Edited version of your written advice

Authorisation Number: 1051196536325

Date of advice: 8 March 2017

Ruling

Subject: Sovereign Immunity

Question

Is Entity A immune from income tax and withholding tax on trust distributions and capital gains derived from its investment in Australian Real Estate Investment Trusts (REITs) under the common law doctrine of sovereign immunity?

Answer

Yes.

This ruling applies for the following periods:

20XX

20XX

20XX

The scheme commences on:

Year commencing XXXX

Relevant facts and circumstances

1. Entity A was established under an Act of a foreign government. That act sets out objectives that Entity A must pursue.

2. Entity A has paid-up capital from the foreign government.

3. This paid up capital may be invested as part of pursuing Entity A's statutory objectives.

4. The net profit of Entity A may either be retained by Entity A or returned to the foreign government.

5. Entity A uses both external and internal fund managers to manage its paid-up capital.

6. Entity A holds investments in Australia REITs through its fund managers.

7. Each of the investments made by Entity A have the following characteristics:

a. Entity A's unit holding constitute less than 10% of the total units in the Australian REIT

b. Neither Entity A nor its fund managers have the right to appoint a director to the board of directors of the responsible entity or the trustee of the Australian REIT or an associated advisory or unit holder committee, and

c. Neither Entity A nor its fund managers have any ability to direct or influence the operation of the Australian REIT outside of the ordinary rights conferred by the units held.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 128B

Income Tax Assessment Act 1997 section 4-1

Reasons for decision

Sovereign immunity

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.

Condition 1: a foreign government or an agency of a foreign government

Entity A is a body established under the laws of a foreign country. It carries out activities in accordance with the objectives outlined in its establishing legislation.

Whilst Entity A is not itself a foreign government, it does constitute a body corporate (not being a natural person or corporation sole) that is an entity, i.e. an agency or instrumentality of a foreign government.

In view of the above, it is considered that Entity A is an agency of a foreign government.

Condition 2: the monies being invested are and will remain government monies

Entity A has paid-up capital. The source of this capital is a foreign government.

The net profit from Entity A's activities can either be paid to the foreign government or retained by Entity A. The Board of Entity A makes this decision with oversight of the foreign government.

The investment income earned by Entity A will support Entity A's statutory functions.

In view of the above, it is considered that the monies being invested by Entity A are and will remain government monies.

Condition 3: that the income is being derived from a non-commercial activity

Whether an operation or activity is a commercial transaction will depend on the facts of each particular case. As a guide, a commercial transaction is generally an activity concerned with the trading of goods and services, such as buying, selling, bartering and transportation, and includes the carrying on of a business.

In relation to the holding of units in a REIT, there would be instances where the extent of the holding gives rise to questions as to whether it constitutes a passive investment or a commercial investment, but this would depend on the particular circumstances. A portfolio holding in a company or fund (i.e. a holding of 10 per cent or less of the equity interests) will generally be accepted as a non-commercial transaction.

Australian investments

Entity A has provided a list of the Australian REITs it has invested in.

Each of the investments made by Entity A in the Australian REITs meets the following conditions:

(a) Entity A's unit holding constitute less than 10% of the total units in the Australian REIT

(b) Neither Entity A nor its fund managers have the right to appoint a director to the board of directors of the responsible entity or the trustee of the Australian REIT or an associated advisory or unit holder committee, and

(c) Neither Entity A nor its fund managers have any ability to direct or influence the operation of the Australian REIT outside of the ordinary rights conferred by the units held.

Entity A 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, the Commissioner accepts that the investments made by Entity A in Australian REITs are non-commercial.

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