Private ruling: Sovereign immunity
Published: June 2013
Ruling period: Year ending 30 June 2013 | Year ending 30 June 2014 | Year ending 30 June 2015
Date scheme commenced: During the income year ending 2013

Ruling: Q1: Is the first applicant exempt from income tax and withholding taxes in Australia under the international law doctrine of sovereign immunity in respect of its proposed investment in the Australian unit trust? | A1: No | Q2: Will an investment in an Australian entity (such as, Australian company or trust), including the proposed investment in the Australian unit trust, held by the second applicant on behalf of the first applicant be exempt from income tax and withholding taxes in Australia under the international law doctrine of sovereign immunity? | A2: No

Relevant facts and circumstances: 1. The first applicant is a body which was established under foreign law. 2. The first applicant received funds from both the foreign government and other non-government entities required to make payments to the applicant under foreign law. The majority of funds are contributed by the foreign government. 3. The funds held by the first applicant are not treated as government funds for government budget purposes. 4. Government entities are required to remit legislated amounts to the first applicant. 5. Other non-government entities are also required to forward part of their income to the first applicant. 6. Other non-government entities are entitled to receive payments directly from the first applicant in specified circumstances. 7. The right of the other non-government entities to receive payments is a personal right and inalienable. 8. The first applicant is controlled by the foreign government. 9. The second applicant is a corporate limited partnership formed and based overseas. 10. The second applicant has two limited partners. The first applicant holds nearly the entire interest; and the second partner holds a nominal interest. 11. The second partner is not owned or controlled by the foreign government and is not an agency of the foreign government. 12. The second partner has exclusive responsibility for the conduct and management of the business and affairs of the partnership. 13. The purpose of the second applicant is to make investments, to acquire, hold and dispose of securities. 14. The income and capital proceeds derived by the second applicant from investments are distributed to the partners in proportion to their respective interests. 15. The first applicant is proposing to indirectly subscribe for units in the Australian unit trust, via the second applicant, 16. The second applicant will own the units in the Australian unit trust. 17. The applicants will not in any way participate in or influence the management of the Australian unit trust.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 94D and | Income Tax Assessment Act 1936 Section 94J.

Reasons for decision: Summary: The first applicant is not exempt from income tax and withholding taxes in Australia under the international law doctrine of sovereign immunity. | Detailed Reasoning - Detailed reasoning: The Australian Taxation Office (ATO) accepts that certain income derived from within Australia by foreign governments is exempt from Australian tax under the international law doctrine of sovereign immunity (see ATO ID 2002/45). Income derived by a foreign government from the performance of governmental functions within Australia is exempt from Australian tax. However, income derived from commercial activities which are conducted by a foreign government are not exempt from Australian tax. In order to establish whether sovereign immunity applies to exempt income from income tax and withholding tax, the current practice of the ATO as set out in ATOID 2002/45 requires that the following three requirements be satisfied: 1. That the entity making the investment (and therefore deriving the income) is a foreign government or an agency of a foreign government; 2. That the moneys being invested are and will remain government moneys; and 3. That the income is being derived from a non-commercial activity. These requirements are discussed below. | Detailed Reasoning - 1. That the person making the investment (and therefore deriving the income) is a foreign government or an agency of a foreign government.: The first applicant has provided evidence that it was created under foreign law and that it is controlled by the foreign government. Accordingly, the first applicant is not a foreign government, as it is separate entity and distinct from the foreign government. The first applicant was created and controlled by the foreign government. The first applicant has also provided evidence it is a public agency which is exempt from income tax in its home jurisdiction. As the first applicant is created and controlled by the foreign government and performs a function of government, it is accepted that the first applicant is an agency of a foreign government. | Detailed Reasoning - 2. That the moneys being invested are and will remain government moneys.: The foreign government has provided most of the funds to finance the activities of the first applicant with the remainder of the funds sourced from mandatory contributions by other non-government entities. The first applicant maintains separate accounts from the foreign government. The funds held by the first applicant do not form part of the foreign government funds for the foreign government's budget purposes. Each non-government entity that has remitted funds to the first applicant is entitled to receive payments from the first applicant under specified circumstances. The right of the non-government entities to receive money from the first applicant is a legislated personal right and inalienable. Those moneys held by the first applicant are held for the purpose of funding payments to the other non-government entities. Thus the moneys, and fund earnings on the moneys, are held for the benefit of the other non-government entities, rather than for the benefit of the foreign government. The foreign government never becomes entitled to receive those moneys or fund earnings on those moneys from the first applicant and the foreign government never becomes beneficially entitled to receive the moneys held in accounts on behalf of the other non-government entities. Accordingly, when the first applicant receives the funds from the foreign government and other non-government entities, it maintains the moneys on behalf of those non-government entities and such funds never become government moneys. Therefore, not all the moneys being invested are and will remain government moneys. Accordingly, the first applicant is not exempt from income tax and withholding taxes in Australia under the international law doctrine of sovereign immunity. | Detailed Reasoning - 3. That the income is being derived from a non-commercial activity.: In view of the conclusion on requirement 2, it is not necessary to consider requirement 3. | Detailed Reasoning - Question 2: As the first applicant is not entitled to exemption from Australian income tax and withholding taxes under the doctrine of sovereign immunity, an investment in an Australian entity (such as, Australian company or trust), including the proposed investment in the Australian unit trust, by the second applicant on behalf of the first applicant will not be exempt from income tax and withholding taxes in Australia.