Private ruling: Sovereign immunity
Date of advice: 27 June 2022
Published: October 2022
Ruling period: Year ended 30 June 20Y2 | Year ended 30 June 20Y3 | Year ended 30 June 20Y4 | Year ended 30 June 20Y5 | Year ended 30 June 20Y6
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is the ordinary income and statutory income derived by XYZ LLC (XYZ) in respect of its direct investment in the Test Entity not assessable and not exempt income under section 880-105 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: Will any capital gain made by XYZ in respect of its direct investment in the Test Entity be disregarded under section 880-115 of the of the ITAA 1997? | A2: Yes. | Q3: Does paragraph 128B(3)(n) of the Income Tax Assessment Act 1936 (ITAA 1936) apply to exclude XYZ from liability to withholding tax on income from the direct investment in the Test Entity that is non-assessable non-exempt income due to the operation of Division 880 of the ITAA 1997? | A3: Yes.

Relevant facts and circumstances: Foreign Government Agency (FGA) 1. FGA was established by law. FGA is a resident in Foreignland for income tax purposes and is not subject to income tax in Foreignland. 2. FGA was established to invest and manage funds for Foreignland. 3. FGA has the power to and has established a number of entities that hold FGA's investments. 4. FGA is recognised under Foreignland law as a government authority of Foreignland. FGA has its own legal personality and an independent budget. 5. FGA is managed by its own Board. 6. FGA was established using assets assigned to it by the governing body of Foreignland. No personal monies of any individual have been contributed to FGA. 7. The income generated by FGA on the investment is re-invested by FGA or distributed to the Government of Foreignland. 8. No distributions of income or gains from FGA have been made or can be made to any person other than the Government of Foreignland. XYZ 9. XYZ is a subsidiary company established by FGA and holds its investment in the Test Entity, as well as other investments. 10. XYZ was incorporated as a limited liability company. 11. XYZ is not subject to income tax in Foreignland. 12. The source of funds invested into XYZ is from the Foreignland government's sovereign reserves, such that there is no third-party debt involved in the investment. 13. XYZ is not a resident of Australia for tax purposes, nor is it a trust under Division 6 of the ITAA 1936. XYZ does not have its central management and control in Australia nor its voting power controlled by Australian residents. XYZ does not maintain an office in Australia or engage in any trade or business in Australia. The investment in the Test Entity 14. The Test Entity is a company established as part of a consortium formed for the purposes of acquiring an investment. The Test Entity is an Australian incorporated company. 15. FGA, through its subsidiary XYZ, has participated in the consortium investment. 16. The investment in the Test Entity is comprised of shares and loan notes. XYZ acquired less than 5% of the shares on issue, and subscribed for less than 5% of the loan notes. Investors, including XYZ, into the Test Entity hold the same proportion of loan notes issued as shares issued by the Test Entity. 17. Separate to the direct investment, FGA currently holds a minor interest in the ZZZ Fund, a separate investment vehicle that holds a stake in the Test Entity. The additional interest held in the Test Entity by FGA (indirectly through the ZZZ Fund) is less than 1%. Direct holding 18. As a holder of the direct interest, XYZ will not have any right to appoint a Director or an Observer to the Board of the Test Entity. 19. While XYZ has the ability to potentially pool their interest to appoint a Director to the Board, XYZ provided a notice to waive its right to form part of a Pooled Interest. The notice gives the effect that the right will be irrevocably and unconditionally waived by way of a legally enforceable agreement. 20. Neither XYZ nor any member of the 'sovereign entity group' have entered into or receive any side letters, arrangements, or agreements. 21. Neither XYZ nor any member of the 'sovereign entity group' holds any veto rights in respect of the Test Entity. 22. Neither XYZ, 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 Entity. 23. The loan notes do not provide XYZ with any additional rights that impact any of the potential influence of XYZ over the Test Entity. Indirect holding 24. As noted above, FGA holds an interest in ZZZ Fund which in turn invests in the Test Entity. 25. FGA is a member of the Board of Advisors of ZZZ Fund. The Board of Advisors is not a governing body of ZZZ Fund (i.e. it is not equivalent to the board of directors), with the ZZZ Fund being governed or directed by its general partner. 26. The Board of Advisors is a body that primarily represents Limited Partners interests in approving or rejecting conflicts of interests. It otherwise is empowered to approve or reject certain General Partner generated waiver or consent requests permitted under the Limited Partnership Agreement ("LPA"). It essentially has no independent jurisdiction to direct the activities of the fund outside of those responses to a limited number of GP generated corporate actions. 27. Under the LPA, the Board of Advisors is also expected to meet at least annually with the GP and carry out duties contemplated by the LPA, including providing advice and counsel as to general economic and financial trends, portfolio investments and valuations, as is requested by the General Partner in connection with the investments of the ZZZ Fund. Notwithstanding, the General Partner ultimately retains the responsibility for all decisions relating to the operation and management of the ZZZ Fund, including investment decisions. 28. There are currently over 20 members of the Board of Advisors, with FGA being one member. Based on governance terms, there have been the maximum number of members at all times from inception. 29. The meetings have historically only been one meeting per year. This is expected to continue to be the case unless a conflict of interest arises that requires the consideration of the Board of Advisors. 30. FGA does not, legally or in practice, have the ability to determine the Directors of ZZZ Fund and none of those Directors are accustomed or obliged to act, or might reasonably be expected to act, in accordance with the directions, instructions or wishes of FGA. 31. The General Partner of ZZZ Fund has the ability to appoint a director to the Board of the Test Entity. 32. XYZ and all members of its sovereign entity group would hold collectively less than 10% of the total participation interests in the Test Entity in the circumstances detailed in paragraph 880-105(4)(b) of the ITAA 1997. 33. Neither XYZ, nor any members of its sovereign entity group, has involvement in the day to day management of the business of the Test Entity. 34. Neither XYZ, nor any members of its sovereign entity group, has the right to appoint a director to the Board of Directors of the Test Entity. 35. Neither XYZ, nor any members of its sovereign entity group, has the ability to direct or influence the operation of the Test Entity outside of the ordinary rights conferred by the interest held. 36. XYZ's interests in the Test Entity does 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 Entity's operations. 37. No person involved in the control and direction of the Test Entity' operations is accustomed or obliged to act in accordance with the directions, instructions or wishes of XYZ or members of XYZ's sovereign entity group.

Relevant legislative provisions: Income Tax Assessment Act 1936 paragraph 128B(3)(n) | Income Tax Assessment Act 1997 section 880-105 | Income Tax Assessment Act 1997 section 880-115

Reasons for decision: 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 - XYZ 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. 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. FGA was established by law for the purposes of investing and managing the reserve funds of Foreignland. FGA is officially recognised as a government body under Foreignland law. FGA meets the requirements of an agency of a foreign government. XYZ is a subsidiary of FGA. XYZ is not subject to income tax in Foreignland. XYZ is a special purpose vehicle established by FGA and holds its investment in the Test Entity, as well as several other investments. Based on these facts and circumstances, it is accepted that XYZ is an entity in which a foreign government agency holds a total participation interest (as defined by section 960-180 of the ITAA 1997) of 100%. XYZ 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. As such, XYZ will meet the definition of a 'sovereign entity' by virtue of the operation of paragraph 880-15(c) of the ITAA 1997. Therefore, this requirement is satisfied. | Detailed Reasoning - XYZ is funded solely by public monies and all returns on XYZ's investment are public monies: FGA was established using public monies. No personal monies of any individual have been contributed to FGA. The income generated by FGA on the investment of the State reserve funds is re-invested by FGA or distributed to the Government of Foreignland. No distributions of income or gains from FGA have been made or can be made to any person other than the Government of Foreignland. In addition, XYZ is entirely funded by FGA and the public monies invested by FGA in the Test Entity are and will remain the monies of the Government of Foreignland. There will be no external debt involved in relation to the investment in the Test Entity. Further, none of the entities in the holding structure have any third-party debt. Therefore, this requirement is satisfied. | Detailed Reasoning - XYZ is not a partnership: XYZ is not a partnership for the purposes of section 880-125 of the ITAA 1997. Therefore, this requirement is satisfied. XYZ 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. Public non-financial entities include entities such as airline corporations, postal authorities, state water corporations and port authorities. They also include public non-profit institutions engaging in market production (such as hospitals, schools, or colleges) if they are separate institutional units and charge economically significant prices. XYZ is a subsidiary of FGA that was incorporated in Foreignland. XYZ is a special purpose vehicle established by FGA and holds its investment in the Test Entity, as well as other investments. Therefore, the principal activity of XYZ is, for the purposes of subsection 880-130(1) of the ITAA 1997, to invest and manage the funds of the Foreignland. XYZ does not produce or trade non-financial goods and does not provide non-financial services. Therefore, XYZ is not in the business of producing or trading non-financial goods and/or providing non-financial services. XYZ does not actively trade in financial assets and liabilities, operate commercially in financial markets or provide any of the services listed in paragraph 880-130(2)(c) of the ITAA 1997. Therefore, XYZ is not a public financial entity, nor a public non-financial entity and passes the condition in paragraph 880-125(d) of the ITAA 1997. As XYZ 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 - XYZ's return is received on a relevant interest in the Test Entity: 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 entity. 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) Bill 2019 ('the EM'), a 'return on' a membership interest for the purposes of paragraph 880-105(1)(b) of the ITAA 1997 will include: The investment in the Test Entity by XYZ has been made through the acquisition of shares and loan notes. XYZ's investment in the shares and the loan notes meet the requirements of being the requisite type of interests for the purposes of paragraph 880-105(1)(b) of the ITAA 1997. It is expected it will receive a 'return on' these interests by way of dividends and interest. Therefore, XYZ will receive amounts which satisfy the requirements of paragraph 880-105(1)(b) of the ITAA 1997. | Detailed Reasoning - XYZ'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; (ii) a *managed investment trust in relation to the income year in which the income time occurs. XYZ holds both direct and indirect participation interests in the Test Entity. XYZ will only satisfy this requirement in respect of its interest directly into the Test Entity, which is an Australian company (i.e. it will not satisfy this requirement for FGA's indirect investment held through ZZZ Fund). It is expected that the Test Entity will continue to be an Australian resident company at the time the ordinary and statutory income is derived by XYZ. Therefore, XYZ's income is received from an entity that satisfies the requirements of paragraph 880-105(1)(c) of the ITAA 1997. | Detailed Reasoning - XYZ'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) 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 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) 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. XYZ holds a less than 5% direct interest in the Test Entity. A member of XYZ's sovereign entity group also holds an indirect interest in the Test Entity of less than 1%. The aggregated participation interest of the XYZ sovereign entity group in the Test Entity is less than 5% both in the circumstances outlined in paragraph 880-105(4)(a) and paragraph 880-105(4)(b) of the ITAA 1997. XYZ and its sovereign entity group collectively held less than 10% interest in the test entity 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 (noting the Test Entity was only recently incorporated for the purpose of the acquisition of the underlying investment). Therefore, XYZ's interest in the Test Entity satisfies the requirements of paragraph 880-105(1)(d) of the ITAA 1997. | Detailed Reasoning - XYZ's sovereign entity group 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). In determining whether a sovereign entity group has the requisite level of influence, subsection 880-105(7) requires that any breaches of the terms of a debt interest by any entity be ignored. As such, there are two distinct sub-tests within the influence test. | Detailed Reasoning - Sub-test 1: Sub-test 1 is contained in paragraph 880-105(6)(a) of the ITAA 1997 and assesses whether the sovereign entity group is able to directly or indirectly 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. 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. Whether the sovereign entity group is 'able to determine' the identity of (to settle or decide upon, to choose or appoint) a person is a question of fact. The phrase 'able to' focuses on the sovereign entity group's capacity or power. Sub-test 1 is therefore not limited to situations where the sovereign entity group has already determined, or intends to determine, the identity of one of the relevant decision makers. A right to determine will be sufficient for the requisite level of influence to exist. Sub-test 1 also extends to situations where the relevant entity has the indirect capacity to determine the identity of one of the relevant decision makers. Paragraph 12 of LCR 2020/3 states that the relevant entity will not be 'able' to determine, as a matter of fact, where it has irrevocably and unconditionally waived its rights by way of a legally enforceable agreement." Sub-test 1 requires that the person whose identity is determined by the sovereign entity group (individually or together with others), makes or might reasonably be expected to make decisions that comprise the control or direction of the test entity's operations. This will depend on the specific facts and circumstances. Paragraph 26 of LCR 2020/3 provides that normally, where a company is run by its directors in accordance with its constitution and the relevant company law rules which give its directors the power to manage the company, the company's directors will control and direct its operations. The Test Entity is a company and therefore a relevant decision maker will include a director of the Test Entity. Further, there is no advisory or investment committee (or similar) for the investment in the Test Entity. As such, it is necessary to consider whether XYZ is able to choose or appoint a person to the Board of the Test Entity. XYZ nor any member of its sovereign entity group hold any veto rights with respect to shareholder decisions of the Test Entity. XYZ has irrevocably and unconditionally waived its rights by way of a legally enforceable agreement for its ability to pool its interest with other investors to appoint a Director, and there is no other ability of XYZ to appoint a person to the Board. Therefore it is considered that XYZ and its sovereign entity group do not have the level of influence described by paragraph 880-105(6)(a) of the ITAA 1997. It is unable to determine the identity of a person who, individually or with others, makes or is reasonably expected to make decisions, and those decision comprise the direction and control of the Test Entity's operations. | Detailed Reasoning - Sub-test 2: 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. The directions, instructions or wishes of XYZ may be expressed directly or indirectly, or through XYZ acting in concert with others. The phrase 'at least one of the persons' is a reference to 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. As outlined above, this is the Board of the Test Entity. In order for XYZ to have influence of a kind described in paragraph 880-105(6)(b) of the ITAA 1997, the Board of the Test Entity must be accustomed, obliged or might reasonably be expected to act in accordance with the directions, instructions or wishes of XYZ. LCR 2020/3 provides at paragraph 29 that the three matters ('accustomed', 'obliged' or 'might reasonably be expected to') are not a composite phrase denoting a single test; they comprise different considerations each of which is sufficient to establish influence: | Detailed Reasoning - Direct interest: XYZ has no involvement in the day-to-day management of the business of the Test Entity. XYZ has no right to appoint a director to the Board of Directors nor the right to representation on any kind of investor representative or advisory committee (or similar) of the Test Entity. Neither XYZ nor any member of its sovereign entity group have entered into or received any side letters, arrangements, or agreements in relation to the investment in the Test Entity. The loan notes do not provide XYZ with any additional rights that impact any of the potential influence of XYZ over the Test Entity. XYZ has no ability to exert actual or potential influence over the operations or investments of the Test Entity outside of the ordinary rights conferred by the interest held. Therefore, no person involved in the control and direction of the Test Entity's operations are accustomed or obliged to act in accordance with the directions, instructions or wishes of XYZ. | Detailed Reasoning - Indirect interest: FGA holds an interest in ZZZ Fund which then invests in the Test Entity. ZZZ Fund will appoint or have the right to appoint a Director to the Board of the Test Entity. As such, it must be determined whether the ZZZ Fund appointee to the board, as a decision maker of the Test Entity, is accustomed to, obliged to, or reasonably expected to act in accordance with the directions, instructions or wishes of FGA. FGA is a member of the Board of Advisors. The Board of Advisors is not considered a governing body of ZZZ Fund (i.e. it is not equivalent to the board of directors). It is a body that primarily represents investor interests in approving or rejecting conflicts of interest. The Board of Advisors essentially has no independent jurisdiction to direct the activities of the fund outside of those responses to a limited number of General Partner generated corporate actions. Even though FGA has appointed a member of the Board of Advisors, it is not a body capable of having any influence over an individual investment decision made by ZZZ Fund, or any influence over persons that ZZZ Fund have appointed to protect their investments, including any director appointed by ZZZ Fund onto the Test Entity's board. Therefore, none of the relevant decision-making persons of the Test Entity are accustomed or obliged to act, or might reasonably be expected to act, in accordance with the directions, instructions or wishes of XYZ and its sovereign entity group, whether through XYZ's direct interest in the Test Entity, or through FGA's indirect interest in the Test Entity via ZZZ Fund. Based upon the above, the Commissioner concludes that XYZ does not have influence of a kind described in paragraph 880-105(6)(b) of the ITAA 1997. As such, the sovereign entity group of XYZ does not have influence of a kind described in subsection 880-105(6) of the ITAA 1997. Therefore, XYZ satisfies 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 such that amounts of ordinary and statutory income derived by XYZ from its direct investment in the Test Entity is not assessable and not exempt income. | Detailed Reasoning - Question 2: Will any capital gain made by XYZ in respect of its direct investment in the Test Entity be disregarded under section 880-115 of the of the ITAA 1997? | Detailed Reasoning - Detailed Reasoning: Section 880-115 of the ITAA 1997 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. As established in Question 1, XYZ: (a) is covered by section 880-125 of the ITAA 1997 (b) holds the relevant type of interests in the test entity, being shares and loan notes and (c) satisfies the requirements in paragraphs 880-105(1)(c), (d) and (e) of the ITAA 1997 in relation to ordinary or statutory income that it will derive from the test entity. Therefore, XYZ may disregard any capital gain made in respect of its direct interests in the Test Entity, by virtue of the operation of sections 880-115 of the ITAA 1997. | Detailed Reasoning - Question 3: Does paragraph 128B(3)(n) of the ITAA 1936 apply to exclude XYZ from liability to withholding tax on income from the direct investment in the Test Entity that is non-assessable non-exempt income due to the operation of Division 880 of the ITAA 1997? | Detailed Reasoning - Detailed reasoning: Section 128B of the ITAA 1936 imposes liability to withholding tax on income derived by a non-resident that consists of dividend income (subsection 128B(1) of the ITAA 1936), interest income (subsection 128B(2) of the ITAA 1936) as well as other income prescribed in that section. Subsection 128B(3) of the ITAA 1936 notes that section 128B of the ITAA 1936 will not apply to prescribed categories of income. Relevantly, paragraph 128B(3)(n) of the ITAA 1936 states that this includes income that is non-assessable non-exempt income because of Division 880 of the ITAA 1997 or Division 880 of the IT(TP)A 1997. As established in Question 1, the ordinary and statutory income derived by XYZ as a return on the interests it holds directly in the Test Entity is considered non-assessable non-exempt income under Division 880 of the ITAA 1997. Therefore, XYZ is excluded from liability to withholding tax on its interest and/or dividend income in respect of these interests under paragraph 128B(3)(n) of the ITAA 1936.

Is the ordinary income and statutory income derived by XYZ in respect of its direct investment in the Test Entity not assessable and not exempt income under section 880-105 of the ITAA 1997? | dividends - including non-share dividends and dividends that pass through a 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. | Whether a person is 'accustomed' to act in accordance with the directions, instructions or wishes of the relevant entity requires an analysis of past facts. This necessitates an examination of any discernible pattern of the person following the directions, instructions or wishes given by the relevant entity. | Whether a person is 'obliged' to act in accordance with the directions, instructions or wishes of the relevant entity depends upon a formal or informal obligation existing at the relevant time. | Whether a person 'might reasonably be expected' to act in accordance with the directions, instructions or wishes of the relevant entity requires a prediction as to future events and a consideration as to the objective likelihood of those future events occurring. This requires a consideration of all of the facts and circumstances impacting upon the relationship between the two parties.