Private ruling: Sovereign immunity
Date of advice: 9 December 2020
Published: February 2021
Ruling period: 1 July 20XX to 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is the ordinary and statutory income derived by the Fund from its Australian investments 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 Fund The Fund was established under Foreign Legislation. According to Foreign Legislation, the property of the Fund consists of the capital contributed under Foreign Legislation, the Fund's investments and money accruing from those investments. All money comprised in the property of the Fund is owned by the Foreign Government. No payment may be made out of the Fund unless it has been authorised by the Managers of the Fund. The Fund is not a separate legal entity from the Foreign Government. The Fund is the property of the Foreign Government. No payment may be made out of the Fund except in accordance with Foreign Legislation and unless it has been authorised by the manager of the Fund. Foreign Government may calculate the amount of capital it will contribute to the Fund each financial year. In addition to the funds the Foreign Government is required to contribute the Foreign Government to may make additional contributions to the Fund. Under Foreign Legislation if the required annual capital contribution is less than zero the Minister may require a capital withdraw from the Fund. The Foreign Legislation has no provision early withdrawal of pension funds by residents of Foreign Country. Managers of the Fund (The Managers) The Manager is a Foreign Government entity. The functions of the Managers are to manage and administer the Fund in accordance with the Foreign Legislation. The Managers have the responsibility to invest the Fund's capital in accordance with Foreign Legislation. The Managers must ensure that the Fund 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. The Managers is overseen by a board. Its members are appointed by the Foreign Government. The Managers are exempt from Foreign Country tax. The Fund's Australian investments The Fund's Australian listed property trusts consist of Australian REITs and Australian REIT stapled securities. The Fund's investments in Australian Listed Securities comprise of equity investments (ordinary shares) in Australian resident companies. The Fund's Australian investments have the following characteristics: (a) All investments are listed on the Australian Securities Exchange (ASX). (b) The Fund's unit holding in each of the Australian companies and Australian REITs constitutes less than 10% of the total units in each company or trust. (c) The Fund has no involvement in the day to day management of the business of any of the Australian companies or REIT. (d) The Fund has no right to appoint a director to the Board of Directors of the Australian company or equivalent role in a REIT. (e) The Fund has no right to representation on any investor's representative or advisory committee (or similar) of the Australian company or REIT. (f) The Fund has no ability to direct or influence the operation of the Australian company or REIT outside of the ordinary rights conferred by the equity interest held. (g) The Fund only hold rights to vote in proportion to their equity interest in each Australian company or REIT. The Fund may receive trust distributions and make gains from the disposal of units in the REITs (that meet all of the above conditions). No Australian substantial holding notices have been issued in respect of The Fund's interest in the Australian investments. Accordingly, the Fund and its associates collectively do not hold (and have not held) an interest of 5% or more in any of the Australian Investments.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 880 | Income Tax Assessment Act 1997 section 880-105

Reasons for decision: Summary: Ordinary and statutory income derived by the Fund as a return on its Australian investments is not assessable and not exempt income due to the operation of section 880-105 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Section 880-105 of the ITAA 1997 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) of the ITAA 1997: (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 Fund is a covered sovereign entity: Section 880-125 of the ITAA 1997 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 Fund is a sovereign entity: For an entity to be covered by section 880-125 of the ITAA 1997, it must be a sovereign entity. Section 880-15 of the ITAA 1997 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 . 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. The Fund is a foreign fund created by the Foreign Government legislation. In accordance with Foreign Legislation, the Fund is property of the Foreign Government and is not a separate legal entity of the Foreign Government. The Managers are the primary decision-making body of the Fund. It is a Foreign Government entity. The Managers are responsible for investing the assets of the Funds. The Managers are overseen by a board appointed by the Foreign Government. Based on the above facts, the Fund 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. | Detailed Reasoning - The Fund 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 of the ITAA 1997, 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. In accordance with Foreign Legislation the purpose of the Fund is to build a portfolio of assets which can be used to supplement the Foreign Government's annual budget to finance the Foreign Government's obligations. Under Foreign Legislation, the property of the Fund consists of capital contributed by the Foreign Government, the Fund's investments and money accruing from the investments. The Fund is therefore funded solely by public monies. | Detailed Reasoning - All returns on the Fund's investments are public monies: In accordance with Foreign Legislation the property including the return on investments is owned by the Foreign Government. Additionally, the funds may only be withdrawn by the Foreign Government into a Foreign Government bank account. Therefore, all returns on the Fund's investments are public monies. | Detailed Reasoning - The Fund is not a partnership: The Fund is not a separate legal entity and is owned by the Foreign Government. It is not a partnership. As such, it passes this condition. | Detailed Reasoning - The Fund is not a public non-financial entity or public financial entity: Subsection 880-130(1) of the ITAA 1997 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) of the ITAA 1997 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. It is noted that subparagraph 880-125(d)(ii) of the ITAA 1997 excludes public financial entities that only carry on central banking activities from being excluded as a covered sovereign entity. The Fund was created by Foreign Government through legislation. The Fund does not produce or trade non-financial goods and does not provide services that are not financial services. The Fund does not commercially trade in its Australian investments. Thus, it is not engaged in the activities described by paragraphs 880-130(2)(a) and 880-130(2)(b) of the ITAA 1997. The Fund does not engage in the activities described in paragraph 880-130(2)(c) of the ITAA 1997. As such, the Fund is not a public non-financial entity nor a public financial entity and passes the condition in paragraph 880-125(d) of the ITAA 1997. As the Fund satisfies each of the requirements in paragraphs 880-125(a) through (d) of the ITAA 1997 it is considered a sovereign entity that is covered by section 880-125 of the ITAA 1997 for the purposes of paragraph 880-105(1)(a) of the ITAA 1997. | Detailed Reasoning - The Fund'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) of the ITAA 1997, 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 membershipinterest for the purposes of paragraph 880-105(1)(b) of the ITAA 1997 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 for the purposes of this ruling are the Australian publicly-traded companies and MITs in which the Fund holds shares and units respectively (which meet the requirements of being membership interests as defined by the interaction of sections 960-135 and 960-130 of the ITAA 1997) and pay to the Fund: • REIT fund payments, including interest components of trust distributions, and • dividends. As such, Fund will receive amounts which satisfy the requirements of paragraph 880-105(1)(b) of the ITAA 1997. | Detailed Reasoning - The Fund's income is received from Australian resident companies or MITs: For an amount of ordinary income or statutory income of a sovereign entity to satisfy paragraph 880-105(1)(c) of the ITAA 1997, 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 Australian resident companies and REITs. As such, the Fund receives income from entities which satisfy the requirements of paragraph 880-105(1)(c) of the ITAA 1997. | Detailed Reasoning - The Fund 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) of the ITAA 1997, the sovereign entity and the sovereign entity group to which it belongs must satisfy the portfolio interest test in relation to the test entity/ies 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) of the ITAA 1997, 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 of the ITAA 1997 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. Thus Fund 1, Fund 2, Fund 3 and Fund 4 will be members of the Fund's sovereign entity group and its holdings will be considered when determining whether the Fund satisfies the portfolio interest test. The Fund's sovereign entity group holds less than 10% of the total shares on issue of each Australian company and less than 10% of the total units on issue of each Australian trust. Additionally, the Fund's sovereign is prohibited under section 59 of the NZ Act from controlling any other entity or holding a percentage of the voting rights in any other entity that would lead NZSF to seek control. As such, the Fund's interest in the test entities satisfy the requirements of paragraph 880-105(d) of the ITAA 1997. | Detailed Reasoning - The Fund does not have influence of a kind described in subsection 880-105(6) of the ITAA 1997: For an amount of ordinary income or statutory income of a sovereign entity to satisfy paragraph 880-105(1)(e) of the ITAA 1997, 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) of the ITAA 1997. Subsection 880-105(6) of the ITAA 1997 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. Sub-test 2 of the influence test, as contained in paragraph 880-105(6)(b) of the ITAA 1997, 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. In relation to the Fund's investments in the Australian companies and trusts: (a) The Fund has no involvement in the day to day management of the business of any of the Australian companies or trusts (b) The Fund has no right to appoint a director to the Board of Directors of any of the Australian companies and has no right to appoint a director to the Board of Directors of any of the trustee companies for the trusts (c) The Fund has no right to representation on any investor representative or advisory committee (or similar) of any of the Australian companies or trusts (d) The Fund has no ability to direct or influence the operation of the Australian company or trust outside of the ordinary rights conferred by the share or unit interest held, and (e) The Fund only holds rights to vote as a shareholder or unitholder in proportion to its share interest in the Australian companies or trusts. Based upon the above, the sovereign entity group of the Fund does not have influence of a kind described in subsection 880-105(6) of the ITAA 1997 and will, therefore, satisfy the requirements of paragraph 880-105(1)(e) of the ITAA 1997. | Detailed Reasoning - Conclusion: As all of the conditions listed in subsection 880-105(1) of the ITAA 1997 have been satisfied, section 880-105 of the ITAA 1997 will apply to the effect that amounts of ordinary and statutory income derived by the Fund from its investments in the Australian investments listed are not assessable and not exempt income for the period from 1 July 20XX to 30 June 20XX.

Other relevant facts: The Fund derives interest, dividends, trust distributions, and capital gains from its investment in Australia. | No other sovereign entity of the Foreign Government holds (or has held) an interest in the Australian Assets, that together with the Fund's interest would equal or exceed 10%. | For completeness Foreign Government's sovereign entity group includes (but not exclusively) the Fund, Fund 1, Fund 2, Fund 3 and Fund 4. Please note that only the Fund is covered by this Private Ruling.