Private ruling: Doctrine of sovereign immunity
Date of advice: 26 September 2016
Published: November 2016

Ruling: Q1: Will the Australian Taxation Office (ATO) impose liability to income tax or withholding tax on interest income, dividend income and capital gains derived by the Government in respect of its Australian investment? | A1: No

Relevant facts and circumstances: The Government invested in units in a trust in Australia. In accordance with the Act, the Government has sole authority over investment, distribution, and utilisation of its investment in Australia. The Government will derive dividend, interest and capital gains from its Australian investments.


Reasons for decision: Detailed Reasoning - Sovereign immunity background: The Foreign States Immunities Act 1985 (Immunities Act) is an Australian Commonwealth Act which reflects a more restrictive view of the common law doctrine of sovereign immunity. The ATO follows the principles delineated in the Immunities Act which represents Australia's restrictive approach when considering sovereign immunity claims to taxation matters. Pursuant to this approach, an entity claiming sovereign immunity must satisfy three conditions: 1. the entity must be a foreign state, or a separate entity of a foreign state 2. the monies being invested in the scheme are and will remain government monies, and 3. the scheme to which the claim applies must not be a commercial transaction. If these three conditions are satisfied, it has been the long-standing practice of the ATO to not impose the entity's liability to income tax and withholding tax in respect of ordinary income and statutory income on the basis that the entity has satisfied the common law doctrine of sovereign immunity. | Detailed Reasoning - Condition 1: a foreign state or separate entity of a foreign state: A claim for sovereign immunity may only be made by a 'foreign state' (section 9 of the Immunities Act). A foreign state is defined in section 3 of the Immunities Act to be a country outside of Australia that is either: a) an independent sovereign state, or b) a separate territory (whether or not it is self-governing) that is not part of an independent sovereign state. Sovereign immunity also extends to a 'separate entity' of a foreign state pursuant to section 22 of the Immunities Act. A separate entity of a foreign state is defined in section 3 of the Immunities Act to be a natural person, body corporate or corporation sole that: a) is an agency or instrumentality of the foreign State, and b) is not a department or organ of the executive government of the foreign State. As the Government is an independent sovereign state, as defined by section 3 of the Immunities Act it is considered that it is a foreign state or a separate entity of a foreign state. | Detailed Reasoning - Condition 2: the monies being invested in the scheme are and will remain government monies: The Government invested in units in a trust in Australia. In accordance with the Act, the Government has sole authority over investment, distribution, and utilisation of its investment in Australia. In view of the above, the monies invested by the Government are and will remain government monies. Condition 3 : the scheme to which the claim applies must not be a commercial transaction An investment undertaken by a foreign government or an agency of a foreign government will generally be accepted as the performance of governmental functions provided that it is within the functions of government. However, it is necessary to establish whether the investment is non-commercial in nature and this will depend on the particular circumstances of the investment. This condition is met. | Detailed Reasoning - Conclusion: Accordingly, ATO will not impose liability to income tax or withholding tax on interest income, dividend income and capital gains derived by the Government in respect of its Australian investment.