Edited version of private ruling

Authorisation Number: 1011830400759

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Ruling

Subject: Income tax Exemption - State/Territory Body

Question 1

Will the Company be an STB as defined in section 24AS of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

Question 2

Will the Company be an "excluded STB" as defined in section 24AT of the ITAA 1936?

Answer

No

Question 3

Will Section 24AM of the ITAA 1936 exempt the assessable and statutory income of the Company from income tax?

Answer

Yes

Question 4

Will the Company's operation of the the Program affect the Company's status as an STB?

Answer

No

Facts

The Company is a company limited by guarantee

The Company has one member

The member has power to vote, and appoint and dismiss the directors of the Company

The current member is to be replaced by another entity (new member)

The new member is established under State Legislation

Question 1

Summary

The Company is considered to be an STB under section 24AS of the ITAA 1936

Detailed reasoning

Section 24AS of the ITAA 1936 provides that:

A body is an STB if:

a. it is not a company limited solely by shares; and

b. it is not established by State or Territory Legislation; and

c. all the legal and beneficial interest (including, but not limited to, interests as to income, profits, dividends, capital, and distributions of capital) in it are held only by one or more government entities; and

d. all the rights or powers (if any) to vote, appoint, or dismiss its governing person or body and direct its governing person or body as to the conduct of its affairs are held only by one or more government entities.

Not a company limited solely by shares

The Corporations Act 2001 states that 'company limited by shares' means:

A company formed on the principle of having the liability of its members limited to the amount (if any) unpaid on the shares respectively held by them (section 9)

The Company is a public company limited by guarantee. The members are liable to contribute money in the event that the Company is wound up, for payment of the debts and liabilities of the Company, and the charges and expenses of winding up. The Company does not have share capital.

The Company is not limited solely by shares.

Not established by State or Territory Legislation

A body is considered to be established by legislation where the legislation specifically establishes the body. Where legislation merely creates an artificial legal body (such as an incorporated association or a public company), the legislation is not considered to specifically establish the body.

The Company is a company limited by guarantee governed by the Corporations Act 2001. The Company is not considered to be established by State legislation.

Legal and beneficial interest are held only by one or more 'government entities'

It is contemplated that the Authority will become the sole member of the Company, and as sole member will hold the legal and beneficial interest in the Company. If ownership changes to the Authority, the Company will only be an STB, under section 24AS, if the Authority is a 'government entity'. Section 24AT of the ITAA 1936 defines 'government entity' as follows:

Government entity means:


(a) a State; or

(b) a Territory; or

(ba) a municipal corporation or other local governing body (within the meaning of section 50-25 of the Income Tax Assessment Act 1997); or

(c) another STB that is not an excluded STB.

The Authority is established under State legislation (the Act). The Act provides that the Company will be a Government Agency. The Authority is not considered to be a State, a Territory, or a municipal corporation or local governing body (see below). As such, the Authority will only be a government entity, as defined, if it is itself an STB that is not an 'excluded STB'.

Division 1AB of the ITAA 1936 provides five ways in which a body can be an STB. The third way stated in section 24AQ is considered to apply to the circumstances of the Authority. Section 24AQ provides that:

A body is an STB if:


(a) it is established by State or Territory legislation; and

(b) it is not a company limited solely by shares; and

(c) the legislation gives the power to appoint or dismiss its governing person or body only to one or more government entities.

The Authority is established under the Act; the Act does not establish the Authority as a company limited by shares; and the Act gives the Governor power to dissolve the Authority or change the nature of the governance of the Authority.

Section 24AU of the ITAA 1936 provides that if the power to dismiss the governing body is given to, or is held by a Governor of a State, the power is taken to be given to, or held by, a 'government entity'.

The Authority is considered to be an STB under section 24AQ. However, as mentioned above, the Authority must not be an 'excluded STB'.

Section 24AT of the ITAA 1936 defines 'excluded STB' as follows:

Excluded STB means an STB that:


(a) at a particular time, is prescribed as an excluded STB in relation to that time; or

(b) is a municipal corporation or other local governing body (within the meaning of section 50-25 of the Income Tax Assessment Act 1997); or

(c) is a public educational institution to which any of paragraphs 50-55(a) to (c) of the Income Tax Assessment Act 1997 applies; or

(d) is a public hospital to which any of paragraphs 50-55(a) to (c) of the Income Tax Assessment Act 1997 applies; or

(e) is a superannuation fund.

(a) at a particular time, is prescribed as an 'excluded STB' in relation to that time

Prescribed 'excluded STBs' are listed in the Income Tax (Excluded STBs) Regulations (the Regulations). The Authority is not listed in the Regulations.

The Authority is not a prescribed 'excluded STB'

(b) is a municipal corporation or other local governing body

Municipal Corporation

ATO ID 2004/757 Income tax exemption: company established by local council provides the following on the meaning of 'municipal council':

'Municipal corporation' is not defined in the ITAA 1997 or the Income Tax Assessment Act 1936 (ITAA 1936).

In the High Court case of Federated Engine-Drivers and Firemen's Association of Australasia v. Broken Hill Pty Co Ltd (1911) 12 CLR 398, Barton J said that 'a municipal corporation is a part of the governmental power of the State.'

In the same case, Isaacs J in reference to municipal corporations said

   ...a corporation is constituted as a regulating agent for certain purposes, and for those purposes is entrusted with governmental powers

He described the Melbourne City Council as 'primarily constituted for the purposes of municipal government and, in respect of its functions of legislation and administration, may be said to be a subordinate local agent for the purposes of government.' He then said:

   For the purpose of non-interference with their governmental functions, a municipal corporation might fairly claim to stand as ... "extending ... the shield of the Crown to what might more fitly be described as the public government of the country." But, on the other hand, corporate trading is none the less trading, and is on a wholly different plane. The difference is ineradicable.

The meaning of 'municipal corporation' was discussed in the Administrative Appeals Tribunal Taxation Appeals Division case, AAT No. 6709 Debit Tax Administration Act , by Mrs R.A. Balmford, the Senior Member, who concluded that:

   ....That expression, combined with "or other local governing body" is calculated to subsume any body, wherever it is situate within the Commonwealth, and under whatever legislation it is established, which, in terms of the decision in Tribe v Salt Lake City (paragraph 15 supra) "is a body politic and corporate created to administer the internal concerns of the district embraced with its corporate limits, in matters peculiar to such place and not common to the state at large". The words "municipal" and "local" in sub-paragraph (vii)(c) indicate that that provision is concerned with bodies operating in respect of a discrete district, region or area within a State or Territory.

Therefore, a municipal corporation must be constituted to exercise governmental functions and is considered to be part of the Government.

The Authority is a Government Agency. The Authority is not considered to be constituted to exercise governmental functions.

Local governing body

Local governing body is defined in section 995-1 of the Income Tax Assessment Act 1997 to mean:

A local governing body established by or under a State law or Territory law.

As stated above, the Authority is a Government Agency. The Authority is not established as a local governing body.

(c) is a public educational institution

A public education institution is an institution that has as its main purpose 'imparting knowledge or assisting and guiding the development of body or mind' (see Chesterman v Federal Commissioner of Taxation (1923) 32 CLR 362 at 386).

The above shows that the Authority is not a public educational institution.

(d) is a public hospital

A hospital (public or otherwise) is an institution that either predominantly provides acute medical, psychiatric, surgical or obstetric care, or accommodation and nursing services.

The above shows that the Authority is not a hospital

(e) is a superannuation fund

A superannuation fund is, generally, a trust designed to hold monies until a 'trigger event' such as retirement or the death of a member.

The above shows that the Authority is not a superannuation fund

The Authority is not an 'excluded STB'

The Authority is an STB that is not an 'excluded STB', and is considered a 'government entity' for the purposes of section 24AS.

The Authority is a 'government entity' that will hold all of the legal and beneficial interest in the Company if it becomes the sole member of the Company.

The rights or powers (if any) to vote, appoint, or dismiss its governing person or body and direct its governing body as to the conduct of its affairs are held only by one or more 'government entities'.

The Company's constitution states that members have voting rights, and members may appoint and remove directors.

The above shows that the right to vote and the powers to appoint and dismiss the directors of the Company are held by a single 'government entity' (being the Authority).

The Company is considered to be an STB under section 24AS of the ITAA 1936.

Question 2

Summary

The Company is not an 'excluded STB'

Detailed reasoning

As stated above, section 24AT of the ITAA 1936 defines 'excluded STB' to mean:

…an STB that:

(a) at a particular time, is prescribed as an excluded STB in relation to that time; or

(b) is a municipal corporation or other local governing body (within the meaning of section 50-25 of the Income Tax Assessment Act 1997); or

(c) is a public educational institution to which any of paragraphs 50-55(a) to (c) of the Income Tax Assessment Act 1997 applies; or

(d) is a public hospital to which any of paragraphs 50-55(a) to (c) of the Income Tax Assessment Act 1997 applies; or

(e) is a superannuation fund.

(see above for a discussion of each requirement)

Is prescribed as an excluded STB

The Company is not listed in the Regulations, and is not a prescribed 'excluded STB'

Is a municipal corporation or other local governing body

The Company is not considered to be a municipal corporation or other local governing body

Is a public educational institution, public hospital, or superannuation fund

The above shows that the Company is not a public educational institution, public hospital or superannuation fund.

The Company is not an 'excluded STB'

Question 3

Summary

The income of the Company is exempt from income tax pursuant to section 24AM of the ITAA 1936.

Detailed reasoning

Section 24AM of the ITAA 1936 provides that

The income of a State/Territory body (an STB) is exempt from income tax unless section 24AN applies to the STB.

Section 24AN of the ITAA 1936 states

Income derived by an STB is not exempt from income tax under this Division if, at the time that it is derived, the STB is an excluded STB.

The Company is an STB that is not an 'excluded STB'. The income of the Company is exempt from income tax pursuant to section 24AM of the ITAA 1936.

Question 4

Summary

The operation of the Program will not affect the Company's status as an STB

Detailed reasoning

Whether an entity is an STB involves a consideration of an entity's establishment, structure and control (see above). There is no requirement in the ITAA 1936 that an STB be undertaking particular activities or services.

An entity's activities and services only seem relevant to the consideration of whether the entity is an 'excluded STB'. They may be relevant to the determination of whether the entity is a municipal corporation or other local governing body, a public educational institution, public hospital or superannuation fund.

If the operation of the Program is transferred to the Company, the transfer will not affect the status of the Company as an STB. The Company will still be a company limited by guarantee, which is not established by State legislation, and whose interests and control are held by a 'government entity'.

The operation of the Program will not materially change the purposes and activities of the Company so as to make it a municipal corporation or other local governing body, a public educational institution, a public hospital, or a superannuation fund.

The operation of the Program will not affect the Company's status as an STB that is not an 'excluded STB'.

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