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Ruling

Subject: R&D Entity

Question 1

Is the rulee an "R&D entity" for the purposes of subsection 355-35(1) of the Income Tax Assessment Act 1997 for the income year ended 30 June 2012?

Answer

No. The rulee is not an "R&D entity" for the income year ended 30 June 2012 because it is not "a body corporate incorporated under an Australian law or under a foreign law" within the meaning of subsection 355-35(1) of the Income Tax Assessment Act 1997.

This ruling applies for the following periods:

1 July 2011 to 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

The rulee is a registered Australian body with an Australian Registered Body Number and an Australian Business Number. It is not an exempt entity.

The rulee was granted a Royal Charter. Supplemental Royal Charters for the rulee have subsequently been granted.

The rulee is undertaking eligible R&D activities and wishes to register for the R&D Tax Incentive in respect of the financial years commencing after 1 July 2011.

Relevant legislative provisions

Section 355-35 of the Income Tax Assessment Act 1997

Reasons for decision

The Tax Laws Amendment (Research and Development) Act 2011 ("Act") received Royal Assent on 8 September 2011. The Act inserted subsection 355-35(1) in the Income Tax Assessment Act 1997 (ITAA 1997) which defines "R&D entity" as a:

(a) body corporate incorporated under an Australian law; or alternatively,

(b) body corporate incorporated under a foreign law that is an Australian resident.

The term "Australian law" is defined in section 995-1 of the ITAA 1997 to mean "a Commonwealth law, a State law or a Territory law". A Commonwealth law means a "law of the Commonwealth" and a foreign law means a "law of a foreign country" (section 995-1 ITAA 1997).

Therefore, the issue for consideration is whether the rulee is a body corporate:

(a) incorporated under a "law of the Commonwealth"; or alternatively

(b) body corporate incorporated under a "law of a foreign country" and is an Australian resident.

Having regard to the terms of the Royal Charter, the rulee is an incorporated body corporate (refer to paragraphs 30 to 34 of Miscellaneous Taxation Ruling MT 2006/1).

As evidenced by the Royal Charter of the rulee, the effect of a Royal Charter is to create a corporation with the consent of the King. Such power is a personal prerogative of the Crown and lies in common law. This position was legally recognised in Sutton's Hospital where the Court held that the King has the power in common law to create corporations. Again, in Barton v The Commonwealth, Mason J described the prerogative powers of the Crown as "the powers accorded to the Crown by the common law".

This is consistent with the ATO view in paragraph 31 of MT 2006/1 which states "a body corporate can be created by common law, for example a chartered corporation".

This common law incorporation by way of Royal Charter is separate and distinct from incorporation by legislation as recognised in 1612 where the Court in Sutton's Hospital held that the King had the power in common law to create corporations and that a corporation may be by prescription, by act of parliament, by the King's charter.

On this basis, the rulee can be said to have been incorporated by an exercise of the royal prerogative, which can be characterised as an act of incorporation done under the common law of Australia.

Construction of "under a law of the Commonwealth"

There is no definition of the term "a law of the Commonwealth" in Australian tax law. However, the phrase has been considered in various cases before the High Court and a number of principles can be derived from these authorities as discussed below.

The phrase "the law of the Commonwealth" was considered in Jerger v Pearce where the High Court in a joint judgement said:

"We think that the words "under the law of the Commonwealth", used as they are in [s 10] in antithesis to the words "of a State", mean "under a law passed under the legislative authority of the Commonwealth"

Again in The Wool Tops case Knox CJ and Gavan Duffy J commented that the words "the laws of the Commonwealth" probably mean "Acts of the Parliament of the Commonwealth" whenever the words appear in the Constitution.

The phrase "a law of the Commonwealth" was considered in The Queen v Foster; Ex parte The Commonwealth Steamship Owners' Association where the High Court unanimously held that in section 405Q:

"The expression "inconsistent with a law of the Commonwealth" does not refer to industrial awards. It refers to laws made under the legislative powers of the Commonwealth directly or indirectly."

In Sankey v Whitlam, Gibbs ACJ held that a financial agreement between the Commonwealth and the States under section 105A of the Constitution was not a law, and that even if it was, "it is not a law of the Commonwealth because it is not made by or under the authority of the Parliament of the Commonwealth".

These authorities make it clear that the ordinary meaning of "a law of the Commonwealth" is a law made directly or indirectly by the Commonwealth Parliament pursuant to its legislative powers.

In addition, the High Court has specifically held that "a law of the Commonwealth" excludes:

- the common law (see Western Australia v The Commonwealth (the Native Title Act case); and

- the Constitution (see Sankey and Re Colina; Ex parte Torney).

In respect of the common law position, the Courts have recognised that the common law is separate and distinct from any law made by the Commonwealth parliament pursuant to its legislative powers. This distinction was recognised in the Native Title Act case where the majority of the High Court noted that:

"A "law of the Commonwealth", as that term is used in the Constitution, cannot be the unwritten law. It is necessarily statute law, for the only power to make Commonwealth law is vested in the Parliament."

As regards the Constitution, the Courts have recognised that the Constitution is separate and distinct from any law made by the Commonwealth parliament pursuant to its legislative powers. In Re Colina the High Court confirmed that an obligation or liability which has its source in the Constitution is not an obligation or liability that arises under a law of the Commonwealth. Also, Stephen J in Sankey held that the Constitution was "clearly incapable" of being among the 'laws of the Commonwealth' saying that it:

"…..forms part of an enactment of the Imperial Parliament, not of the Commonwealth legislature, and rather than being a law of the Commonwealth it is the constitutional instrument to which that legislature from which laws of the Commonwealth emanate owed its existence and its law-making power. Section 61 of the Constitution, when it speaks of "the execution and maintenance of this Constitution, and of the laws of the Commonwealth" recognises the Constitution as a measure distinct from the laws of the Commonwealth. No doubt the Constitution may be spoken of, in one sense, as being the fundamental law of the Commonwealth: but the words of section 86 of the Crimes Act d not speak in any such broad jurisprudential terms. The past decisions of this Court which have in any way treated this matter have always confined that which is a law of the Commonwealth to that which emanates directly or indirectly from an exercise of the legislative power of the federal Parliament."

For the purposes of section 355-55 of the ITAA 1997 "a law of the Commonwealth" means a law made, directly or indirectly, by the Commonwealth parliament pursuant to its legislative powers. It does not extend to the common law or the Constitution. This is the settled ordinary meaning of the words and it is not possible to discern a sufficiently clear and relevant object or purpose behind the provisions that would support a departure from that settled meaning in section 355-55 of the ITAA 1997.

Regardless of whether the rulee was incorporated under the common law or, as the rulee submits, the Constitution, neither the common law nor the Constitution answers the description of a law of the Commonwealth.

Construction of "under a law of a foreign country"

The term "under a law of a foreign country" is not defined in ITAA 1997.

Since "law of the Commonwealth" is interpreted to mean a law made by the Commonwealth Parliament pursuant to its legislative powers then "law of a foreign country" can be similarly interpreted to be mean a law passed under the legislative authority of the foreign country.

This position is consistent with the ATO view in Taxation Determination TD 1999/61 which states that a reference to 'a State law, Territory law or foreign law" in paragraphs 126-5(1)(c) and 126-15(1)(c) of the ITAA 1997 is:

"confined to statutory laws of a State, Territory or foreign country and does not extend to the law generally in a State, Territory or foreign country."

Therefore, the words "under a law of a foreign country" should be interpreted as referring to statutory laws only and not common law.

Application to the rulee

We consider the rulee to have been incorporated by the exercise of a royal prerogative under common law.

The common law does not answer the description of an Australian law for the purposes of paragraph 355-35(1)(a) ITAA 1997 because it is not a law made by the Commonwealth parliament pursuant to its legislative powers and is therefore not a law of the Commonwealth.

The common law also does not answer the description of a foreign law for the purposes of paragraph 355-35(1)(b) ITAA 1997 because it is not a statutory law of a foreign country and is therefore not a law of a foreign country.

Having regard to the above, we take the view that while the rulee is a "body corporate", it is not incorporated under an Australian law or a foreign law. Accordingly, it is not an "R&D entity" within the meaning of subsection 355-35(1) ITAA 1997.