Edited version of private advice

Authorisation Number: 1012619828641

Ruling

Subject: Income tax - assessable income - exempt entities - State & Territory bodies

Question 1

Is the receipt of premiums and other amounts by entity A for or in connection with a policy of insurance assessable income of entity A?

Answer

No. The receipt of premiums and other amounts by entity A for or in connection with a policy of insurance is not assessable income of entity A.

Question 2

Is the ordinary income and statutory income of entity B exempt from income tax by reason that it is a State/Territory body pursuant to Division 1AB of Part III of the Income Tax Assessment Act 1936?

Answer

Yes, the ordinary income and statutory income entity B is exempt from income tax by reason that it is a State/Territory body pursuant to Division 1AB of Part III of the ITAA 1936.

This ruling applies for the following periods:

Year ended 30 June 2015;

Year ended 30 June 2016;

Year ended 30 June 2017;

Year ended 30 June 2018.

The scheme commences on:

1 July 2014.

Relevant facts and circumstances

Entity B is managed and operated by entity A.

Premiums are received by entity A for policies of insurance, although such amounts are paid to, and become the assets of entity B.

Premiums and other amounts paid in connection with insurance policies are included in the assets of entity B, together with income (including realised and unrealised capital gains) from investments of the assets of entity B. The assets of entity B are primarily applied as:

• payments to meet claims under insurance policies;

• payments of direct expenses associated with claims; and

• payment of management expenses.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 23(d);

Income Tax Assessment Act 1936 Section 24AM;

Income Tax Assessment Act 1936 Section 24AN;

Income Tax Assessment Act 1936 Section 24AO;

Income Tax Assessment Act 1936 Section 24AP;

Income Tax Assessment Act 1936 Section 24AQ;

Income Tax Assessment Act 1936 Section 24AR;

Income Tax Assessment Act 1936 Section 24AS;

Income Tax Assessment Act 1936 Section 24AT;

Income Tax Assessment Act 1936 Division 1AB of Part III;

Income Tax Assessment Act 1997 section 6-5;

Income Tax Assessment Act 1997 section 6-10;

Income Tax Assessment Act 1997 section 10-5;

Income Tax Assessment Act 1997 section 50-25;

Taxation Administration Act 1953 division 359 of schedule 1;

Explanatory Memorandum to the Taxation Laws Amendment Act (No. 2) 1995

Reasons for decision

Question 1

Division 6 of the Income Tax Assessment Act 1997 (ITAA 1997) sets out what is included in the assessable income of an entity. Under section 6-5 of the ITAA 1997, the assessable income of a taxpayer consists of amounts of ordinary income derived, directly or indirectly, from all sources during the income year. Subsection 6-10(1) of the ITAA 1997 includes in the assessable income any statutory income that is not ordinary income but specifically made assessable by other provisions (section 10-5 of the ITAA 1997 provides a list of provisions about assessable income).

Subsection 6-5(4) of the ITAA 1997 further provides that an entity derives an amount of ordinary income as soon as it is applied or dealt with in any way on behalf of the entity or as directed by it. The question of derivation of statutory income is similarly addressed in subsection 6-10(3) of the ITAA 1997. The result of these two provisions is that an amount is treated as having been received as soon as the taxpayer gets the benefit of it.

Consistent with this fundamental principle in revenue law, the court has held that the general provisions of the income tax legislation are directed to income to which a taxpayer is beneficially entitled: Zobory v. FCT 95 ATC 4521.

In order for the insurance premiums and other amounts, the subject matter of this ruling, to be assessable income, it is therefore necessary to establish that the receipt is capable of being applied or dealt with on behalf of entity A or as it directs.

The purposes to which the assets of entity B may only be primarily applied include:

• payments to meet claims under insurance policies;

• payments of direct expenses associated with claims;

• payments of management expenses;

• payments for overpayment of premiums;

• payments to any re-insurance arrangement;

• payments to meet costs incurred in connection with the operation of entity B;

• payments under the agency arrangements.

Entity B, in carrying out the functions of entity A, has no discretion or power to apply the money for any purposes not prescribed in subsection 154E(2) of the Act.

With reference to the operation of the Insurance Fund, subsection 154D(6) of the Act specifies that:

For the purposes of this Act and any other Act or law, each of the State, the Nominal Insurer, the Authority and any authority of the State:

(a) has no beneficial interest in or entitlement to the assets of the Insurance Fund, and

(b) has no liability to meet any deficit in the Insurance Fund and no entitlement to any surplus in the Insurance Fund, and

(c) is not trustee of the Insurance Fund.

In the absence of any evidence to the contrary, entity A is not beneficially entitled to the premiums and other amounts received. Although the money is received entity A, it flows through to the designated beneficial owner, entity B. Entity A has no discretion in how to apply or deal with the receipts. The prerequisite for considering income "derived" in terms of subsection 6-5(4) of the ITAA 1997 is missing and it follows that the receipts are not assessable income under section 6-5 of the ITAA 1997.

An amount that is not ordinary income may, nevertheless, be assessable as statutory income by virtue of the operation of a specific provision of the ITAA 1997 or the ITAA 1936. We consider that neither the premiums nor other amounts received by entity A fall within a provision that makes statutory income assessable income.

We have also considered but dismissed the notion that the scheme may give rise to a constructive trust.

A constructive trust is a trust imposed by the operation of law, regardless of the intentions of the parties concerned. As Deane J put it in Muschinski v. Dodds (1985) 160 CLR 583 at 613-14:

Like express and implied trusts, the constructive trust developed as a remedial relationship superimposed upon common law rights by order of the Chancery Court. It differs from those other forms of trust, however, in that it arises regardless of intention. ... In deed, whereas the rationale of the institutions of express and implied trust is now usually identified by reference to intention, the rationale of the constructive trust must still be found essentially in its remedial function which it has predominantly retained (cf. Waters, op. cit., pp. 37-39) ... Viewed in its modern context, the constructive trust can properly be described as a remedial institution which equity imposes regardless of actual or presumed agreement or intention (and subsequently protects) to preclude the retention or assertion of beneficial ownership of property to the extent that such retention or assertion would be contrary to equitable principle.

Entity A is not a constructive trust in form or in substance.

In conclusion, although the premium and other amounts are received by entity A, they flow through to the beneficial owner, entity B. The receipt is not ordinary income as entity A does not derive the income as provided in subsection 6-5(4) of the ITAA 1997. Neither is the receipt statutory income as defined in subsection 6-10(2) of the ITAA 1997. Accordingly, the receipt of premiums and other amounts (being those specified in paragraph 154E(1)(b) of the Act) are not assessable income of entity A.

Question 2

Detailed reasoning

Division 1AB of Part III of the Income Tax Assessment Act 1936 (ITAA 1936) exempts the income of a State/Territory body (STB) from income tax.

Section 24AM of the ITAA 1936 for certain STB's exempt from income tax states:

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

There are five ways in which a body can be an STB as provided for in sections 24AO to 24AS of the ITAA 1936.

Section 24AQ of the ITAA 1936

Section 24AQ of the ITAA 1936 states:

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.

Entity B satisfies all of the requirements of section 24AQ of the ITAA 1936 and is an STB under this section.

Section 24AR of the ITAA 1936

Section 24AR of the ITAA 1936 states:

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 direct its governing person or body as to the conduct of its affairs only to one or more government entities.

Entity B satisfies all of the requirements of section 24AR of the ITAA 1936 and is an STB under this section.

Section 24AN of the ITAA 1936

Section 24AN of the ITAA 1936 states:

SECTION 24AN CERTAIN STBs NOT EXEMPT FROM TAX UNDER THIS DIVISION

24AN 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.

'Excluded STB' is defined in section 24AT of the ITAA 1936:

SECTION 24AT WHAT DO EXCLUDED STB, GOVERNMENT ENTITY AND TERRITORY MEAN

24AT In this Division:

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 (within the meaning of paragraph 23(e)); or

(d) is a public hospital (within the meaning of paragraph 23(ea)); or

(e) is a superannuation fund.

Entity B has not been prescribed as an excluded STB and is not an entity described in paragraphs (b) to (e) of section 24AT of the ITAA 1936. Entity B is not an excluded STB as defined in section 24AT.

Therefore entity B is exempt from income tax by reason that it is a State/Territory body.

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