Edited version of private advice

Authorisation Number: 1052400830415

Date of advice: 27 May 2025

Ruling

Subject: Sovereign immunity

Question 1

Is the ordinary and statutory income derived by Entity A from bank accounts held with banks that are Australian resident companies not assessable and not exempt income under section 880-105 of the Income Tax Assessment Act 1997?

Answer 1

Yes.

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Entity A

Entity A is one of the central agencies of the Government of Country X.

Entity A is mandated to oversee and coordinate the effective management of public finance and resources in Country X.

Entity A is not a partnership.

Entity A's objective is to ensure that the financial resources of Country X are managed in accordance with the law and are utilised in an efficient and effective manner.

Entity A is funded from the Government's consolidated revenue.

Entity A does not produce or trade goods of any kind, nor provides other services that could be considered as 'non-financial services'.

Entity A does not trade in financial assets or liabilities or operate commercially in the financial markets. Entity A does not provide financial intermediary services, financial auxiliary services, or capital financial institution services.

Australian bank deposits

Entity A has bank accounts held with banks that are Australian resident companies.

Interest income earned on the deposited funds will be retained in consolidated revenues and form part of the Government's cash reserves.

Entity A currently holds bank accounts with banks that are Australian resident companies, and may in the future hold bank accounts with other banks that are also Australian resident companies (collectively referred to as the Test Entities). Entity A's relationship with the Test Entities have (or will have) the following characteristics:

•                     Entity A and all members of its sovereign entity group do not hold any participation interest in the Test Entities.

•                     Entity A and all members of its sovereign entity group would collectively hold less than 10% of the total participation interests in the Test Entities in the circumstances detailed in paragraph 880-105(4)(b) of the ITAA 1997.

•                     Neither Entity A, nor any members of its sovereign entity group, has involvement in the day to day management of the business of any of the Test Entities.

•                     Neither Entity A, nor any members of its sovereign entity group, has the right to appoint a director to the Board of Directors of any of the Test Entities.

•                     Neither Entity A, or any members of its sovereign entity group, holds the right to representation on any investor representative or advisory committee (or similar) of the Test Entities.

•                     Neither Entity A, nor any members of its sovereign entity group, has the ability to direct or influence the operation of the Test Entities outside of the ordinary rights conferred by the debt interest held.

•                     Entity A's interests in the Test Entities do 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 Entities' operations.

•                     Entity A's interests, when combined with the other interests held within its sovereign entity group, do not provide 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 Entities' operations.

•                     No person involved in the control and direction of the Test Entities' operations is accustomed or obliged to act in accordance with the directions, instructions or wishes of Entity A, or any member of its sovereign entity group.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 880

Reasons for decision

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.

Entity A 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.

Entity A is a sovereign entity

For an entity to be covered by section 880-125, it must be a sovereign entity. Section 880-15 defines a sovereign entity to be any of the following:

(a)           a body politic of a foreign country, or a part of a foreign country;

(b)           a *foreign government agency;

(c)           an entity:

(i) in which an entity covered by paragraph (a) or (b) holds a *total participation interest of 100%; and

(ii) that is not an Australian resident; and

(iii) that is not a resident trust estate for the purposes of Division 6 of Part III of the Income Tax Assessment Act 1936.

A 'foreign government agency' is defined in subsection 995-1(1) of the ITAA 1997 as:

(a)           the government of a foreign country or of part of a foreign country; or

(b)           an authority of the government of a foreign country; or

(c)           an authority of the government of part of a foreign country.

Country X is a foreign country.

Entity A is one of the central agencies of the Government of Country X and is mandated to oversee and coordinate the effective management of public finance and resources in Country X.

Entity A is an authority of the government of a foreign country. As such, it is a foreign government agency.

Therefore, Entity A meets the requirements of being a sovereign entity in accordance with section 880-15 of the ITAA 1936.

Entity A 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.

Entity A is funded from the Government's consolidated revenue, which is generated from Country X's normal government revenue activities.

As such, Entity A is funded solely by public monies.

All returns on Entity A's investments are public monies

Interest income earned on the deposited funds will be retained in consolidated revenues and form part of Country X's cash reserves.

As such, it is accepted that the monies invested are and will remain government monies.

Therefore, all returns on Entity A's bank accounts are public monies.

Entity A is not a partnership

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

Entity A 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.

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.

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.

Entity A was established for the purpose of overseeing and coordinating the effective management of public finance and resources in Country X.

Entity A does not produce or trade goods of any kind, nor provides other services that could be considered as 'non-financial services'. Entity A functions in the government sector not the private sector and, in this regard receives and deploys only public monies on behalf of the Government of Country X.

Entity A does not trade in financial assets or liabilities or operate commercially in the financial markets. Entity A does not provide financial intermediary services, financial auxiliary services, or capital financial institution services, and is therefore not a public financial entity.

It is considered that the activities of the Entity A as outlined in the facts and circumstances of this Ruling are consistent with Entity A not being a public non-financial entity or public financial entity. As such, Entity A passes the condition in paragraph 880-125(d).

As Entity A satisfied 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).

Entity A's return is received on a relevant interest in the Test Entities

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 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) will include:

•                     dividends - including non-share dividends that pass through a managed invest trust (MIT)

•                     interest - including interest that passes through a MIT

•                     fund payments made by a MIT (other than fund payments that are attributable to non-concessional MIT income), and

•                     revenue gains made on the disposal of an interest in the test entity - including revenue gains that pass through a MIT.

Entity A receives interest income from its bank accounts held with Australian banks.

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

Entity A'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.

Entity A holds bank accounts with banks that are Australian resident companies at the time that Entity A derives interest income in relation to such bank accounts.

As such, Entity A receives income from entities which satisfy the requirements of paragraph 880-105(1)(c).

Entity A'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 the test entity/ies 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.

Entity A and all members of its sovereign entity group do not hold any participation interests in the relevant banks.

Therefore, the portfolio test is satisfied.

Entity A's sovereign entity group does not have influence of a kind described in subsection (6) in relation to the Test Entities 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 describe 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;

(iii)          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.

Entity A's interests in the Test Entities do 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 Test Entities' operations. Furthermore, Entity A's interests, when combined with the other interests held within its sovereign group, do 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 Test Entities' 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 Test Entities' operations is accustomed or obliged to act in accordance with the directions, instructions or wishes of Entity A or members of Entity A's sovereign entity group.

Based upon the above, the sovereign entity group of Entity A does not have influence of a kind described in subsection 880-105(6) and will, therefore, satisfy the requirements of paragraph 880-105(1)(f).

Conclusion

As all of the conditions listed in subsection 880-105(1) have been satisfied, section 880-105 will apply such that amounts of ordinary and statutory income derived by Entity A from its bank accounts held with banks that are Australian resident companies are not assessable and not exempt income.