Edited version of your written advice

Authorisation Number: 1012838569834

Date of advice: 10 July 2015

Ruling

Subject: State and Territory Body

Question 1

Given that The Trustee becomes tax exempt from 4 July 20XX, is the Trustee required to prepare a trust tax return for an income year where it remains a tax exempt State or Territory body (STB) for the whole of that income year?

Answer

No

Question 2

Given that The Trustee becomes tax exempt from 4 July 20XX, would the exempt income earned during the period while it is a tax exempt body reduce the carried forward tax losses incurred during the period before it becomes a State or Territory body?

Answer

Yes

Question 3

For the exempt income earned in the trust during the period the trust remains a State or Territory body, would the Trustee be subject to any tax liability on the exempt income if it is retained in the trust?

Answer

No

Question 4

If the ATO confirms that the trustee would not be subject to any tax liability in question 3, would the trustee be subject to any tax liability on the exempt income accumulated in the trust during the period while it is a STB if it continues to retain these amounts after it is no longer a STB?

Answer

No

This ruling applies for the following periods:

4 July 2013 to 30 June 2014

1 July 2015 to 30 June 2016

1 July 2016 to 30June 2017

1 July 2017 to 30 June 2018

The scheme commences on:

4 July 20ZZ

Relevant facts and circumstances

• The Trustee is a State or Territory body (STB) exempt from Commonwealth income tax under section 24AM of the ITAA 1936 effective 4 July 20XX.

• The trust is a discretionary trust incorporated under a Trust Deed.

• In 20ZZ a deed of settlement was entered into between the parties which upon completion will give one party 100% shareholdings and voting rights to the organisation.

• Subsequently, one party will become the sole beneficiary. The effective date of the deed poll is defined as the date of completion under the deed of settlement.

• The trust has carried forward tax losses.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 161(1)

Income Tax Assessment Act 1936 Division 1AB of Part III

Income Tax Assessment Act 1997 Division 50-1

Income Tax Assessment Act 1997 Division 50-25

Income Tax Assessment Act 1997 Subdivision 50A

Income Tax Assessment Act 1997 Section 36-15

Income Tax Assessment Act 1997 Section 36-20

Reasons for decision

Question 1

Given that The Trustee becomes tax exempt from 4 July 20XX, is the Trustee required to prepare a trust tax return for an income year where it remains a tax exempt State or Territory body for the whole of that income year?

Detailed reasoning

Subsection 161(1) of the Income Tax Assessment Act 1936 (ITAA1936) states:

Every person must, if required by the Commissioner by notice published in the Gazette, give to the Commissioner a return for a year of income within the period specified in the notice.

Table L of the Legislative Instrument 2014, registered for the purposes of subsection 161(1), states:

Where the trustee of a trust estate has derived income (including capital gains) and the trustee is not covered by Tables M, N or O, a trust return is required to be lodged by the trustee resident in Australia. If there is no trustee resident in Australia, the return is to be lodged by the trust's public officer or, where no public officer is appointed, by the trust's agent in Australia.

the Legislative Instrument 2014 states:

Any non-profit company that is an Australian resident and whose taxable income for the year of income does not exceed $416.

Any non-profit association, organisation, institution, society or club, the income of which is exempt from liability to income tax under the provisions of Division 50 of the Income Tax Assessment Act 1997.

Any State/Territory body, the income of which is exempt from income tax under the provisions of Division 1AB of Part III of the Income Tax Assessment Act 1936.

The Trust is therefore required by the Commissioner to lodge an Income Tax return for the period in the 20XX that is was not a State or Territory Body (STB).

It is not required by the Commissioner to lodge an Income Tax Return for the remainder of the time that it is deemed to be a State or Territory Body.

Question 2

Given that The Trustee becomes tax exempt from 4 July 20XX, would the exempt income earned during the period while it is a tax exempt body reduce the carried forward tax losses incurred during the period before it becomes a State or Territory body?

Detailed reasoning

Section 36-15 of the ITAA 1997 sets out the rules on how entities other than corporate tax entities may deduct tax losses from a loss year in a later income year.

(1)  Your * tax loss for a * loss year is deducted in a later income year as follows if you are not a * corporate tax entity at any time during the later income year.

Note 1: See section 36- 17 for the deduction of a tax loss of an entity that is a corporate tax entity at any time during the later income year.

Note 2:       A tax loss can be deducted only to the extent that it has not already been utilised: see subsection 960-20(1).

If you have no net exempt income

(2)   If your total assessable income for the later income year exceeds your total deductions (other than * tax losses), you deduct the tax loss from that excess.

If you have net exempt income

(3)   If you have * net exempt income for the later income year and your total assessable income (if any) for the later income year exceeds your total deductions (except * tax losses), you deduct the tax loss:

(a)  first, from your net exempt income; and

(b)  secondly, from the part of your total assessable income that exceeds those deductions.

(4)   However, if you have * net exempt income for the later income year and those deductions exceed your total assessable income, then:

(a)  subtract that excess from your net exempt income; and

(b)  deduct the tax loss from any net exempt income that remains.

To work out your net exempt income: see section 36-20.

General

(5)  If you have 2 or more * tax losses, you deduct them in the order in which you incurred them.

Section 36-20 of the ITAA 1997 details what is included in net exempt income:

(1)   If you are an Australian resident, your net exempt income is the amount by which your total * exempt income from all sources exceeds the total of:

(a)  the losses and outgoings (except capital losses and outgoings) you incurred in deriving that exempt income; and

(b)  any taxes payable outside Australia on that exempt income.

Based on the information above, the exempt income earned during the time that it is an STB is net income for the purpose of section 36-15 and therefore will reduce the carried forward losses incurred during the period before it became an STB.

Question 3

For the exempt income earned in the trust during the period while it remains a STB, would the Trustee be subject to any tax liability on the exempt income if it is retained in the trust?

Detailed reasoning

As stated in Income Tax Assessment Act 1997 - section 50.1:

Entities whose ordinary income and statutory income is exempt

The total * ordinary income and * statutory income of the entities covered by the following tables is exempt from income tax. In some cases, the exemption is subject to special conditions.

Ordinary and statutory income that is exempt from income tax is called exempt income: see section 6-20. The note to subsection 6-15(2) describes some of the other consequences of it being exempt income.

Even if you are an exempt entity, the Commissioner can still require you to lodge an income tax return or information under section 161 of the Income Tax Assessment Act 1936 .

In all cases the exemption is subject to the special condition in section 50-47 (about an entity that is an ACNC type of entity).

INCOME TAX ASSESSMENT ACT 1997 - SECT 50.25

Government  

Government
Item	Exempt entity	Special conditions
5.1	(a) a municipal corporation; or (b) a *local governing body	none
5.2	a public authority constituted under an *Australian law	none
5.3	a *constitutionally protected fund	none

Note: The ordinary and statutory income of a State or Territory body is exempt: see Division 1AB of Part III of the Income Tax Assessment Act 1936 .

Section 50-1 of the ITAA 1997 exempts from income tax the income of the entities described in the tables listed in Subdivision 50A of the ITAA 1997.

Section 50-25 of the ITAA 1997 is contained in Subdivision 50A of the ITAA 1997. It states that the ordinary and statutory income of a State or Territory body is exempt.

In light of the facts, it is considered that the Trust is a State or Territory body as described in the table in section 50-25 of the ITAA 1997. The income is therefore exempt from income tax pursuant to section 50-1 of the ITAA 1997.

The Trust will not be subject to income tax on exempt income that is retained in the trust.

Question 4

If the ATO confirms that the trustee would not be subject to any tax liability in question 3, would the trustee be subject to any tax liability on the exempt income accumulated in the trust during the period while it is a STB if it continues to retain these amounts after it is no longer a STB?

Detailed reasoning

The definition of an exempt entity includes an entity whose whole ordinary and statutory income is exempt from income tax. The trust is exempt from income tax pursuant to section 50-1 of the ITAA 1997 and therefore amounts retained in the trust are income tax exempt. If the Trust were to lose its income tax exempt status, amounts earned whilst it was exempt will continue to remain non-taxable.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).