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Ruling

Subject: Eligible Company

Question 1

Is the rulee an "eligible company" for the purposes of former subsection 73B(1) of the Income Tax Assessment Act 1936 for the income year ended 30 June 2011?

Answer

No. The rulee is not an "eligible company" for the income year ended 30 June 2011 because it is not "a body corporate incorporated under a law of the Commonwealth or of a State or Territory" within the meaning of former subsection 73B(1) of the Income Tax Assessment Act 1936.

This ruling applies for the following periods:

1 July 2010 to 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

The rulee is a registered Australian body with an Australian Registered Body Number and an Australian Business Number. It is not an exempt entity.

The rulee was granted a Royal Charter. Supplemental Royal Charters for the rulee have subsequently been granted.

The rulee is undertaking eligible R&D activities and wishes to register for the R&D Tax Concession in respect of the income year ended 30 June 2011.

Relevant legislative provisions

Subsection 73B(1) Income Tax Assessment Act 1936

Reasons for decision

Former subsection 73B(1) of the Income Tax Assessment Act 1936 (ITAA 1936) defines "eligible company" as follows:

"eligible company means a body corporate incorporated under a law of the Commonwealth or of a State or Territory."

For the rulee to be an "eligible company" for the income year ended 30 June 2011, it must satisfy the following three requirements during that time:

(a) the rule is a body corporate;

(b) the rulee was incorporated; and

(c) such incorporation was under a law of the Commonwealth or of a State or Territory.

Having regard to the terms of the Royal Charter, the rulee is an incorporated body corporate (refer to paragraphs 30 to 34 of Miscellaneous Taxation Ruling MT 2006/1).

As evidenced by the Royal Charter of the rulee, the effect of a Royal Charter is to create a corporation with the consent of the King. Such power is a personal prerogative of the Crown and lies in common law. This position was legally recognised in Sutton's Hospital where the Court held that the King has the power in common law to create corporations. Again, in Barton v The Commonwealth, Mason J described the prerogative powers of the Crown as "the powers accorded to the Crown by the common law".

This is consistent with the ATO view in paragraph 31 of MT 2006/1 which states "a body corporate can be created by common law, for example a chartered corporation".

This common law incorporation by way of Royal Charter is separate and distinct from incorporation by legislation as recognised in 1612 where the Court in Sutton's Hospital held that the King had the power in common law to create corporations and that a corporation may be by prescription, by act of parliament or by the King's charter.

On this basis, the rulee can be said to have been incorporated by an exercise of the royal prerogative, which can be characterised as an act of incorporation done under the common law of Australia.

Construction of "under a law of the Commonwealth"

There is no definition of the term "a law of the Commonwealth" in Australian tax law. However, the phrase has been considered in various cases before the High Court and a number of principles can be derived from these authorities as discussed below.

The phrase "the law of the Commonwealth" was considered in Jerger v Pearce where the High Court in a joint judgement said:

"We think that the words 'under the law of the Commonwealth", used as they are in [s 10] in antithesis to the words "of a State", mean "under a law passed under the legislative authority of the Commonwealth"

Again in The Wool Tops case Knox CJ and Gavan Duffy J commented that the words "the laws of the Commonwealth" probably mean "Acts of the Parliament of the Commonwealth" whenever the words appear in the Constitution.

The phrase "a law of the Commonwealth" was considered in The Queen v Foster; Ex parte The Commonwealth Steamship Owners' Association where the High Court unanimously held that in section 405Q:

"The expression "inconsistent with a law of the Commonwealth" does not refer to industrial awards. It refers to laws made under the legislative powers of the Commonwealth directly or indirectly."

In Sankey v Whitlam, Gibbs ACJ held that a financial agreement between the Commonwealth and the States under section 105A of the Constitution was not a law, and that even if it was, "it is not a law of the Commonwealth because it is not made by or under the authority of the Parliament of the Commonwealth".

These authorities make it clear that the ordinary meaning of "a law of the Commonwealth" is a law made directly or indirectly by the Commonwealth Parliament pursuant to its legislative powers.

In addition, the High Court has specifically held that "a law of the Commonwealth" excludes:

- the common law (see Western Australia v The Commonwealth (the Native Title Act case); and

- the Constitution (see Sankey and Re Colina; Ex parte Torney).

In respect of the common law position, the Courts have recognised that the common law is separate and distinct from any law made by the Commonwealth parliament pursuant to its legislative powers. This distinction was recognised in the Native Title Act case where the majority of the High Court noted that:

"A "law of the Commonwealth", as that term is used in the Constitution, cannot be the unwritten law. It is necessarily statute law, for the only power to make Commonwealth law is vested in the Parliament."

As regards the Constitution, the Courts have recognised that the Constitution is separate and distinct from any law made by the Commonwealth parliament pursuant to its legislative powers. In Re Colina the High Court confirmed that an obligation or liability which has its source in the Constitution is not an obligation or liability that arises under a law of the Commonwealth. Also, Stephen J in Sankey held that the Constitution was 'clearly incapable' of being among the 'laws of the Commonwealth' saying that it:

"…..forms part of an enactment of the Imperial Parliament, not of the Commonwealth legislature, and rather than being a law of the Commonwealth it is the constitutional instrument to which that legislature from which laws of the Commonwealth emanate owed its existence and its law-making power. Section 61 of the Constitution, when it speaks of "the execution and maintenance of this Constitution, and of the laws of the Commonwealth" recognises the Constitution as a measure distinct from the laws of the Commonwealth. No doubt the Constitution may be spoken of, in one sense, as being the fundamental law of the Commonwealth: but the words of section 86 of the Crimes Act d not speak in any such broad jurisprudential terms. The past decisions of this Court which have in any way treated this matter have always confined that which is a law of the Commonwealth to that which emanates directly or indirectly from an exercise of the legislative power of the federal Parliament."

For the purposes of section 73B of the ITAA 1936, "a law of the Commonwealth" means a law made, directly or indirectly, by the Commonwealth parliament pursuant to its legislative powers. It does not extend to the common law or the Constitution. This is the settled ordinary meaning of the words and it is not possible to discern a sufficiently clear and relevant object or purpose behind the provisions that would support a departure from that settled meaning in section 73B of the ITAA 1936.

Regardless of whether the rulee was incorporated under the common law or the Constitution (as discussed above), neither the common law nor the Constitution answers the description of a law of the Commonwealth.

Application to the rulee

We consider the rulee to have been incorporated by the exercise of a royal prerogative under the common law of Australia. Regardless of whether the rulee is incorporated under the common law or the Constitution, neither the common law nor the Constitution answers the description of 'a law of the Commonwealth' for the purposes of section 73B because such laws are not laws made by the Commonwealth Parliament pursuant to its legislative powers.

Having regard to the above, we take the view that while the rulee is a "body corporate", it was not "incorporated under a law of the Commonwealth or of a State or Territory". Accordingly, it is not an "eligible company" within the meaning of subsection 73B(1) ITAA 1936.

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