Edited version of private advice

Authorisation Number: 1051760368937

Date of advice: 25 September 2020

Ruling

Subject: Tax exemption for a state or territory body

Question 1:

Will the Commissioner confirm that Company A is a State or Territory Body ('STB') and is therefore exempt from income tax under Division 1AB of the Income Tax Assessment Act 1936 ('ITAA 1936')?

Answer

Yes

Question 2:

Assuming the answer to Question 1 is "yes", will the Commissioner confirm that Company A is not required to lodge an income tax return under section 161 of the ITAA 1936?

Answer

Yes

This ruling applies for the following periods

1 xx 20XX to 30 yy 20YY

Relevant Facts and circumstances

Incorporation details of Company A

Company A was incorporated on x xx 20XX.

Company A is an Australian based proprietary company, incorporated in XYZ.

Company A's directors are Taxpayer A and Taxpayer B.

Company A is a directly wholly owned subsidiary of Company B

Company B is a body corporate established pursuant to section x of the XYZ Act

Company A has x ordinary shares on issue to Company B since incorporation.

Company A was specifically incorporated to act as a joint venture participant in respect of the development of an area of land into offices and industrial warehouses, known as Project XYZ.

Company A does not carry on any other activities or business, other than acting as a joint venture participant in Project XYZ.

Information provided

You have provided a number of documents containing detailed information in relation to Company A, including:

a.      Private Binding Ruling ('PBR') Application, dated 7 yy 20YY

b.      Further information provided in accompanying letter and Annexure A

We have referred to the relevant information within these documents in applying the relevant tests to your circumstances.

Relevant legislative provisions

Income Tax Assessment Act 1936 Part III of Division 1AB

Income Tax Assessment Act 1936 Section 24AK

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 Subsection 161(1A)

Income Tax Assessment Act 1997 Section 50-1

Income Tax Assessment Act 1997 Section 50-25

Income Tax Assessment Act 1997 Section 50-55

Income Tax Assessment Act 1997 Section 995-1

XYZ Act Section x

Assumption(s)

Not applicable.

Further issues for you to consider

Not applicable.

Reasons for decision

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

Question 1:

Will the Commissioner confirm that Company A is a State or Territory Body ('STB') and is therefore exempt from income tax under Division 1AB of the Income Tax Assessment Act 1936 ('ITAA 1936')?

Detailed reasoning

Subdivision A of Division 1AB of the ITAA 1936 provides that certain State and Territory bodies are exempt from income tax.

The key principle of Division 1AB of the ITAA 1936, as outlined in Section 24AK, is that a body that is a State or Territory body (an 'STB') is exempt from income tax under this Division unless it is an excluded STB. There are 5 different ways in which a body can be an STB.

Section 24AM of the ITAA 1936 provides that the income of a STB will be exempt, unless section 24AN applies to the STB.

Section 24AN of the ITAA 1936 states that 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, 24AP, 24AQ, 24AR and 24AS of the ITAA 1936 provide five (5) ways in which a body can be regarded an STB. In particular, section 24AO 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(1)(a) to (c) of the Income Tax Assessment Act 1997 applies; or

(d) is a public hospital to which any of paragraphs 50-55(1)(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

(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.

Territory means the Northern Territory or the Australian Capital Territory.

The term local governing body is defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 to mean 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.

Section 24AM refers to the 'income of a State / Territory body' rather than the 'ordinary income and statutory income of a State / Territory body'. Nonetheless, it is submitted that the income of an STB should be read as the 'ordinary income and statutory income of a State / Territory body'.

Section 50-1 of the ITAA 1997 exempts from income tax the total *ordinary income and *statutory income of the entities described in the tables listed in Subdivision 50A of the ITAA 1997 (Various Exempt Entities).

Section 50-25 of the ITAA 1997 is contained in Subdivision 50A of the ITAA 1997. Listed in the table in section 50-25 as exempt entities are municipal corporations, local government bodies and public authorities constituted under an Australian law. Additionally, section 50-25 by way of a note states that the ordinary and statutory income of a State or Territory body is exempt (Division 1AB of the ITAA 1936).

Application to your circumstances

As noted earlier, subdivision A of Division 1AB of the ITAA 1936 provides that certain State and Territory bodies are exempt from income tax.

The key principle of Division 1AB of the ITAA 1936, as outlined in Section 24AK, is that a body that is a State or Territory body (an 'STB') is exempt from income tax under this Division unless it is an excluded STB, as outlined in sections 24AO, 24AP, 24AQ, 24AR and 24AS of the ITAA 1936.

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.

As noted in the ASIC Current Extract dated z zz 20ZZ, Company A satisfies section 24AO of the ITAA 1936 as:

(a)    It is a company limited solely by shares - it has x ordinary shares on issue, and

(b)    those x shares are beneficially owned by the government entity, Company B.

Section 24AT of the ITAA 1936 defines the meaning of 'government entity' as:

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.

Pursuant to section 995-1 of the ITAA 1997, a 'local governing body' is defined as a 'local governing body established by or under a State law or Territory law, which is, in turn, defined as a law of a State of Australia.

As Company B is a body corporate established pursuant to section x of the XYZ Act, Company B satisfies the definition of being a government entity pursuant to section 24AT of the ITAA 1936.

Section 24AT of the ITAA 1936 defines the meaning of 'excluded STB' as:

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(1)(a) to (c) of the Income Tax Assessment Act 1997 applies; or

(d) is a public hospital to which any of paragraphs 50-55(1)(a) to (c) of the Income Tax Assessment Act 1997) applies; or

(e) is a superannuation fund.

Subsection 24AT(b) describes a municipal corporation or other local governing body (within the meaning of section 50-25 of the ITAA 1997) as an excluded STB. Although Company A is wholly owned (both legally and beneficially) by Company B, it is not in itself a municipal corporation or other local governing body. Accordingly, Company A does not qualify as an excluded STB.

In conclusion, as Company A is an STB pursuant to section 24AO of the ITAA 1936 and is not an excluded STB pursuant to section 24AT of the ITAA 1936, its income is exempt from income tax pursuant to section 24AM of the ITAA 1936.

Question 2:

Assuming the answer to Question 1 is "yes", will the Commissioner confirm that Company A is not required to lodge an income tax return under section 161 of the ITAA 1936?

Summary

The Commissioner confirms that Company A is not required to lodge an income tax return pursuant to 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.

As noted previously, the key principle of Division 1AB of the ITAA 1936, as outlined in Section 24AK, is that a body that is a State or Territory body (an 'STB') is exempt from income tax under this Division unless it is an excluded STB.

Each year, the Commissioner publishes relevant tables in the Legislative Instruments in the Government Gazette, which indicate if a taxpayer is not required to lodge an income return for that particular year. An STB is exempt from lodging an income tax return according to Tables in gazetted Legislative Instruments.

Application to your circumstances

As noted previously, 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.

Notably, the key principle of Division 1AB of the ITAA 1936, as outlined in Section 24AK, is that a body that is a State or Territory body (an 'STB') is exempt from income tax under this Division unless it is an excluded STB.

The Commissioner has published relevant tables in the Legislative Instruments in the Government Gazette, which have indicated that State and Territory body's income is exempt from income tax under the provisions of Division 1AB of Part III of the ITAA 1936.

As such, the STB is not required to lodge an income return for that particular year. An STB is exempt from lodging an income tax return according to Tables in gazetted Legislative Instruments.

In conclusion, Company A is not required to lodge an income tax return for the years ending 30 June 20XY until 30 June 20YY, pursuant to section 161 of the ITAA 1936.

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