Edited version of private advice

Authorisation Number: 1052042413543

Date of advice: 11 October 2022

Ruling

Subject: Sovereign immunity

Question 1

Is the ordinary and statutory income derived by ForeignCo from its investment in ABC AMIT not assessable income 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 period:

1 July 20YY to 30 June 20YY

The scheme commences on:

1 July 20YY

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 advise and plan Country X's financial policy and organise financial affairs that guarantee the achievement of the objectives of the socio-economic development strategy.

6.    The Agency is competent in matters including, but not limited to:

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

(b)  commanding and overseeing the asset management and the Government's properties in Country X, and

(c)   formulating financial studies and research that are needed to plan and progress Country X's financial policy.

7.    The Agency's responsibilities also include:

(a)  categorising and investing in appropriate private unlisted companies, and

(b)  leaving investments in light of current commercial factors.

8.    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.

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

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.

HoldCo

11.  The Agency incorporated HoldCo, a limited liability company, to facilitate and exercise the governmental functions bestowed upon it, which is legally domiciled in Country X.

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

13.  The Agency holds 100% of the shares in HoldCo.

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

15.  HoldCo's shareholders have elected one Manager to oversee the management of the company.

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

17.  HoldCo is a holding entity for the Agency.

ForeignCo

18.  ForeignCo was incorporated as a sole proprietor company with limited liability.

19.  ForeignCo is wholly owned by HoldCo, which in turn is ultimately wholly owned by the Agency. ForeignCo is therefore indirectly wholly owned by the Agency.

20.  ForeignCo's governance and management is carried out by its manager(s) as elected by the shareholders.

21.  ForeignCo's sole shareholder, HoldCo, elected a chairman for ForeignCo.

22.  ForeignCo is wholly capitalised and funded by HoldCo from funds allocated to HoldCo by the Agency.

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

24.  The Memorandum of Association (MOA) for ForeignCo does not explicitly preclude ForeignCo shares from being transferred or issued to non-government entities. However, there is currently no intention by Agency or HoldCo to transfer or issue any shares to non-government entities.

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

26.  ForeignCo does not produce or trade non-financial goods.

27.  ForeignCo does not provide services that are not financial services.

28.  ForeignCo 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 - ABC AMIT

29.  The Agency, through ForeignCo, acquired an interest in ABC AMIT. ForeignCo was issued with units in ABC AMIT.

30.  ABC AMIT is an Australian resident trust. It is an unlisted, open-ended loan fund.

31.  ABC AMIT has been managed as an Attributed Managed Investment Trust (AMIT) and will continue to be managed as an AMIT for Australian tax purposes.

32.  The trustee for ABC AMIT is the Trustee.

33.  The beneficial interest is divided into units where each unit confers an equal, undivided interest in the assets or investments.

34.  ForeignCo's voting power as a unitholder in ABC AMIT is proportionate to its unit holding.

35.  The Trustee may redeem units. The Trustee may also transfer assets in lieu of cash to a unitholder who has made a redemption request if the Trustee believes it is in the unitholder's best interests.

36.  The Trustee must determine and distribute (after making any necessary deductions) the income for ABC AMIT for each distribution period and financial year. ForeignCo receives income from its investment in ABC AMIT in the form of interest, AMIT fund payments and capital gains.

37.  ForeignCo is not represented on the Trustee's board of directors and/or the responsible entity of ABC AMIT. ForeignCo's interest in ABC AMIT 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 ABC AMIT's operations.

38.  AMIT does not have an investment committee. There is a Compliance Committee as required by the Corporations Act 2001 (Cth).

39.  No member of ForeignCo's sovereign entity group, including HoldCo and the Agency, have representation on the Trustee's board of directors and/or the responsible entity of ABC AMIT. Neither the Agency, HoldCo nor ForeignCo will exert actual or potential influence over ABC AMIT's operations or investments.

40.  The Trustee cannot act as ForeignCo's agent, but may exercise any of the voting rights attached to the underlying assets invested in.

41.  ForeignCo does not have any special rights issued with respect to its unit holding in ABC AMIT, so it cannot:

(a)  interfere with any rights, powers, authorities or discretions of the Trustee

(b)  exercise a right, power or privilege in respect of ABC AMIT '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 Trustee if it would require the Trustee to do or omit to do anything which may result in the exercise of any discretion expressly conferred on the Trustee by its Constitution or the determination of any matter which requires the approval of the Trustee under that Constitution.

42.  ForeignCo has no ability to block or veto unitholder resolutions.

43.  No other entity of the Government other than ForeignCo has an interest in ABC AMIT.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 840-805

Income Tax Assessment Act 1997 section 880-105

Income Tax Assessment Act 1997 section 880-110

Income Tax Assessment Act 1997 section 880-115

Income Tax Assessment Act 1997 section 880-120

Reasons for decision

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.

ForeignCo 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.

ForeignCo 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, is competent in matters including, but not limited to:

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

(b)          commanding and overseeing the asset management and the Government's properties in Country X, and

(c)           formulating financial studies and research that are needed to plan and progress Country X's financial policy.

HoldCo was incorporated to facilitate and exercise the governmental functions bestowed upon the Agency. HoldCo is wholly owned by the Agency.

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

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

Based on the above facts, ForeignCo 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.

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 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.

ForeignCo 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's finances which are managed by the Agency.

As such, ForeignCo is funded solely by public monies.

All returns on ForeignCo's investments are public monies

ForeignCo 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 ForeignCo. Surplus income derived by ForeignCo is distributed to HoldCo and subsequently to the Agency for use by the Government. Therefore, the returns will remain public monies.

The MOA for ForeignCo does not explicitly preclude ForeignCo 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.

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

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

ForeignCo is not a partnership

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

ForeignCo 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.

ForeignCo was incorporated by HoldCo to make and acquire investments for the Agency's benefit. ForeignCo's role of investing the Government's funds in a manner benefitting the Agency's obligations is considered to be the exercise of a government function.

ForeignCo does not produce or trade non-financial goods and does not provide services that are not financial services. Further, ForeignCo 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, ForeignCo 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 ForeignCo satisfies each of the requirements in paragraphs 880-125(a) through (d) of the ITAA 1997 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.

ForeignCo's return is received on a relevant interest in the Test Entity (ABC AMIT)

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, ABC AMIT, is an unlisted, open-ended loan fund.

ABC AMIT has been managed as an AMIT and will continue to be managed as an AMIT for Australian tax purposes.

ForeignCo receives income in the form of interest, AMIT fund payments and capital gains from its investment in ABC AMIT.

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

ForeignCo'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:

(a)          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

(b)          a *managed investment trust in relation to the income year in which the income time occurs.

The Test Entity, ABC AMIT, is an AMIT for Australian income tax purposes and it is intended for ABC AMIT to continue to be managed in a manner to qualify as an AMIT.

Section 995-1 of the ITAA 1997 states that 'AMIT (short for attribution managed investment trust) has the meaning given by section 276-10'.

Subsection 276-10(1) of the ITAA 1997 provides that a trust is an AMIT in an income year if the trust is a MIT in relation to the income year and the other requirements detailed in the subsection are satisfied. Therefore, an AMIT must be a MIT as one of the criteria to be classified as an AMIT.

Further, the EM confirms at paragraph 4.29 that the MITs referred to in subsection 880-105(1) of the ITAA 1997 includes MITs that are AMITs.

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

ForeignCo 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 ForeignCo. ForeignCo's interest in ABC AMIT is the only interest of the Agency and HoldCo in ABC AMIT.

No other entity of the Government has an interest in ABC AMIT.

ForeignCo's interest in ABC AMIT is under 10% and therefore the collective interest held in ABC AMIT of its sovereign entity group, is less than 10%.

As such, ForeignCo's interest in ABC AMIT satisfies the requirements of paragraph 880-105(d) of the ITAA 1997.

ForeignCo'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 ForeignCo's sovereign entity group (including any entity directly or indirectly owned by the Government) holds an interest in ABC AMIT, the influence considerations are limited to the influence held by ForeignCo.

ForeignCo and its sovereign entity group do not have influence of a kind described in subsection 880-105(6) of the ITAA 1997 in respect of ABC AMIT as:

•                     ForeignCo's interest in ABC AMIT 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 ABC AMIT's operations

•                     ForeignCo s interest in ABC AMIT is insufficient as to provide it with the right to block or veto unitholder resolutions

•                     ForeignCo is not represented on the board of directors of the Trustee and/or the responsible entity of ABC AMIT

•                     neither HoldCo nor ForeignCo have representation on the board of directors of the Trustee and/or the responsible entity of ABC AMIT. As such, neither the Agency, HoldCo nor ForeignCo will exert actual or potential influence over the operations or investments of ABC AMIT

•                     ABC AMIT has no investment advisory committee to which ForeignCo may be able to appoint representation, and

•                     ForeignCo does not have any special or additional rights with respect to its unit holding in ABC AMIT.

Based upon the above, the sovereign entity group of ForeignCo 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 ForeignCo from its investment in ABC AMIT is not assessable and not exempt income.