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Authorisation Number: 1051287602021

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Date of advice: 20 October 2017

Ruling

Subject: Income tax exemption

Question:

Is the Entity exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as a public authority pursuant to item 5.2 in section 50-25 of the ITAA 1997?

Answer:

Yes.

This ruling applies for the following periods:

1 July 2018 to 30 June 2028

The scheme commences on:

1 July 2018

Relevant facts and circumstances

● The Entity was established to operate as a national body to govern the operation of a resource market.

● The Entity is incorporated as a non-profit company limited by guarantee under the Corporations Act 2011 (Cth).

● Legislation governing this resource market was amended to confer statutory functions and powers to the Entity to enable it to perform its role in governing and regulating this market.

● The Entity has also been provided with broad information gathering and advisory powers to carry out its objects and statutory functions.

● The Entity has the power to make binding rules and procedures and has been granted enforcement powers to require persons to comply with the procedures.

● The Entity is comprised of certain types of members.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 50-1

Income Tax Assessment Act 1997 Section 50-25

Reasons for decision

Section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the ordinary and statutory income of the 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.

The term 'public authority constituted under an Australian Law' is not defined in the ITAA 1997. However, the High Court of Australia has considered the meaning of the term and this has been discussed in Taxation Ruling No. IT 2632 Income tax: meaning of 'public authority' in definition of 'exempt public body' in Division 16D.

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, a number of propositions were derived from previous cases about public authorities, that is:

(i) 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.

(ii) 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.

(iii) 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.

(iv) 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.

(v) 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.

(vi) 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.

(vii) 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 entity 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:

(1)Conferred by statute and of a public nature

The Entity was established to operate as a national body to govern the operation of a resource market.

Legislation governing this resource market was amended to confer statutory functions and powers to the Entity to enable it to perform its role in governing and regulating this market.

The Entity has been vested with a wide range of statutory functions and powers to achieve these functions.

The Entity has also been provided with broad information gathering and advisory powers to carry out its objects and statutory functions.

In carrying out its statutory functions, the Entity must have regard to the objectives stipulated in the legislation which is to promote the efficient operation of the market for the long term interests of consumers.

It is evident that the Entity is authorised by statute to perform a function of government and is of a public nature.

Based on the information provided it is accepted that the entity operates under governmental authority to regulate the operation of the resource market, and that it is of a public nature.

(2) Exercise powers and functions not possessed by the ordinary citizen

The Entity has been established to administer a resource and has been conferred with exceptional statutory powers to govern and regulate the operation of that market.

Further, the Entity also has the power to make binding rules and procedures and has been granted enforcement powers to require persons to comply with the procedures.

It is evident the Entity will exercise powers and functions not possessed by the ordinary citizen.

Special Conditions

Section 50-70 of the ITAA 1997 sets out the special conditions for item 2.1. Subsection 50-70(1) of the ITAA 1997 states:

(1) An entity covered by item 1.7, 2.1, 9.1 or 9.2 is not exempt from tax unless the entity is a society, association or club that is not carried on for the purpose of profit or gain of its individual members and that:

(a) has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia; or

(b) is a society, association or club that meets the description and requirements in item 1 of the table in section 30-15; or

(c) is a prescribed society, association or club which is located outside Australia and is exempt from income tax in the country in which it is resident.

and the entity satisfies the conditions in subsection (2).

Not carried on for the profit or gain of its members

Subsection 50-70(1) of the ITAA 1997 requires that the association not be carried on for the purpose of profit or gain to its individual members. This is known as the non-profit requirement. Where members, in their individual capacity, are to receive benefits from an association it will fail the non-profit test. An association usually ensures they operate on a non-profit basis by including non-profit clauses in their constituent documents. An association’s actions must also be consistent with the non-profit requirement.

The entity has been established as a non-profit company limited by guarantee and is required to operate on a non-profit basis. Further, the constitution prohibits the entity from making distributions to its members and provides that any profits, income and property, however derived, must be applied solely towards the promotion of its objects.

It is accepted that the entity has not been established for the private interests of its members and operates on a non-profit basis.

Has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia

For the entity to meet this condition, it must have a ‘physical presence’ in Australia and, to that extent, incur its expenditure and pursues its objectives principally in Australia.

The entity has a physical presence in Australia. It is located in a state and incurs its expenditure and pursues its purposes principally in Australia.

Governing rules and application of income and assets

Subsection 50-70(2) of the ITAA 1997 provides that the Association must:

(a) comply with all the substantive requirements in its governing rules; and

(b) apply its income and assets solely for the purpose for which the entity is established.

Taxation Ruling TR 2015/1 Income tax: special conditions for various entities whose ordinary and statutory income is exempt (TR 2015/1) provides guidance in respect of the conditions in subsection 50-70(2). Paragraph 9 of TR 2015/1 provides that an entity’s ‘governing rules’ are those rules that authorise the policy, actions and affairs of the entity. Paragraphs 18 and 19 of TR 2015/1 explain that the substantive requirements in an entity’s governing rules are those rules that define the rights and duties of the entity and include rules such as those that:

● give effect to the object or purpose of the entity

● relate to the non-profit status of the entity

● set out the powers and duties of directors and officers of the entity

● require financial statements to be prepared and retained

● set out the criteria for admission as a member of an entity

● require an entity to maintain a register of members, and

● relate to the winding-up of the entity.

Paragraphs 33 to 35 of TR 2015/1 provide that an entity must solely apply its income and assets for the purpose for which the entity is established. However, where the misapplication or misapplications of part of the income or assets are immaterial in amount and are a one-off misapplication or occasional misapplications, the income and assets condition will still be satisfied.

After a review of the entity’s Constitution, and the activities conducted by the entity, it is accepted that the entity complies with the substantive requirements in its Constitution in the pursuit of its objects as set out in its Constitution. Accordingly, it is accepted that the entity complies with all substantive requirements of its governing rules and applies its income and assets solely for the purposes for which it was established. Accordingly, the entity satisfies the ‘Special Conditions’ specified in section 50-70 of the ITAA 1997.

ACNC type entity condition

Section 50-47 of the ITAA 1997 provides that an entity that is covered by any item and is an Australian Charities and Not-for-profit Commission (ACNC) type of entity is not exempt from income tax unless the entity is registered under the Australian Charities and Not-for-profits Commission Act 2012 (‘ACNC Act’). Section 50-47 of the ITAA 1997 provides:

An entity that:

(a) is covered by any item; and

(b) is an ACNC type of entity;

is not exempt from income tax unless the entity is registered under the Australian Charities and Not-for profits Commission Act 2012.

The expression ‘ACNC type of entity’ is defined in subsection 995-1(1) of the ITAA 1997 to mean an entity which meets the description of a type of entity in column 1 of the table in subsection 25-5(5) of the ACNC Act.

Broadly, an entity capable of being a registered charity is an ACNC type of entity.

In Taxation Ruling TR 2011/4 Income tax and fringe benefits tax: charities sets out the Commissioner’s views on the meaning of 'charitable' in the terms 'charitable institution' and 'fund established for public charitable purposes' by reference to principles established by court decisions. Paragraph 26 of TR 2011/4 provides that an institution is charitable if it’s main or predominant or dominant' purpose is charitable in the technical legal meaning and it was established and is maintained for that charitable purpose. Any other purpose can only be incidental or ancillary to the charitable purposes.

The Constitution sets out the objects of the entity and provides that it is a public authority and this non-charitable purpose is not ancillary or incidental. As the entity has a non-charitable purpose, it is not capable of being a registered charity. The entity is therefore not an ACNC type of entity and section 50-47 is not applicable.

Conclusion

Having regard to the public duties, statutory functions and powers conferred on the entity, it is evident the entity has been established to perform a function of government. The entity does not have features that are inconsistent with the concept of a ‘public authority’.

Therefore, the entity is exempt from income tax pursuant to section 50-1 of the ITAA 1997 on the basis that it qualifies as a public authority pursuant to item 5.2 in section 50-25 of the ITAA 1997.

Case Law

FC of T v. Bank of Western Australia Limited; FC of T v. State Bank of New South Wales Limited 96 ATC 4009

ATO view documents

Taxation Ruling IT 2632 Income tax: meaning of 'public authority' in definition of 'exempt public body' in Division 16D.

Taxation Ruling TR 2015/1 Income tax: special conditions for various entities whose ordinary and statutory income is exempt

Taxation Ruling TR 2011/4 Income tax and fringe benefits tax: charities

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