Private ruling: Sovereign immunity
Published: April 2012
Ruling period: Year ending 30 June 2012 | Year ending 30 June 2013 | Year ending 30 June 2014
Date scheme commenced: 1 July 2011

Ruling: Q1: Is the income derived in Australia by the Trust from its debt investments exempt from Australian income and withholding tax under the international law doctrine of sovereign immunity? | A1: Yes.

Relevant facts and circumstances: The relevant entities 1. BCo is the sole legal and beneficial holder of the units in a unit trust (the Trust) which was established to hold investments in Australia. CCo is the trustee of the Trust. 2. BCo, CCo, their holding company, and their ultimate holding company, Investment Corp, are wholly owned by a statutory body corporate established under an enactment of the Government of the foreign country to own and administer assets of that foreign government. These entities are residents of the same foreign country. 3. Investment Corp acts as a holding company for global investments that are made in the management of the foreign reserves of the foreign country. 4. The trust deed of the Trust is governed by Australian law. Investment in Australia 5. The Trust has entered into an arrangement, whereby in conjunction with an unrelated Australian resident entity (together referred to as the Lenders), it will provide secured cash advance facilities (the Facilities) to two Australian resident entities (the Borrowers). 6. Syndicated Facility Agreements for each respective Facility have been executed as an agreement between the Lenders and the Borrowers and outline the respective obligations of these parties with regards to the co-investment. 7. The Facilities will be primarily secured by mortgages over Australian real property. In addition, fixed and floating "all assets" charges will be granted by the Borrowers, and mortgages will be provided over all the units in the Borrowers. 8. Income to be derived by the Trust from the Facilities will consist mainly of interest and fees (e.g. establishment fees and line fees). 9. The Lenders will share the establishment fees and line fees (where applicable) pro-rata to their commitment amounts. 10. Income derived by the Trust from its debt investments will be used to fund and support governmental functions of the foreign country. 11. There will be no control element or voting rights acquired by the Trust in relation to the Facilities other than rights relating to the protection of its investment. Other activities/investments 12. The Trust does not engage in commercial activities such as trading of goods and services, buying, selling, bartering and transportation or carrying on a business. 13. The Trust does not hold any other investments at present.


Reasons for decision: Summary: While the Australian taxation legislation itself does not provide an exemption specifically for foreign government agencies, the Australian government recognises the international law doctrine of sovereign immunity and will treat as "exempt" certain income derived by foreign governments. In accordance with that doctrine, the Australian government accepts 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 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 House of Lords in the case I Congreso del Partido [1981] 2 All ER 1064 where it was held that activities of a trading, commercial or other private law character were not governmental functions. ATO Interpretive Decision ATO ID 2002/45 discusses the conditions that must be satisfied for the doctrine of sovereign immunity to apply to treat interest and dividend income as being exempt from Australian income and withholding taxes. These conditions are: 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 being invested are and will remain government moneys; and 3. that the income is being derived from a non-commercial activity. | Detailed Reasoning - Condition 1: That the person making the investment (and therefore deriving the income) is a foreign government or agency of a foreign government: The Trust, itself, is not a foreign government. Therefore, it will be necessary to consider whether the Trust is an 'agency of a foreign government'. An 'agency of a foreign government' is not defined in ATO ID 2002/45. However, subsection 995-1(1) of the Income Tax Assessment Act 1997 provides that a foreign government agency is: (a) the government of a foreign country or part of a foreign country; (b) the authority of the government of a foreign country; or (c) the authority of the government of part of a foreign country. In the context of sovereign immunity, we consider that an entity that is wholly owned by a foreign government is an 'authority' where that entity is performing a function for the public advantage and executes a function in the public interest and not a private body established exclusively for private profit. The Trust, which is indirectly wholly owned by the body corporate established under an enactment of the Government of the foreign country, acts as a special purpose vehicle for investments in Australia in the management of the foreign reserves of the foreign country. The management of the foreign reserves of a country is a function for the public advantage or public interest and is not a function exclusively for private profit. Therefore, the Trust acts as an 'authority' of that body corporate. Accordingly, the Trust is considered to be an 'agency of a foreign government' and satisfies condition 1 of ATO ID 2002/45. | Detailed Reasoning - Condition 2: That the moneys being invested are and will remain government moneys: The funds used by the Trust to make the debt investment are sourced from the foreign reserves of the foreign country and will remain so for the period that the Trust holds the investment. The money is being invested for the purpose of preserving and enhancing the foreign reserves of the foreign country. Further, all income derived from the debt investments will be used to fund and support governmental functions of the Government of the foreign country. Accordingly, the moneys being invested by the Trust are, and will remain, government moneys. | Detailed Reasoning - Condition 3: That the income is being derived from a non-commercial activity: ATO ID 2002/45 states that the question of whether an operation or activity is commercial in nature will depend on the facts of each particular case. However, it provides that commercial activity is generally concerned with the trading of goods and services or the carrying on of a business. In contrast, income from interest bearing investments or investments in equities is generally not considered to be income derived from commercial activities. The Trust has entered into an arrangement with an unrelated Australian resident entity to provide a secured cash advance facility to the Borrowers. Income derived by the Trust from the facilities will consist mainly of interest and fees. The Trust does not acquire any control or voting rights over the Borrowers in relation to the facilities (other than rights relating to the protection of its investment). The Trust does not carry on a business nor does it engage in the trading of goods and services. Based on the above factors, the Trust's debt investment in the secured cash advance facility to the Borrowers will constitute a passive, non-commercial activity. | Detailed Reasoning - Conclusion: The three conditions outlined in ATO ID 2002/45 are satisfied. Accordingly, the interest income derived by the Trust in Australia in respect of its debt investments will be treated as exempt from Australian income and withholding tax under the common law doctrine of sovereign immunity.

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