Edited version of private advice

Authorisation Number: 1052142489261

Date of advice: 18 July 2023

Ruling

Subject: Income tax exemption - public authority

Question

Does the entity qualify as a Public Authority under Item 5.2 of the table in section 50-25 of the Income Tax Assessment Act 1997 (ITAA 1997), and is therefore exempt from income tax?

Answer

Yes.

This ruling applies for the following periods:

22 February 2023 to 30 June 2023

Year ending 30 June 2024

Year ending 30 June 2025

Year ending 30 June 2026

Year ending 30 June 2027

The scheme commenced on:

22 February 2023

Relevant facts and circumstances

Background

1.    The entity is a type of corporation as defined in the relevant Act.

2.    The entity is an unlisted public company limited by shares that supplies services to its members and customers via infrastructure.

3.    The infrastructure that is presently owned or controlled by the entity was once owned by a State Government through a body constituted under an Act.

4.    The State Government privatised the infrastructure and transferred the operation in the relevant area to the entity.

5.    The shares in the entity were transferred to service users for nil consideration and in proportion to their existing entitlements.

6.    The entity holds licences issued by the State Government.

Structure and activities

7.    The entity has previously been a tax-paying entity with its income primarily comprising revenue from its members, which is targeted to be on a cost-recovery basis.

8.    All shares issued are fully paid ordinary shares. The entity has members who are in its area of operation. The entity's Constitution specifies when shares are cancelled.

9.    The entity funds its activities primarily through levying fees and charges on its customer base (which largely, although not exclusively, consists of its members). The entity has other income, including from investments.

The entity's powers

10.  The entity is regulated by an Act. The entity must hold and does hold appropriate licenses before it can do anything the Act requires. It is authorised to carry on the operations and must observe the terms and conditions of the license.

11.  The Act requires priority be given to certain customers and there are also requirements around spending public money.

12.  The entity has power and authority conferred on it by the Act to do acts in relation to the public which would otherwise be beyond its power or unauthorised. Such as:

•         owns works that it installs in or on land within its area of operations, whether or not it owns the land.

•         enter land within its areas of operations for any one or more specified purposes.

13.  The Act states that the Minister has powers that it can exercise if the entity contravenes its licence.

14.  The Act states that the licence can be cancelled by the Governor in certain circumstances.

15.  The Act covers ceasing to be the type of corporation defined in the relevant Act.

The entity's Constitution

16.  The constitution does not have an objects clause. However, the entity's operations are governed by a licence granted under the Act. Under the terms of the licence, the entity is authorised to carry on the business and to exercise its functions under the Act.

17.  The Constitution states that shares may only be issued or transferred to certain entities.

18.  The Constitution states that all shares in the entity which are not issued upon special terms and conditions are fully paid ordinary shares.

19.  The Constitution states when shares are cancelled.

20.  The Constitution prevents the entity from distributing to its members any property on dissolution or winding up. Any surplus property is required to be distributed to a type of corporation as defined in the Act or to an institution having similar objects to the entity including the prohibition of the distribution of its or their property amongst members.

21.  The Constitution was amended on 22 February 2023 to prevent the entity from paying dividends.

Relevant legislative provisions

Section 50-1 of the Income Tax Assessment Act 1997

Section 50-25 of the Income Tax Assessment Act 1997

Section 50-47 of the Income Tax Assessment Act 1997

Subsection 995-1(1) of the Income Tax Assessment Act 1997

Reasons for decision

Summary

The entity is exempt from income tax pursuant to section 50-1 of the ITAA 1997 as a public authority constituted under an Australian law as described in Item 5.2 of section 50-25 of the ITAA 1997.

Detailed reasoning

Public Authority

Section 50-1 of the ITAA 1997 provides that the ordinary and statutory income of entities covered by the tables listed in Subdivision 50-A are exempt from income tax.

Section 50-25 of the ITAA 1997 covers exempt Government entities. Item 5.2 of the table in section 50-25 provides that 'a public authority constituted under an Australian law' is an exempt entity. There are no special conditions that must be met for this item. Section 47 applies to all items in Division 50.

The term 'public authority constituted under an Australian law' is not defined in the ITAA 1997. Taxation Ruling IT 2632 'Income tax: meaning of 'public authority' in definition of 'exempt public body' in division 16D' provides the Commissioner's view on whether a particular body is a public authority. Although it is considered in the context of Division 16D of the Income Tax Assessment Act 1936 (ITAA 1936) which relates to denial of a tax deduction associated with property which is the subject of a finance lease or similar arrangements where that property is used by or controlled by an "exempt public body", it is also considered to apply here.

Paragraph 4 of IT 2632 confirms that "public authority" is not a defined term in the ITAA 1936 (or ITAA 1997) but that its meaning has been considered its meaning in relation to paragraph 23(d) by the High Court of Australia. It then considers a number of court decisions, including Renmark Hotel v FC of T (1949) 79 CLR 10, where Rich J at page 19 said:

The characteristics of a public authority seem to be that it should carry on some undertaking of a public nature for the benefit of the community or of some section or geographical division of the community and that it should have some governmental authority to do so.

Paragraph 14 of IT 2632 then sets out the necessary considerations for determining whether a body answers the description of a 'public authority' within the Division 16D of Part III of the ITAA 1936 definition as follows:

(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 underlying Division 16D.

Paragraphs 15 to 19 of IT 2632 discuss the meaning of 'constituted by or under' a relevant law and essentially provides that a year-by-year consideration is necessary to determine whether a body is set up, founded or established as a public authority by or under the relevant law, or at the relevant date, has acquired the attributes and qualities of a public authority.

The entity is responsible for services to members in the area.

The entity is a type of corporation in accordance with the Act. It is governed by a licence granted under the Act. Under the terms of the licence, the entity is authorised to carry on operations and exercise its functions in the area.

The entity is permitted to access resources and construct and operate works. The entity is authorised to enter land to perform a number of functions. Its power to perform these functions that were previously undertaken by the State are set out in the Act.

The entity is required to comply with the Act so that it must give priority to certain customers.

The entity is a non-profit entity. Its Constitution prevents the distribution of profits to its members during its operation and upon winding up. In accordance with its Constitution, the entity is prevented from paying a dividend and upon winding up, any surplus property is required to be distributed to a certain type of corporation or to an institution having similar objects.

The entity exercises powers and functions not possessed by the ordinary citizen conferred by statute of a public nature and must comply with the requirements of the Act for the benefit of a section or geographical division of the community, being the supply services to its customers. The fact that the corporation is to give priority to certain customers indicates that the operation of the entity is for the public benefit and not outweighed by the benefit to its members.

ACNC type of entity condition

Section 50-47 of the ITAA 1997 provides that an entity that is covered by any item and 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 ('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.

The entity has a purpose to perform functions, and exercises powers, conferred by statute in relation to its services. The entity also has a purpose to supply services to its members and others. Due to these non-charitable purposes, it is not an ACNC type of entity and section 50-47 is not applicable.

Conclusion

For the above reasons, the entity has the power or authority conferred upon it by legislation to do acts in relation to the public which would otherwise be beyond its power or authority. It is a public authority constituted under an Australian law as described in Item 5.2 of section 50-25 of the ITAA 1997. The entity is therefore exempt from income tax pursuant to section 50-1 of the ITAA 1997.

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