Edited version of private ruling

Authorisation Number: 1011720687559

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Ruling

Subject: Exemption from income tax

Facts

The Rulee is a body corporate established under Australian government legislation.

The Rulee is a statutory authority under the Commonwealth Authorities and Companies Act 1997 (CAC Act).

The Rulee operates under a corporate plan which is subject to Ministerial approval.

The Rulee's objects, functions and powers are set out in its establishing legislation

Summary

The Rulee is considered to be a public authority constituted under an Australian law for the purposes of item 5.2 in section 50-25 of the Income Tax Assessment Act 1997 (ITAA 1997); the Rulee is an exempt entity under that provision. As such, the Rulee's income is exempt from tax under section 50-1 of the ITAA 1997.

Detailed reasoning

The Rulee has sought confirmation of its exemption from income tax under Division 50 of the ITAA 1997, specifically under Item 5.2 of section 50-25 of the ITAA 1997.

To be an 'exempt entity' as described under Item 5.2 of section 50-25 of the ITAA 1997 the following requirements must be satisfied:

1. the entity must be a public authority

2. constituted under an Australian law

Public authority

The term 'public authority' is not defined in the ITAA 1997. Guidance on whether an entity is a public authority can be found in court decisions and Taxation Ruling No. IT 2632. IT 2632 discusses the meaning of the terms 'public authority' and 'constituted under a law of the Commonwealth, State or Territory' in relation to paragraph 23(d) of the Income Tax Assessment Act 1936 (ITAA 1936). Paragraph 23(d) of the ITAA 1936 is the precursor to section 50-25 of the ITAA 1997. IT 2632 notes the usefulness of the general approach taken by the courts in determining what is a 'public authority'.

Australian cases as to the meaning of 'public authority'

A number of cases have determined whether particular bodies were or were not authorities or public authorities; there is no universal test. In Commissioner of Taxation v. Bank of Western Australia Limited; Commissioner of Taxation v. State Bank of New South Wales Limited (1995) 32 ATR 380 Hill J noted, at page 396:

Perhaps the closest any judicial comment has come to attempting a definition of the word "authority" is in the judgment of Gibbs J in Committee of Direction of Fruit Marketing v Australian Postal Commission (1980) 144 CLR 577 at 580 where His Honour said:

"The expression "authority of a State" refers to a body which exercises power derived from or delegated by the State, but the fact that a body is established under State law and possesses power conferred upon it by State law will not necessarily mean the body is an authority of a State….The words "authority of State" naturally mean a body which is given by the State the power to direct or control the affairs of others on behalf of the State - i.e., for the purposes of and in the interests of the community or some section of it."

Hill J stated, at page 397, that a 'number of propositions can be derived from the cases':

1. A question whether a particular entity is an authority is a question of fact and degree dependent upon all the circumstances of the case…No one factor will be determinative…

2. A private body, corporate or unincorporated, established for profit will not be an authority…

3. Incorporation by legislation is not necessary before a body may be classified as an authority…

4. For a body to be an authority of a State or of the Commonwealth, 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…

5. The body in question must perform a traditional or inalienable function of government and have governmental authority for so doing…

6. It is not necessary for a person or body to be an authority that he, she or it have coercive powers, whether of an administrative or legislative character…Conversely the fact that a person or body has statutory duties or powers will not of itself suffice to characterise that person or body as an authority…

7. At least where the question is whether a 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…

In Renmark Hotel Incorporated v. Federal Commissioner of Taxation (1949) 79 CLR 10 Rich J 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 some geographical division of the community and that it should have some governmental authority to do so.

IT 2632, although dealing with whether a body answers the description of a 'public authority' within the definition in Division 16D of the ITAA 1936, provides useful guidance on the definition of 'public authority' in section 50-25 of the ITAA 1997. At paragraph 14 of IT 2632, the Commissioner has identified the following steps in deciding whether a body answers the description of a 'public authority':

a) Weigh all relevant circumstances, especially the nature of the functions of the body concerned…

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

Applicable legislative provisions

Commonwealth authority

§ The Rulee is a body corporate established under Australian government legislation.

§ The Rulee is a Commonwealth Authority (as defined) for the purposes of the CAC Act.

Applying the legal tests to the present case, the factors pointing in favour of the Rulee being characterised as a 'public authority' are:

§ The Rulee is a body corporate established under Australian government legislation. The entity has been authorised by statue to act on behalf of the Australian government. The Rulee performs a specific function on behalf of the Australian government.

§ The activities of the Rulee are for the benefit of the Australian community and are carried out under Government authority.

§ The Rulee exercises powers and functions not possessed by the ordinary citizen. The Rulee may perform its functions, in so far as it is appropriate for those functions to be performed by it on behalf of the Government of the Commonwealth as the national Government of Australia.

§ The Rulee is a Commonwealth authority for the purposes of the CAC Act 1997.

§ The Rulee carries out functions commonly recognised as those in which the Australian government might appropriately engage.

§ The Rulee exercises its functions in the interests of the Australian public.

§ The Rulee must apply its money only to pay the costs and other obligations incurred by it in the performance of its functions and the exercise of its powers.

It is accepted that the Rulee is a 'public authority' for the purposes of item 5.2 of section 50-25 of the ITAA 1997.

Constituted under an Australian law

'Constituted' is not defined. The Australian Oxford Dictionary defines 'constitute' as '…give legal or constitutional form to; establish by law…'

An Australian law is defined in sub-section 995-1(1) of the ITAA 1997 as '…a Commonwealth law, a State law or a Territory law'. A Commonwealth law means a law of the Commonwealth (see subsection 995-1(1) of the ITAA 1997).

The Rulee was established under a Commonwealth law which sets out the functions and powers of the entity. The Rulee is also subject to the operation of the CAC Act which deals with matters relating to Commonwealth authorities, including reporting and accountability, banking and investment, and conduct of executive officers.

It is accepted that The Rulee has been constituted under an Australian law for the purposes of item 5.2 of section 50-25 of the ITAA 1997.

Liability to taxation

Under its establishing legislation the Rulee is subject to taxation under Commonwealth laws. Based on the evidence provided, it is accepted that the intention of the provision is not explicitly to subject the Rulee to tax, but instead to subject it to the normal operation of the taxation laws, without specific exemption.

It is accepted that the Rulee is subject to the normal operation and application of taxation laws and should be exempt from income if it falls within a general category for exemption from income tax.