Private ruling: Sovereign immunity
Published: July 2014
Ruling period: For the period from 1 July 2014 to 30 June 2015 | For the period from 1 July 2015 to 30 June 2016 | For the period from 1 July 2016 to 30 June 2017 | For the period from 1 July 2017 to 30 June 2018 | For the period from 1 July 2018 to 30 June 2019
Date scheme commenced: During the period from 1 July 2014 to 30 June 2015

Ruling: Q1: Is the fund entitled to an exemption from liability to interest withholding tax under the doctrine of sovereign immunity in respect of interest derived from debt instruments, provided that the fund is deriving the interest income from passive debt instruments and not from any commercial activity? | A1: Yes | Q2: Is the fund entitled to an exemption from liability to dividend withholding tax under the doctrine of sovereign immunity in respect of its share portfolio investments (i.e. shareholdings in which the fund holds less than 10% of the total shares in the Australian resident company)? | A2: Yes | Q3: Is the fund entitled to an exemption from liability to income and withholding taxes under the doctrine of sovereign immunity in respect of distributions from its investments in widely held managed investment funds or unit trusts (including distributions of rental income, trading income or capital gains) in which the fund holds less than 10% of the fund or unit trust? | A3: Yes

Relevant facts and circumstances: The fund comprises the foreign government's official reserves and provides the backing to safeguard the exchange value of the currency. The fund also helps preserve the stability and integrity of the monetary and financial systems. The fund is managed by the managing authority and the managing authority's activities are financed by the fund. The managing authority is the government authority responsible for maintaining monetary and banking stability. The Australian investments constitute part of the foreign government's official foreign reserves and the income received from these investments remains part of the foreign government's official foreign reserves. The fund's Australian sourced interest income is derived from its investments in passive debt instruments and not from any commercial activity. The fund's Australian sourced dividend income is derived from its individual shareholdings in Australian resident companies. Each of the fund's shareholdings is less than 10% of the total shares in each company. The fund's Australian trust distributions (including distributions of rental income, trading income or capital gains) is received in respect of its holdings in widely held managed investment funds or unit trusts. Each of the fund's unit holdings is less than 10% of the total units in the fund or unit trust. The fund is not represented on the board of directors of any Australian resident corporation in which the fund has invested and has no control or influence over the appointment of senior management employees, or is otherwise able to control or influence management decisions.

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 fund comprises the foreign government's official reserves and provides the backing to safeguard the exchange value of the currency. The fund also helps preserve the stability and integrity of the monetary and financial systems. The fund is managed by the managing authority and the managing authority's activities are financed by the fund. The managing authority is the government authority responsible for maintaining monetary and banking stability. In view of the above, the fund 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: The Australian investments constitute part of the foreign government's official foreign reserves and the income received from these investments remains part of the foreign government's official foreign reserves. Accordingly, the monies invested are and will remain the monies 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. The fund's Australian sourced interest income is derived from its investments in passive debt instruments and not from any commercial activity. The fund's Australian sourced dividend income is derived from its individual shareholdings in Australian resident companies. Each of the fund's shareholdings is less than 10% of the total shares in each company. The fund's Australian trust distributions (including distributions of rental income, trading income or capital gains) is received in respect of its holdings in widely held managed investment funds or unit trusts. Each of the fund's unit holdings is less than 10% of the total units in the fund or unit trust. The fund is not represented on the board of directors of any Australian resident corporation in which the fund has invested and has no control or influence over the appointment of senior management employees, or is otherwise able to control or influence management decisions. In view of the above, it is considered that the fund's Australian investments are non-commercial. | Detailed Reasoning - Conclusion: As discussed above, the three conditions are satisfied. Accordingly, pursuant to the doctrine of sovereign immunity, the fund will be exempt from: 4. liability to interest withholding tax in respect of interest derived from debt instruments, provided that the fund is deriving the interest income from passive debt instruments and not from any commercial activity; 5. liability to dividend withholding tax in respect of its share portfolio investments (i.e. shareholdings in which the fund holds less than 10% of the total shares in the Australian resident company); and 6. liability to income and withholding taxes in respect of distributions from its investments in widely held managed investment funds or unit trusts (including distributions of rental income, trading income or capital gains) in which the fund holds less than 10% of the fund or unit trust.