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Ruling

Subject: Fringe Benefits Tax-Rebatable Employer Status

Question

Are you a rebatable employer?

Answer

No.

This ruling applies for the following periods:

Year ending 31 March 2011

Year ending 31 March 2012

The scheme commences on:

1 April 2010

Relevant facts and circumstances

You have been endorsed by as a charitable institution (other than a public benevolent institution or health promotion charity) under subsection 123E(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA).

Your functions were originally carried out by a body that was originally established by the Govenor in Council prior to the State and Commonwealth coming into existence.

This original body was converted into its present form by a State Act.

The State Act is divided into a number of parts and schedules that:

o set out your constitution and membership;

o provide that you are not part of the Crown;

o gives powers to the Governor in Council in relation to establishing you and abolishing you;

o lists your functions;

o lists your powers;

o enables you to make rules that are required to be approved by the Governor in Council and published in the Government Gazette;

o provides that any land which is purchased will be Crown land; and

o provides that you are subject to the relevant Act that sets out the financial administration requirements that apply to the public sector bodies of the relevant State.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 section 65J.

Reasons for decision

Are you a rebatable employer?

Section 65J of the FBTAA allows certain non-profit employers a rebate of fringe benefits tax at the rate of 48%.

Subsection 65J(1) lists the categories of non-profit employers which are rebatable employers. Subsection 65J(1) states:

… an employer is a rebatable employer for a year of tax if the employer is not a public benevolent institution, is not a health promotion charity, and is covered by any of the following paragraphs at any time during the year of tax: ….

For the purpose of this ruling the relevant paragraph is paragraph 65J(1)(baa) which lists:

a charitable institution (other than an 'institution of the Commonwealth, a State or a Territory) that is endorsed under subsection 123E(1);

For you to come within this paragraph there are two requirements that must be satisfied. They are:

· you must be a charitable institution that is endorsed under subsection 123E(1) of the FBTAA; and

· not be an institution of the Commonwealth, a State or a Territory.

In considering these two requirements:

Are you a charitable institution that has been endorsed under subsection 123E(1) of the FBTAA?

As you have been endorsed under subsection 123(1) as a charitable institution (other than a public benevolent institution or health promotion charity) the first requirement is satisfied.

Are you an institution of the Commonwealth, a State or a Territory?

The words '(other than an institution of the Commonwealth, a State or a Territory)' were inserted into paragraph 65J(1)(baa) by Tax Laws Amendment (2005 Measures No. 3) Act 2005.

In explaining this amendment the Explanatory Memorandum stated:

4.2 Schedule 10 of the Tax Laws Amendment (2004 Measures No. 1) Act 2004 introduced a requirement for charities, public benevolent institutions and health promotion charities to be endorsed by the Commissioner of Taxation in order to access certain taxation concessions, including FBT rebatable employer status. FBT rebatable employers are eligible for a 48 per cent rebate of the FBT amount that would otherwise be payable.

4.3 In introducing this new requirement, a caveat of the law precluding charitable institutions of the Commonwealth, a state or a territory from claiming FBT rebatable employer status was omitted. As a result of this anomaly, institutions such as public universities, public museums, public art galleries and other government bodies accepted as charitable at law will become eligible FBT rebatable employers from 1 July 2005.

4.4 These government institutions have traditionally been ineligible for FBT rebatable status as their overriding purpose is considered to be to carry out the functions or responsibilities of government. It is appropriate that this arrangement continues after 1 July 2005 in recognition of this distinction.

As you have been endorsed as a charitable institution it is accepted that you are an institution. However, you will not be eligible for the rebate if you are an institution 'of the State'.

The phrase 'of the State' is not defined within the FBTAA. However, subsection 65J(3) of the FBTAA provides that the ordinary meaning of 'institution of the Commonwealth, a State or a Territory is extended to include 'an institution established by a law of the Commonwealth, a State or a territory'.

The meaning of the word 'of' is discussed at paragraphs 31 and 32 of Taxation Ruling TR 2000/4 Fringe benefits tax: meaning of 'business premises' in the context of the definition of 'business premises' in subsection 136(1) of the FBTAA.

Paragraphs 31 and 32 of TR 2000/4 state:

31. The word 'of' as used in relation to the words 'the person' in the definition of 'business premises' in subsection 136(1), is the key to the interpretation of the words 'premises, or a part of premises, of the person'.

32. This issue was canvassed by Merkel J in Esso Australia Ltd v. FC of T 98 ATC 4953, at 4958; (1998) 40 ATR 76, at 80-81; 157 ALR 652, at 656-657, in relation to the exemption available for certain child care benefits:

'The relevant requirement in s 47(2) is that the child care facility be located on "business premises of the employer". Obviously the meaning to be attributed to those words will be influenced by the context of, and the purpose intended to be served by, the exemption granted in s 47(2). In other contexts it has been accepted that the word "of" is not a word of precision in defining a relationship between a person and a thing and generally, is apt to embrace a connection, association or relationship which may fall short of a proprietorial relationship or one involving ownership: see Bailey v Worsley (1969) VR 79 at 83 per Lush J and Re Simersall; Blackwell v Bray (1992) 35 FCR 584 at 591 per Gummow J.'

'The Macquarie Dictionary relevantly defines "of" as: "Belonging or possession, connection, or association." '

'It seems to me that, under s 47(2), for the relevant business premises to be those of an employer, the employer must have a right to possession of the premises, at least to the extent necessary to enable the conduct thereon of the relevant recreational or child care facility. If the employer has the requisite possessory entitlement in respect of the premises it does not appear to matter whether that entitlement is one of ownership, exclusive possession or non-exclusive possession.'

The decision in Simersall; Blackwell v Bray (1992) 108 ALR 375 related to paragraph subsection 77A(2)(c) of the Bankruptcy Act 1966 which permits the investigator to require a person to produce specified books that are books 'of' an associated entity of the bankrupt.

Similarly, McKechnie J. in Molina v Zaknich [2001] BC200106701; WASCA 337 in considering paragraph 23(3)(c) of the Industrial Relations Act 1979 referred to the Macquarie Dictionary definition of 'of' to conclude that the premises of the employer are those premises which have a connection or association with the employer.

The meaning of the phrase 'of the State' has also been considered in several cases in the context of whether a body is an 'authority of a State'.

In Committee of Direction of Fruit Marketing v. Australian Postal Commission (1980) 144 CLR 577; [1980] HCA 23 (Fruit Marketing case) Gibbs J said at CLR 580:

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 that the body is an authority of a State. For example, a private company, such as a gas supply company, which provides a public service for profit, may be set up under the company laws of a State, and may be given special statutory powers to enable it to carry on its undertaking, but it does not thereby become an authority of a State. The words "authority of a 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. In some cases it may be decisive that the body concerned is given exceptional powers of a kind not ordinarily possessed by an individual or a company, and that those powers are intended to be exercised for a purpose that would ordinarily be regarded as a purpose of government. On the other hand, in some cases it may be decisive that the body is conducted in the interest and for the profit of its members. In all cases, however, it is necessary to have regard to all the relevant circumstances in order to determine the character of the body in question.

This decision was referred to by Hill J. in Federal Commissioner of Taxation v Bank of Western Australia Ltd; Federal Commissioner of Taxation v State bank of New South Wales (1995) 133 ALR 599; 96 ATC 4009; (1995) 32 ATR 380.

Gibbs J in the Fruit Marketing case referred to several cases including General Steel Industries Inc. v. Commissioner for Railways (N.S.W.) (1964) 112 CLR 125 where Barwick C.J. in considering the phrase 'authority of the State' said at CLR 132:

But, to my mind, these authorities are not decisive of the present question which is whether in the Commonwealth statute dealing with patents for inventions the expression "an authority of the State" embraces the Commissioner for Railways. That he has some of the immunities of the Crown and is not bound by some statutes may be elements for consideration but cannot be conclusive. Perhaps the judicial decision most relevant to answering this question is Electricity Trust of South Australia v. Linterns Ltd. (1950) SASR 133 where Ligertwood J. held that the Electricity Trust of South Australia was an "instrumentality" of the Crown within the meaning and operation of the Landlord and Tenant (Control of Rents) Act, 1942-1949 of South Australia. His Honour rightly perceived the inadequacy for this purpose of merely deciding that the Electricity Trust was entitled to the immunities of the Crown. He adopted the view that an "instrumentality" is that which serves or is employed for some purpose or end, a means, an agency. He applied this view in the following passage: "The Trust, in my opinion, exactly fits this conception. By virtue of s. 15 of the Electricity Trust of South Australia Act, the Crown is the owner of the undertaking for the supply of electricity and the mining of coal in South Australia. The Trust serves the purposes of the Crown in managing the undertaking and in making electricity and coal available for the public. It exercises its functions on behalf of the Crown and is the means or agency for managing the Crown assets. It is not the servant or agent of the Crown because it has independent powers and is not subject to the control of the Govenor in Council or any Minister of State. Nevertheless, it is an instrumentality or agency of the Crown, because it serves the purpose of the Crown in managing Crown assets in the interests of the public." (1950) SASR, at pp 139, 140

In summarising these decisions, an institution will be an institution of the State where it acts for the purposes of and in the interest of the State, rather than for the interests of members. The fact that the body has independent powers or is not owned by the State will not prevent it being an 'institution of the State' provided it has the necessary connection or association with the State.

The necessary connection is discussed in Taxation Determination TD 2008/2 Fringe benefits tax: in determining whether a charitable institution is a rebatable employer for the purposes of paragraph 65J(1)(baa) of the Fringe Benefits Tax Assessment Act 1986, is the institution 'established by a law of the Commonwealth, a State or a Territory under subsection 65J(3) of that Act because it is incorporated under either the Corporations Act 2001 or under a law of a State or Territory which relates to the incorporation of Associations?

Paragraphs one and two of TD 2008/2 state:

The mere incorporation of a charitable institution under the Corporations Act 2001 or a law of a State or Territory which relates to the incorporation of Associations¹ does not mean that the institution is 'established by a law of the Commonwealth, a State or a Territory' under subsection 65J(3) of the Fringe Benefits Tax Assessment Act 1986.

2. A charitable institution will only be 'established by a law of the Commonwealth, a State or a Territory' under subsection 65J(3) when the relevant law specifically constitutes or establishes the institution for purposes that are charitable.

Further guidance is given in the explanation contained in Appendix 1 of TD 2008/2 which states at paragraphs 18 and 19:

18. A charitable institution will not be 'established by a law of the Commonwealth, a State or a Territory' under subsection 65J(3) where the law only gives the institution artificial legal status as an incorporated body.

19. A charitable institution is an institution established and maintained for purposes that are charitable in the technical legal sense.⁸ A charitable institution will be 'established by a law of the Commonwealth, a State or a Territory' where the law sets out the purposes or objects of the organisation which are charitable.

In applying the summary of the decisions discussed above and the guidance provided in TD 2008/2 to your situation:

· you obtained your current structure under the State Act;

· your functions are set out in the State Act;

· the State Act provides the power for the Governor in Council to establish or abolish you;

· your members are appointed by the Governor in Council on the recommendation of the Minister;

· the Governor in Council also has the power to remove a member on the recommendation of the Minister;

· a member who resigns does so by writing to the Minister

· on the recommendation of the Minister the Governor in Council may convert your structure to a different type of body;

· the Governor in Council on the recommendation of the Minister may appoint an administrator;

· you are required to comply with the State Act that governs the financial reporting of public sector bodies;

· the State Act requires you to establish certain committees;

· any rules that you make are required to be approved by the Governor in Council who also has the power to revoke a rule;

· any land which you acquire becomes Crown land and the purchases must be approved by the Minister;

· the approval of the Minister is required in relation to the granting of a licence or lease of land that you occupy;

· under the State Act the fees and charges for services that you set are required to be published in the Government Gazette; and

· under the State Act the remuneration of a member is fixed by the Governor in Council.

These factors indicate that you are an institution of the State as:

· you were established in your current form by an Act of Parliament;

· the Act under which you were established sets out your purposes or objects;

· you act for the purposes of the State, rather than your members;

· you are required to report in accordance with legislation that governs the financial reporting of public sector bodies; and

· you are subject to the control of the State in relation to your ongoing existence, the appointment of members, your rules, fees and services, the acquisition of land and the remuneration paid to your members.

Therefore, although you are a body corporate with perpetual succession and are not part of the Crown the control of the State over your activities and your existence is sufficient for you to be considered to be an institution of the State.

Alternatively, as set out above the meaning of 'institution of the Commonwealth, a State or a Territory' is extended by subsection 65J(3) of the FBTAA.

Subsection 65J (3) states:

[Extended meaning of "institution of the Commonwealth, a State or a Territory"]

For the purposes of this section, an institution established by a law of the Commonwealth, a State or a Territory is taken to be an institution of the Commonwealth, the State or the Territory, as the case requires.

In your ruling application you referred to the fact that a body was initially established by the Governor in Council prior to any State or Commonwealth laws coming into existence. In so doing, you contended that subsection 65J(3) does not apply to you as the body was not established under a law of the Commonwealth, a State or a Territory.

We do not agree with this contention. Although original body may have originally been established before the State or Commonwealth came into existence, the State Act established you in your current form. Therefore, we consider that you were established in your current form by the State Act which is a law of the State.

Support for this conclusion is provided by Taxation Ruling IT 2632 Income Tax: Meaning of 'Public authority' in definition of 'Exempt Public Body' in Division 16D.

Paragraph 19 of IT 2632 states;

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. The 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.

IT 2632 further provides an example of a public hospital founded in the 19^th century by volunteer workers. The hospital was initially operated by a Board of Trustees. Some 50 years later it was incorporated on the enactment of the relevant State legislation and given perpetual succession and independent corporate existence.

In discussing how the hospital is constituted paragraph 22 of IT 2632 states;

Bearing in mind that it is the manner in which a body is presently constituted, and not how it was originally constituted, that is relevant, this Office accepts that the public hospital in question now depends on the relevant State legislation for its constitution. The hospital was therefore regarded as a body that is constituted under a State law for the purposes of the definition of "exempt public body".

In accordance with this ruling you are considered to be an institution established by a law of a State for the purposes of subsection 65J(3) of the FBTAA.

As an institution of the State you will not be a rebatable employer under paragraph 65J (1)(baa) of the FBTAA.