Edited version of your written advice

Authorisation Number: 1051306056909

Date of advice: 9 November 2017

Ruling

Subject: Not for Profit – A state or territory body (SBT)

Issue 1 - State or Territory body

Question 1

Is Entity A a state or territory body (STB) in accordance with section 24AO of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

Question 2

Is the income of Entity A, a STB under section 24AO of the ITAA 1936, exempt from Commonwealth income tax under section 24AM of the ITAA 1936?

Answer

Yes.

Question 3

Is Entity A, a STB under section 24AO of the ITAA 1936 required to lodge an income tax under section 161 of the ITAA 1936?

Answer

No.

Issue 2 – Prior year tax losses

Question 1

Will the available tax losses that existed prior to Entity A becoming a STB under section 24AO of the ITAA 1936 be reduced by the exempt income earned during the period Entity A is a STB?

Answer

Yes

Question 2

Will the tax losses that existed prior to Entity A becoming a STB under section 24AO of the ITAA 1936 remain available after Entity A is no longer a STB?

Answer

Decline to rule – see ‘Reasons for Decision’.

This ruling applies for the following periods

Income year ended 30 June 2018

The scheme commences on

1 July 2017

Relevant facts and circumstances

Entity A was wholly funded by way of share capital (equity).

Entity A had two shareholders at inception: Entity X and Entity Y.

Entity X acquired all shares in Entity A from Entity Y; as a result, Entity A became its wholly owned subsidiary.

Entity A is not under consideration for a new ownership.

Entity A had carried forward losses.

Entity X is owned by Australian Government.

Entity X has not formed a tax consolidated group.

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 1AB

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 24AT

Income Tax Assessment Act 1997 section 36-17

Income Tax Assessment Act 1997 subsection 36-17(3)

Income Tax Assessment Act 1997 subsection 36-17)4)

Income Tax Assessment Act 1997 section 36-25

Income Tax Assessment Act 1997 section 50-25

Income Tax Assessment Act 1997 paragraph 50-55(1)(a)

Income Tax Assessment Act 1997 paragraph 50-55(1)(b)

Income Tax Assessment Act 1997 paragraph 50-55(1)(c)

Taxation Administration Act 1953 Division 359

Further issues for you to consider

The Commissioner has not determined within your ruling whether you pass the Continuity of Ownership Test (COT) under section 165-12 of the Income Tax Assessment Act 1997 (ITAA 1997); or, whether you satisfy the Same Business Test (SBT) under section 165-13 of the ITAA 1997.

Generally the SBT is performed at each time you want to apply any prior year tax losses that may be available at the end of an income year against a profit arising in an income year (this is often referred to as a recoupment year). The SBT may allow your losses to be deductible, despite change in the ownership or control of the company's shares. The SBT is only available after ascertaining that you do not pass the COT.

Satisfying the SBT relies on examination and comparison of the business that you are carrying on with the business you have carried on in the past, at certain points in time.

You may request a private ruling on this matter at the time you need to ascertain whether you satisfy the COT or SBT for a recoupment year.

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter ‘part iva general’ in the search box on the top right of the page, then select: ‘Part IVA: the general anti-avoidance rule for income tax’.

Reasons for decision

These reasons for decision accompany the Notice of private ruling for Entity A

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Issue 1

Question 1

Summary

Entity A is a state or territory body (STB) in accordance with section 24AO of the ITAA 1936.

Detailed reasoning

Section 24AM of the ITAA 1936 states that income of a STB is exempt from income tax unless section 24AN of the ITAA 1936 applies to the STB.

Section 24AN of the ITAA 1936 states income derived by an STB is not exempt from income tax under division 1AB of the ITAA 1936 if, at the time that income is derived; the STB is an excluded STB.

Further, sections 24AO to 24AS of the ITAA 1936 provide five ways in which a body can be regarded an STB. In particular, section 24AO of the ITAA 1936 provides that a body is an STB if:

(a) it is a company limited solely by shares; and

(b) all the shares in it are beneficially owned by one or more government entities.

Section 24AT of the ITAA 1936 defines the meaning of 'excluded STB', 'government entity’ and ‘territory’, and provides that in this Division:

excluded STB is an entity 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 to which any of paragraphs 50-55(a) to (c) of the Income Tax Assessment Act 1997 applies; or

(d) is a public hospital to which any of paragraphs 50-55(a) to (c) of the Income Tax Assessment Act 1997) applies; or

(e) is a superannuation fund.

government entity means:

(a) a State; or

(b) a Territory; or

(c) another STB that is not an excluded STB.

In your circumstances, Entity A is a company limited solely by shares and all of those shares are beneficially owned by Entity X which is a government entity within the meaning set out under section 24AT of the ITAA 1936.

Further, Entity A does not fall within the categories of excluded STBs set out under section 24AT of the ITAA 1936.

Therefore, it is considered that Entity A is a STB in accordance with section 24AO of the ITAA 1936.

Question 2

Summary

Entity A, a STB under section 24AO of the ITAA 1936 is exempt from Commonwealth income tax under section 24AM of the ITAA 1936.

Detailed reasoning

As discussed above section 24AN of the ITAA 1936 does not apply as Entity A is not an excluded STB. Further, both the requirements for Entity A to be an STB under section 24AO of the ITAA 1936 have been met.

As Entity A is an STB under section 24AO of the ITAA 1936 that is not an excluded STB under section 24AT of the ITAA 1936, its income is exempt from income tax pursuant to section 24AM of the ITAA 1936.

Question 3

Summary

Entity A, a STB under section 24AO of the ITAA 1936 is not required to lodge an income tax under section 161 of the ITAA 1936.

Detailed reasoning

Subsection 161(1A) of the ITAA 1936 states:

The Commissioner may, in the notice, exempt from liability to furnish returns such classes of persons not liable to pay income tax as the Commissioner thinks fit, and a person so exempted need not furnish a return unless the person is required by the Commissioner to do so.

Exceptions to the requirement to lodge an income tax return under Legislative Instrument 2017 covers a person described in Table O.

Table O includes:

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.

As Entity A is an STB under section 24AO of the ITAA 1936 that is not an excluded STB under section 24AT of the ITAA 1936, its income is exempt from income tax pursuant to section 24AM of the ITAA 1936, is not required to lodge an income tax return as per Table O of the Legislative Instrument.

(Requirement to lodge a return for the year of income ended 30 June 2017 under the Income Tax Assessment Act 1936, the Income Tax Assessment Act 1997, the Income Tax (Transitional Provisions) Act 1997, the Taxation Administration Act 1953, the Superannuation Industry (Supervision) Act 1993, the Higher Education Support Act 2003 and the Trade Support Loans Act 2014)

Issue 2

Question 1

Summary

The available tax losses that existed prior to Entity A becoming a STB under section 24AO of the ITAA 1936 will be reduced by the exempt income earned during the period Entity A is a STB.

Detailed reasoning

Division 1AB of the ITAA 1936 operates to, among other things, exempt the income of wholly-owned state and territory bodies from income tax.

There is no stated intention in explanatory material accompanying the introduction of the relevant legislation, nor any explicit provisions within Division 1AB, to affect the availability of tax losses made in income years prior to the income year in which a company commences to be an STB.

A ‘company’ is defined in section 995-1 of the ITAA 1997 as:

(a) a body corporate; or

(b) any other unincorporated association or body of persons;

but does not include a partnership or a non-entity joint venture.

Section 995-1 of the ITAA 1997 defines an ‘entity’ to have the meaning in section 960-100 of the ITAA 1997. An ‘entity’ is defined to mean any of the following:

(a) an individual;

(b) a body corporate;

(c) a body politic;

(d) a partnership;

(e) any other incorporated association or body of persons;

(f) a trust;

(g) a superannuation fund.

Subsection 960-115(a) further expands the meaning of corporate tax entity and states that an entity is a corporate tax entity at a particular time if it is a company at that time.

Section 24AO of the ITAA 1936 states that a body can be an STB if:

(a) it is a company limited solely by shares; and

(b) all the shares in it are beneficially owned by one or more government entities.

Although Entity A became a STB on 30 June 2017, it still remains the same legal entity, a company.

Section 36-17 of the ITAA 1997 sets out the rules on how corporate tax entities may deduct tax losses from a loss year in a later income year.

Subsection 36-17(3) of the ITAA 1997 applies if a company has net exempt income in a later year and the company's total assessable income exceeds the entity's total deductions (a recoupment year). This subsection requires that you first deduct the tax loss from your net exempt income.

Subsection 36-17(4) of the ITAA 1997 deals with the situation where you have net exempt income, however your deductions in an income year exceed your total assessable income (a loss). Similarly to subsection 36-17(3) of the ITAA 1997, you are required to offset the excess of the deductions against net exempt income.

The entity may also choose to offset any amount of, or none of (nil), the available loss under subsections 36-17(2) and (3) of the ITAA 1997, however that choice is limited by circumstances set out under subsection 36-15(5) of the ITAA 1997, which provides:

The choice that the entity has under subsection (2) or (3) for the later income year is subject to both of the following:

(a) the entity must choose a nil amount if, disregarding the tax loss and other tax losses of the entity, the entity would have an amount of excess franking offsets for that year;

(b) if, disregarding the tax loss and other tax losses of the entity, the entity would not have an amount of excess franking offsets for that year - the entity must not choose an amount that would result in the entity having an amount of excess franking offsets for that year.

In other words, you can only deduct a tax loss from your total assessable income to the extent that the tax losses are not required to be deducted from the net exempt income in accordance with subsections 36-17(3) and (4) of the ITAA 1997.

An exception to this is contained in section 24AY of the ITAA 1936, which provides that prior year tax losses are not deductible:

If a body is an STB on the last day of a year of income in which it incurs a tax loss, the tax loss is not allowable as a deduction from the body's assessable income of a later year of income unless the body is an STB on the first day of that later year of income.

Subsection 36-20(1) states, 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.

Section 36-25 of the ITAA 1997 provides special rules about tax losses of certain entities. This section states that where a company wants to deduct a tax loss, it cannot do so unless it passes the Continuity of Ownership Test (COT) or, if the entity does not satisfy the COT, the company satisfies the Same Business Test (SBT).

The Commissioner has not determined within your ruling whether you pass the Continuity of Ownership Test (COT) under section 165-12 of the ITAA 1997; or, whether you satisfy the Same Business Test (SBT) under section 165-13 of the ITAA 1997.

Generally the SBT is performed at each time you want to apply any prior year tax losses that may be available at the end of an income year against a profit arising in an income year (this is often referred to as a recoupment year). The SBT may allow your losses to be deductible, despite change in the ownership or control of the company's shares. The SBT is only available after ascertaining that you do not pass the COT.

Satisfying the SBT relies on examination and comparison of the business that you are carrying on with the business you have carried on in the past, at certain points in time.

Accordingly the available tax losses that existed prior to Entity A becoming a STB under section 24AO of the ITAA 1936 will be reduced by the exempt income earned during the period Entity A is a STB.

Question 2

Summary

We declined to rule on whether the tax losses that existed prior to Entity A becoming a STB under section 24AO of the ITAA 1936 will remain available after Entity A is no longer a STB.

Detailed reasoning

The Commissioner may decline to rule under Division 359 of Schedule 1 to the Taxation Administration Act 1953 if a scheme is not under serious contemplation and the issues raised are merely hypothetical. You have indicated that at the present time there is no change in ownership of Entity A being contemplated.

The Commissioner has not determined whether you pass the Continuity of Ownership Test (COT) under section 165-12 of the ITAA 1997 or whether you satisfy the Same Business Test (SBT) under section 165-13 of the ITAA 1997.

Generally the SBT is performed at each time you want to apply any prior year tax losses that may be available at the end of an income year against a profit arising in an income year (this is often referred to as a recoupment year). The SBT may allow your losses to be deductible, despite a change in the ownership or control of the company's shares. The SBT is only available after ascertaining that you do not pass the COT.

Satisfying the SBT relies on examination and comparison of the business that you are carrying on with the business you have carried on in the past, at certain points in time.

You may request a private ruling on this matter at the time you need to ascertain whether you satisfy the COT or SBT for a recoupment year.

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