Australia: Sovereign immunity back to the future: no legislated tax exemptions for foreign governments and SWFs

The new Federal Coalition government has recently announced that it will not proceed with the 2005/06 proposal to codify into legislation the exemption from Australian tax of certain passive income derived by foreign governments and sovereign wealth funds (SWFs).

The exemption has its foundation in the doctrine of sovereign immunity, but its precise scope is unclear. As a result, foreign governments and SWFs are faced with a compliance burden of applying to the Australian Taxation Office (ATO) for a private binding ruling if they require certainty that certain income from their non-commercial investments into Australia is exempt from Australian income tax and Australian withholding tax. The proposed measures would have enshrined the ATO's current administrative practice in legislation, thereby allowing affected entities to effectively self-assess the Australian tax implications of their passive investments into Australia.

The proposals were the subject of detailed consultation in 2009 and 2011, but were never finalised.

In November 2012, after the election of the current Federal government, the Australian Assistant Treasurer announced that the above proposal was amongst a suite of proposed but not enacted measures that would be the subject of further consultation with relevant stakeholders before a decision would be made whether to proceed with those measures. However, on 14 December 2012, the Assistant Treasurer made a further announcement confirming that the proposal had been shifted to the "not to proceed" category.

Although the demise of the above proposal may be seen to represent a missed opportunity to reduce the compliance burden on those looking to invest in Australia, it remains open to foreign governments and SWFs to apply to the ATO for confirmation of the exemption by way of a private binding ruling. There are more than 100 examples of such rulings on the ATO's register of private binding rulings.

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