Sovereign immunity - superannuation fund for foreign residents Issue 1 Sovereign immunity

1 Is the Fund excluded from liability to income tax and withholding tax under the common law doctrine of sovereign immunity on any income and capital gainsderived from its Australian investments for the period 1 July 20XX to 30 June 20XX?

No. Question 2 Is the ordinary and statutory income derived by the Fund from its interests in the investments listed in Appendix 3 (the Test Entities) not assessable and not exempt income under section 880-105 of the Income Tax Assessment Act 1997 (ITAA 1997)? Answer No. Question 3 Is any capital gain made by the Fund with respect to its investments disregarded under section 880-115 of the ITAA 1997 for the period from 1 July 20XX onwards? Answer No. Issue 2 Superannuation fund for foreign residents Question 4 If the answer to questions 1-3 is 'No', is the Fund entitled to the dividend and interest withholding tax exemption for superannuation funds for foreign residents for its investments under paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)? Answer No. Question 5 If the answer to question 2 is 'No', is the Fund entitled to the dividend and interest withholding tax exemption for 'superannuation funds for foreign residents' under paragraph 128B(3)(jb) (as modified by subsection 128B(3CA)) of the ITAA 1936 for the period from 1 July 20XX onwards? Answer No. This ruling applies for the following period : Year ended 30 June 20XX The scheme commences on:

1 July 20XX

The Fund The Fund was established by the Country X government for the purpose of managing and investing the reserve pension funds of the Country X government (the Pension Funds) and contributing to the financial stability of the Pension Plans. The Fund is a corporation that has a separate legal personality from the Country X government and its departments, which needs to administer its operations properly and efficiently for the benefit of the public, maintain transparency and independence in running its operations. The Country X government is the sole shareholder in the Fund and has contributed share capital. The Country X Minister (Minister) determines the objectives of the Fund and has the power to appoint or dismiss officers and employees of the Fund. All board members are Country X residents. The Fund is granted a level of autonomy and follows its own investment principles but is ultimately accountable to the Minister. The Fund does not act on behalf of the Minister. The balance sheet of the Fund (including any cash on hand and the investments held on trust) are included in the Country X national annual accounts.

The Fund is funded by withdrawals from the Pension Account (PA), which it then invests in accordance with its investment principles. The Fund then remits the profits earned from its investments to the PA under the supervision of the Minister. Under the budget of the PA (which the Pension Plans are included), there is no restriction or limit by the Minister. The PA forms a part of the government consolidated revenue/reserve funds. The Country X government is responsible for the PA and authorises the transfer of the funds to the Fund. The Fund's principal office is located at Country X. The Fund is not a partnership. The Fund is exempt from corporation tax and income tax in Country X. Amounts paid to, or set aside for, the Fund have not been and cannot be deducted under the ITAA 1997. The Fund has not been allowed a tax offset or a tax offset is not allowable for an amount that has been paid to it. Neither the Fund nor the Pension Agency maintain records of the nationality or tax residency of members. The Fund 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.

The Fund does not have a legislated termination date. The Fund can only be liquidated or dissolved by a formal Act by the legislative body. The Fund separates accounting for Employee Plan (EP) and Social Security (SS) (together, the Pension Plans) as well as the Account 3. The Fund is funded by withdrawals from the PA and there is no segregation of EPs. The Fund does not invest on behalf of specific EPs. When profits have accrued as a result of the calculation of profits and losses in Account 3, the Fund shall allocate the amounts of profits prorated based on the amounts of funds received from each of the EP account and the SS account in such business year. The Pension Funds are booked on the EP Account and the SS Account respectively. However, for reasons of operating efficiency, the Fund maintains Account 3. The Fund remits the amount to the PA, which is stipulated by the Minister. The amount which is allocated from the PA to the Pension Agency may be separately decided by the Minister.Once an employee or other person becomes entitled to a pension, the Minister does not have a discretion over withdrawal of funds from the Fund that affects what they ultimately receive.

Pension Plans The Pension Plans were established by the Country X government. The Fund's activities are limited to: determining the asset allocation target of reserve assets or funds of the Pension Plans. the management and investment of assets of the Pension Plans. The Pension Plans do not have a separate legal personality under Country X law. The Pension Funds are part of moneys collected from EP and SS members and will serve as a precious financial source for future financial benefits. The Pension Agency tracks these contributions. The Fund must invest the Pension Funds by law. The Fund may invest the EP's and SS's Pension Funds jointly. The Country X government collects moneys from employers and employees. Any investment of special account reserves is to be carried out by the Minister by making a bailment of special account reserves to the Fund with the objective of making payments based on investment guidelines.

The Pension Agency is a public entity established by the Country X government is responsible for the primary operation of the Pension Plans. This includes determining the premiums, collecting the contribution amounts from insured persons and employers, remitting contributions to the PA, withdrawing funds from the PA and making distributions to beneficiaries. The Pension Agency is also responsible for collecting the contributions. Employers may also collect contributions in limited circumstances. The Country X government is responsible for unfunded liabilities of the Pension Plans (in the event the contributions and earnings from investments are insufficient) and must make contributions to the PA. Overview of the SS All persons who are residents of Country X must be covered under the SS regardless of nationality. Such persons are categorised according to their status as follows: a.    Group I persons: All registered residents of Country X who are not Group II or III persons b.    Group II persons: Persons covered under the EP and c.     Group III persons: Dependent spouses of a Group II person. Contributions are deducted from the employees' monthly salaries and bonuses.

The SS includes various basic pension benefits that are provided to persons, including: a.    Old-age basic pension b.    Disability basic pension for persons with a qualifying level of disability, and c.     Survivors and widows basic pension or lump-sum death benefit for dependent family members of a person that is deceased. The amount of the basic pension benefits depends on the number of months covered by the SS (i.e. defined benefits). Overview of the EP All persons who are employed by a company that employs yy or more employees must be covered under the EP. Contributions are deducted from the employees' monthly salaries and bonuses. The EP includes various employee pension benefits which are provided to persons in addition to the basic pension benefits provided under the SS. The employee pension benefits include: a.    Old-age employee pension b.    Disability pension or disability allowance (which is lump-sum payment) for persons with a qualifying level of disability, and c.     Survivors pension for dependent family members of a covered person that is deceased.

The amount of the employee pension benefits depends on the monthly remuneration of the covered person and the number of months covered by the EP (i.e. defined benefits). Australian investments The Fund appoints third party asset managers to manage its investments. With respect to the investments in Australia, the Fund has appointed the Trustee. A trust (the Fund Trust) was created by agreement between the Fund and the Trustee. The Fund is the sole beneficiary of the Fund Trust. The Trustee has an obligation to administer the property rights and disposal rights of the trust property; and the 'Beneficiary' means a person who holds a beneficial interest in a Trust. The trust agreement does not confer any powers on the Trustee to unilaterally modify the entitlements of the beneficiary (the Fund). The Trustee is responsible for managing and administering the Fund Trust properties, distributing returns and executing trades in accordance with Fund's investment principles. The investments are held in different accounts and the Trustee has appointed a custodian.

With these trustee and custodian arrangements, the Fund has invested in listed Australian securities (both company shares and trust units (including Managed Investment Trusts (MITs)) and received distributions of dividends, trust distributions (including MIT fund payments) and interest from those investments. The equity interests held by the Fund all have the following characteristics: a)    All securities are listed on the Australian Securities Exchange (ASX) or another recognised stock exchange. b)    Neither the Fund, nor any related party, holds collectively less than 10% of the total participation interests in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936. c)    Neither the Fund, nor any related party, has any involvement in the day to day management of the Test Entity. d)    Neither the Fund, nor any related party, has any right to representation on the board of directors of any of the Test Entities. e)    Neither the Fund, nor any related party, has any right to representation on any investor representative or advisory committee (or similar) of any Test Entity.

f)     Neither the Fund, nor any related party, has the ability to direct or influence the operation of the Test Entities outside of the ordinary rights conferred by the interest held. g)    the Fund'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 comprise 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 the Fund or the Pension Plans. These debt interests that the Fund holds in Australian Test Entities have the following characteristics: a)    The debt securities provide no rights to representation, no voting rights, and no ability to influence the Test Entity. b)    The debt securities have broad financial covenants, and do not allow the Fund or the Pension Plans to have any influence or control over the debt issuer's management. The covenants are in accordance with industry standard.

Income Tax Assessment Act 1936 paragraph 128B(3)(jb) Income Tax Assessment Act 1997 Division 880

Issue 1 Sovereign immunity Question 1 Is the Fund excluded from liability to income tax and withholding tax under the common law doctrine of sovereign immunity on any income and capital gainsderived from its Australian investments for the period 1 July 20xx to 30 June 20XX? Summary The Fund is not immune from income and withholding tax under the common law doctrine of sovereign immunity on any income or capital gains derived on its Australian investments up to 30 June 20XX. Detailed reasoning Prior to the commencement of Division 880 from 1 July 20XX , 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 provide immunity from Australian income tax and/or withholding tax on Australian sourced income and gains, it is necessary to establish the following: that the person making the investment (and therefore deriving the income) is a foreign government or an agency of a foreign government, that the moneys invested are and will remain government moneys, and 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 agency of a foreign government The Foreign States Immunities Act 1985 (Immunities Act) is an Australian Commonwealth Act which reflects a more restrictive view of the common law doctrine of sovereign immunity. The High Court of Australia case, Firebird Global Master Fund II Ltd v Republic of Nauru [2015] HCA 43 (Firebird), details the history of this legislation:

5. Prior to the passing of the Immunities Act, the entitlement of foreign States to immunity from the jurisdiction of the courts of Australia was governed by the common law. In 1984 a report was prepared by the Australian Law Reform Commission ("the ALRC") following the reference to it of the subject of the law in Australia of foreign State immunity. ... [T]he ALRC observed there had been a progressive reduction in the scope of foreign State immunity in other jurisdictions. It recommended that the Commonwealth legislate on the subject, as other countries had done. The Immunities Act was based upon draft legislation prepared by the ALRC. It is now the sole basis for foreign State immunity in Australian courts. A claim for sovereign immunity may only be made by a 'foreign state' (section 9 of the Immunities Act). A foreign state is defined in section 3 of the Immunities Act to be a country outside of Australia that is either: •         an independent sovereign state, or •         a separate territory (whether or not it is self-governing) that is not part of an independent sovereign state.

Sovereign immunity also extends to a 'separate entity' of a foreign state pursuant to section 22 of the Immunities Act. A separate entity of a foreign state is defined in section 3 of the Immunities Act to be a natural person, body corporate or corporation sole that: •         is an agency or instrumentality of the foreign state, and •         is not a department or organ of the executive government of the foreign state. The lower court decision of the PT Garuda Case ( PT Garuda Indonesia Ltd v. Australian Competition and Consumer Commission [2011] FCAFC 52)considered when an entity may be an agency or instrumentality of the foreign state. The court decided (at paragraph 128), that the correct approach is to consider, on the whole of the evidence, whether the person is acting for, or being used by, the foreign state as its means to achieve some purpose or end of that state in the relevant circumstances. This was not overturned on appeal to the High Court in PT Garuda Indonesia Ltd v. Australian Competition & Consumer Commission [2012] HCA 33 ( PT Garuda ). Is the Fund a foreign state or separate entity of a foreign state?

The Fund is a separate entity from the Country X government, and the Fund performs a number of government functions on its behalf. The Fund was established by the Country X government for the purpose of managing and investing the reserve funds of the Country X government (the Pension Funds) and contributing to the financial stability of the Pension Plans. The Fund is a corporation that has a separate legal personality from the Country X government and its departments. The Country X government is the sole shareholder in the Fund. The Minister determines the objectives of the Fund and has the power to appoint or dismiss officers and employees of the Fund. All board members are Country X residents at present. The Fund is granted a level of autonomy and follows its own investment principles but is ultimately accountable to the Minister. The Fund is funded by withdrawals from the PA, which it then invests in accordance with its investment principles. The Fund then remits the profits earned from its investments to the PA under the supervision of the Minister.

The PA forms a part of the government consolidated revenue/reserve funds. The Country X government is responsible for the PA and authorises the transfer of the funds to the Fund. The above factors all lead to the conclusion that the Fund is a separate entity of a foreign state, satisfying this requirement. Condition 2: monies are and will remain government monies In line with the principle that sovereign immunity applies to foreign states performing only governmental functions, an entity claiming sovereign immunity must establish that the monies being invested in the scheme are and will remain government monies. All persons who are employed by a company that employs five or more employees must be covered under the EP regardless of nationality. EPP and SS contributions are deducted from the employees' monthly salaries and bonuses. The Fund is funded by withdrawals from the PA, which it then invests in accordance with its investment principles. The Fund then remits the profits earned from its investments to the PA under the supervision of the Minister, which is transferred to the Pension Agency to distribute pensions.

The monies of the PA shall not be diverted or used for any purpose other than paying pension benefits under the Pension Plans. Country X residents have no legal or beneficial entitlement to call on the monies of the PA (via the Pension Agency) unless they have an entitlement to a defined benefit allowance or lump-sum payment upon a contingency occurring (e.g. retirement, disability or death). The Fund is investing the monies of the Pension Funds. These monies are not considered government monies. For these reasons, this condition is not satisfied as the monies invested and income derived from the investments is not and will not remain government monies. Condition 3: The income or gain is being derived from a non-commercial activity When determining whether the doctrine of sovereign immunity applies to provide immunity for Australian sourced income and gains from Australian income tax and/or withholding tax, it is necessary to establish that the income or gain is being derived from a non-commercial activity. As noted in ATO Interpretive Decision ATO ID 2002/45 Withholding Tax: Sovereign Immunity

(ATO ID 2002/45), whether an operation or activity is a commercial transaction will depend on the facts of each case. As a guide, a commercial transaction is generally considered to be an activity concerned with the trading of goods and services, such as buying, selling, bartering, transportation, and includes the carrying on of a business. A passive investment is more likely to be considered a non-commercial transaction. Are the Fund's investments commercial transactions? The Fund 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. The relevant investments for this Ruling on the doctrine of sovereign immunity held by the Fund are in equity interests in listed entities including Australian companies and managed investment trusts. These investments exhibit the following characteristics: a)    The securities are listed on the ASX or another recognised stock exchange. b)    The Fund, along with any related party, has a combined holding of less than 10% of the equity securities of the issuer.

c)    Neither the Fund, nor any related party, has any involvement in the day to day management of the issuing entity's business. d)    Neither the Fund, nor any related party, has any right to representation on the board of an equity issuer, which includes the board of the corporate trustee of any unit trust in which the Fund may have acquired units. e)    Neither the Fund, nor any related party, has any right to representation on any investor representative or advisory committee (or similar) of any equity issuer. f)     The Fund, along with any related party, only has rights to vote as a shareholder or unitholder in proportion to their equity interest in the relevant entity. Accordingly, the Fund's investments are non-commercial transactions and are performed as part of the Fund's governmental functions. Conclusion Condition 2 has not been satisfied because the monies being invested by the Fund do not remain government monies. As such, the Fund is not immune from income and withholding tax under the common law doctrine of sovereign immunity on any income or capital gains derived from its Australian investments for the period 1 July 20xx to 30 June 20XX. Question 2

Is the ordinary and statutory income derived by the Fund from its interests in the investments listed in Appendix 3 (the Test Entities) not assessable and not exempt income under section 880-105 of the Income Tax Assessment Act 1997 (ITAA 1997)? Summary The income derived by the Fund derived from its interests is not assessable income and not exempt income due to the operation of section 880-105 of the ITAA 1997. Detailed reasoning Section 880-105 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 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. These conditions are considered below. The Fund is a covered sovereign entity Section 880-125 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 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). These conditions are considered below.

The Fund is a sovereign entity For an entity to be covered by section 880-125, it must be a sovereign entity. Section 880-15 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.

The Fund is a corporation that has a separate legal personality from the Country X government. The Fund was established by the Country X government for the purpose of managing and investing the Pension Funds and contributing to the financial stability of the Pension Plans. The Law Companion Ruling 2020/3 The superannuation fund for foreign residents withholding tax exemption and sovereign immunity (LCR 2020/3) discusses government-administered superannuation funds: 47. Whether this is satisfied in relation to a government-administered superannuation fund will depend on the facts. However, in most cases, the participation interests in the fund will be held by the individual members rather than the body politic or government agency. In such cases, the government-administered superannuation fund will not satisfy the definition of a sovereign entity. The Country X government is the sole shareholder in the Fund, not individual Pension Plan members. The Fund is not a government-administered superannuation fund.

The Fund is funded by withdrawals from the PA, which it then invests in accordance with its investment principles. The Fund then remits the profits earned from its investments to the PA under the supervision of the Minister. The funds are transferred to the Pension Agency to distribute pensions. The PA forms a part of the government consolidated revenue/reserve funds. The Country X government is responsible for the PA and authorises the transfer of the funds to the Fund. When profits have accrued as a result of the calculation of profits and losses in the general account, the Fund allocates the amounts of profits prorated based on the funds received from each of the employees' pension account and the national pension account in such business year pursuant to the provisions of the Cabinet Order to the respective accounts. The Fund meets the requirements of being a sovereign entity as defined in subsection 880-15 of the ITAA 1997. The Fund 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 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 issue of government bonds, the proceeds of privatisations etc. As stated above, the Fund's purpose is managing and investing the Pension Funds. The Fund invests Pension Funds, drawing from the PA, which is made up of employer and employee contributions. As such, the Fund is not funded solely by public monies. All returns on the Fund's investments are public monies The monies of the PA are not diverted or used for any purpose other than paying pension benefits under the Pension Plans.

The residents of Country X have no legal or beneficial entitlement to call on the monies of the PA unless they have an entitlement to a defined benefit allowance or lump-sum payment upon a contingency occurring (e.g. retirement, disability or death). The Pension Agency is responsible for the primary operation of the Pension Plans. This includes determining the premiums, collecting the contribution amounts from insured persons and employers, remitting contributions to the PA, withdrawing funds from the PA and making distributions to beneficiaries. The Pension Agency is also responsible for collecting the contributions under the same rules applied to collecting taxes. Any monies given to the Fund, or income made by the Fund, are not ultimately owned by the Government. The Government is not able to recall any monies of the Fund or its subsidiaries at any time. In the event the Fund is liquidated or dissolved, it cannot be said that all assets and monies will flow back to the Government. Therefore, not all returns on the Fund's investments are public monies. The Fund 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 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. Is the Fund a public non-financial entity? LCR 2020/3 provides that a public non-financial entity is determined by:

76. Whether an entity is producing or trading non-financial goods and/or providing services that are not financial services is a question of fact... The Fund 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. Is the Fund a public financial entity? The Fund 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. Based on the circumstances, the Commissioner accepts that the Fund is not a public non-financial entity or a public financial entity under subsection 880-130(2) of the ITAA 1997, being a part of the State and engaging in the relevant activities outlined in subsection 880-130(2) of the ITAA 1997. As the Fund does not satisfy each of the requirements in paragraphs 880-125(a) through (d) of the ITAA 1997 it is considered a sovereign entity that is not covered by section 880-125 of the ITAA 1997 for the purposes of paragraph 880-105(1)(a) of the ITAA 1997. The Fund'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. The Fund invests in the Test Entities, which are Australian resident companies and MITs. The Fund holds both shares and debt interests in the Test Entities. The Fund receives income from these interests. As such, the Fund will receive amounts which satisfy the requirements of paragraph 880-105(1)(b) of the ITAA 1997. The Fund'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.

As previously outlined, the Test Entities from which the Fund derives its ordinary and statutory income are all Australian resident companies. As such, the Fund receives income from an entity which satisfies the requirements of paragraph 880-105(1)(c) of the ITAA 1997. The Fund's sovereign entity group satisfies the portfolio interest test For an amount of ordinary income 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 entity/ies 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 *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. 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. The Fund's sovereign entity group consists of all entities that are wholly owned. With respect to the equity interests in the Test Entities, the Fund holds significantly less than 10% of the participation interests in the Test Entity. To the best of the Fund's knowledge, its sovereign entity group as a whole holds less than 10% of the participation interests in the Test Entity. As such, the Fund's sovereign entity group satisfies the requirements of paragraph 880-105(d) of the ITAA 1997 with respect to each Test Entity.

The Fund's sovereign entity group does not have influence of a kind described in subsection (6) 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) of the ITAA 1997 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, makes or is reasonably expected to make, decisions comprising 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 the sovereign entity group. The Fund'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 comprise the control and direction of the Test Entities' operations. Furthermore, the Fund'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 the Fund or members of the Fund's sovereign entity group.

Based upon the above, the sovereign entity group of the Fund 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. Conclusion The Fund does not satisfy all of the requirements to be considered a covered sovereign entity under section 880-125 of the ITAA 1997. Therefore, as the Fund is not a covered sovereign entity, section 880-105 of the ITAA 1997 will not apply to amounts of ordinary and statutory income derived by the Fund from its investments in the Test Entities. Question 3 Is any capital gain made by the Fund with respect to its investments disregarded under section 880-115 of the ITAA 1997 for the period from 1 July 20XX onwards? Summary The income comprising capital gains that are made by the Fund is not disregarded under section 880-115 of the ITAA 1997 for the period from 1 July 20XX onwards. Detailed reasoning As stated in Question 2 above, the Fund is not a covered sovereign entity under section 880-125 and its income comprising capital gains cannot be disregarded under Subdivision 880-C of the ITAA 1997. Issue 2

Superannuation fund for foreign residents Question 4 If the answer to questions 1-3 is 'No', is the Fund entitled to the dividend and interest withholding tax exemption for superannuation funds for foreign residents for its investments under paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)? Summary The Fund does not meet the requirements for the superannuation fund for foreign residents withholding tax exemption under paragraph 128B(3)(jb) of the ITAA 1936. Detailed reasoning Broadly, paragraph 128B(3)(jb) of the ITAA 1936 provides an exclusion from withholding tax for interest, dividends and non-share dividends derived by a superannuation fund for foreign residents (subject to the satisfaction of certain conditions). For the exclusion to apply, the interest, dividend and/or non-share dividend income must be: •         derived by a superannuation fund for foreign residents (as defined in section 118-520 of the ITAA 1997), and •         exempt from income tax in the country in which the superannuation fund for foreign residents arise. The Fund is a non-resident The Fund is a resident of Country X. Therefore, the Fund satisfies this requirement.

The Fund is a superannuation fund for foreign residents Section 118-520 of the ITAA 1997 provides: (1)          A fund is a superannuation fund for foreign residents at a time if: (a)          at that time, it is: (i)            an indefinitely continuing fund; and (ii)           a provident, benefit, superannuation or retirement fund; and (b)          it was established in a foreign country; and (c)           it was established, and is maintained at that time, only to provide benefits for individuals who are not Australian residents; and (d)          at that time, its central management and control is carried on outside Australia by entities none of whom is an Australian resident. (2)          However, a fund is not a superannuation fund for foreign residents if: (a)          an amount is paid to the fund or set aside for the fund has been or can be deducted under this Act; or (b)          a *tax offset has been allowed or is allowable for such an amount. An indefinitely continuing fund The Fund does not have a legislated termination date. The Fund can only be liquidated or dissolved by a formal Act by the legislative body.

There is sufficient evidence to accept that the Fund will continue to operate for an indefinite period of time. Therefore, the Fund satisfies this requirement. A provident, benefit, superannuation or retirement fund The phrase 'provident, benefit, superannuation or retirement fund' under subparagraph 118-520(1)(a)(ii) of the ITAA 1997 is not defined in either the ITAA 1997 or the ITAA 1936. ATO Interpretative Decision ATO ID 2009/67 Income Tax: Superannuation fund for foreign residents (ATO ID 2009/67) refers to these authorities to provide guidance on the meaning of the phrase 'provident, benefit, superannuation or retirement fund': None of the four descriptors 'provident', 'benefit', 'superannuation' or 'retirement fund' in subparagraph (a)(ii) of the definition of 'superannuation fund for foreign residents' in section 118-520 of the ITAA 1997 are defined. The terms have, however, been the subject of judicial consideration.

The courts have held that for a fund to be a 'provident, benefit, superannuation or retirement fund', the fund 's sole purpose must be to provide superannuation benefits, that is, benefits to a member upon the member reaching a prescribed age or upon their retirement, death or other cessation of employment ( Scott v. FC of T (No 2) (1966) 14 ATD 333; (1966) 10 AITR 290, per Windeyer J; Mahony v. FC of T (1967) 14 ATD 519, per Kitto J; Walstern Pty Ltd v. Commissioner of Taxation (2003) 138 FCR 1; 2003 ATC 5076; (2003) 54 ATR 423, per Hill J and Cameron Brae Pty Ltd v. Federal Commissioner of Taxation (2007) 161 FCR 468; 2007 ATC 4936; (2007) 67 ATR 178, per Stone and Allsop JJ). The above establish that for a fund to qualify as a provident, benefit, superannuation or retirement fund, the Fund must have the sole purpose of providing retirement benefits or benefits in other allowable contemplated contingencies (such as death, disability or serious illness).

The applicant submitted that the concept of 'superannuation fund' should not be narrowly defined by reference to a single legal entity or any specific kind of vehicle but instead should be more broadly defined to cover schemes that involve more than one legal entity and different kinds of vehicles (including incorporated entities) that are established solely for the purpose of providing superannuation benefits to members. The relevant definitions in Australia of a superannuation fund are derived from the Australian regulatory requirements and are ultimately anchored in the common law understanding of a superannuation fund in Australia. This in turn affects provisions aimed at foreign superannuation funds, as the definitions do not embrace foreign definitions or classifications of such. For Australian tax and regulatory purposes, a superannuation fund has as, its sole purpose, the purpose of providing superannuation benefits to members. A foreign entity must therefore have this purpose.

In relation to foreign entities, the Commissioner may consider how entities are classified in other jurisdictions. However, this is not determinative and must give way to the operation of Australian law. The first question to consider in determining whether the Fund is a 'superannuation fund for foreign residents' within the meaning of section 118-520 of the ITAA 1997 is whether the Fund is a 'fund'. The term 'fund' is not defined in either the ITAA 1997 or the ITAA 1936. Therefore, it should be given its ordinary meaning subject to the context in which it appears and having regard to any relevant case law authorities. The Macquarie Dictionary, [Online], viewed 24 November 2015, www.macquariedictionary.com.au (Macquarie Dictionary) defines the term 'fund' as: a stock of money or pecuniary resources. 2. a store or stock of something, now often of something immaterial. 3. an organisation which manages money invested for a particular purpose, such as superannuation. In Scott v. FC of T (No 2)

(1966) 40 ALJR 265; (1966) 14 ATD 333; (1966) 10 AITR 290 (Scott), Windeyer J expressed the view that 'fund' in the context of 'superannuation fund' ordinarily meant 'money (or investments) set aside and invested, the surplus income there from being capitalised'. From Australian case law, 'fund' in the context of a superannuation fund refers to the trust property that the trustee holds and over which there are obligations as between the trustee and the members of the superannuation fund. The fund is a reference to the property which is held for the purpose of providing benefits of the relevant kind to non-residents. A company is an entity that is separate and distinct from its members, who are liable only to the extent that they have contributed to the company's capital. The Fund, as an incorporated entity, is such a company. That is, the Fund is a corporation that has a separate legal personality from the Country X government and its departments, which needs to administer their operations properly and efficiently for the benefit of the public, maintain transparency and independence in running their operations.

The Pension Agency, which distributes pensions to Pension Plan members once they become entitled, is a public entity under Country X law separate to the Fund. The Superannuation Industry (Supervision) Act 1993, which regulates superannuation funds in Australia, does not encompass companies that may be wholly owned by a superannuation fund. There is a difference between the assets of the fund, and the assets of an entity in which the fund invests. The assets are the Pension Funds invested by the Fund. The Fund is not acting as a trustee for the Pension Plans. A company is a separate and distinct legal entity for taxation, even if it is taxed at the same rate as a superannuation fund. The Fund is a distinct entity in its own right. The recognition of a separate legal or tax entity not being a part of the fund is well established in Australian law.

In the ordinary case, the Fund would constitute an asset of the Country X government rather than forming part of a superannuation fund. The Fund is not responsible for the provision of benefits to Pension Plan members. As such, it does not meet the definition of 'superannuation fund for foreign residents' under section 118-520 of the ITAA 1997, having not been established for a superannuation purpose. Therefore, the Fund does not satisfy this requirement. Established in a foreign country The Fund was established in Country X. Therefore, the Fund satisfies this requirement. Was established and maintained only to provide benefits for individuals who are not Australian residents The Fund was established in Country X to manage the Pension Funds, which are remitted to the PA which then has benefits distributed by the Pension Agency to EP and SS members. These employees reside in Country X. Therefore, the Fund does not satisfy this requirement. Central management and control (CM&C) Paragraphs 20 and 21 of Taxation Ruling TR 2008/9 Income tax: meaning of 'Australian superannuation fund' in subsection 295-95(2) of the Income Tax Assessment Act 1997 (TR 2008/9) states:

20. The CM&C of a superannuation fund involves a focus on the who, when and where of the strategic and high level decision making processes and activities of the fund. In the context of the operations of a superannuation fund, the strategic and high level decision making processes includes: •         formulating the investment strategy for the fund; •         reviewing and updating or varying the fund's investment strategy as well as monitoring and reviewing the performance of the fund's investments; •         if the fund has reserves - the formulation of a strategy for their prudential management; and •         determining how the assets of the fund are to be used to fund member benefits.

21. The other principal areas of operation of a superannuation fund that form part of the day-to-day or operational side of the fund's activities will not constitute CM&C. These activities do not form part of the CM&C of the fund because they are not of a strategic or high level nature. Rather, these activities are of a more formalistic or administrative nature. Examples of such activities include the acceptance of contributions that are made on a regular basis, the actual investment of the fund's assets, the fulfilment of administrative duties and the preservation, payment and portability of benefits. The Fund is a corporation that has a separate legal personality from the Country X government and its departments, which needs to administer their operations properly and efficiently for the benefit of the public, maintain transparency and independence in running their operations. The Fund's principal office is located at Country X. The Country X Government is the sole shareholder in the Fund. The Minister determines the objectives of the Fund and has the power to appoint or dismiss officers and employees of the Fund. All board members are Country X residents at present.

The Fund is granted a level of autonomy and follows its own investment principles but is ultimately accountable to the Minister. Based on the above, it is reasonable to conclude that the central management and control of the Fund occurs outside of Australia by entities that are not Australian residents. Therefore, the Fund satisfies this requirement. Subsection 118-520(2) of the ITAA 1997 The Fund has not and cannot deduct amounts under either the ITAA 1997 or the ITAA 1936 for amounts paid to it. The Fund has not been allowed a tax offset or a tax offset is not allowable for an amount that has been paid to it. Therefore, the Fund satisfies this requirement. Conclusion As all of the above requirements are not satisfied, the Fund does not meet the requirements of being a superannuation fund for foreign residents as defined by section 118-520 of the ITAA 1997. The income, consisting of interest, dividend or non-share dividend income, is derived by the Fund Subsection 128A(3) The operation of paragraph 128B(3)(jb) of the ITAA 1936 is extended by subsection 128A(3) of the ITAA 1936 which states:

For the purposes of this Division, a beneficiary who is presently entitled to a dividend, to interest or to a royalty included in the income of a trust estate shall be deemed to have derived income consisting of that dividend, interest or royalty at the time when he or she became so entitled. The operation of subsection 128A(3) of the ITAA 1936 will, therefore, deem interest, dividend and non-share dividend income paid by an Australian resident company and derived by a trust estate where the beneficiary is always presently entitled to the income to have been derived by the beneficiary. According to the facts and circumstances provided, the Fund invests in Australia through the Trustee. This is facilitated through the Fund Trust. That is, in accordance with the Fund Trust, the Trustee invests the Pension Funds as directed by the Fund. Under the Fund Trust, the Fund is entitled to all of the income derived by the Trustee. Derived by the Fund

In order to be excluded from withholding tax under paragraph 128B(3)(jb) of the ITAA 1936, the income must be derived by a non-resident superannuation fund for foreign residents. This requires an examination of any interposed entities. This includes an examination of the relationship between the Fund, the Pension Plans and The Bank, and what type of relationship this is for Australian tax purposes. ATO Interpretative Decision ATOID 2008/61 - Withholding Tax Exemption: interest and dividends paid by an Australian resident and received by a Dutch Stichting as unitholder in an Irish Common Contractual Fund ( ATO ID 2008/61)determined that income received through an interposed CCF was entitled to the exemption under paragraph 128B(3)(jb). It states the following with respect to the relationship between the interposed CCF and the Stichting: Is the relationship between the CCF and the Stichting a trust for the purposes of subsection 128A(3) of the ITAA 1936? The term 'trust estate' is not defined in the ITAA 1936 or Income Tax Assessment Act 1997

(ITAA 1997). Whether the interest and dividend income forms part of a trust estate, therefore, depends on whether a trust exists in accordance with guidance provided by the Courts. Justice French in Harmer & Ors v. FC of T 89 ATC 5180; (1989) 20 ATR 1461 stated that a trust 'is notably a definition of a relationship by reference to obligations'. His Honour went on to state that the four essential elements of a trust are: 1. the trustee who holds a legal or equitable interest in the trust property 2. the trust property which must be property capable of being held on trust and which includes a chose in action 3. one or more beneficiaries other than the trustee, and 4. a personal obligation on the trustee to deal with the trust property for the benefit of the beneficiaries, which obligation is also annexed to the property. Is the relationship between the Fund, The Bank and Pension Plans a trust relationship for the purposes of subsection 128A(3) of the ITAA 1936?

The Fund is a company and, as such, a corporate investment vehicle. The Fund merely provides investment returns to the Country X government. The income that the Fund derives via the Trustee does not flow through to the Pension Plan members. The Fund does not distribute income to Pension Plan members once they become entitled; this role is undertaken by a separate public entity, the Pension Agency. Therefore, the relationship between the Fund and the Pension Plans does not constitute a trust relationship. Accordingly, the income received by the Fund is not income of a trust estate for the purposes of subsection 128A(3) of the ITAA 1936. Conclusion Due to the operation of subsection 128A(3) of the ITAA 1936, the Pension Plans will not be deemed to have derived the interest and dividend income from the investments to the extent that the income was derived by the Trustee and the Fund. The Fund is exempt from income tax in the country in which the non-resident resides The Fund is exempt from tax in Country X. Therefore, the Fund satisfies this requirement. Conclusion

As subparagraph 118-520(1)(a)(ii) of the ITAA 1997 has not been satisfied, the Fund is not excluded from withholding tax in relation to interest, dividend and non-share dividend income derived from its current investments under paragraph 128B(3)(jb) of the ITAA 1936. Question 5 If the answer to question 2 is 'No', is the Fund entitled to the dividend and interest withholding tax exemption for 'superannuation funds for foreign residents' under paragraph 128B(3)(jb) (as modified by subsection 128B(3CA)) of the ITAA 1936 for the period from 1 July 20XX onwards? Summary The Fund does not meet the requirements for the superannuation fund for foreign residents withholding tax exemption under paragraph 128B(3)(jb) of the ITAA 1936, as modified by subsection 128B(3CA). Detailed reasoning Broadly, paragraph 128B(3)(jb) of the ITAA 1936 provides an exclusion from withholding tax for interest, dividends and non-share dividend income derived by a superannuation fund for foreign residents (subject to the satisfaction of certain conditions). It has been established through the reasoning for Question 4 that the Fund: •         is a non-resident

•         does not meet the requirements of the definition of a 'superannuation fund for foreign residents' in section 118-520 of the ITAA 1997 •         is exempt from income tax in the Foreign Country. Subsection 128B(3CA) of the ITAA 1936 The Treasury Laws Amendment (Making Sure Foreign Investors Pay Their Fair Share of Tax in Australia and Other Measures) Act 2019 introduced extra requirements that must be met for paragraph 128B(3)(jb) of the ITAA 1936 to apply. Generally, these extra requirements apply to income derived from 1 July 20XX. Relevantly: i.              The Fund must satisfy the 'portfolio interest test' in relation to the test entity (subsection 128B(3CC) of the ITAA 1936) ii.             The Fund must satisfy the 'influence test' (subsection 128B(3CD) of the ITAA 1936) in relation to the test entity, and iii.            The income cannot otherwise be non-assessable non-exempt income because of: a.    Subdivision 880-C of the ITAA 1997, or b.    Division 880 of the Income Tax (Transitional Provisions) Act 1997 . The Fund satisfies the 'portfolio interest test' Subsection 128B(3CC) of the ITAA 1936 states:

A superannuation fund satisfies the portfolio interest test in this subsection in relation to the test entity at a time if, at that time, the total participation interest (within the meaning of the Income Tax Assessment Act 1997 ) the superannuation fund 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 (within the meaning of that Act) 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. The Fund holds less than 10% of the total participation interests in each Australian company, or trust. Further, the Fund would hold less 10% of the total participation interests in each Australian company or trust in the circumstances detailed in paragraph 128B(3CC)(b) of the ITAA 1936. The Fund therefore satisfies the 'portfolio interest test' in respect of its current investments. The Fund satisfies the 'influence test' Subsection 128(3CD) of the ITAA 1936 states:

A superannuation fund 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) the superannuation fund: (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 the superannuation fund (whether those directions, instructions or wishes are expressed directly or indirectly, or through the superannuation fund 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 128B(3CD)(a) of the ITAA 1936, assesses whether the Fund is able to determine the identity of at least one of the persons who, individually or together with others, makes or is reasonably expected to make, decisions comprising the control and direction of the test entity's operations. This includes situations where the Fund 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 Fund, 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 128B(3CD)(b) of the ITAA 1936, 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 the Fund. Relevantly, in respect of the investments of the relevant facts and circumstances to this Ruling:

a.    Neither the Fund, nor any related party, has involvement in the day to day management of the business of any of the Australian companies, trusts, or Australian debt issuer. b.    Neither the Fund, nor any related party, has the right to appoint a director to the Board of Directors of the Australian company, Australian debt issuer or equivalent role in a trust. c.     Neither the Fund, nor any related party, holds the right to representation on any investor representative or advisory committee (or similar) of the Australian company, Australian debt issuer or equivalent role in a trust. d.    Neither the Fund, nor any related party, has the ability to direct or influence the operation of the Australian company, Australian debt issuer or trust outside of the ordinary rights conferred by the equity interest held. e.    The Fund only holds rights to vote in proportion to its equity interest in each Australian company, trust, or Australian debt issuer. Based upon the above, the Commissioner accepts that the Fund does not have influence of a kind described in subsection 128B(3CD) of the ITAA 1936. Otherwise non-assessable non-exempt

The income received by the Fund will not be non-assessable non-exempt income because of Subdivision 880-C of the ITAA 1997 or Division 880 of the Income Tax (Transitional Provisions) Act 1997 . Conclusion As stated above in Question 4, because subparagraph 118-520(1)(a)(ii) of the ITAA 1997 has not been satisfied, the Fund is not excluded from withholding tax in relation to interest, dividend and non-share dividend income derived from its current investments under paragraph 128B(3)(jb) of the ITAA 1936 (as modified by subsection 128B(3CA)).