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Edited version of your written advice
Authorisation Number: 1051380725985
Date of advice: 4 June 2018
Subject: Exempt entities - state and territory bodies - special conditions
Question 1
Is the receipt of premiums and other amounts by entity A (acting in its own right rather than in any capacity as a trustee) for or in connection with a policy of insurance assessable income of entity A?
Answer
No
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 (ITAA 1936)?
Answer
Yes
This ruling applies for the following periods:
Year of income ended 30 June 20xx
Year of income ended 30 June 20xx
Year of income ended 30 June 20xx
Year of income ended 30 June 20xx
The scheme commences on:
1 July 20xx
Relevant facts and circumstances
Entity A and B are statutory bodies.
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 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;
State Insurance and Care Governance Act 2015 (NSW)
Workers Compensation Act 1987 (NSW);
Workers Compensation Legislation Amendment (Insurance Reform) Act 2003 (NSW);
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. Section 6-10 includes in the assessable income any statutory income, being income that is not ordinary income but is specifically made assessable by another provision of the tax acts.
Income (whether statutory income or ordinary income) will be derived when it is applied or dealt with in any way on behalf of the entity or as directed by the entity (subsection 6-5(4) – ordinary income and subsection 6-10(3) – statutory income). Additionally, they must be amounts to which the taxpayer is beneficially entitled (Zobory v. FCT 95 ATC 4521). That is, the amounts must be capable of being applied or dealt with on behalf of the entity A or as it directs.
In the current case, the assets of entity B may only be applied for particular purposes, and entity A is not entitled to benefit from any surplus in entity B, nor liable to meet any deficits in entity B.
The receipt of premiums and other amounts by entity A (acting in its own right rather than in any capacity as a trustee) for or in connection with a policy of insurance is not assessable income of entity A.
Question 2
Division 1AB of Part III of the ITAA 1936 exempts from income tax the income of a State/Territory body (STB) unless it is an excluded STB under section 24AN.
Sections 24AO to 24AS of the ITAA 1936 set out the five ways that a body can be an STB, however, the only relevant sections in relation to this ruling are sections 24AP, 24AQ and 24AR, and the requirements in only one of these sections needs to be satisfied for entity B to be exempt from income tax.
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.
Entity B is not an entity of the type listed in section 24AT of the ITAA 1936, therefore it is not an excluded STB for the purposes of section 24N and the income of entity B will be exempt from income tax under section 24AM Division 1AB of Part III of the ITAA 1936.
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