Treasury Laws Amendment (Making Sure Foreign Investors Pay Their Fair Share of Tax in Australia and Other Measures) Act 2019 (34 of 2019)

Schedule 4   Sovereign immunity

Part 1   Amendments

Income Tax Assessment Act 1997

6   At the end of Part 4-5

Add:

Division 880 - Sovereign entities and activities

Table of Subdivisions

880-A Basic concepts

880-B Basic tax treatment of sovereign entities

880-C Sovereign immunity

880-D Consular activities

Subdivision 880-A - Basic concepts

Guide to Subdivision 880-A

880-10 What this Subdivision is about

This Subdivision defines several terms that are fundamental to the operation of this Division, such as sovereign entity and sovereign entity group .

Table of sections

Operative provisions

880-15 Meaning of sovereign entity

880-20 Meaning of sovereign entity group

Operative provisions

880-15 Meaning of sovereign entity

A sovereign entity is 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.

880-20 Meaning of sovereign entity group

(1) Each of the following is part of a sovereign entity group :

(a) a body politic of a foreign country (other than a body politic of a part of that foreign country);

(b) a *foreign government agency in relation to that foreign country (other than a foreign government agency in relation to a part of that foreign country);

(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.

(2) Each of the following is part of a sovereign entity group :

(a) a body politic of a part of a foreign country;

(b) a *foreign government agency in relation to that part of that foreign country;

(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.

(3) Each entity that is part of a *sovereign entity group is a member of the group.

Subdivision 880-B - Basic tax treatment of sovereign entities

Guide to Subdivision 880-B

880-50 What this Subdivision is about

This Subdivision provides that a sovereign entity is liable to pay tax. It also provides that a body politic (or a foreign government agency) of a foreign country, or part of a foreign country, is treated as being a person that is not a resident of Australia, but is a resident of the foreign country.

Table of sections

Operative provisions

880-55 Sovereign entity liable to pay tax

880-60 Bodies politic of foreign countries and foreign government agencies treated as foreign residents

Operative provisions

880-55 Sovereign entity liable to pay tax

A *sovereign entity is liable to pay *tax.

Note: The actual amount of tax payable may be nil.

880-60 Bodies politic of foreign countries and foreign government agencies treated as foreign residents

(1) For the purposes of this Act, treat a body politic of a foreign country, or a part of a foreign country:

(a) as being a person that is not a resident of Australia; and

(b) as being a resident of the foreign country.

(2) For the purposes of this Act, treat a *foreign government agency in relation to a foreign country (including a foreign government agency in relation to a part of a foreign country):

(a) as being a person that is not a resident of Australia; and

(b) as being a resident of the foreign country.

Subdivision 880-C - Sovereign immunity

Guide to Subdivision 880-C

880-100 What this Subdivision is about

This Subdivision provides a tax exemption for certain sovereign entities in respect of certain returns on membership interests (etc.) in entities that are Australian resident companies or managed investment trusts. To obtain this exemption, the relevant sovereign entity group can hold only a portfolio interest in the entity, and cannot have relevant influence over the entity.

Table of sections

Operative provisions

880-105 Sovereign entity's income from membership interest etc. in trust or company - non-assessable non-exempt income

880-110 Sovereign entity's deduction from membership interest etc. - loss not deductible

880-115 Sovereign entity's capital gain from membership interest etc. - gain disregarded

880-120 Sovereign entity's capital loss from membership interest etc. in trust or company - loss disregarded

880-125 Covered sovereign entities

880-130 Meaning of public non-financial entity and public financial entity

Operative provisions

880-105 Sovereign entity's income from membership interest etc. in trust or company - non-assessable non-exempt income

(1) An amount of *ordinary income or *statutory income of a *sovereign entity is not assessable income and is not *exempt income if:

(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 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 than that time; and

(e) the sovereign entity group of which the sovereign entity is a member does not have influence of a kind described in subsection (6) in relation to the test entity at the income time.

(2) For the purposes of paragraph (1)(b), treat an interest that a *sovereign entity holds in another entity as a partner in a *partnership as not being an interest that the sovereign entity holds in the other entity.

(3) If the amount is a *fund payment, subsection (1) does not apply to the extent that the amount is attributable to:

(a) *non-concessional MIT income (see section 12-435 in Schedule 1 to the Taxation Administration Act 1953); or

(b) an amount that would be non-concessional MIT income if the following provisions were disregarded:

(i) subsection 12-437(5) in that Schedule;

(ii) sections 12-440, 12-447, 12-449 and 12-451 in that Schedule.

Portfolio interest test

(4) 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 *total 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.

(5) For the purposes of subsection (4), in working out the sum of the *total participation interests held by each *member of the group in the test entity, take into account:

(a) a particular *direct participation interest; or

(b) a particular *indirect participation interest;

held in the entity only once if it would otherwise be counted more than once.

Influence test

(6) 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).

(7) However, a *sovereign entity group does not have influence of a kind described in subsection (6) if, disregarding any breach of terms of a *debt interest by any entity, the sovereign entity group would not have influence of that kind.

(8) For the purposes of subsection (6), in working out whether an entity is a *member of a *sovereign entity group, treat the references in paragraphs 880-20(1)(c) and (2)(c) to 100% as instead being references to more than 50%.

880-110 Sovereign entity's deduction from membership interest etc. - loss not deductible

A *sovereign entity cannot deduct an amount if:

(a) the sovereign entity is covered by section 880-125; and

(b) the amount is a loss in respect of any of the following kinds of interest that the sovereign entity holds in another entity:

(i) a *membership interest;

(ii) a *debt interest;

(iii) a *non-share equity interest; and

(c) the requirements in paragraphs 880-105(1)(c), (d) and (e) would be satisfied, on the assumptions that:

(i) the amount were *ordinary income or *statutory income; and

(ii) the amount became ordinary income or statutory income of the sovereign entity at the time it arose; and

(iii) references in those paragraphs to the test entity were references to the other entity mentioned in paragraph (b) of this section.

880-115 Sovereign entity's capital gain from membership interest etc. - gain disregarded

Disregard a *capital gain of a *sovereign entity from a *CGT event that happens in relation to a *CGT asset if:

(a) the sovereign entity is covered by section 880-125; and

(b) the CGT asset is a *membership interest, *non-share equity interest or *debt interest in another entity; and

(c) the requirements in paragraphs 880-105(1)(c), (d) and (e) would be satisfied, on the assumptions that:

(i) the capital gain were an amount of *ordinary income or *statutory income; and

(ii) the amount mentioned in subparagraph (i) became ordinary income or statutory income of the sovereign entity immediately before the time the CGT event happened; and

(iii) references in those paragraphs to the test entity were references to the other entity mentioned in paragraph (b) of this section.

880-120 Sovereign entity's capital loss from membership interest etc. in trust or company - loss disregarded

Disregard a *capital loss of a *sovereign entity from a *CGT event that happens at a time if, on the assumption that the loss were a *capital gain that happened at that time, the capital gain would be disregarded because of section 880-115.

880-125 Covered sovereign entities

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 returns on the entity's investments 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).

880-130 Meaning of public non-financial entity and public financial entity

(1) 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.

(2) 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 investment management services;

(iii) capital financial institution services, including financial services in relation to assets or liabilities that are not available on open financial markets.

Subdivision 880-D - Consular activities

Guide to Subdivision 880-D

880-200 What this Subdivision is about

This Subdivision provides a tax exemption for income of an entity that arises from its consular functions.

Table of sections

Operative provisions

880-205 Income from consular functions - non-assessable non-exempt income

Operative provisions

880-205 Income from consular functions - non-assessable non-exempt income

An amount of *ordinary income or *statutory income of an entity is not assessable income and is not *exempt income if the income arises from the entity's consular functions.