Private ruling: Sovereign Immunity
Date of advice: 15 June 2016
Published: August 2016
Ruling period: Year ended 30 June 2016 | Year ended 30 June 2017 | Year ended 30 June 2018 | Year ended 30 June 2019 | Year ended 30 June 2020
Date scheme commenced: Prior to the income year ended 30 June 2016

Ruling: Q1: Is the non-resident entity immune from income tax and withholding tax under the common law doctrine of sovereign immunity on any income and capital gains derived from: a) its current investments in Australian equity securities inside the parameters contained in paragraph 11 of the relevant facts and circumstances b) its future investments in Australian equity securities inside the parameters contained in paragraph 15 of the relevant facts and circumstances c) its current and future investments in Australian federal and state government debt securities, and d) its investment in a corporate debt instrument issued by an unrelated entity? | A1: Yes.

Relevant facts and circumstances: Non-resident entity 1. The non-resident entity was created by statute and is an agency of a foreign government. 2. The non-resident entity is responsible for administering programs providing retirement and related or incidental benefits to current and former public employees and their dependants (Programs). 3. The foreign government appoints the majority of the non-resident entity's board of directors. 4. The non-resident entity is accountable to the executive and legislative branches of the foreign government. It is required to lodge financial statements and other reports in respect of the funds it manages. It is also required to be audited by the foreign government. 5. The financial statements of the non-resident entity are included in the foreign government's annual financial report. 6. The non-resident entity is funded by monies from the foreign government treasury to meet its obligations to pay benefits to its members. 7. The non-resident entity manages and invests funds legally belonging to the foreign government. 8. Individual members of the Programs managed by the non-resident entity do not have distinct individual accounts with real money and assets tied to them. Individuals are not legally entitled, or beneficially entitled, to the funds held by the non-resident entity. 9. Individuals have no legal or equitable remedies available to obtain monies from the non-resident entity. Investments 10. The non-resident entity currently holds a number of investments in Australia. 11. All of the equity securities subject to this private ruling that the non-resident entity currently holds have the following characteristics: a. Listed on the Australian Stock Exchange (ASX) or another recognised stock exchange b. The non-resident entity holds less than 10% of the equity securities of the issuer c. The non-resident entity has no involvement in the day to day management of the issuing entity's business d. The non-resident entity has no right to representation on the board of an equity issuer, which includes the board of the corporate trustee of a unit trust in which the non-resident entity has acquired units e. The non-resident entity has no right to representation on any investor representative or advisory committee (or similar) of any equity issuer, and f. The non-resident entity only has rights to vote as a shareholder or unitholder (as the case may be) in proportion to its equity interest in the relevant entity. 12. With respect to debt instruments, apart from the debt instrument outlined at fact 13 below, the non-resident entity has only invested in debt securities issued by Australian federal government and Australian state government owned issuers. 13. The non-resident entity also currently holds debt securities issued by an Australian resident entity. These securities are a Term B high yield loan underwritten by a merchant bank. The non-resident entity did not negotiate the terms of the corporate debt instrument and purchased it on a 'take it or leave it' basis as part of a large public offering. The securities provide no rights to representation, no voting rights, and no ability to influence the security issuer or its business. 14. The non-resident entity will make further investments in Australian federal and state government debt securities and widely held listed equity securities. 15. The non-resident entity will invest directly in equity securities in Australia subject to the following parameters: a. All equity securities will be listed on the ASX or another recognised stock exchange b. The non-resident entity will acquire less than 10% of the equity securities of any issuer c. The non-resident entity will have no involvement in the day to day management of any issuing entity's business d. The non-resident entity will not acquire the right to representation on the board of an equity issuer, which includes the board of the corporate trustee of a unit trust in which the non-resident entity has acquired listed units e. The non-resident entity will not acquire the right to representation on any investor representative or advisory committees (or similar) of any equity issuer, and f. The non-resident entity will only have rights to vote as a shareholder or unitholder (as the case may be) in proportion to its equity interest in the relevant entity.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 128B and | Income Tax Assessment Act 1997 section 4-1.

Reasons for decision: Detailed Reasoning - Detailed reasoning: For Australian income tax and withholding tax purposes, it is accepted that the doctrine of sovereign immunity applies to a foreign government or an agency of a foreign government that engages in governmental functions. This approach is consistent with the decision of the British House of Lords in the case I Congreso del Partido [1981] 2 All ER 1064 which held that activities of a trading, commercial or other private law character were not governmental functions. When determining whether the doctrine of sovereign immunity applies to exempt Australian sourced income and gains from Australian income tax and/or withholding tax, it is necessary to establish the following: 1. that the person making the investment (and therefore deriving the income) is a foreign government or an agency of a foreign government 2. that the moneys invested are and will remain government moneys, and 3. that the income or gain is being derived from a non-commercial activity. If these three conditions are satisfied, then the income or gains will not be subject to Australian income tax and/or withholding tax. | Detailed Reasoning - Condition 1: Foreign state or an agency of a foreign state: The non-resident entity is part of an agency of a foreign state for the following reasons: • it was established by statute, and is funded by a foreign government • the majority of the directors on its board of directors are appointed by the foreign government • it is evaluated and audited by the foreign government • Its assets are all legally and beneficially owned by the foreign government, and • Its purpose is to perform the governmental function of providing retirement and related or incidental benefits to current and former public employees. Given the above factors, the Commissioner accepts that the non-resident entity satisfies this requirement. | Detailed Reasoning - Condition 2: Monies are and will remain government monies: In line with the principle that sovereign immunity applies to foreign states performing only governmental functions, an entity claiming sovereign immunity must establish that the monies being invested are and will remain government monies. Are the contributions received by the non-resident entity government monies? The non-resident entity was established by a foreign government. It receives all of its funds for investment from the foreign government. The money is invested by the non-resident, and called upon by the foreign government when it needs to exercise the governmental function of funding the Programs and paying out member benefits. Accordingly, the money the subject of this scheme is and will remain government monies, satisfying this requirement with respect to sovereign immunity. | Detailed Reasoning - Condition 3: Non-commercial transaction: Whether an operation or activity is a commercial transaction will depend on the facts of each case. As a guide, a commercial transaction is generally considered to be an activity concerned with the trading of goods and services, such as buying, selling, bartering, transportation, and includes the carrying on of a business. A passive investment is more likely to be considered a non-commercial transaction. In relation to the ownership of shares in a company or other similar equity interests, there would be instances where the extent of the holding gives rise to questions as to whether the interests constitute a passive investment or a commercial investment. A determination of commerciality will depend on the particular circumstances. In ATO Interpretative Decision ATOID 2002/45 Sovereign Immunity , a holding of less than 10% is generally considered to be indicative of a passive investment. In all circumstances, consideration will be given to factors relating to the influence and control that is exercised by the investor in relation to the acquired company or similar equity investment, particularly in relation to its influence on day to day management and key business, strategy and financial decisions,. Are the non-resident entity's current investments in Australia commercial transactions? The non-resident entity currently holds a number of investments in Australia. These consist of listed Australian equity securities, Australian federal and state government debt securities, and a corporate debt instrument. The following factors are considered relevant as to determining whether the non-resident entity's investments in Australia are commercial transactions: Equities: • Listed on the ASX or another recognised stock exchange • The non-resident entity holds less than 10% of the equity securities of the issuer • The non-resident entity has no involvement in the day to day management of the issuing entity's business • The non-resident entity has no right to representation on the board of an equity issuer, which includes the board of the corporate trustee of a unit trust in which the non-resident entity has acquired units • The non-resident entity has no right to representation on any investor representative or advisory committee (or similar) of any equity issuer, and • The non-resident entity only has rights to vote as a shareholder or unitholder (as the case may be) in proportion to its equity interest in the relevant entity. Debt (apart from corporate debt instrument) • The non-resident entity has only invested in debt securities issued by Australian federal government or Australian state government owned issuers. Corporate debt instrument • The non-resident entity did not negotiate any of the terms of the instrument and purchased it on a 'take it or leave it' basis via a public offering • The non-resident entity was not the original lender or underwriter for the debt instrument, and • The non-resident entity's interest provides no rights to representation, no voting rights, and no ability to influence the security issuer or its business. The above factors demonstrate that the non-resident entity' current investments are passive investments, and therefore non-commercial activities, satisfying this condition. Are the non-resident entity proposed investments in Australia commercial transactions? The non-resident entity will make further investments into Australia in the future. These investments are subject to the following parameters: • All equity securities will be listed on the ASX or another recognised exchange • The non-resident entity will acquire less than 10% of the equity securities of any issuer • The non-resident entity will have no involvement in the day to day management of any issuing entity's business • The non-resident entity will not acquire the right to representation on the board of an equity issuer, which includes the board of the corporate trustee of a unit trust in which the non-resident entity has acquired listed units • The non-resident entity will not acquire the right to representation on any investor representative or advisory committees (or similar) of any equity issuer, and • The non-resident entity will only have rights to vote as a shareholder or unitholder (as the case may be) in proportion to its equity interest in the relevant entity. • The non-resident entity will only invest in debt securities issued by Australian federal government or Australian state government owned issuers. The parameters given above as to the non-resident entity's future investments into Australia demonstrate they will be passive investments, and therefore satisfy the requirement of being a non-commercial activity. Given the above factors, the Commissioner accepts that the non-resident entity satisfies this requirement. | Detailed Reasoning - Conclusion: As the three conditions have been satisfied, the non-resident entity will be immune from income taxes and withholding taxes on all income and gains it derives from its current investments in Australia, as well as its proposed investments subject to the conditions outlined, under the common law doctrine of sovereign immunity.