Edited version of private advice

Authorisation Number: 1051550408262

Date of advice: 19 July 2019

Ruling

Subject: Exemption from income tax and requirement to lodge an income tax return

Question 1

Is Company A ('the Company') a State/Territory Body ('STB') under section 24AO of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

Question 2

Is the Company an excluded STB as defined under section 24AT of the ITAA 1936?

Answer

No

Question 3

Is the income of the Company exempt from income tax under section 24AM of the ITAA 1936?

Answer

Yes

Question 4

Is the Company required to lodge an income tax return under section 161 of the ITAA 1936?

Answer

No

This ruling applies for the following period:

Year ending 30 June AAAA

The scheme commences on:

Year ending 30 June AAAA

Relevant facts and circumstances

1. The Company is an Australian proprietary company limited by shares.
2. The sole shareholder of the Company is Organisation A ('the Organisation').
3. The Organisation was established under a State Law of Australia.
4. The directors of the Company are independent, non-Organisation employees appointed by the Organisation with the view to running a business as an independent management group.
5. The Company commenced operating the business in the year ending 30 June AAAA.
6. All profits derived from the business activities of the Company will be reinvested into the business, with any surplus being distributed to the Organisation for use in the local area.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subdivision A of Division1AB

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 1936 Section 161

Income Tax Assessment Act 1936 Section 161(1)

Income Tax Assessment Act 1936 Section 161(1A)

Income Tax Assessment Act 1937 Subsection 995-1(1)

All legislative references are to the Income Tax Assessment Act 1936 (ITAA 1936) unless otherwise specified.

Reasons for decision

Question 1

Is the Company a State/Territory Body ('STB') under section 24AO of the Income Tax Assessment Act 1936 (ITAA 1936)?

Summary

The Company is an STB under section 24AO of the ITAA 1936.

Detailed reasoning

Subdivision A of Division 1AB of the ITAA 1936 provides income tax exemption for certain STB's in respect of income derived on or after 1 July 1994.

There are five ways in which a body can be an STB under Division 1AB.

Section 24AO of the ITAA 1936 provides the first way in which a body can be an STB:

24AO FIRST WAY IN WHICH A BODY CAN BE AN STB

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.

Note:

For the definition of government entity see section 24AT. Note that an excluded STB is not a government entity.

Is the Company an STB pursuant to section 24AO of the ITAA 1936?

(a) Company limited solely by shares

The ASIC database confirms that the Company is an Australian proprietary company limited by shares.

Accordingly, the Company satisfies subsection 24AO(a).

(b) All shares beneficially owned by one or more government entities

All the legal and beneficial interests in an STB which are exempt from income tax under section 24AO of the ITAA 1936 must be held only by one or more government entities.

The definition of government entity is set out in section 24AT which provides:

...

government entity means:

(a)  a State; or

(b)  a Territory; or

(ba) a municipal corporation or other local governing body (within the meaning of section 50-25 of the Income Tax Assessment Act 1997); or

Note:

The effect of this paragraph is that some bodies owned or controlled by a municipal corporation or other local governing body may be an STB even though the municipal corporation or other local governing body is an excluded STB.

(c)  another STB that is not an excluded STB

...

The term 'local governing body' is defined in subsection 995-1(1) of the ITAA 1997 as meaning a local governing body established by or under a State Law or Territory Law. Broadly this refers to a city, town, municipal, or shire council.

The Organisation was established under a State Law of Australia. Therefore, the Organisation satisfies the criteria to be a local governing body under subsection 995-1(1) and therefore the criteria to be a government entity under section 24AT (subsection 24AT(ba)).

All the shares in the Company are beneficially owned by the Council, which falls within the definition of a local governing body.

Accordingly, the Company meets the requirement under item 24AO(b).

Summary

The Company meets both of the requirements to be an STB pursuant to section 24AO of the ITAA 1936.

Question 2

Is the Company an excluded STB as defined under section 24AT of the ITAA 1936?

Summary

The Company is not an excluded STB as defined under section 24AT of the ITAA 1936.

Detailed reasoning

Section 24AT sets out the meaning of what is an excluded STB:

24AT WHAT DO EXCLUDED STB. GOVERNMENT ENTITY AND TERRITORY MEAN?

In this Division:

excluded STB means an STB 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.

....

The Company does not fall under any category of excluded STBs and is therefore not prescribed as an excluded STB.

The Company is not a public educational institution, public hospital or a superannuation fund.

The Company is also not a municipal corporation or local governing body. Its only shareholder is the Organisation which is a local governing body, and therefore falls within the definition of an excluded STB under subsection 24AT(b). However, the explanation at paragraph 24AO(ba) of the ITAA 1936 provides that bodies owned or controlled by a local governing body may be an STB even though the local governing body itself is an excluded STB.

Accordingly, as the Company does not fall within any of the criteria for section 24AT to apply, it is not an excluded STB under that section.

Question 3

Is the income of the Company exempt from income tax under section 24AM of the ITAA 1936?

Summary

As the Company is an STB under section 24AO, and section 24AN does not apply as it is not an excluded STB, the income of the Company is exempt from tax under section 24AM.

Detailed reasoning

Under section 24AM, the income of an STB is exempt from income tax unless section 24AN applies, that is, it is an excluded STB.

Section 24AM provides:

24AM CERTAIN STBs EXEMPT FROM TAX

The income of a State / Territory body (an STB) is exempt from income tax unless section 24AN applies to the STB.

Section 24AN provides:

24AN CERTAIN STBs NOT EXEMPT FROM TAX UNDER THIS DIVISION

Income derived by an STB is not exempt from income tax under this Division if, at the time that it is derived, the STB is an excluded STB.

It has been established (refer Question 2 above) that 24AN of the ITAA 1936 does not apply to make the income derived by the Company not exempt from tax because it is not an excluded STB.

It has also been established (refer question 1 above) that the Company meets the requirements to be an STB under section 24AO.

Accordingly, as the Company is an STB under section 24AO, and section 24AN does not apply as it is not an excluded STB, the income of the Company is exempt from tax under section 24AM.

Question 4

Is the Company required to lodge an income tax return under section 161 of the ITAA 1936?

Summary

As the Company 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. Therefore, it is not required to lodge an income tax return for the year ending 30 June AAAA as per the relevant table of Legislative Instrument AAAA.

Detailed reasoning

Subsection 161(1) provides:

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

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

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.

The relevant notice for the year ending 30 June AAAA is Legislative Instrument AAAA Notice of Requirement to Lodge a Return for the Income Year Ended 30 June AAAA ('Legislative Instrument AAAA').

Entities that are not required to lodge an income tax return under Legislative Instrument AAAA are described in the relevant table of that legislative instrument.

The relevant table of Legislative Instrument AAAA 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.

Accordingly, as the Company 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, it is not required to lodge an income tax return for the year ending 30 June AAAA as per the relevant table of Legislative Instrument AAAA

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