Edited version of private advice

Authorisation Number: 1052401743368

Date of advice: 28 May 2025

Ruling

Subject: Sovereign immunity

Question

Is the ordinary and statutory income derived by Entity A from its interests in the Test Entities not assessable 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 periods:

1 July 20XX to 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Entity A

1.    Entity A is a body politic of a foreign country.

2.    Entity A is funded by tax revenue, mining revenue, and investments of sovereign wealth funds.

3.    Entity A's funds form part of the funds available to the government of Entity A in implementing government policy and pursuing government objectives.

4.    Entity A is not a partnership.

Investments

5.    Entity A invests in a combination of Australian equity and debt instruments.

6.    Entity A has investments in entities that are Australian resident companies or Managed Investment Trusts (the Test Entities). All of the Test Entities are Australian Securities Exchange (ASX) listed. Entity A's investments in the Text Entities currently have the following characteristics:

a.    Entity A and all members of its sovereign entity group hold collectively less than 10% of the total participation interests in each of the Test Entities.

b.    Entity A and all members of its sovereign entity group would hold collectively 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.

c.     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.

d.    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.

e.    Neither Entity A, nor 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.

f.      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 interest held.

g.    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.

h.    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 make decisions that comprise the control and direction of the Test Entities' operations.

i.      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.

7.    Entity A derives dividend income, interest income, capital gains, and MIT fund payments from its interests in the Test Entities.

Relevant legislative provisions

Division 880 of the Income Tax Assessment Act 1997

Reasons for decision

Question

Is the ordinary and statutory income derived by Entity A from its interests in the Test Entities not assessable and not exempt income under section 880-105 of the ITAA 1997?

Summary

All of the conditions listed in subsection 880-105(1) have been satisfied in relation to Entity A's investments in the Test Entities. As such, section 880-105 will apply to the effect that amounts of ordinary and statutory income derived by Entity A from the Test Entities will be not assessable and not exempt income.

Details 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.

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.

The term 'Body politic' is not defined in either the ITAA 1997 or the ITAA 1936. Therefore, it should be given its ordinary meaning subject to the context in which it appears and having regard to any relevant case law authorities.

Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (MT 2006/1) provides from paragraph 38 that:

38.  'Body politic' is not a defined term. The term takes its meaning from the general law. It includes the Crown in right of the Commonwealth, a State or Territory. However, government departments are not bodies politic in their own right. Instead, they are part of the larger body politic of the Commonwealth or State or Territory (see the treatment of departments in paragraphs 87 to 88 of this Ruling). Bodies such as municipal councils are bodies corporate rather than bodies politic.

39.  A body politic, like a body corporate and corporation sole, has the ability to continue in existence indefinitely and to keep its identity regardless of changes to its membership. It also has the power to act, to hold property, to enter into legal contracts and to sue and be sued in its own name, just as a natural person can.

40.  The term 'body politic' is not restricted to Australia in any way, and can also mean a foreign nation and its government.

Entity A is a body politic of a foreign country.

As such, Entity A is a sovereign entity under section 880-15, being a body politic of a foreign country.

Entity A is funded solely by public monies

Law Companion Ruling LCR 2020/3 - The superannuation fund for foreign residents withholding tax exemption and sovereign immunity (LCR 2020/3) provides guidance on the term 'public monies'.

In the context of Division 880, LCR 2020/3 provides at paragraph 54, that this phrase essentially means monies of a foreign government (or part of a foreign government) held 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 by tax revenue, mining royalties and investments sovereign wealth funds.

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

All returns on Entity A's investments are public monies

As Entity A constitutes part of the State, all of its investment returns also constitute public monies.

Funds of the sovereign wealth funds controlled by Entity A are used for implementing government policy and pursuing government objectives.

All returns on Entity A's investments therefore go towards public purposes and are at the government of Entity A's disposal.

As such, Entity A satisfies this requirement.

Entity A is not a partnership

Entity A is not a partnership. Entity A therefore satisfies this requirement.

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.

The sovereign wealth funds do not produce, trade, nor provide non-financial goods or services. As such, they are not public non-financial entities under subsection 880-130(1). They are also not public financial entities as they do not partake in any activities listed in subsection 880-130(2).

Entity A is also not a public non-financial entity as it does not produce, trade, nor provide non-financial goods or services. Based on the circumstances, the Commissioner also accepts that Entity A is not a public financial entity under subsection 880-130(2) as it does not engage in providing the relevant financial service activities outlined in paragraph 880-130(2)(c).

As such, Entity A does not meet either definition of being a public non-financial or public financial entity, satisfying the condition in subsection 880-125(d).

As Entity A 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 purpose 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 and dividends that pass through a managed investment 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 invests in the Test Entities which are all Australian resident companies or MITs. Entity A holds both equity and debt interests in the Test Entities. Entity A receives dividend income, interest income, and MIT fund payments from the Test Entities.

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

Entity A's income is received from Australia resident companies or MITs

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.

As previously outlined, the relevant Test Entities are all Australian resident companies and MITs which pay dividend income, interest income, and MIT fund payments to Entity A.

As such, Entity A receives income from an entity which satisfies the requirements of paragraph 880-105(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.

Based on the facts provided, Entity A, together with its sovereign entity group holds substantially less than 10% of the equity interests in all of the Test Entities. As such, paragraph 880-105(d) of the ITAA 1997 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 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).

Sub-test 1 of the influence test, as contained in paragraph 880-105(6)(a), assesses whether the sovereign entity group is able to directly or indirectly 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), 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.

The equity and debt holdings that Entity A's sovereign entity group have in the Test Entities do not give Entity A, directly or indirectly, or acting in concert with others, any ability to appoint, control or influence any person that has the ability to participate in or influence decisions that comprise the control and direction of the Test Entities. There are no rights to appoint directors, management, or any other person in a decision-making capability within the Test Entities. Entity A has no ability to influence or otherwise participate in the decision-making of the Test Entities, or the appointment of persons that do have this capability.

No relevant decision-making person in the Test Entities is accustomed or obliged to act, or might reasonably be expected to act, in accordance with the directions, instructions or wishes of Entity A or any other entity within the 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 to the effect so that amounts of ordinary and statutory income derived by Entity A from its interests in the Test Entities is not assessable and not exempt income.