Codification of the Tax Treatment of Sovereign Investments

Background:

In 2009, the Australian Government announced that it would introduce amendments to the income tax law to formalise the existing administrative practice of exempting certain income earned by foreign governments and their wholly-owned entities.

The current administrative practice is based on the doctrine of sovereign immunity - a principle of customary international law according to which one country is immune from suit in another country. The scope of this doctrine has evolved from an absolute, wide-ranging immunity to a more restrictive one. This change is primarily due to the fact that governments have increasingly engaged in commercial activities for which it would be inappropriate to extend sovereign immunity. Gradually, therefore, the doctrine has been narrowed so that a country only enjoys immunity with respect to its non-commercial activities.

The ATO’s current administrative practice is set out in ATO ID 2002/45. Under current arrangements, each foreign government agency must apply to the Australian Taxation Office for a Private Ruling (PR) in order to determine whether income derived from an Australian investment is exempt from income tax and withholding tax.

Development:

20/08/2009	The former Assistant Treasurer announces that the Government will introduce amendments to the income tax law to formalise the existing tax practice of exempting certain income earned by foreign governments.
30/11/2009	The former Assistant Treasurer announces the release of the consultation paper, “Greater certainty for Sovereign Investments”. This paper sets out high-level design options for the proposed rules. 05/02/2010 – Submissions in relation to the consultation paper close.
23/06/2010	Treasury releases a second consultation paper, “Greater Certainty for Sovereign Investments – The Framework Rules”. This paper sets out the legislative framework for the proposed rules. 21/07/2010 – Submissions in relation to the second consultation paper close.
20/04/2011	The Assistant Treasurer and Minister for Financial Services and Superannuation announces the release of a third proposals paper, “Options to Codify the Tax Treatment of Sovereign Investments”. This proposals paper builds on the second consultation paper and sets out options to legislate the tax treatment of sovereign investments. 20/05/2011 – Submissions in relation to the third proposals paper close.

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