Private ruling: Sovereign immunity
Date of advice: 24 August 2020
Published: October 2020
Ruling period: Year ending 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is the ordinary and statutory income derived by the Bank from its interests held in the Test Entities not assessable and not exempt income under section 880-105 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes.

Relevant facts and circumstances: The Bank is a resident in Country A. It is the central bank of Country A and exempt from all taxes in Country A. The Bank was formally established by Country A's government under their Constitution and by statute. It is a public legal entity. The Bank's primary objective is to achieve and maintain domestic price stability, promote and maintain a stable and competitive financial system based on free market principles, and support the general economic policies of Country A's government. The Bank undertakes central banking activities, including acting as the fiscal agent of and Banker to the Government. The Bank's capital was provided by and is held solely by the Government of Country A. The net profit of the Bank is distributed to the Government of Country A and forms part of Country A's central budget or is placed in the Bank's reserve accounts. The Bank's sovereign entity group consists of Country A, and any entities in which Country A either directly or indirectly holds 100% of the participation interests. Investments in the Test Entities The Bank holds various equity interests in the Test Entities as listed in Appendix 1. The equity interests held by the Bank as at 24 June 20XX have the following characteristics: a. The Bank and all members of its sovereign entity group hold collectively less than 10% of the total participation interests in each of the Test Entities. b. The Bank and all members of its sovereign entity group would hold collectively less than 10% of the total participation interests in the Test Entities in the circumstances detailed in paragraph 880-105(4)(b) of the ITAA 1997. c. The Test Entities are all entities listed on the Australian Stock Exchange (ASX). d. Neither the Bank, nor any members of its sovereign entity group, has involvement in the day to day management of the business of any of the Test Entities. e. Neither the Bank, nor any members of its sovereign entity group, has the right to appoint a director to the Board of Directors of any of the Test Entities. f. Neither the Bank, nor any members of its sovereign entity group, holds the right to representation on any investor representative or advisory committee (or similar) of the Test Entities. g. Neither the Bank, nor any members of its sovereign entity group, has the ability to direct or influence the operation of the Test Entities outside of the ordinary rights conferred by the interest held. h. The Bank's interests in the Test Entities do not provide it with an entitlement to either directly or indirectly determine the identity of any person who make decisions that comprise the control and direction of the Test Entities' operations. i. The Bank's interests, when combined with the other interests held within its sovereign entity group, do not provide an entitlement to either directly or indirectly determine the identity of any person who make decisions that comprise the control and direction of the Test Entities' operations. j. No person involved in the control and direction of the Test Entities' operations is accustomed or obliged to act in accordance with the directions, instructions or wishes of the Bank or members of the Bank's sovereign entity group.

Relevant legislative provisions: Division 880 of the Income Tax Assessment Act 1997

Reasons for decision: Summary: Section 880-105 provides that amounts of ordinary and statutory income derived by a sovereign entity are not assessable and not exempt income if certain conditions are met. Those conditions are listed in subsection 880-105(1): (a) the sovereign entity is covered by section 880-125; and (b) the amount is a return on any of the following kinds of interest that the sovereign entity holds in another entity (the test entity ): (i) a *membership interest; (ii) a *debt interest; (iii) a *non share equity interest; and (c) the test entity is: (i) a company that is an Australian resident at the time (the income time ) when the amount becomes ordinary or statutory income of the sovereign entity; or (ii) a *managed investment trust in relation to the income year in which the income time occurs; and (d) the *sovereign entity group of which the sovereign entity is a member satisfies the portfolio interest test in subsection (4) in relation to the test entity: (i) at the income time; and (ii) throughout any 12 month period that began no earlier than 24 months before that time and ended no later than that time; and (e) the sovereign entity group of which the sovereign entity is a member does not have influence of a kind described in subsection (6) in relation to the test entity at the income time. These conditions are considered below. | Detailed Reasoning - The Bank is a covered sovereign entity: Section 880-125 states: A *sovereign entity is covered by this section if it satisfies all of the following requirements: (a) the entity is funded solely by public monies; (b) all returns on the entity's investments are public monies; (c) the entity is not a partnership; (d) the entity is not any of the following: (i) a *public non-financial entity; (ii) a *public financial entity (other than a public financial entity that only carries on central banking activities). These conditions are considered below. | Detailed Reasoning - The Bank is a sovereign entity: For an entity to be covered by section 880-125, it must be a sovereign entity. Section 880-15 defines a sovereign entity to be any of the following: (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) holds 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 Income Tax Assessment Act 1936 . Section 960-180 provides that an entity's total participation interest in another entity is the sum of: (a) the entity's direct participation interest in the other entity at that time; and (b) the entity's indirect participation interest in the other entity at that time. The Bank is a public institution established by Country A's government. It is governed by statute. The capital of the Bank is held solely by Country A. As such, the Bank is a body corporate that is an agency or instrumentality of Country A. The Bank is also an entity in which a foreign state, Country A, owns 100% of the participation interest. As such, the Bank is a sovereign entity under section 880-15 of the ITAA 1997. | Detailed Reasoning - The Bank is funded solely by public monies: The phrase 'public monies' is not defined and as such takes its ordinary meaning. In the context of Division 880, this phrase essentially means monies raised by a foreign government (or part of a foreign government) for a public purpose which form part of the foreign government's (or part of the foreign government's) equivalent to Australia's Consolidated Revenue Fund ( Roy Morgan Research Pty Ltd v FC of T & Anor [2011] HCA 35). This would ordinarily include general tax revenue, proceeds from the issue of government bonds, the proceeds of privatisations etc. The Bank is funded by capital provided by Country A's government. It also invests and holds the foreign reserves of Country A and uses these funds in the course of achieving its objectives as a central bank. It can be concluded based on the above facts that the Bank is funded solely by public monies. All returns on The Bank's investments are public monies Net profits of the Bank are either retained by the Bank in its reserves accounts or transferred to the general budget of the State. As such, all returns on the Bank's investments are public monies. The Bank is not a partnership The Bank is a public law entity, which legal status is defined by statute and is not a partnership. As such, it passes this condition. The Bank is not a public non-financial entity or public financial entity Subsection 880-130(1) defines the term public non-financial entity: An entity is a public non financial entity if its principal activity is either or both of the following: (a) producing or trading non financial goods; (b) providing services that are not financial services. Subsection 880-130(2) defines the term public financial entity: An entity is a public financial entity if any of the following requirements are satisfied: (a) it trades in financial assets and liabilities; (b) it operates commercially in the financial markets; (c) its principal activities include providing any of the following financial services: (i) financial intermediary services, including deposit taking and insurance services; (ii) financial auxiliary services, including brokerage, foreign exchange and investment management services; (iii) capital financial institution services, including financial services in relation to assets or liabilities that are not available on open financial markets. The Bank was established for the purpose of carrying on the business of central banking. The Bank satisfies the definition of a public financial entity provided for in subsection 880-130(2). However subparagraph 880-125(d)(ii) states that public financial entities that only carry on central banking activities are not excluded from being a covered sovereign entity. Paragraph 75 of the Draft Law Companion Ruling LCR 2019/D4 The superannuation fund for foreign residents withholding tax exemption and sovereign immunity (LCR 2019/D4) lists the following as being considered as 'central banking activities': · monetary policy development · issuing national currency · acting as custodian of international reserves, and · providing banking services to government. The Bank is a public financial entity that only carries on central banking activities. As such, the Bank passes the condition in 880-125(d). As the Bank satisfies each of the requirements in paragraphs 880-125(a) through (d) it is a sovereign entity that is covered by section 880-125 for the purposes of paragraph 880-105(1)(a). | Detailed Reasoning - The Bank's return is received on a relevant interest in the Test Entities: For an amount of ordinary income or statutory income of a sovereign entity to satisfy paragraph 880-105(1)(b), it must be a 'return on' a membership interest, debt interest or non-share equity interest held by the sovereign entity in the test entities. As detailed in paragraph 4.37 of the Explanatory Memorandum to the Making Sure Foreign Investors Pay Their Fair Share of Tax in Australia and Other Measures) Act 2019 ('the EM'), a 'return on' a membership interest, debt interest or non-share equity interest for the purposes of paragraph 880-105(1)(b) will include: 1. dividends - including non-share dividends and dividends that pass through a managed investment trust (MIT) 2. interest - including interest that passes through a MIT 3. fund payments made by a MIT (other than fund payments that are attributable to non-concessional MIT income), and 4. revenue gains made on the disposal of an interest in the test entity - including revenue gains that pass through a MIT. The Test Entities are entities in which the Bank holds an equity interest and earns returns in the form of dividends, interest, and fund payments. As such, the Bank will receive amounts which satisfy the requirements of paragraph 880-105(1)(b). | Detailed Reasoning - The Bank's income is received from Australian resident companies or managed investment trusts: For an amount of ordinary income or statutory income of a sovereign entity to satisfy paragraph 880-105(1)(c), it must be received from an entity that is either: (i) a company that is an Australian resident at the time (the income time ) when the amount becomes ordinary or statutory income of the sovereign entity; or (ii) a *managed investment trust in relation to the income year in which the income time occurs. The Test Entities are ASX listed Australian resident companies and MITs at the relevant times. As such, the Bank receives income from entities which satisfy the requirements of paragraph 880-105(1)(c). | Detailed Reasoning - The Bank's sovereign entity group satisfies the portfolio interest test: For an amount of ordinary income or statutory income of a sovereign entity to satisfy paragraph 880-105(1)(d), the sovereign entity and the sovereign entity group to which it belongs must satisfy the portfolio interest test in relation to the test entities at both the income time and throughout any 12 month period that began no earlier than 24 months before that time and ended no later than that time. The portfolio interest test is outlined in subsection 880-105(4), which states: A *sovereign entity group satisfies the portfolio interest test in this subsection in relation to the test entity at a time if, at that time, the sum of the *total participation interests that each *member of the group holds in the test entity: (a) is less than 10%; and (b) would be less than 10% if, in working out the *direct participation interest that any entity holds in a company: (i) an *equity holder were treated as a shareholder; and (ii) the total amount contributed to the company in respect of *non-share equity interests were included in the total paid-up share capital of the company. Section 880-20 provides the definition of sovereign entity group. Broadly, sovereign entities of the same foreign government will be members of the same sovereign entity group and sovereign entities of the same part of a foreign government will be members of the same sovereign entity group. The Bank is part of Country A's sovereign entity group. At the relevant times (as required by paragraph 880-105(1)(d)), the Bank, and its sovereign entity group collectively, holds less than 10% of the total participation interests in each of the Test Entities and the Bank and its sovereign entity group collectively, would hold less than 10% of the total participation interests in the Test Entities in the circumstances detailed in paragraph 880-105(4)(b). Therefore the portfolio test is satisfied. | Detailed Reasoning - The Banks's sovereign entity group does not have influence of a kind described in subsection (6) in relation to the Test Entities at the income time: For an amount of ordinary income or statutory income of a sovereign entity to satisfy paragraph 880-105(1)(e), at the income time the sovereign entity group to which the sovereign entity belongs must not have influence over the test entity of a kind described in subsection 880-105(6). Subsection 880-105(6) states: A *sovereign entity group has influence of a kind described in this subsection in relation to the test entity at a time if any of the following requirements are satisfied at that time: (a) a *member of the group: (i) is directly or indirectly able to determine; or (ii) in acting in concert with others, is directly or indirectly able to determine; the identity of at least one of the persons who, individually or together with others, make (or might reasonably be expected to make) the decisions that comprise the control and direction of the test entity's operations; (b) at least one of those persons is accustomed or obliged to act, or might reasonably be expected to act, in accordance with the directions, instructions or wishes of a member of the group (whether those directions, instructions or wishes are expressed directly or indirectly, or through the member acting in concert with others). As such, there are two distinct sub-tests within the influence test. Sub-test 1 of the influence test, as contained in paragraph 880-105(6)(a), assesses whether the sovereign entity group is able to determine the identity of at least one of the persons who, individually or together with others, makes or is reasonably expected to make, decisions comprising the control and direction of the test entity's operations. This includes situations where the sovereign entity group is able to act in concert with others to determine the identity of a relevant decision-maker in the test entity. Sub-test 1 also extends to situations where the sovereign entity group, in its own right, holds the ability to approve or veto decisions which go to the control or direction of the test entity. The Bank's interests in the Test Entities do not provide it with an entitlement to either directly or indirectly determine the identity of any person who make decisions that comprise the control and direction of the Test Entities' operations. Furthermore, the Bank's interests, when combined with the other interests held within its sovereign entity group, do not provide an entitlement to either directly or indirectly determine the identity of any person who make decisions that comprise the control and direction of the Test Entities' operations. Sub-test 2 of the influence test, as contained in paragraph 880-105(6)(b), assesses whether at least one of the relevant decision-making persons of the test entity is accustomed or obliged to act, or might reasonably be expected to act, in accordance with the directions, instructions or wishes of the sovereign entity group. No person involved in the control and direction of the Test Entities' operations is accustomed or obliged to act in accordance with the directions, instructions or wishes of the Bank or members of the Bank's sovereign entity group. Based upon the above, the sovereign entity group of the Bank does not have influence of a kind described in subsection 880-105(6) and will, therefore, satisfy the requirements of paragraph 880-105(1)(f). | Detailed Reasoning - Conclusion: As all of the conditions listed in subsection 880-105(1) have been satisfied, section 880-105 will apply to the effect that amounts of ordinary and statutory income derived by the Bank from its equity interests held in the Test Entities are not assessable and not exempt income.