Edited version of private advice

Authorisation Number: 1052284083487

Date of advice: 30 July 2024

Ruling

Subject: Sovereign immunity

Question 1

For ForCo's investments in Australian entities that have all the characteristics as set out in Fact 10 of this Ruling (with each of these entities to be referred to in the Ruling as an 'Eligibility Entity'), is an amount of ordinary or statutory income that is a return on the interest that ForCo holds in an Eligible Entity not assessable income and not exempt income under subsection 880-105(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Does paragraph 128B(3)(n) of the Income Tax Assessment Act 1936 (ITAA 1936) (for interest and dividends) and subsection 840-805(9) of the ITAA 1997 (for fund payments from MITs) apply to exclude ForCo from liability to withholding tax on income from an Eligible Entity that is not assessable income and is not exempt income due to the operation of Division 880 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period:

XX July 20YY to XX June 20YY

The scheme commenced on:

XX July 20YY

Relevant legislative provisions

Division 880 of the Income Tax Assessment Act 1997

Relevant facts and circumstances

ForCo

1.    ForCo is a body corporate wholly owned by the sovereign government of Country X.

2.    ForCo was created by legislation.

3.    ForCo's principal objects include:

•         The holding and management of the General Reserve Fund and all external assets of the Government of Country X.

•         To provide the Government with money management services.

•         To take steps and incur expenditure to recover or protect assets and property that are property of the Government and to hold, manage and deal with the assets and the property.

4.    The General Reserve Fund of the Government and all external assets of the Government are public moneys and are the property of the Government. Funds generated from its investments remain in public ownership.

5.    ForCo is not a partnership.

6.    ForCo does not operate an active trading business and it does not directly engage in any commercial activities in Australia.

7.    While ForCo provides money management services for the Government of Country X, it does not provide financial services externally.

8.    ForCo's powers, duties and functions include:

•         To open and operate securities and cash clearing accounts and place deposits on terms.

•         Purchase, acquire by exchange or other means, hold, sell or otherwise dispose of various types of investment assets.

•         Borrow money and establish credits and give guarantees.

•         Open and operate accounts with central banks.

9.    ForCo's investments can include:

•         Gold coin or bullion and other precious metals

•         Real property and interest in real property

•         Notes, coins, bank balances and money at call

•         Treasury bills of government

•         Securities of, or guarantees by, governments or financial institutions

•         Other classes or specific investment assets as authorised.

Australian Investments

10.  ForCo has made investments and will continue to make investments in Australia. This will include investments in Bonds, ASX listed companies or Australian Real Estate Investment Trusts (REITs) that have all of the following characteristics satisfied (making the entity an 'Eligible Entity' for the purposes of this Ruling):

(a)  ForCo hold an interest in the Eligible Entity that is either a membership interest, non-share equity interest or debt interest in the entity,

(b)  The Eligible Entity, at the income time, satisfies the requirements of paragraph 880-105(1)(c) of the ITAA 1997,

(c)   ForCo and all members of its sovereign entity group hold collectively less than 10% of the total participation interests in the Eligible Entity,

(d)  ForCo and all members of its sovereign entity group would hold collectively less than 10% of the total participation interests in the Eligible Entity in the circumstances detailed in paragraph 880-105(4)(b) of the ITAA 1997,

(e)  Neither ForCo, nor any members of its sovereign entity group, has involvement in the day-to-day management of the business of the Eligible Entity,

(f)    Neither ForCo, nor any members of its sovereign entity group, has the right to appoint a director to the Board of Directors of the Eligible Entity,

(g)  Neither ForCo, nor any members of its sovereign entity group, holds the right to representation on any investor representative or advisory committee (or similar) of the Eligible Entity,

(h)  Neither ForCo, nor any members of its sovereign entity group, has the ability to direct or influence the operation of the Eligible Entity outside of the ordinary rights conferred by the interest held,

(i)    ForCo only holds rights to vote in proportion to its interest in the Eligible Entity and does not have any veto rights in relation to the Eligible Entity,

(j)    ForCo's interest in the Eligible Entity, including when combined with the other interests held within its sovereign entity group, does 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 Eligible Entity's operations, and

(k)   No person involved in the control and direction of the Eligible Entity's operations is accustomed or obliged to act in accordance with the directions, instructions or wishes of ForCo or members of ForCo's sovereign entity group.

Relevant legislative provisions

Division 880 of the Income Tax Assessment Act 1997

Reasons for decision

Question 1

For ForCo's investments in Australian entities that have all the characteristics as set out in Fact 10 of this Ruling (with each of these entities to be referred to in the Ruling as an 'Eligible Entity'), is an amount of ordinary or statutory income that is a return on the interest that ForCo holds in an Eligible Entity not assessable income and not exempt income under subsection 880-105(1) of the ITAA 1997?

Summary

The ordinary and statutory income derived by ForCo from its investments in the Australian Eligible Entities is not assessable and not exempt income due to the operation of subsection 880-105(1) of the ITAA 1997.

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 (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 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, 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 part of a foreign county; 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.

Country X is a foreign country.

Country X through its 100% ownership of ForCo, has a total participation interest of 100% in ForCo. ForCo is not an Australian resident, nor is ForCo a resident trust estate for the purposes of Division 6 of Part III of the ITAA 1936.

As such, ForCo meets the requirements of being a sovereign entity in accordance with paragraph 880-15(c) as it is an entity in which Country X, being a foreign country, holds a total participation interest of 100%.

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, 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.

The capital of ForCo is wholly owned by Country X. ForCo's principal objects include the holding and management of the General Reserve Fund and all external assets of the Government.

The General Reserve Fund of the Government and all external assets of the Government are public moneys and are the property of the Government. Funds generated from its investments remain in public ownership.

The income derived by ForCo from its investments in an Eligible Entity (which may be used for re-investment purposes) is also wholly owned by Country X.

As such, ForCo is funded solely by public monies.

All returns on ForCo's investments are public monies

The General Reserve Fund of the Government and all external assets of the Government are public moneys and are the property of the Government. Funds generated from its investments remain in public ownership.

As such, all returns on ForCo's investments are public monies.

ForCo is not a partnership

ForCo is not a partnership. As such, it passes this condition.

ForCo 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 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.

Law Companion Ruling 2020/3: The superannuation fund for foreign residents withholding tax exemption and sovereign immunity (LCR 2020/3) provides the following examples of public non-financial entities:

• airline corporations;
• postal authorities;
• state water corporations;
• port authorities;
• hospitals;
• schools;
• colleges;
• state electricity corporations; and
• state mining corporations.

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.

LCR 2020/3 provides the following examples of public financial entities:

• banks;
• deposit taking corporations;
• captive financial institutions;
• pension/superannuation funds;
• insurance corporations;
• entities in the business of investment management;
• entities in the business of share trading; and
• entities in the business of money lending.

It is noted that subparagraph 880-125(d)(ii) excludes public financial entities that only carry on central banking activities from being excluded as a covered sovereign entity.

ForCo was established for the purpose of carrying on investment activities and money management services for the Government of Country X. ForCo provides money management services for the Government of Country X, but it does not provide financial services externally.

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 (securities are held as longer term assets) and liabilities, operate commercially in financial markets or provide services listed in paragraph 880-130(2)(c).

As such, ForCo is not a public non-financial entity, nor a public financial entity and passes the condition in paragraph 880-125(d).

As ForCo 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).

ForCo's return is received on a relevant interest in an Eligible Entity

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 a test entity.

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, debt interest or non-share equity interest for the purposes of paragraph 880-105(1)(b) will include:

1.    dividends - including non-share dividends and dividends that pass through a managed investment trust (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.

ForCo is required to hold a membership interest, debt interest and/or non-share equity interest in an Eligible Entity and earn returns in the form of dividends, interest and/or fund payments to satisfy the requirements of paragraph 880-105(1)(b).

ForCo'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.

An Eligible Entity must be an Australian resident company or a managed investment trust at the relevant time for ForCo to receive income that satisfies the requirements of paragraph 880-105(1)(c).

ForCo'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 a 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), 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.

ForCo is part of the sovereign entity group of Country X. At the relevant times (as required by paragraph 880-105(1)(d)), ForCo, and its sovereign entity group collectively, must hold less than 10% of the total participation interests in each Eligible Entity. In addition, ForCo and its sovereign entity group collectively, must hold less than 10% of the total participation interests in each Eligible Entity in the circumstances detailed in paragraph 880-105(4)(b) to satisfy the portfolio test.

ForCo's sovereign entity group does not have influence of a kind described in subsection (6) in relation to the Eligible Entity at the income time

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.

ForCo's interests in the Eligible Entity must 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 Eligible Entity's operations. Furthermore, ForCo's interests, when combined with the other interests held within its sovereign entity group, must 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 Eligible Entity's operations.

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.

No person involved in the control and direction of the Eligible Entity's operations must be accustomed or obliged to act in accordance with the directions, instructions or wishes of ForCo or members of ForCo's sovereign entity group.

As outlined above, ForCo's sovereign entity group must not have influence of a kind described in subsection 880-105(6) to satisfy the requirements of paragraph 880-105(1)(f).

Conclusion

As all conditions listed in subsection 880-105(1) above will be satisfied, subsection 880-105(1) of the ITAA 1997 will apply to the effect that an amount of ordinary or statutory income derived by ForCo from its investments in an Eligible Entity is not assessable income and is not exempt income.

Question 2

Does paragraph 128B(3)(n) of the ITAA 1936 (for interest and dividends) and subsection 840-805(9) of the ITAA 1997 (for fund payments from MITs) apply to exclude ForCo from liability to withholding tax on income from an Eligible Entity that is not assessable income and is not exempt income due to the operation of Division 880 of the ITAA 1997?

Summary

Paragraph 128B(3)(n) of the ITAA 1936 and subsection 840-805(9) of the ITAA 1997 apply to exclude ForCo from liability to withholding tax on income from an Eligible Entity that is not assessable and not exempt income due to the operation of Division 880 of the ITAA 1997.

Detailed reasoning

Paragraph 128B(3)(n) of the ITAA 1936 provides an exclusion from withholding tax on income that is non-assessable non-exempt income because of Division 880 of the ITAA 1997 or Division 880 of the Income Tax (Transitional Provisions) Act 1997.

Further, subsection 840-805(9) of the ITAA 1997 provides an exclusion from managed investment trust withholding tax on income that is non-assessable non-exempt income because of Division 880 of the ITAA 1997 or Division 880 of the Income Tax (Transitional Provisions) Act 1997.

Section 6-23 of the ITAA 1997 provides that an amount of ordinary income or statutory income is non-assessable non-exempt income if a provision of the ITAA 1997 or of another Commonwealth law states that it is not assessable income and is not exempt income.

As stated in Question 1, an amount of ordinary or statutory income that is a return on the interest that ForCo holds in an Eligible Entity is not assessable income and is not exempt income due to the operation of Division 880 of the ITAA 1997.

Therefore, where Division 880 of the ITAA 1997 applies to income of ForCo from its investments that satisfy all the characteristics listed in Fact 10 of this Ruling, the exclusions from liability to withholding tax under paragraph 128B(3)(n) of the ITAA 1936 (for interest and dividends) and subsection 840-805(9) of the ITAA 1997 (for fund payments from MITs) will apply.

Conclusion

As the ordinary or statutory income derived by ForCo from its interest in an Eligible Entity is not assessable income and is not exempt income due to the operation of Division 880 of the ITAA 1997, paragraph 128B(3)(n) of the ITAA 1936 (for interest and dividends) and subsection 840-805(9) of the ITAA 1997 (for fund payments from MITs) will apply to exclude ForCo from liability to withholding tax.