Edited version of private advice

Authorisation Number: 1052240928145

Date of advice: 19 April 2024

Ruling

Subject: Income tax exemption

Question

Will XX be exempt from income tax pursuant to section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997), because it is a public authority constituted under an Australian law as described in Item 5.2 of section 50-25 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods:

Income year end 30June 20XX

Income year end 30 June 20XX

Income year end 30 June 20XX

Income year end 30 June 20XX

Income year end 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Background:

The applicant, XX is an "irrigation corporation" as that term is defined in the Water Management Act (2000) NSW (Water Management Act).

XX is a member-owned co-operative that supplies irrigation and drainage services to its members and customers. It delivers water via gravity-driven open earthen channels.

In July 19XX, a statutory State-owned corporation called XX was formed and vested with the NSW Government's irrigation undertaking in the XX Irrigation Area.

As part of the move to privatisation and local ownership, in December 19XX, the business and assets of XX were transferred to an unlisted public company under the Corporations Law called XX which was, at that time, a State-owned corporation whose shares were held by Ministerial shareholders on behalf of the State of New South Wales.

On privatisation in June 20XX, the shares in XX were transferred to local irrigators for nil consideration and in proportion to their existing statutory and administrative water entitlements.

The members of XX subsequently resolved in September 20XX to convert the entity into a co-operative and it was renamed XX.

XX's business is situated in XX. It provides irrigation and drainage services to nearly XX owned by XX businesses and has XX members. The average size of an irrigated farm is XX hectares.

XX hold a number of water access licences issued by the NSW Government and its regulated surface water supply is accessed from the XX River which is upstream of XX.

The area in which XX operates is approximately XX hectares and includes:

• the XX Irrigation Area, servicing an area of XX hectares of irrigable land;
• the XX scheme, servicing an area of XX hectares of grazing and irrigation land;

and

• the XX Outfall District (also known as the XX Channel), servicing approximately XX hectares of mainly grazing land with some opportunistic irrigation development.

XX has XX kilometres of supply channels and XX kilometres of drainage channels and its irrigation service is generally available from mid-August to mid-May.

XX's members grow a mixture of summer and winter irrigated crops with cotton, rice and corn being the main summer crops.

Previous Structure

The structure within which XX operated consisted of two separate co-operatives: XX and XX.

XX was responsible for, and its objects were specifically directed to providing for the future refurbishment and replacement of XX's water management works.

XX was responsible for business planning to ensure there was sufficient funding available to support the future refurbishment and replacement of XX's water management works.

XX collected an annual sinking fund levy (SFL) from its members for its future needs and this levy was collected based on the number of delivery entitlements held by each member.

XX also collected a Fixed Charge Equivalent fee for access to water delivery services by a member over and above the access to which the member was entitled as a result of the number of delivery entitlements the member held. XX also charged its members termination fees in respect of the termination or surrender by a member of rights of access to the irrigation infrastructure or services provided in relation to such rights of access.

The provision of professional investment services and the refurbishment and replacement of XX's water management works were the primary activities of XX.

XX did not employ staff because XX was responsible for undertaking XX's activities.

The dual co-operative structure was established before commencement of the Water Management Act. It was discovered that this structure is incompatible with the Water Management Act, for the reasons explained below.

XX owned the irrigation infrastructure and, under that structure:

• as the irrigation infrastructure reached the end of its design life, XX would fund its replacement;
• XX would own the replacement irrigation infrastructure;
• accordingly, more and more of the irrigation infrastructure would, over time, be owned by XX and, eventually, XX would own all of the irrigation infrastructure; and
• XX would lease the irrigation infrastructure to XX.

The difficulty with XX owning irrigation infrastructure is that only the five "irrigation corporations" listed in Schedule 1 of the Water Management Act (such as XX) have the power under section 119 that allows them to construct and own irrigation infrastructure (i.e. fixtures) that are on other's land. At common law, a fixture, such as a building or an irrigation channel is generally owned by whoever owns the land to which the building or irrigation channel is attached. Generally, it is impossible for fixtures to be owned separately from the land to which they are attached. In the case of an "irrigation corporation", however, section 119 of the Water Management Act overrides the common law so that an "irrigation corporation" can, for example, own a channel, regulator or culvert which it constructs on another's land. As XX is not an "irrigation

corporation", any fixture constructed by XX on someone else's land will be owned by the landholder, not by XX.

Furthermore, XX (rather than XX) held the combined water supply work approval and water use approval issued by the NSW Government that authorises the construction and operation of this irrigation infrastructure. XX had no water supply work approval. Accordingly, the construction of a water supply work by XX would be a criminal offence under section 91B of the Water Management Act. Under section 363, if a corporation commits an offence against the Act, each director and each person concerned in the management of the corporation is taken to have committed the same offence if they knowingly authorised or permitted the act or omission constituting the offence.

Accordingly, it was proposed that the difficulties described above be overcome by:

• XX ceasing to collect sinking fund levies and XX beginning to collect sinking fund levies; and
• XX entering into an agreement with XX pursuant to which XX would spend its sinking fund on "maintenance" of the assets of XX, which would continue to be owned by XX. Once XX's sinking fund was spent, XX would be wound up.

XX was granted and issued a private binding ruling on XX January 20XX confirming its tax-exempt entity pursuant to item 5.2 of section 50-25 of the Act for the income tax years ended 1 July 20XX through to 30 June 20XX inclusive.

Summary of significant changes since previous private ruling application:

On XX February 20XX XX and XX entered into an agreement referred to as the Sinking Fund Transfer Deed. The effect of the Deed was to transfer all assets of XX to XX effective XX March 20XX. XX was deregistered XX November 20XX. XX now collects sinking fund levies from its members to fund future infrastructure needs.

XX is regulated by the Co-operatives National Law. Under

section 17(2) of the Co-operatives National Law, a co-operative may be either:

• a distributing co-operative
• a non-distributing co-operative

A distributing co-operative must have share capital and is a co-operative which is not prohibited from giving returns or distributions on surplus or share capital: subsection 18(1) of the Co-operatives National Law. A non-distributing co-operative is prohibited from giving returns or distributions on surplus or share capital to members other than the nominal value of shares (if any) at winding up: subsection 19(1) of the

Co-operatives National Law

XX converted to a non-distributing co-operative. Changes to the rules governing XX to effect this change were approved by members XX March 20XX and lodged with the Registrar of Co-operatives XX April 20XX. The effect of this is that members of XX are prohibited from receiving distributions, dividends or other returns from surplus or share capital of XX.

XX ceased to be head of a tax consolidated group effective XX January 20XX. A 100% owned subsidiary (XX) compiles and lodges its own income tax return.

Ongoing Activities of XX and other relevant matters

There has been no change in the ongoing activities of XX since January 20XX other than it now collects sinking fund levies from its members and manages the sinking fund.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 50-1

Income Tax Assessment Act 1997 section 50-25

Reasons for decision

Section 50-25 provides the table relevant to XX's circumstances. The table is reproduced below.

1052240928145image001.gif.

A Public Authority

The High Court determined in Renmark Hotel Incorporated v FC of T (1949) 8 ATD 424, that to be a public authority, the entity:

• should carry on some undertaking of a public nature for the benefit of the community or for some section of it or geographical division of the community
• should not make private profits for its corporations although there is no objection to profits made for the public benefit. Therefore "public authority" does not include a public utility (such as an electric lighting company invested with statutory powers) carried on for profit by private enterprise.
• should have power or authority conferred on it by legislation to do acts in relation to the public which would otherwise be beyond its power or unauthorised, and
• need not have coercive powers over the individual, whether of an administrative or a legislative character. However, it should have exceptional powers or authority to do what an ordinary private individual may not do (eg, the exceptional authority of taking its trams down a public street, the authority to lay water mains, etc).

Hill J made the following propositions in FC of T v Bank of Western Australia Ltd; FC of T v State Bank of New South Wales Ltd 96 ATC 4009 from the relevant cases:

• A question whether a particular entity is an authority will be a question of fact and degree dependent upon all the circumstances of the case (Western Australian Turf Club). No one factor will be determinative, rather there will be a range of considerations.
• A private body, corporate or unincorporated, established for profit will not be a public authority.
• Incorporation by legislation is not necessary for an entity to be considered a public authority.
• The body in question must be an agency or instrument of government set up to exercise control or execute a function in the public interest. It must be an instrument of government existing to achieve a government purpose.
• The body must perform a traditional or inalienable function of government and have governmental authority for doing so.
• It is not necessary that the body have coercive powers, whether of an administrative or legislative character. Conversely, the fact that a body has statutory duties or powers will not of itself suffice to characterise that body as a public authority.
• Where the question is whether the body is a "public authority", the body must exercise control, power or command for the public advantage or execute a function in the public interest. The central concept is the ability to exercise power or command.

Constituted Under an Australian law

An Australian law means a law of the Commonwealth or of a state or a territory (s995-1(1) ITAA 1997).

Taxation Ruling IT 263219 explains the expression "constituted under" a relevant law makes it clear, as Stephen J pointed out in Western Australian Turf Club that an entity need not, from its origin, have possessed those qualities which make it a public authority. It may acquire the necessary attributes subsequently and, if it does so as a result of the legislation, it will thereupon have become a public authority that is constituted under the relevant law.

The expression "constituted by or under" a Commonwealth, State or Territory law is therefore concerned with the manner in which a body is presently constituted, and not how it was originally constituted. This expression calls for a consideration year by year of whether the body is either set up, founded or established as a public authority by or under the relevant law or, at the relevant date, has acquired the qualities and attributes of a public authority.

Application to XX's Circumstances

Constituted under and Australian law

XX is an "irrigation corporation" as defined in the Water Management Act (2000) NSW.

XX was originally part of XX Irrigation Corporation (XX) which was formed and vested with the NSW Government's irrigation undertaking in the XX Irrigation Area.

As part of its move to privatisation and local ownership, the business assets of XX were transferred to an unlisted public company under the Corporations Law called XX Irrigation Limited (XX) which was, at that time, a company State owned corporation whose shares were held by Ministerial shareholders on behalf of the State of New Wales.

On privatisation, the shares in XX were transferred to local irrigators for nil consideration and in proportion to their existing statutory and administrative water entitlements. Its member subsequently resolved to convert XX into a co-operative and it was renamed XX.

In a previous Private Ruling it was considered that the applicant was:

"... a body born out of a particular statute with discrete and specific functions, is subject to a complex regulatory framework by virtue of what vests in the Trust, namely its licences and allocations. That is, the Trust is constituted to manage the water sources of particular areas, but in ways spelt out by the State. Importantly, the water resources are that of the State and the Trust's licences and allocations are mere rights to those resources granted by the State. More than that, the rights are highly conditional and serve the objects of the relevant State Acts and plans adopted under those Acts.

Prima facie, the Trust is an "instrument of government existing to achieve a government purpose".

"Water management of major river systems, watercourses, wells and catchment areas is generally an inalienable function of government".

XX was born out of the Water Management Act (2000) NSW and is subject to a complex regulatory framework by virtue of what vests in the co-operative, namely its licences and allocations. XX is constituted to manage the water sources of the XX Irrigation Area, but in ways spelt out by the State of New South Wales. Importantly, the water resources are that of the State and XX's licences and allocations are mere rights to those resources granted by the State. More than that, the rights are highly conditional and serve the objects of the relevant State Acts and plans adopted under those Acts. Prima facie, XX is an "instrument of government existing to achieve a government purpose".

Therefore, the Commissioner considers XX to be constituted under an Australian law.

A Public Authority

XX not be able to pay any surplus to members, including by way of dividend, limited dividend, rebate or bonus; and will not be able to distribute, on winding up, any of its surplus assets to members.

XX has power and authority conferred on it by legislation to do acts in relation to the public which would otherwise be beyond its power or unauthorised.

It is considered XX is a "public authority" as the co-operative exercises control, power or command for the public advantage or executes a function in the public interest. Furthermore, XX has the ability to exercise power or command.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).