's approval.

50.  The Trustee has all the powers in respect of the Trust, these include but are not limited to acquire and invest in any property, manage and administer the Assets and make any necessary decisions. The Trustee has full discretion over the over the day-to-day management, and broader business direction and operation of MIT 2.

51.  ForCo has no ability to veto or block any unitholder resolutions.

52.  No other entity of the Government other than ForCo has an interest in MIT 2.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 880-105

Income Tax Assessment Act 1997 section 880-125

Reasons for decision

Question 1

Is the ordinary and statutory income derived by ForCo from its investment in MIT 1 not assessable income and not exempt income under section 880-105 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Summary

The ordinary and statutory income derived by ForCo from its unit holding in MIT 1 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):

(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.

ForCo 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.

ForCo is a sovereign entity

For an entity to be covered by section 880-125 of the ITAA 1997, it must be a sovereign entity. Section 880-15 of the ITAA 1997 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 of the ITAA 1997 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.

Country X is an independent, sovereign state.

The Agency, as part of the Government:

• directs the public financial policy for Country X
• controls and supervises the asset management and government's properties in Country X
• manages and liquidates the funds that devolve upon the Country X by virtue of laws and court judgments

HoldCo was incorporated to facilitate and exercise the governmental functions bestowed upon the Agency.

HoldCo is wholly owned by the Agency.

ForCo was incorporated by HoldCo to make and acquire investments for the Agency's benefit. ForCo's sole shareholder is HoldCo, who elects ForCo's management.

Ultimately, ForCo is wholly owned by the Agency, a part of the Government.

Based on the above facts, ForCo meets the requirements of being a sovereign entity in accordance with section 880-15 of the ITAA 1997 as it is an entity owned by a foreign government agency as defined in paragraph 880-15(c) of the ITAA 1997.

ForCo 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.

ForCo has been wholly capitalised and funded by HoldCo. HoldCo is wholly capitalised and funded by the Agency. The funds used for capitalisation and ongoing financing are from the general pool of the Government finances that are managed by the Agency.

As such, ForCo is funded solely by public monies.

All returns on ForCo's investments are public monies

ForCo is wholly owned by HoldCo, which in turn is wholly owned by the Agency, a part of the Government. As such, the Government is the beneficial owner of all the capital invested, and all income derived from that capital by ForCo. Surplus income derived by ForCo is distributed to HoldCo and subsequently to the Agency for use by the Government. Therefore, the returns will remain public monies.

Nothing explicitly precludes ForCo shares from being transferred or issued to non-government entities. However, there is currently no intention by the Agency or HoldCo to transfer or issue any shares to non-government entities.

ForCo will not issue any new shares in itself to non-Government entities, nor will HoldCo transfer its shareholding in ForCo to non-Government entities.

Therefore, all returns on ForCo's investments are public monies. Should any new shares be issued, or existing shares transferred, to a non-Government entity, ForCo will no longer meet this requirement.

ForCo is not a partnership

ForCo is a sole proprietor company with limited liability and is not a partnership. ForCo therefore satisfies this condition.

ForCo 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 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) of the ITAA 1997 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.

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.

ForCo was incorporated by HoldCo to make and acquire investments for the benefit of the Agency. ForCo's role investing the Government's funds in a manner befitting the Agency's governmental obligations. ForCo does not produce or trade non-financial goods and does not provide services that are not financial services. ForCo 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, ForCo 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 ForCo 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 of the ITAA 1997 for the purposes of paragraph 880-105(1)(a) of the ITAA 1997.

ForCo's return is received on a relevant interest in the Test Entity (MIT 1)

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) of the ITAA 1997 will include:

1. dividends - including non-share dividends and dividends that pass through a 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 Entity, MIT 1, is an unlisted, open ended single pooled fund which provides investors with the opportunity to invest in a diversified portfolio.

MIT 1 has been managed as a MIT and will continue to be managed as a MIT for Australian tax purposes.

ForCo receives income in the form of MIT fund payments and capital gains from its investment in MIT 1.

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

ForCo's income is received from Australian resident companies or MITs

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 Entity, MIT 1, is a MIT for Australian income tax purposes and it is intended for MIT 1 to continue to be managed in a manner to qualify as a MIT.

As such, ForCo's income is received from an entity which satisfies the requirements of paragraph 880-105(1)(c) of the ITAA 1997.

ForCo 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 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) of the ITAA 1997, 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 of the ITAA 1997 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.

The Agency has invested in Australia through ForCo. ForCo's interest in MIT 1 is the only interest of the Agency and HoldCo in MIT 1.

No other entity of the Government has an interest in MIT 1.

ForCo's sovereign entity group has a collective interest held in MIT 1 of substantially less than 10%.

As such, ForCo's interest in MIT 1 satisfies the requirements of paragraph 880-105(d) of the ITAA 1997.

ForCo'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.

As no other members of ForCo's sovereign entity group (including any entity directly or indirectly owned by the Government) holds an interest in MIT 1, the influence considerations are limited to the influence held by ForCo.

ForCo and its sovereign entity group does not have influence of a kind described in subsection 880-105(6) of the ITAA 1997 in respect of MIT 1 because

• ForCo's interest in MIT 1 does not provide it with an entitlement to either directly or indirectly determine the identity of any person who makes decisions that comprise the control and direction of MIT 1's operations
• ForCo's interest in MIT 1 is insufficient as to provide it with the right to block or veto unitholder resolutions
• A unitholder (including ForCo) has no right or entitlement to, and must not:
  • Interfere with any of the Trustee's rights, powers, authorities or discretions
  • Exercise a right, power or privilege in respect of the Assets or lodge a caveat or other notice affecting or encumbering the assets or otherwise claim any interest in the Assets
  • Require any Assets be transferred to that unitholder, or
  • Give any directions to the Trustee if it would require the Trustee to do or omit to do anything that may result in the exercise of any of the Trustee's discretions or the determination of any matter that requires the Trustee's approval.

• ForCo is not represented on the board of directors of the trustee and/or the responsible entity of MIT 1.
• Neither HoldCo nor ForCo have representation on the board of directors of the trustee and/or the responsible entity of MIT 1. As such, neither the Agency, HoldCo nor ForCo will exert actual or potential influence over the operations or investments of ForCo.
• MIT 1 has no investor advisory committee to which ForCo may be able to appoint representation.
• ForCo does not have any special or additional rights with respect to its unit holding in MIT 1.

Based upon the above, the sovereign entity group of ForCo does not have influence of a kind described in subsection 880-105(6) of the ITAA 1997 and, therefore, satisfies 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 such that amounts of ordinary and statutory income derived by ForCo from its investment in MIT 1 is not assessable and not exempt income.

Question 2

Is the ordinary and statutory income derived by ForCo from its investment in MIT 2 not assessable income and not exempt income under section 880-105 of the ITAA 1997?

Summary

The ordinary and statutory income derived by ForCo from its unit holding in MIT 2 is not assessable and not exempt income due to the operation of section 880-105 of the ITAA 1997.

Detailed Reasoning

As stated above in Question 1, it is concluded that ForCo is a covered sovereign entity. It is therefore only the other requirements of section 880-105 of the ITAA 1997 that need to be satisfied by ForCo with respect to its investment in MIT 2.

ForCo's return is received on a relevant interest in the Test Entity, MIT 2

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) of the ITAA 1997 will include:

1. dividends - including non-share dividends and dividends that pass through a 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 Entity, MIT 2, is an unlisted, close-ended property fund which provides investors with the opportunity to invest in a Holding Trust.

MIT 2 has been managed as a MIT and will continue to be managed as a MIT for Australian tax purposes.

The Agency, through ForCo, acquired an interest in MIT 2. HoldCo was issued with units in MIT 2, which was equal to an interest of less than 10% in MIT 2.

ForCo receives income in the form of MIT fund payments and capital gains from its investment in MIT 2.

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

ForCo's income is received from Australian resident companies or MITs

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 Entity, MIT 2, is a MIT for Australian income tax purposes and it is intended for MIT 2 to continue to be managed in a manner to qualify as a MIT.

As such, ForCo's income is received from an entity which satisfies the requirements of paragraph 880-105(1)(c) of the ITAA 1997.

ForCo 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 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) of the ITAA 1997, 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 of the ITAA 1997 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.

ForCo's interest in MIT 2 is the only interest of the Agency and HoldCo in MIT 2.

No other entity of the Government has an interest in MIT 2.

ForCo's has an interest less than 10% in MIT 2 and, therefore, the collective interest held in MIT 2 by the ForCo sovereign entity group is less than 10%.

As such, ForCo's interest in MIT 2 satisfies the requirements of paragraph 880-105(1)(d) of the ITAA 1997.

ForCo'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.

As no other members of ForCo's sovereign entity group (including any entity directly or indirectly owned by the Government) holds an interest in MIT 2, the influence considerations are limited to the influence held by ForCo.

ForCo does not have influence of a kind described in subsection 880-105(6) of the ITAA 1997 with respect to its holding in MIT 2 because:

• ForCo's interest in MIT 2 does not provide it with an entitlement to either directly or indirectly determine the identity of any person who makes decisions that comprise the 'control and direction of the Test Entity's operations'.
• ForCo's interest in MIT 2 does not provide it with the right to veto unitholder resolutions or otherwise interfere in the MIT 2's Trustee's actions.
• A unitholder (including ForCo) has no right or entitlement to, and must not:
  • Interfere with any of the Trustee's rights, powers, authorities or discretions
  • Exercise a right, power or privilege in respect of the Assets or lodge a caveat or other notice affecting or encumbering the assets or otherwise claim any interest in the Assets
  • Require any Assets be transferred to that unitholder, or
  • Give any directions to the Trustee if it would require the Trustee to do or omit to do anything that may result in the exercise of any of the Trustee's discretions or the determination of any matter that requires the Trustee's approval.
• The Trustee has all the powers in respect of the Trust, these include but are not limited to acquire and invest in any property, manage and administer the Assets and make any necessary decisions. The Trustee has full discretion over the over the day-to-day management, and broader business direction and operation of MIT 2 to the exclusion of the unitholders.
• ForCo is not represented on the board of directors of the trustee and/or the responsible entity of MIT 2.
• Neither HoldCo nor ForCo have representation on the board of directors of the trustee and/or the responsible entity of MIT 2.
• MIT 2 does not have an investor advisory committee on which ForCo may appoint a representative.
• Neither the Agency, HoldCo nor ForCo will exert actual or potential influence over the operations or investments of MIT 2.
• ForCo does not have any special or additional rights with respect to its unit holding in MIT 2.

Based upon the above, the sovereign entity group of ForCo does not have influence of a kind described in subsection 880-105(6) of the ITAA 1997 and, therefore, satisfies 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 such that amounts of ordinary and statutory income derived by ForCo from its investment in MIT 2 is not assessable and not exempt income.