Private ruling: Doctrine of sovereign immunity
Published: December 2014
Ruling period: Income year ended 30 June 2015 | Income year ended 30 June 2016 | Income year ended 30 June 2017 | Income year ended 30 June 2018 | Income year ended 30 June 2019
Date scheme commenced: During the income year ended 30 June 2015

Ruling: Q1: Is the entity exempt from Australian income tax and withholding tax pursuant to the doctrine of sovereign immunity in respect of trust distributions, being the entity 's share of the trust's net income as determined under section 95 of the Income Tax Assessment Act 1936 (ITAA 1936), and gains made on the disposal of units in Australian property trusts, including managed investment trusts within the meaning of section 12-400 in Schedule 1 to the Taxation Administration Act 1953 (Australian REITs), where all of the following are satisfied: (a) The entity's investment in Australian REITs as at 30 June 2014; (b) Each investment in the Australian REIT is made and managed in accordance with the entity's investment approach and criteria; (c) Each of the entity's unit holding in the Australian REIT constitute less than 10% of the total units in each trust; (d) The entity is not a party to any investors' agreement in connection with each Australian REIT; and (e) The entity has not appointed a director to the board of directors of the responsible entity or the trustee of each Australian REIT? | A1: Yes | Q2: Is the entity exempt from Australian income tax pursuant to the doctrine of sovereign immunity on gains assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) from the disposal of shares (ordinary and converting preference shares) and units in unit trusts forming part of certain stapled security groups (together referred to as listed investments), where more than 50% of the value of each listed investment is derived directly or indirectly from real property situated in Australia and where the following are satisfied: (a) The entity's Australian listed investments as at 30 June 2014; (b) The listed investment in the Australian resident company or unit trust is made and managed in accordance with the entity's investment approach and criteria; (c) The entity holds a portfolio interest of less than 10% of the total shares (ordinary and converting preference shares) in each company and less than 10% of the total units in each unit trust; (d) The entity is not a party to any investors' agreement in connection with the companies or unit trusts; and (e) The entity has not appointed a director to the board of directors of each company or board of directors of the responsible entity or the trustee of each unit trust? | A2: Yes

Relevant facts and circumstances: The scheme that is the subject of this Ruling is described below. The entity was established under the Superannuation and Retirement Act (the Act) of the foreign country to partially provide for the future cost of superannuation, being a taxpayer funded pension scheme under which all eligible residents receive a pension irrespective of their income or assets. The purpose is to build up a portfolio of foreign government owned financial assets that will then be progressively drawn on to supplement the foreign government's annual budget as its finances adjust to an increasing level of on-going expense for superannuation. According to the Act, the property of the entity consists of the capital contributed under the Act by the foreign government, the entity's investments and money accruing from those investments. The Act provides that the entity is the property of the foreign government. The entity's investment approach and criteria The entity's goal is to have a broad, diversified portfolio with a wide range of asset classes and strategies. The entity invests on the basis of a long time horizon and as such has increased liquidity tolerance compared to many other investors. Australian investments Australian REITs The entity has investments in Australian REITs that meet the following conditions: (a) The entity's investment in Australian REITs as at 30 June 2014; (b) Each investment in the Australian REIT is made and managed in accordance with the entity's investment approach and criteria; (c) Each of the entity's unit holding in the Australian REIT constitute less than 10% of the total units in each trust; (d) The entity is not a party to any investors' agreement in connection with each Australian REIT; and (e) The entity has not appointed a director to the board of directors of the responsible entity or the trustee of each Australian REIT. The entity receives trust distributions and will make gains from the disposal of units in the Australian REITs that meet all of the above conditions. Australian listed investments The entity has Australian listed investments that meet the following conditions: (a) The entity's Australian listed investments as at 30 June 2014; (b) where more than 50% of the value of each Australian listed investment is derived directly or indirectly from real property situated in Australia; (c) The listed investment in the Australian resident company or unit trust is made and managed in accordance with the entity's investment approach and criteria; (d) The entity holds a portfolio interest of less than 10% of the total shares (ordinary and converting preference shares) in each company and less than 10% of the total units in each unit trust; (e) The entity is not a party to any investors' agreement in connection with the companies or unit trusts; and (f) The entity has not appointed a director to the board of directors of each company or board of directors of the responsible entity or the trustee of each unit trust. The entity will make gains from the disposal of Australian listed investments that meet all of the above conditions.

Relevant legislative provisions: Not applicable

Reasons for decision: Summary: While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision. 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 engage 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. To establish whether the doctrine of sovereign immunity applies to exempt Australian sourced income and gains of a foreign government or an agency of a foreign government 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 or gain) 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 or gain is being derived from a non-commercial activity. If these three conditions are satisfied, the Australian sourced income or gains will not be subject to Australian income and/or withholding taxes. | Detailed Reasoning - Condition 1 - a foreign government or an agency of a foreign government: The entity was established under the Act of the foreign country to partially provide for the future cost of superannuation, being a taxpayer funded pension scheme under which all eligible residents receive a pension irrespective of their income or assets. The purpose is to build up a portfolio of foreign government owned financial assets that will then be progressively drawn on to supplement the foreign government's annual budget as its finances adjust to an increasing level of on-going expense for superannuation. The Act provides that the entity is the property of the foreign government. In view of the above, it is considered that the entity is an integral part of the foreign government's provision of retirement income. Accordingly, the entity satisfies the condition that it is a foreign government or an agency of a foreign government. | Detailed Reasoning - Condition 2 - moneys are and will remain government moneys: According to the Act, the property of the entity consists of the capital contributed under the Act by the foreign government, the entity's investments and money accruing from those investments. The Act provides that the entity is the property of the foreign government. In view of the above, it is considered that the moneys invested by the entity are and will remain the moneys of a foreign government or an agency of a foreign government. | Detailed Reasoning - Condition 3 - non-commercial activity: 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. Whether the entity's investments in Australian REITs and Australian listed investments are non-commercial in nature is discussed below. | Detailed Reasoning - Australian REITs: The entity has investments in Australia REITs that meet the following conditions: (a) The entity's investment in Australian REITs as at 30 June 2014; (b) Each investment in the Australian REIT is made and managed in accordance with the entity's investment approach and criteria; (c) Each of the entity's unit holding in the Australian REIT constitute less than 10% of the total units in each trust; (d) The entity is not a party to any investors' agreement in connection with each Australian REIT; and (e) The entity has not appointed a director to the board of directors of the responsible entity or the trustee of each Australian REIT. The entity receives trust distributions and will make gains from the disposal of units in the Australian REITs that meet all of the above conditions. In view of the above, it is considered that the entity's investments in Australia REITs that meet all of the above conditions are non-commercial. | Detailed Reasoning - Australian listed investments: The entity has Australian listed investments that meet the following conditions: (a) The entity's Australian listed investments as at 30 June 2014; (b) where more than 50% of the value of each Australian listed investment is derived directly or indirectly from real property situated in Australia; (c) The listed investment in the Australian resident company or unit trust is made and managed in accordance with the entity's investment approach and criteria; (d) The entity holds a portfolio interest of less than 10% of the total shares (ordinary and converting preference shares) in each company and less than 10% of the total units in each unit trust; (e) The entity is not a party to any investors' agreement in connection with the companies or unit trusts; and (f) The entity has not appointed a director to the board of directors of each company or board of directors of the responsible entity or the trustee of each unit trust. The entity will make gains from the disposal of Australian listed investments that meet all of the above conditions. In view of the above, it is considered that the entity's investments in Australian listed investments that meet all of the above conditions are non-commercial. | Detailed Reasoning - Australian REITs: As discussed above, the three conditions in relation to the entity's investment in Australian REITs are satisfied. Accordingly, pursuant to the doctrine of sovereign immunity, the entity shall be exempt from Australian income tax and withholding tax in respect of trust distributions, being the entity's share of the trust's net income as determined under section 95 of the ITAA 1936, and gains made on the disposal of units in Australian REITs, where all of the following are satisfied: (a) The entity's investment in Australian REITs as at 30 June 2014; (b) Each investment in the Australian REIT is made and managed in accordance with the entity's investment approach and criteria; (c) Each of the entity's unit holding in the Australian REIT constitute less than 10% of the total units in each trust; (d) The entity is not a party to any investors' agreement in connection with each Australian REIT; and (e) The entity has not appointed a director to the board of directors of the responsible entity or the trustee of each Australian REIT. | Detailed Reasoning - Australian listed investments: As discussed above, the three conditions in relation to the entity's investments in Australian listed investments are satisfied. Accordingly, pursuant to the doctrine of sovereign immunity the entity shall be exempt from Australian income tax on gains assessable under section 6-5 of the ITAA 1997 from the disposal of investments, where more than 50% of the value of each Australian listed investment is derived directly or indirectly from real property situated in Australia and where the following are satisfied: (a) The entity's Australian listed investments as at 30 June 2014; (b) The listed investment in the Australian resident company or unit trust is made and managed in accordance with the entity's investment approach and criteria; (c) The entity holds a portfolio interest of less than 10% of the total shares (ordinary and converting preference shares) in each company and less than 10% of the total units in each unit trust; (d) The entity is not a party to any investors' agreement in connection with the companies or unit trusts; and (e) The entity has not appointed a director to the board of directors of each company or board of directors of the responsible entity or the trustee of each unit trust.