Private ruling: Sovereign Immunity
Date of advice: 28 August 2017
Published: December 2017
Ruling period: Year ended XXXX | Year ended XXXX | Year ended XXXX
Date scheme commenced: XXXX

Ruling: Q1: Is the non-resident entity immune from income tax and withholding tax under the common law doctrine of sovereign immunity on any income and capital gains derived from its investments in Australian equity securities (including investments in unit trusts and real estate investment trusts) outlined in its private ruling application? | A1: Yes.

Relevant facts and circumstances: 1. The non-resident entity was established by a foreign government. It is an agency of a foreign government. 2. The non-resident entity is under the direct supervision of the foreign government. It is required to report to and is responsible to the foreign government, including managing the foreign exchange reserves of the foreign government. 3. The non-resident entity’s objectives and functions, as guided by the foreign government, are to formulate and implement monetary policy, promote economic growth, maintain currency stability, prevent and mitigate financial risks, and maintain financial stability. 4. The non-resident entity’s functions have been detailed and documented. 5. The non-resident entity obtains its operational costs out of the state treasury of the foreign government. 6. All capital of the non-resident entity is funded by the State and owned by the State. 7. All income or gains, being income or gains from the investments of the foreign exchange reserves belong to the foreign government. 8. As an integral part of the foreign government, the non-resident entity is the sole beneficial owner of all the assets under its custody. 9. In accordance with the non-resident entity’s constituent legislation, the Governor of the non-resident entity is nominated and appointed by the foreign government. Deputy Governors of the non-resident entity can also be appointed or removed by a representative of the foreign government. 10. In performing its official responsibilities, the non-resident entity invests a portion of the foreign exchange reserves of the State in investments made in Australia or with Australian residents, this has been documented. 11. The non-resident entity’s investments in Australian equity securities relevant to this ruling are outlined in its private ruling application. This document forms part of the Scheme to which this Ruling relates. 12. The non-resident entity held these investments through a number of custodians. 13. The non-resident entity held these investments for a significant period of time for the purposes of deriving distribution income. The non-resident entity disposes of its interests when it is commercially prudent to do so. Most investments were held for a significant period of time, and many continue to be held. 14. The non-resident entity is not in the business of trading securities. 15. All of the equity securities subject to this ruling that the non-resident entity held have the following characteristics: a. Listed on the Australian Securities Exchange (ASX) or another recognised stock exchange b. The non-resident entity held less than 10% of the equity securities of the issuer c. Neither the non-resident entity or a related party had involvement in the day to day management of the issuing entity’s business d. Neither the non-resident entity or a related party had rights to representation on the board of an equity issuer, including the board of the corporate trustee of a unit trust in which the non-resident entity had acquired units e. Neither the non-resident entity or a related party had rights to representation on any investor representative or advisory committee (or similar) of any equity issuer, and f. The non-resident entity only had rights to vote as a shareholder or unitholder (as the case may be) in proportion to its equity interest in the relevant entity.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 128B | Income Tax Assessment Act 1997 section 4-1 | Income Tax Assessment Act 1997 subsection 995-1(1).

Reasons for decision: Summary: When determining whether the doctrine of sovereign immunity applies to exempt Australian sourced 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. Condition 1: A foreign government or an agency of a foreign government In the context of sovereign immunity, it is considered that an entity which is wholly owned by a foreign government is an 'agency of a foreign government' where that entity is performing a function for the public advantage and executes a function in the public interest and is not a private body established for private profit. The non-resident entity is an agency of a foreign government because; ● It is established by the foreign government, and all of its capital is funded and owned by the State ● The non-resident entity’s objectives and functions are consistent with a foreign agency executing government functions and responsibilities. These functions include formulating and implementing monetary policy, promoting economic growth, maintaining currency stability, preventing and mitigating financial risks and maintaining financial stability. ● It is under the direct supervision of the foreign government ● It is required to report to the foreign government, and manages the foreign exchange reserves of the State; and ● Its Governor and Deputy Governors are appointed and removed by the State. Given the above factors, the Commissioner accepts that the non-resident entity satisfies this requirement. Condition 2: the monies being invested are and will remain government monies In line with the principle that sovereign immunity applies to foreign states performing only governmental functions, an entity claiming sovereign immunity must establish that the monies being invested are and will remain government monies. All capital of the non-resident entity is funded by the State and owned by the State. All income and gains from the investments made by the non-resident entity that are the subject of this Ruling, being income or gains from the investments of the foreign exchange reserves of the State, belong to the State. It is considered that the money being invested by the non-resident entity is and will remain government money. Given the above factors, the Commissioner accepts that the non-resident entity satisfies this requirement. Condition 3: The income or gain is being derived from a non-commercial activity As noted in ATO Interpretive Decision ATO ID 2002/45 Sovereign Immunity , whether an operation or activity is a commercial transaction will depend on the facts of each case. As a guide, a commercial transaction is generally considered to be an activity concerned with the trading of goods and services, such as buying, selling, bartering, transportation, and includes the carrying on of a business. A passive investment is more likely to be considered a non-commercial transaction. In relation to the ownership of shares in a company or other similar equity interests, there will be instances where the extent of the holding gives rise to questions as to whether the interests constitute a passive investment or a commercial investment. In all circumstances, consideration will be given to factors relating to the influence or control potentially able to be exercised by the investor (or a related party/associate of the investor) in relation to the investment. This includes (but is not limited to) any potential influence or control in relation to day to day management and key business, strategy and financial decisions. The non-resident entity held a number of investments in Australia which has been documented. The full list of investments relevant to the ruling was attached to the private ruling application. The following factors are relevant to determining whether the non-resident entity’s investments in Australia relevant to the ruling were commercial activities: ● Listed on the ASX or another recognised stock exchange ● The non-resident entity held less than 10% of the equity securities of the issuer ● Neither the non-resident entity or a related party had involvement in the day to day management of the issuing entity’s business ● Neither the non-resident entity or a related party had rights to representation on the board of an equity issuer, including the board of the corporate trustee of a unit trust in which the non-resident entity had acquired units ● Neither the non-resident entity or a related party had rights to representation on any investor representative or advisory committee (or similar) of any equity issuer ● The non-resident entity only had rights to vote as a shareholder or unitholder (as the case may be) in proportion to its equity interest in the relevant entity, and ● The non-resident entity did not carry on a business of securities trading. Its intention was to hold securities for the purpose of deriving distribution income. The above factors demonstrate that non-resident entity’s investments were passive investments, and therefore non-commercial activities, satisfying this condition. Given the above factors, the Commissioner accepts that the non-resident entity satisfies this requirement. | Detailed Reasoning - Conclusion: As the three conditions have been satisfied, the non-resident entity will be immune from income taxes and withholding taxes on all income and gains it derives from its investments in Australia outlined in the private ruling application under the common law doctrine of sovereign immunity.