Private ruling: Sovereign Immunity
Date of advice: 4 July 2018
Published: September 2018
Ruling period: Income years ended XXXX to XXXX
Date scheme commenced: During the income year ended XXXX

Ruling: Q1: Will the Board, as the administrator of a foreign resident superannuation fund (the Fund), be immune from income and withholding taxes on any rental income it derives from leasing the residential property located in Australia (the Property) under the common law doctrine of sovereign immunity? | A1: No.

Relevant facts and circumstances: 1. The Fund was established by a foreign government by an Act (the Act) and operates subject to the provisions of a related Act. 2. The Fund is a defined compulsory contribution superannuation fund. 3. The Fund is a resident of a foreign country for tax purposes. 4. The Board is a statutory body corporate established by the Act and its members appointed by a related Act. 5. The Board administers the Fund, manages and invests the members’ savings and contributions into various asset classes for their retirement in accordance with the guidelines in the related Act. 6. The assets of the Fund are the property of the Board. 7. No part of the Fund may be appropriated by the foreign government for government purposes under any circumstance. 8. The Board makes rules for the withdrawal by members of their general entitlement amounts as prescribed by the Act. 9. If the Board is unable to satisfy a liability of the Board, the Minister must advance to the Board the amount needed to enable the Board to satisfy the liability but the Board must repay the advanced amount as soon as practicable. 10. Any winding up of the Fund would necessarily require and occur in accordance with a legislative instrument. 11. The Board proposes to acquire the Property with the intention of deriving rental income from leasing the Property. 12. The leasing of the Property occurs in the context of the Board’s significant other commercial activities in relation to its existing property portfolio.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 128B | Income Tax Assessment Act 1997 section 4-1

Reasons for decision: Summary: The ATO accepts that certain income derived from within Australia by foreign governments is exempt from Australian tax under the international law doctrine of sovereign immunity. In accordance with that doctrine, we accept that any income derived by a foreign government from the performance of governmental functions within Australia is exempt from Australian tax. An activity undertaken by a foreign government agency will generally be accepted as the performance of governmental functions provided that it is functions of government, provided that the agency is owned and controlled by the government and does not engage in commercial activities. This approach is consistent with the decision of the British House of Lords in the case I Congreso del Partido [1981] 2 All ER 1064 which held that activities of a trading, commercial or other private law character were not governmental functions. When determining whether sovereign immunity applies to exempt income and gains from Australian income tax and/or withholding tax, it is necessary to establish the following: 1. that the person making the investment (and therefore deriving the income) is a foreign government or an agency of a foreign government; 2. that the moneys invested are and will remain government moneys; and 3. that the income or gain is being derived from a non-commercial activity. If these three conditions are satisfied, then the income or gains will not be subject to Australian income tax and/or withholding tax. | Detailed Reasoning - Condition 1 – that the person making the investment (and therefore deriving the income) is a foreign government or an agency of a foreign government: Based on the facts provided, it is considered that the Board, which invests the moneys in the Fund meets the condition that the person making the investment (and therefore deriving the income) is a foreign government or an agency of a foreign government. Condition 2 – that the moneys invested are and will remain government moneys The Fund is funded by non-government contributions held for the benefit of members. Further, no part of the Fund may be appropriated by the foreign government for government purposes under any circumstance. Therefore, it is not accepted that the moneys invested are and will remain government moneys. | Detailed Reasoning - Condition 3 – that the income or gain is being derived from a non-commercial activity: Whether an operation or activity is commercial in nature will depend on the facts of each particular case. However, as a guide, a commercial activity is generally an activity concerned with the trading of goods and services, such as buying, selling, bartering and transportation, and includes the carrying on of a business. It is considered that the rental income to be derived from leasing the Property by the Board will be derived from an activity that is an ordinary commercial activity of a ‘private law’ character (i.e. it is not done within the sphere of governmental sovereignty). Further, it is commercial in nature in the context of the Board’s significant other commercial activities in relation to its existing property portfolio. As all the conditions for immunity under the common law doctrine of sovereign immunity are not satisfied, the Board is not immune from income and withholding taxes on the rental income to be derived from leasing the Property.