Private ruling: Sovereign immunity - transitional measures
Date of advice: 8 October 2020
Published: November 2020
Ruling period: 1 July 2019 to 30 June 2026
Date scheme commenced: 1 July 2019

Ruling: Q1: Is ordinary and statutory income derived by Entity 1 as a return on the investments that were acquired on or before March 2018 non-assessable non-exempt income due to the operation of section 880-5 of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A 1997)? | A1: Yes | Q2: Is ordinary and statutory income derived by Entity 1 as a return on the investments that were acquired on or before March 2018 non-assessable non-exempt income due to the operation of section 880-5 of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A 1997)? | A2: Yes

Relevant facts and circumstances: Entity 1 1. Entity 1 was established under Foreign Legislation by Foreign Country to partially provide for the future cost of superannuation, being a taxpayer funded pension scheme under which all eligible residents over the age of 65 receive a pension irrespective of their income or assets. 2. The purpose of Entity 1 is to build up a portfolio of 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. 3. According to Foreign Legislation, the property of Entity 1 consists of the capital contributed by the Government, Entity 1 investments and money accruing from those investments. 4. All money comprised in the property of the Entity 1 as set out in Foreign Legislation is owned by the Government. Under Foreign Legislation, no payment may be made out of the Entity 1 unless it has been authorised by Entity 2. 5. Entity 1 is not a separate legal entity from the Foreign Government. 6. Foreign Legislation provides that Entity 1 is the property of the Foreign Government. 7. According to Foreign Legislation Entity 1 must hold the assets for the purpose of paying superannuation. Furthermore, no payment may be made out of the Entity 1 except for the purposes outline in the Foreign Legislation unless it has been authorised by Entity 2. 8. The Foreign Legislation has no provision for early withdrawal of pension funds by residents of Foreign Country. Entity 2 9. Entity 2 is a government entity established under Foreign Legislation. The functions of the Entity 2 are to manage and administer Entity 1 in accordance with Foreign Legislation. Entity 2 have the responsibility to invest Entity 1's capital in accordance with Foreign Legislation. 10. In accordance with Foreign Legislation Entity 2 must ensure that Entity 1 does not control any other entity or hold a percentage of the voting rights in any other entity that would require it to seek control of that entity. 11. Entity 2 is overseen by a board. Its members are appointed by the Foreign Government. Entity 2 is exempt from Foreign Country tax. Entity 1's Investment Approach and Criteria 12. In accordance with Foreign Legislation, Entity 1 is required to establish and adhere to investment policies and standards. Entity 1's goal is to smooth the cost of funding superannuation delivered though a broad, diversified portfolio with a wide range of asset classes and strategies. Entity 1 invests on the basis of a long-term horizon.

Relevant legislative provisions: Income Tax (Transitional Provisions) Act 1997 section 880-5 | Income Tax (Transitional Provisions) Act 1997 section 880-15

Reasons for decision: Detailed Reasoning - Background: Schedule 4 of the Treasury Laws Amendment (Making Sure Foreign Investors Pay Their Fair Share of Tax in Australia and Other Measures) Act 2019 amended the ITAA 1936 and the ITAA 1997 to improve the integrity of the income tax law to limit access to tax concessions for foreign investors by codifying and limiting the scope of the sovereign immunity tax exemption. Section 880-1 of the IT(TP)A 1997 provides that the amendments to codify and limit the scope of the sovereign immunity tax exemption apply to the 2019-20 income year and to later income years. However, transitional rules may apply to income derived from investments of a sovereign entity held at the announcement date of the amendments (March 2018), subject to the satisfaction of certain requirements. | Detailed Reasoning - Transitional provisions: Section 880-5 of the IT(TP)A 1997 provides transitional relief for amounts of ordinary and statutory income derived by a sovereign entity where the following requirements are met: An amount of ordinary income or statutory income of a sovereign entity for an income year is not assessable income and is not exempt income if: (a) the amount is a return on an investment asset under a scheme; and (b) the sovereign entity acquired the investment asset on or before March 2018 under the scheme; and (c) on or before March 2018, the sovereign entity applied for a private ruling in relation to the scheme; and (d) before 1 July 2026, the Commissioner gave the entity a private ruling confirming that income from the investment asset was not subject to income tax, or withholding tax, because of the doctrine of sovereign immunity; and (e) the private ruling applied during at least part of the period: (i) starting on March 2018; and (ii) ending before July 2026; regardless of whether the private ruling started to apply before March 2018, or ceased to apply before July 2026; and (f) the scheme carried out is not materially different to the scheme specified in the private ruling; and (g) the income year is: (i) unless subparagraph (ii) applies - the 2025-26 income year or an earlier income year; or (ii) if the last income year to which the private ruling relates is a later income year than the 2025-26 income year - that later income year, or an earlier income year. | Detailed Reasoning - Analysis: Entity 1 will receive ordinary and/or statutory income as a return on the equity investments and debt interests in Australia. Therefore, this requirement is satisfied. A 'sovereign entity' is defined in section 880-15 of the ITAA 1997 as: (a) a body politic of a foreign country, or a part of a foreign country; (b) a *foreign government agency; (c) an entity: (i) in which an entity covered by paragraph (a) or (b) hold a *total participation interest of 100%; and (ii) that is not an Australian resident; and (iii) that is not a resident trust estate for the purposes of Division 6 of Part III of the ITAA 1936. A 'foreign government agency' is defined in subsection 995-1(1) of the ITAA 1997 as: (a) the government of a foreign country or of part of a foreign country; or (b) an authority of the government of a foreign country; or (c) an authority of the government of part of a foreign country. Entity is a foreign superannuation fund created by Foreign Government via Foreign Legislation. Entity 1's main purpose is to invest Foreign Government funds in order to partially provide for the cost of superannuation to eligible persons. In accordance with Foreign Legislation, Entity 1 is property of Foreign Government and is not a separate legal entity of the Foreign Government. Entity 2 are the primary decision-making body of Entity 1. It is a Foreign Government entity established under Foreign Legislation. Entity 2 is responsible for investing the assets of Entity 1. Entity 2 is overseen by a board which its members are appointed by the Government. Based on the above facts, Entity 1 is a foreign government agency as defined in subsection 995-1(1) of the ITAA 1997 and is therefore a sovereign entity under paragraph 880-15(b) of the ITAA 1997. Therefore, this requirement is satisfied. Entity 1 will receive ordinary and/or statutory income as a return on the investment assets (shares in companies, units in trusts and debt investments) under a scheme. Therefore, this requirement is satisfied. Entity 1 acquired the investments on or before March 2018. Therefore, this requirement is satisfied. It is noted the transitional provisions will not apply in respect of ordinary or statutory income received as a return on assets acquired by Entity 1 after March 2018. Entity 1 applied for a private ruling on DDMMYYYY in relation to the scheme specified in the Private Ruling that issued on DDMMYYYY. Therefore, this requirement is satisfied. A private ruling was issued to Entity 1 on DDMMYYYY. The Commissioner determined in the private ruling that Entity 1 was immune from liability to income tax and withholding tax under the common law doctrine of sovereign immunity on any income and capital gains derived from its investments listed in Appendices 1 and 2 of that private ruling. Therefore, this requirement is satisfied. Entity 1's private ruling issued on DDMMYYYY and applied for the period between DDMMYYYY to DDMMYYYY. Therefore, this requirement is satisfied. The scheme is not materially different to the scheme specified in the Private Ruling that issued on DDMMYYYY. Therefore, this requirement is satisfied. The ruling period of this ruling is DDMMYYYY to DDMMYYYY. Therefore, this requirement is satisfied. | Detailed Reasoning - Conclusion: All the requirements in section 880-5 of the IT(TP)A 1997 are satisfied. | Detailed Reasoning - Question 2: Will any capital gain arising to Entity 1 in respect of listed equity investment assets, that were acquired on or before March 2018, be disregarded pursuant to section 880-15 of the IT(TP)A 1997? | Detailed Reasoning - Detailed Reasoning: Section 880-15 of the IT(TP)A 1997 provides that a capital gain of a sovereign entity from a Capital Gains Tax (CGT) event that happens in relation to a CGT asset is disregarded if the following conditions are met: [1] (a) the capital gain arises under a scheme; and (b) the CGT asset is a membership interest, non-share equity interest or debt interest in another entity; and (c) the requirements in paragraphs 880-5(b) to (g) are satisfied (on the assumption that reference in those paragraphs to the investment asset were references to the CGT asset). | Detailed Reasoning - Analysis: 1. The capital gain arises under a scheme Entity 1, in accordance with its investment guidelines and policies, purchased Australian equities in the form of shares, stapled securities, and REITs. The assets satisfy the definition of CGT assets in section 108-5 of the ITAA 1997 (which includes any kind of property, or, a legal or equitable right which is not property). The disposal of the equity investment assets would trigger a CGT event in which Entity 1 may make a capital gain under the scheme. Therefore, Entity 1 satisfies this requirement. 2. CGT asset is a membership interest, non-share equity interest or debt interest in another entity As demonstrated in Appendices 1 and 2 of the Private Ruling made on DDMMYYYY, the CGT assets that are covered by this private ruling are either membership interests or non-share equity interests in a company or trust. Therefore, Entity 1 satisfies this requirement. 3. The requirements of 880-5(b) to (g) have been satisfied. For the reasons outlined in the answer to Question 1, the requirements in paragraphs 880-5(b) to (g) of the IT(TP)A 1997 are satisfied. | Detailed Reasoning - Conclusion: All the requirements in section 880-15 of the IT(TP)A 1997 are satisfied. Any capital gain arising to Entity 1 in respect of listed equity investment assets, that were acquired on or before March 2018, will be disregarded pursuant to section 880-15 of the IT(TP)A 1997. [1] Section 880-15 IT(TP)A 2019

15. No future investments in the assets or in similar assets were considered in the DDMMYYYY Private Ruling.: 16. The Private Ruling applied for the income tax years ending DDMMYYYY to DDMMYYYY. | 2014 Australian investments: 17. The following are the characteristics of Entity 1's Australian investments as described in the Private Ruling dated DDMMYYYY. | 18. As at DDMMYYYY, Entity 1 had the following investments in Australia (direct investments in Australian assets or with Australian counterparties): | (b) Australian listed investments | (d) Government (Federal and State) Bonds | (e) Corporate Bonds and Notes | 19. As at DDMMYYYY Entity 1 had investments in Australian REITs that met the following conditions: | (a) Each investment in the Australian REIT is made and managed in accordance with Entity 1's Investment Approach and Criteria as described earlier. | (b) Entity 1's unit holding in each of the Australian REITs constitutes less than 10% of the total units in each trust. | (c) Entity 1 is not a party to any investors' agreement in connection with each Australian REIT. | (d) Entity 1 has not appointed a director to the board of directors of the responsible entity or the trustee of each Australian REIT. | 20. Entity 1 may receive trust distributions and make gains from the disposal of units in the Australian REITs (that meet all of the above conditions). | Australian listed investments | 21. As at DDMMYYYY Entity 1 had investments that meet the following conditions: | (a) The listed investment in the Australian resident company or unit trust is made and managed in accordance with Entity 1's Investment Approach and Criteria. | (b) Entity 1 holds a portfolio interest of less than 10% of the total shares (ordinary and converting preference shares) in each company and less than 10% of the total units in each unit trust. | (c) Entity 1 is not a party to any investors' agreement in connection with the companies or unit trusts. | (d) Entity 1 has not appointed a director to the board of directors of each company or board of directors of the responsible entity or the trustee of each unit trust. | Entity 1s investments in Australia: 22. Entity 1 acquired its Australian investments before March 2018. | 23. Entity 1 derives interest, dividends, trust distributions, and capital gains from its investments in Australia. | 24. The current scheme is not materially different to the scheme specified in the Private Ruling that issued on DDMMYYYY. | Is ordinary and statutory income derived by Entity 1 as a return on the investments that were acquired on or before March 2018 non-assessable non-exempt income due to the operation of section 880-5 of the IT(TP)A 1997? | Investment asset acquired on or before March 2018 | Applied for a private ruling on or before March 2018 | Private ruling made before July 2026 | Private ruling applied during the relevant period | Scheme not materially different