Private ruling: Sovereign immunity
Date of advice: 6 March 2025
Published: 14 April 2025
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 Foreign Entity from returns on its investment 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. | Q2: Does section 880-110 of the ITAA 1997 operate to deny the Foreign Entity a deduction for any loss it incurs in respect of its interests in the Test Entities? | A2: Yes. | Q3: Is any capital gain or capital loss made by the Foreign Entity with respect to its interests in the Test Entities disregarded under section 880-115 and 880-120 of the ITAA 1997 respectively? | A3: Yes.

Relevant facts and circumstances: Foreign Entity The Foreign Entity carries out investment activities. The Government of the Foreign Country has an 100% interest in the Foreign Entity. The Foreign Entity is funded by assets ultimately owned by the Government of the Foreign Country. The Foreign entity has not obtained any third-party debt funding since its establishment. The Foreign Entity has had loans from related parties. None of these related parties of the Foreign Entity have borrowing/financing from any source other than from the Government of the Foreign Country. The Government of the Foreign Country is the ultimate beneficial recipient of all the returns on investments distributed by the Foreign Entity. The Foreign Entity is not a partnership. Test Entities The Test Entities for the purposes of this Ruling are Resident Co and Resident Trust. The Foreign Entity's investments in the Test Entities have the following characteristics: • The Foreign Entity and all members of its sovereign entity group hold collectively less than 10% of the total participation interest in each of the Test Entities. • The Foreign Entity 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. • Neither the Foreign Entity, 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. • Neither the Foreign Entity, 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. • Neither the Foreign Entity, 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. • Neither the Foreign Entity, 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 equity interest held. • The Foreign Entity's interests, including the Foreign Entity'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. • 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 Foreign Entity, or members of the Foreign Entity's sovereign entity group.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 880-105 | Income Tax Assessment Act 1997 section 880-110 | Income Tax Assessment Act 1997 section 880-115 | Income Tax Assessment Act 1997 section 880-120

Reasons for decision: Detailed Reasoning - Issue 1: Sovereign immunity | Detailed Reasoning - Question 1: Is the ordinary and statutory income derived by the Foreign Entity from returns on its investment in the Test Entities not assessable and not exempt income under section 880-105 of the ITAA 1997? | Summary: All of the conditions listed in subsection 880-105(1) have been satisfied in relation to Foreign Entity's investments in the Test Entities. As such, section 880-105 will apply to the effect that amounts of ordinary and statutory income derived by the Foreign Entity from its investments in the Test Entities are not assessable and not exempt income. | Detailed Reasoning - Detailed reasoning: All references are to the ITAA 1997 unless otherwise stated. Subsection 880-105(1) provides that an amount of ordinary income or statutory income of a sovereign entity will be not assessable and not exempt (NANE) if: (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 (e) 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 (f) 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 - 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 - 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 . A 'foreign government agency' is defined under subsection 995-1(1) 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. Section 960-180 provides that the total participation interest in another entity is the sum of an entity's direct participation interest and indirect participation interest in the other entity at that time. The ultimate holding entity of the Foreign Entity is the Government of the Foreign Country. The Government of the Foreign Country is considered to be a foreign government agency under paragraph 880-15(b) as it is the government of the foreign country. The Government of the Foreign Country holds a total participation interest of 100% in the Foreign Entity. Further, the Foreign Entity is not an Australian resident and is not a resident trust estate for the purposes of Division 6 of Part III of the ITAA 1936. Accordingly, the Foreign Entity will meet the definition of a 'sovereign entity' in accordance with paragraph 880-15(c). | Detailed Reasoning - Funded solely by public monies: The phrase 'public monies' is not defined within the legislation. Law Companion Ruling LCR 2020/3 - The superannuation fund for foreign residents withholding tax exemption and sovereign immunity provides guidance on the term 'public monies'. In the context of Division 880, LCR 2020/3 provides at paragraph 54, that this phrase essentially means monies of a foreign government (or part of a foreign government) held 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. LCR 2020/3 also provides at paragraph 70 the following: Paragraph 880-125(a) will not be satisfied where a sovereign entity obtains third-party debt funding. In this scenario, it cannot be concluded that the sovereign entity is funded solely by public monies. The sovereign entity will, at least in part, be funded by the third-party debt. The Foreign Entity is funded by assets ultimately owned by the Government of the Foreign Country. The Foreign entity has not obtained any third-party debt funding since its establishment. During the relevant period, the Foreign Entity had loans with related parties. All related parties that provide debt funding to the Foreign Entity do not obtain any third party debt funding or financing from any source other than the Government of the Foreign Country. Accordingly, the Commissioner is satisfied that the Foreign Entity is funded solely by public monies. | Detailed Reasoning - All returns on the entity's investments are public monies: The Government of the Foreign Country is the ultimate beneficial recipient of all the returns on investments distributed by the Foreign Entity. Accordingly, all returns of the Foreign Entity are public monies. | Detailed Reasoning - The entity is not a partnership: The Foreign Entity is not a partnership as it is a company incorporated in the Foreign Country. This condition is therefore satisfied. | Detailed Reasoning - Is the entity 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. The Foreign Entity's principal activity is not producing or trading non-financial goods, nor is it providing services that are not financial services. Therefore, the Foreign Entity is not a public non-financial entity. An entity is a public financial entity under subsection 880-130(2) 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 Foreign Entity does not trade in financial assets or operate commercially in the financial markets. The Foreign Entity does not operate in commercial financial markets. the Foreign Entity's principal activities do not include financial intermediary services, financial auxiliary services or capital financial institution services. Additionally, the Foreign Entity is not a type of entity listed in paragraphs 76 or 79 of LCR 2020/3. The Foreign Entity's primary activity is investing. Accordingly, the Foreign Entity is neither a public non-financial entity, nor a public financial entity under section 880-130. It therefore satisfies the requirement under paragraph 880-125(d). As the Foreign Entity 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 Foreign Entity'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 , a 'return on' a membership interest, debt interest or non-share equity interest for the purposes of paragraph 880-105(1)(b) will include: • dividends - including non-share dividends and dividends that pass through a managed investment trust (MIT) • interest - including interest that passes through a MIT • fund payments made by a MIT (other than fund payments that are attributable to non-concessional MIT income), and • revenue gains made on the disposal of an interest in the test entity - including revenue gains that pass through a MIT. The Foreign Entity receives MIT fund payments and interest components of trust distributions from units held in Resident Trust, and may receive unfranked dividends from shares held in Resident Co. The trust units and shares are membership interests as defined by the interaction of sections 960-135 and 960-130. As such, the Foreign Entity will receive amounts which satisfy the requirements of paragraph 880-105(1)(b). | Detailed Reasoning - Australian resident company or MIT: 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; (ii) a *managed investment trust in relation to the income year in which the income time occurs. The Test Entities comprise of an Australian resident company and a MIT. Accordingly, the Foreign Entity satisfy the requirements in paragraph 880-105(1)(c). | Detailed Reasoning - 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 Foreign Entity forms part of a sovereign entity group which includes the Government of the Foreign Country and any entities in which the Government of the Foreign Country either directly or indirectly holds 100% of the participation interest. At the relevant times (as required by paragraph 880-105(1)(d)), the Foreign Entity and its sovereign entity group collectively held less than 10% of the total participation interests in each of the Test Entities. In addition, the Foreign Entity and its sovereign entity group collectively hold less than 10% of the total participation interests in the Test Entities in the circumstances detailed in paragraph 880-105(4)(b). | Detailed Reasoning - Influence Test: For an amount of ordinary income or statutory income of a sovereign entity to satisfy paragraph 880-105(1)(e), 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) at the income time. 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. Foreign Entity's interest, when combined with the other interests held within the sovereign entity group, does 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 Foreign Entity or a member of the Foreign Entity's sovereign entity group. Accordingly, the sovereign entity group of the Foreign Entity does not have influence of a kind described in subsection 880-105(6) at the income time in the Test Entities and will therefore satisfy the requirements of paragraph 880-105(1)(e). | 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 Foreign Entity from its investments in the Test Entities are not assessable and not exempt income. | Detailed Reasoning - Question 2: Does section 880-110 of the ITAA 1997 operate to deny the Foreign Entity a deduction for any loss it incurs in respect of its interests in the Test Entities? | Summary: Section 880-110 of the ITAA 1997 operates to deny the Foreign Entity a deduction for any loss it incurs in respect of its interests in the Test Entities. | Detailed Reasoning - Detailed reasoning: Section 880-110 provides that a sovereign entity cannot deduct an amount if: (a) the sovereign entity is covered by section 880-125; and (b) the amount is a loss in respect of any of the following kinds of interest that the sovereign entity holds in another entity: (i) a *membership interest; (ii) ... (c) the requirements in paragraphs 880-105(1)(c), (d) and (e) would be satisfied, on the assumptions that: (i) the amount were *ordinary income or *statutory income; and (ii) the amount became ordinary income or statutory income of the sovereign entity at the time it arose; and (iii) references in those paragraphs to the test entity were references to the other entity mentioned in paragraph (b) of this section. As established in Question 1, the Foreign Entity: (a) is covered by section 880-125 (b) holds membership interests in the Test Entities, and (c) satisfied the requirements in paragraphs 880-105(1)(c), (d) and (e) in relation to ordinary or statutory income that it will derive from the Test Entities. As such, the Foreign Entity cannot deduct an amount if it is a loss in respect of its ownership interests in the Test Entities. | Detailed Reasoning - Question 3: Is any capital gain or capital loss made by the Foreign Entity with respect to its interests in the Test Entities disregarded under section 880-115 and 880-120 of the ITAA 1997 respectively? | Summary: Any capital gain or loss made by the Foreign Entity with respect to its interests in the Test Entities will be disregarded under sections 880-115 and 880-120 of the ITAA 1997 respectively. | Detailed Reasoning - Detailed reasoning: Section 880-115 provides that a sovereign entity disregards a capital gain from a CGT event that happens in relation to a CGT asset if: (a) the sovereign entity is covered by section 880-125; 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 880-105(1)(c), (d) and (e) would be satisfied, on the assumptions that: (i) the capital gain were an amount of ordinary income or statutory income; and (ii) the amount mentioned in subparagraph (i) became ordinary income or statutory income of the sovereign entity immediately before the time the CGT event happened; and (iii) references in those paragraphs to the test entity were references to the other entity mentioned in paragraph (b) of this section. Section 880-120 provides that a sovereign entity disregards a capital loss from a CGT event if, on the assumption that the loss were a capital gain, the capital gain would be disregarded because of section 880-115. As established in Question 1, the Foreign Entity: • is covered by section 880-125 • holds membership interests in the Test Entities, and • satisfied the requirements in paragraphs 880-105(1)(c), (d) and (e) in relation to ordinary or statutory income that it will derive from the Test Entities. Therefore, any capital gain or loss made by the Foreign Entity from a CGT event that happens in relation to its interests in the Test Entities, is disregarded under section 880-115 (for capital gains) or section 880-120 (for capital losses).