Edited version of your written advice

Authorisation Number: 1012789450826

Ruling

Subject: Income Tax Exemption

Question 1

Is the ordinary income and statutory income of the Rulee, exempt from income tax on the basis that it is a public authority constituted under an Australian law as described in item 5.2 of the table in section 50-25 of the Income Tax Assessment Act 1997 (ITAA 1997?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 2016

Year ended 30 June 2017

Year ended 30 June 2018

Year ended 30 June 2019

The scheme commences on:

1 July 2015

Relevant facts and circumstances

The Commonwealth and State Government had established a statutory body to provide services to a resource industry.

A number of Acts applying to this industry were subsequently repealed resulting in the dissolution of certain bodies, and the transfer and vesting of particular assets, rights and liabilities to certain entities. These entities also assumed the functions of the dissolved statutory bodies.

A provision of the relevant Act provided for a Minister to approve certain companies to carry out the activities and functions formerly performed by the dissolved bodies.

The Rulee is an approved company pursuant to this particular provision. The approved company provides specific services in the resource industry. The Company is legally and financially independent of the State Government, however the State Government will retain an oversight role to monitor and oversee the company's operations.

The rulee, as an approved company, is wholly owned in equal shares by two entities representing specific interests of stakeholders in the industry.

The rulee is a company limited by shares and the constitution provides the company can pay dividends to the respective shareholders.

However, the Company has never declared or paid dividends to those shareholding entities, and no such distributions are intended to take place and any profits derived are reinvested into carrying out its functions.

The Directors of the Company made a resolution to notify these shareholding entities that it was not the intent on the establishment of the company to pay dividends to shareholders and the Director's policy is that no dividends shall be paid to shareholders out of profits earned by the company.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 50-1

Income Tax Assessment Act 1997 section 50-25

Reasons for decision

Summary

The Rulee is exempt from income tax pursuant to section 50-1 of the ITAA 1997 on the basis that it qualifies as a 'public authority constituted under an Australian law' under item 5.2 of the table in section 50-25 of the ITAA 1997.

Detailed reasoning

Section 50-1 of the ITAA 1997 provides that the ordinary and statutory income of entities covered by the tables listed in Subdivision 50A of the ITAA 1997 is exempt from income tax.

Section 50-25 of the ITAA 1997 is contained in Subdivision 50A of the ITAA 1997 and covers exempt government entities. Item 5.2 of the table in section 50-25 of the ITAA 1997 provides that 'a public authority constituted under an Australian law' is an exempt entity. There are no special conditions to be met under this provision.

To be a public authority, the body in question should exercise control, power or command in its undertaking of a public nature for the benefit of the community or of some section or geographical division of the community and it should have governmental authority to do so.

The term 'public authority constituted under an Australian law' is not defined in the ITAA 1997. Taxation Ruling No. IT 2632 Income tax: meaning of 'public authority' in definition of 'exempt public body' in Division 16D (IT 2632) provides the Commissioner's view on whether a particular body is a 'public authority'.

IT 2632 at paragraph 14 states that in determining whether a particular body is a 'public authority' it is necessary to: 

(a) Weigh all relevant circumstances, especially the nature of the functions of the body concerned, treating the question of the status of the body as essentially a question of fact and degree to be determined in the light of the particular facts of each case.

(b) Consider whether the body has one primary function or a variety of functions not all of which involve the exercise of powers and functions not possessed by the ordinary citizen and which have been conferred by statute and are essentially of a public nature.

(c) Examine all the characteristics of the body to determine whether it can be seen in general to conform to the common understanding of a public authority. To so conform a body would be expected to have public duties, functions or powers to perform and these would ordinarily be carried out under statutory authority for the benefit of the public. While not essential, a distinguishing characteristic is the possession of exceptional powers conferred by statute beyond those possessed by private individuals. However, the derivation of profits for distribution to shareholders or members would not ordinarily be a characteristic of a "public authority". The examination will involve a consideration of:

(i)   the significance of any features of the body clearly alien to, or inconsistent with, the concept of what is a public authority; and

(ii)   the relevant statutory context, namely, the overall statutory scheme and policy.

IT 2632 at paragraph 16 also discusses the meaning of 'constitute' and states:

16. The ordinary meaning of the word "constitute", according to the Macquarie Dictionary is "to set up or found (an institution etc)." The expression "is constituted" (emphasis added) in subparagraph (c)(i) of the definition of "exempt public body" indicates that the particular organisation or body concerned and its activities must be looked at year by year, and not merely at the time it was first set up or founded. In addition, the context of the word "constituted", indicates that the particular organisation or body concerned must be constituted as a public authority.

In FC of T v. Bank of Western Australia Limited; FC of T v. State Bank of New South Wales Limited 96 ATC 4009 at 4027, the following propositions regarding 'public authorities' were derived from case law:

1. A question whether a particular entity is an authority will be a question of fact and degree dependent upon all the circumstances of the case: Western Australian Turf Club per Stephen J with whom Barwick CJ agreed at ATC 4134; CLR 290. No one factor will be determinative, rather there will be a "range of considerations'': the Fruit Marketing case at 580.

2. A private body, corporate or unincorporated, established for profit will not be an authority: Renmark Hotel at ATD 429; CLR 17 per Rich J, Silverton Tramway per Dixon CJ at ATD 297; CLR 566.

3. Incorporation by legislation is not necessary before a body may be classified as an authority: Renmark Hotel per Rich J at ATD 430; CLR 19, Western Australian Turf Club at ATC 4135; CLR 293.

4. For a body to be an authority of a State or of the Commonwealth, the body in question must be an agency or instrument of government set up to exercise control or execute a function in the public interest. It must be an instrument of government existing to achieve a government purpose: the Fruit Marketing case at 580.

5. The body in question must perform a traditional or inalienable function of government and have governmental authority for so doing: Renmark Hotel at ATD 428; CLR 16 per Rich J, General Steel per Barwick CJ at 134, Anti-Cancer Council case at 450-451 per Mason CJ, Brennan and
Gaudron JJ.

6. It is not necessary for a person or body to be an authority that he, she or it have coercive powers, whether of an administrative or legislative character: Renmark Hotel per Rich J at ATD 430; CLR 18. Conversely the fact that a person or body has statutory duties or powers will not of itself suffice to characterise that person or body as an authority: Western Australian Turf Club per Stephen J at ATC 4137; CLR 297.

7. At least where the question is whether a body is a "public authority'' the body must exercise control power or command for the public advantage or execute a function in the public interest: Silverton Tramway per Dixon CJ at ATD 297 and 298; CLR 565 and 567. The central concept is the ability to exercise power or command: the Fruit Marketing case per Gibbs J at 580.

Based on the principles established in case law and IT 2632, the following factors have been considered in determining whether the Rulee is a 'public authority constituted under Australian law' for the purposes of item 5.2 of the table in section 50-25 of the ITAA 1997.

Application to the Rulee

Conferred by statute and of a public nature

The Commonwealth and State Government had established statutory bodies to provide services to a resource industry.

A number of Acts applying to this industry were subsequently repealed resulting in the dissolution of those statutory bodies and the transfer and vesting of particular assets, rights and liabilities to certain approved entities. A provision of the relevant Act provided for a Minister to approve certain companies to carry out the activities and functions formerly performed by the dissolved bodies.

The rulee is an approved company pursuant to this particular provision to provide specific services in the resource industry. The rulee company is legally and financially independent of the State Government, however the State Government will retain an oversight role to monitor and oversee the operations of the rulee company.

It is accepted that the rulee has been conferred powers and functions under statute to serve the interests of the public and operates under governmental authority to deliver services a resource industry

Exercise powers and functions not possessed by the ordinary citizen

As an approved company, the Rulee has been conferred coercive powers and functions under statute not possessed by the ordinary citizen.

Operates for public benefit

The Rulee as an approved company is wholly owned in equal shares by two entities representing specific interests of stakeholders in the industry.

The appointment of these entities as shareholders was not to provide those entities any private gain. Rather, they were appointed to represent the interests of stakeholders in the industry in the governance and administration of the rulee company, to ensure that the interests of the stakeholders would be taken into account and for the benefit of the resource industry.

The Rulee has not been established for private commercial gain for the respective shareholders.

Conclusion

Having regard to the public duties, statutory functions and powers conferred to it, the Rulee does not have features that are inconsistent with the concept of a 'public authority'.

Therefore, the Rulee is exempt from income tax pursuant to section 50-1 of the ITAA 1997 on the basis that it qualifies as a 'public authority constituted under an Australian law' under item 5.2 of the table in section 50-25 of the ITAA 1997.

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