Private ruling: Sovereign immunity
Published: August 2013
Ruling period: 1 January 2012 to 30 June 2016
Date scheme commenced: 1 January 2012

Ruling: Is the foreign government pension fund exempt from income tax in Australia under the international law doctrine of sovereign immunity in respect of its investment in an Australian managed investment trusts? | Yes.

Relevant facts and circumstances: The fund is established outside Australia and is administered by the foreign country's Minister of Health who delegated its powers of management to an entity to supervise the investment fund. The fund was established to serve as a reserve fund to secure the financial resources necessary for the implementation of the pension scheme. The fund is composed of contributions, returns from asset management, a reserve, and earnings retained by the fund. The fund is managed so that profits are maximized, thus achieving the long-term financial stability of the pension scheme.

Relevant legislative provisions: Taxation Administration Act 1953 Schedule 1 subsection 15-15(2). | Taxation Administration Act 1953 Schedule 1 section 12-400 | Income Tax Assessment Act 1997 Subdivision 840-M

Reasons for decision: Summary: The doctrine of sovereign immunity provides that income derived by a foreign State from sources in another State should not be subject to tax in the State in which the income has its source. The requirements in ATO ID 2002/45 that must be satisfied in establishing that sovereign immunity applies to exempt income tax are: · The person making the investment (and therefore deriving the income) is a foreign government or an agency of a foreign government; · The moneys being invested are and will remain government moneys; and · The income is being derived from a non-commercial activity. Whilst these requirements specifically deal with sovereign immunity in the context of withholding tax, if the requirements listed are satisfied, the foreign entity should be exempt from all Australian income taxes in respect of the relevant instrument (i.e. including capital gains tax on the future realisation of that investment). | Detailed Reasoning - Agency of a foreign government: For an entity to obtain an income tax exemption under the doctrine of sovereign immunity, the entity making the investment into Australia must be a foreign government or agency of a foreign government on the basis that a foreign government pension fund has been created by a statute of the foreign country and therefore has an objective and real connection to that country; The majority of the Board members of foreign government pension fund are members of the government or have been appointed by the government, providing the requisite control necessary to satisfy the sovereign immunity requirements in respect of foreign government pension fund. The 20XX Annual Report of foreign government pension fund declares it to be an agency of the foreign country. Therefore the foreign government pension fund is an agency of the foreign country. | Detailed Reasoning - Government moneys: For an entity to obtain an income tax exemption under the doctrine of sovereign immunity, the moneys being invested are and will remain government moneys. The money used by foreign government pension fund to invest in the Australian management investment trusts is and will remain the property of the foreign government on the basis that no individual possesses an entitlement or right to any of the capital or earnings of the fund as the fund does not have any private members. The fund is incapable of making specific payments to individuals and while the foreign government has an intended use for the accumulated capital and earnings of the trust, all of its capital and earnings can only be paid or become payable to the foreign government. The investment in the Australian company was made using moneys from the Fund and the members and employers although they have a compulsory obligation as prescribed by legislation to contribute moneys to the fund have no right to call on these funds as individuals or contributors. Legislation prescribes that foreign government pension fund is responsible for the management and control of the money in the fund; Legislation provides the circumstances in which a member is entitled to benefits. These are defined benefits and are not contingent on underlying investment performance. The foreign country is legally obligated to provide the vested member benefits regardless of whether there is a shortfall. In light of the above facts it is possible to conclude that the moneys invested by foreign government pension fund are and will remain the moneys of the government. | Detailed Reasoning - Non-commercial activity: For an entity to obtain an income tax exemption under the doctrine of sovereign immunity, the income being derived must be from non-commercial activities. The foreign government pension fund will derive the relevant income from its investment in managed investment trusts from non-commercial activities on the basis that: · The foreign government pension fund is a passive investor in Australian MITs; · The foreign government pension fund will not in any way participate in the management of the Australian MITs; and · The foreign government pension fund's total indirect interest in the Australian MIT amounts to less than 10%. In light of the above facts it is possible to conclude that foreign government pension fund will derive the relevant income from non-commercial activities. | Detailed Reasoning - Conclusion: As the requirements of sovereign immunity are satisfied, any income the foreign government pension fund derives from its investment in the Australian MITs will be exempt from income tax in Australia.