Private ruling: International Issues ~ Sovereign immunity
Date of advice: 12 March 2024
Published: 22 April 2024
Ruling period: 1 July 20XX to 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is the ordinary and statutory income derived by Company A from its interests held in the Test Entities not assessable and not exempt income under section 880-105 of the ITAA 1997? | A1: Yes.

Relevant facts and circumstances: Company A 1. Company A is a wholly owned corporate subsidiary of Entity B, a foreign government agency established and supervised by the Government of Country X ('the Government'). 2. Entity B is an independent government investment institution created by Law. 3. The establishment of Company A is enabled by Law. This Law provides that Entity B is permitted to establish companies and other entities in order to achieve their statutory objectives. 4. Entity B's statutory powers also extend to the winding up, liquidation, merging, amalgamation and/or consolidation of any subsidiary (including Company A). 5. In line with Entity B, Company A's primary objective is to invest funds and deliver sustained long-term financial returns so the Government can provide for Country X's current and future welfare. 6. Company A manages and administers a range of infrastructure and real estate assets on behalf of Entity B and the Government. 7. Company A receives its funds from Entity B, who in turn receive their funds from the Government's financial surplus to its budgetary and other funding sources. 8. Any monies provided to Company A, or income made on their investments, are ultimately owned by the Government. 9. Any returns on investment by Company A are not reinvested but remitted to Entity B who are only able to remit those funds to the Government. 10. The Government is able to recall any monies of Entity B or its subsidiaries (including Company A) at any time. In the event Entity B (or Company A) is liquidated or dissolved, under Law, all assets and monies will flow back to the Government. 11. Company A has a Board of Directors. 12. Company A is not a partnership. 13. Company A is not a resident of Australia for Australian income tax purposes. 14. Company A is exempt from taxes in Country X. 15. Company A is not in the business of trading in equity and debt securities with the intent of deriving profits from the buying and selling of securities. Australian Investments 16. The majority of investments of Company A are publicly traded funds. 17. All Company A's directly held investments within Australia are equity interests. 18. The investments held by Company A all have the following characteristics: a. All securities are listed on the Australian Securities Exchange ('ASX') or another recognised stock exchange. b. Company A and all members of the sovereign entity group, to the best of its knowledge, hold collectively less than 10% of the total participation interests in the circumstances detailed in paragraph 880-105(4)(b) of the ITAA 1997. c. Neither Company A, nor any member of its sovereign entity group, has any involvement in the day to day management of the Test Entities. d. Neither Company A, nor any member of its sovereign entity group, has any right to representation on the board of directors of any of the Test Entities. e. Neither Company A, nor any member of its sovereign entity group, has any right to representation on any investor representative or advisory committee (or similar) of any Test Entity. f. Neither Company A, nor any member of its sovereign entity group, has the ability to direct or influence the operation of the Test Entities outside of the ordinary rights conferred by the interest held. g. Company A's interests in the Test Entities do not provide it with an entitlement to either directly or indirectly determine the identity of any person who makes decisions that compromise the control and direction of the Test Entities' operations. h. No person involved in the control and direction of the Test Entities' operations is accustomed or obliged to act in accordance with the directions, instructions or wishes of Company A or members of Company A's sovereign entity group. 19. Company A is currently in receipt of and expects to receive Australian source income including franked dividend income, unfranked dividend income, MIT fund payments, interest income, and Australian sourced capital gains income.

Relevant legislative provisions: Income Tax Assessment Act 1997 - Division 880

Reasons for decision: Summary: 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): (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 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 that that time; and (e) the sovereign entity group of which the sovereign entity is a member does not 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 - Company A 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 the returns on the entity's investment 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. | Detailed Reasoning - Company A is a sovereign entity: 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. Section 960-180 of the ITAA 1997 provides that an entity's total participation interest in another entity is the sum of: (a) the entity's direct participation interest in the other entity at that time; and (b) the entity's indirect participation interest in the other entity at that time. Country X is an independent sovereign state. Country X constitutes a body politic of a foreign country. Entity B is a foreign government agency of the Country X. Entity B holds a total participation interest of 100% in Company A, being its sole shareholder. Company A meets the requirements of being a sovereign entity as defined in paragraph 880-15(c) of the ITAA 1997 as it: • is an entity that has a total participation interest of 100% held by a foreign government agency (i.e. Entity B) • is not an Australian resident; and • is not a resident trust estate. | Detailed Reasoning - Company A is funded solely by public monies: The phrase 'public monies' is not defined and as such takes its ordinary meaning. In the context of Division 880 of the ITAA 1997, this phrase essentially means monies raised by a foreign government (or part of a foreign government) for a public purpose which will often form part of the foreign government's (or part of the foreign government's) equivalent to Australia's Consolidated Revenue Fund ( Roy Morgan Research Pty Ltd v FC of T & Anor [2011] HCA 35). This would ordinarily include general tax revenue, proceeds from the issues of government bonds, the proceeds of privatisations etc. Company A receives its funds from Entity B, who in turn receive its funds from the Government. The Government sources these funds from financial surpluses to its budgetary and other funding requirements. Entity B is legally responsible for receiving the funds of the Government earmarked for investment. In line with Entity B, Company A's primary objective is to invest funds and deliver sustained long-term financial returns so the government can provide for Country X's current and future welfare. As such, it can be concluded that Company A is funded solely by public monies. | Detailed Reasoning - All returns on Company A's investments are public monies: Company A manages and administers a range of investments on behalf of Entity B and the Government. Any monies given to Entity B, or income made by Entity B, are ultimately owned by the Government. The Government is able to recall any monies of Entity B or its subsidiaries (including Company A) at any time. In the event Entity B (or Company A) is liquidated or dissolved, by Law, all assets and monies will flow back to the Government. Therefore, it is concluded that all returns on Company A's investment are public monies. | Detailed Reasoning - Company A is not a partnership: Company A is not a partnership. Therefore, it satisfies paragraph 880-125(c) of the ITAA 1997. | Detailed Reasoning - Company A is not a public non-financial or 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 investments management services; (iii)capital financial institution services, including financial services in relation to assets or liabilities that are not available on open financial markets. | Detailed Reasoning - Is Company A a public non-financial entity?: Law Companion Ruling 2020/3 The superannuation fund for foreign residents withholding tax exemption and sovereign immunity (LCR 2020/3) provides, in relation to subsection 880-130(1) of the ITAA 1997, that: 76. Whether an activity is producing or trading non-financial goods and/or providing services that are not financial services is a question of fact... Company A does not produce or trade in non-financial goods or provide non-financial services. As such, it is not a public non-financial entity as defined in subsection 880-130(1) of the ITAA 1997. | Detailed Reasoning - Is Company A a public financial entity?: Entity B was established to be a sovereign wealth fund to invest funds so that the Government can provide for Country X's current and future welfare. Company A is an operational entity incorporated by Entity B to assist in achieving this purpose. All monies and income gained by Company A are ultimately returned to the Government for this purpose through Entity B. The principal activities of Company A are not activities of the type outlined in subsection 880-130(2) of the ITAA 1997. Additionally, Company A is not a type of entity listed in paragraphs 76 or 79 of LCR 2020/3. Based on the circumstances, the Commissioner accepts that Company A is not a public financial entity under subsection 880-130(2) and therefore satisfies paragraph 880-125(d) of the ITAA 1997. As Company A satisfies each of the requirements in paragraph 880-125(a) through (d) it is 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 - Company A's return is received on a relevant interest in the Test Entities: 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 Entities. Company A invests in the Test Entities, which are all Australian resident companies and/or managed investment trusts. Company A holds either shares and/or units in each of the Test Entities (which meet the requirements of being membership interests as defined by the interaction of sections 960-135 and 960-130 of the ITAA 1997). The Test Entities are entities in which Company A holds a membership interest and earns returns including dividends, interest and/or managed investment trust fund payments. As such, Company A satisfies the requirements of paragraph 880-105(1)(b) of the ITAA 1997. | Detailed Reasoning - Company A's income is received from Australian resident companies or managed investment trusts: 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; or (ii) a *managed investment trust in relation to the income year in which the income time occurs. The Test Entities from which Company A derives its ordinary and statutory income and are all Australian resident companies and/or managed investment trusts. As such, Company A satisfies the requirements of paragraph 880-105(1)(c) of the ITAA 1997. Company A's sovereign entity group satisfies the portfolio interest test For an amount of ordinary 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 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. Company A's sovereign entity group consists of all entities that are ultimately wholly owned by Country X. With respect to the equity interests in the Test Entities outlined, Company A holds significantly less than 10% of the participation interest in the Test Entities. To the best of Company A's knowledge, its sovereign entity group as a whole holds less than 10% of the participation interests in each Test Entity. As such, the Commissioner accepts that Company A satisfies the requirements of paragraph 880-105(1)(d) of the ITAA 1997 with respect to each Test Entity. | Detailed Reasoning - Company A's sovereign entity group does not have influence of a kind described in subsection 880-105(6) in relation to the Test Entities: 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) 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). As such, there are two distinct sub-tests within the influence test. Sub-test 1 of the influence test, as contained in paragraph 880-105(6)(a) of the ITAA 1997, assesses whether the sovereign entity group is 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. 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. 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 a member of the group. Company A's interests in the Test Entities have the characteristics outlined in Fact 18 of the Scheme. Company A's interests do not provide it with an entitlement to either directly or indirectly determine the identity of any person who makes decisions that comprise the control and direction of the Test Entities' operations. Furthermore, Company A's interests, when combined with the other interests held by members of its sovereign entity group, do not provide an entitlement to either directly or indirectly determine the identity of any person who makes decisions that comprise the control and direction of the Test Entities' operations. No person involved in the control and direction of the Test Entities' operations is accustomed or obliged to act in accordance with the directions, instructions or wishes of Company A or members of Company A's sovereign entity group. Based upon the above, the sovereign entity group of Company A does not have influence of a kind described in subsection 880-105(6) of the ITAA 1997 and, therefore, satisfies the requirements of paragraph 880-105(1)(f) 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 Company A from its investments in the Test Entities are not assessable and not exempt income.