Private ruling: Doctrine of sovereign immunity
Published: February 2015
Ruling period: Income year ended 30 June 2015 | Income year ended 30 June 2016 | Income year ended 30 June 2017 | Income year ended 30 June 2018 | Income year ended 30 June 2019
Date scheme commenced: During the income year ended 30 June 2015

Ruling: Q1: Is the entity exempt from Australian income tax and withholding tax pursuant to the doctrine of sovereign immunity in respect of trust distributions received from the trust, being the entity's share of the trust's net income as determined under section 95 of the Income Tax Assessment Act 1936 (ITAA 1936), and gains made from the disposal of units in the trust, where all of the following are satisfied: (a) the entity's share and unit trust holdings (in the stapled group comprising of shares and units in stapled together) will be less than 10%; (b) the entity has no director appointed to the board of directors of the company (the Board), being the trustee of trust; (c) the entity has appointed an observer to attend meetings of the Board; and (d) the observer cannot vote at meetings of the Board? | A1: Yes

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. The scheme that is the subject of this Ruling is described below. The entity was established under an Act of the foreign country to partially provide for the future cost of superannuation, being a taxpayer funded pension scheme under which all eligible residents receive a pension irrespective of their income or assets. The purpose is to build up a portfolio of foreign government owned financial assets that will then be progressively drawn on to supplement the foreign government's annual budget as its finances adjust to an increasing level of on-going expense for superannuation. According to the Act, the property of the entity consists of the capital contributed under the Act by the foreign government, the entity's investments and money accruing from those investments. The Act provides that the entity is the property of the foreign government. The entity's investment in the stapled group The entity acquired 9.9% interest in the stapled group comprising of shares in the company and units in the trust stapled together. The company and the trust are respectively an Australian resident company and an Australian resident unit trust. The company is the trustee of the trust. The entity does not have a director on the board. The entity has an observer appointed to observe meetings of the Board. As an observer the entity cannot vote at a meeting of the board and can only participate in the discussions at a board meeting subject to the chairman's permission. The entity will receive trust distribution paid by the trust, being the entity's share of the trust's net income as determined under section 95 of the ITAA 1936, and is expected to make gains from the disposal of units in the trust.

Relevant legislative provisions: Not applicable

Reasons for decision: Summary: For Australian income tax and withholding tax purposes it is accepted that the doctrine of sovereign immunity applies to a foreign government or an agency of a foreign government that engage in governmental functions. 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. To establish whether the doctrine of sovereign immunity applies to exempt Australian sourced income and gains of a foreign government or an agency of a foreign government 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 or gain) is a foreign government or an agency of a foreign government; 2. that the moneys being 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, the Australian sourced income or gains will not be subject to Australian income and/or withholding taxes. | Detailed Reasoning - Condition 1 - a foreign government or an agency of a foreign government: The entity was established under the Act of the foreign country to partially provide for the future cost of superannuation, being a taxpayer funded pension scheme under which all eligible residents receive a pension irrespective of their income or assets. The purpose is to build up a portfolio of foreign government owned financial assets that will then be progressively drawn on to supplement the foreign government's annual budget as its finances adjust to an increasing level of on-going expense for superannuation. The Act provides that the entity is the property of the foreign government. In view of the above, it is considered that the entity is an integral part of the foreign government's provision of retirement income. Accordingly, the entity satisfies the condition that it is a foreign government or an agency of a foreign government. | Detailed Reasoning - Condition 2 - monies are and will remain government monies: According to the Act, the property of the entity consists of the capital contributed under the Act by the foreign government, the entity's investments and money accruing from those investments. The Act provides that the entity is the property of the foreign government. In view of the above, it is considered that the moneys invested by the entity are and will remain the moneys of a foreign government or an agency of a foreign government. | Detailed Reasoning - Condition 3 - non-commercial activity: An investment undertaken by a foreign government or an agency of a foreign government will generally be accepted as the performance of governmental functions provided that it is within the functions of government. However, it is necessary to establish whether the investment is non-commercial in nature and this will depend on the particular circumstances of the investment. In determining whether the entity's investment in the stapled group is non-commercial in nature it is necessary to consider whether the entity is able to exert influence over Board decisions and in the running of the business of the stapled group. The entity has a 9.9% interest in the stapled group that meets the following conditions: (a) the entity's share and unit trust holdings in the stapled group will be less than 10%; (b) the has no director appointed to the Board; (c) the entity has appointed an observer to attend meetings of the Board; and (d) the observer cannot vote at meetings of the Board. The entity will receive trust distribution paid by the trust, being the entity's share of the trust's net income as determined under section 95 of the ITAA 1936, and is expected to make gains from the disposal of units in the trust. The entity does not have a director on the board; it has appointed an observer to observe meetings of the Board. As an observer the entity cannot vote at a meeting of the Board and can only participate in the discussions at a board meeting subject to the chairman's permission. The entity cannot exert influence over board decisions and the running of the business of the stapled group. In view of the above, it is considered that the entity's investment in the stapled group is non-commercial in nature. | Detailed Reasoning - Conclusion: As discussed above, the three conditions in relation to the entity's investment in the stapled group are satisfied. Accordingly, pursuant to the doctrine of sovereign immunity, the entity will be exempt from Australian income tax and withholding tax in respect of the trust distributions paid by the trust, being the entity's share of the trust's net income as determined under section 95 of the ITAA 1936, and gains made from the disposal of units in the trust, where all of the following are satisfied: (a) the entity's share and unit trust holdings in the stapled group will be less than 10%; (b) the has no director appointed to the Board; (c) the entity has appointed an observer to attend meetings of the Board; and (d) the observer cannot vote at meetings of the Board.