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Ruling

Subject: STB- Income Tax Exemption

Question

Is the income of Entity A exempt from tax under Division lAB of Part III of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

This ruling applies for the following period

Financial year ending 2013

Financial year ending 2014

Financial year ending 2015

Financial year ending 2016

Financial year ending 2017

The scheme commenced on

Financial year ending 30 June 2008

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The current shareholders of Entity A are government agencies and associations.

Entity A is a company limited solely by shares. Entity A has an industry specific licence which restricts it to providing services to the relevant government agencies and its subsidiaries.

Entity A's constitution states that it may only offer its services to the relevant government agencies that have been accepted as members of Entity A, or to entities that are permitted by the terms of Entity A's licence and which has received consent from its board of directors.

The practical effect of this is that Entity A is only to provide its services to these government agencies and its subsidiaries given that:

§ entity A's licence only permits it to provide services to these relevant government agencies and its subsidiaries; and

§ a 'member' of Entity A is defined in the constitution to include any entity that is noted on the register as a member of the company as long as they hold shares. Entity A's shareholders consist only of these government agencies and associations.

Entity A's constitution also outlines that only 'the relevant government agency shares' have the right to receive a dividend. A' relevant government agency share 'is defined in the constitution as meaning 'shares held by the relevant government agency' on the terms and conditions of this constitution and 'the relevant government agencies' are defined by reference to the relevant government legislation. The effect of these clauses is that Entity A may only distribute dividends to the relevant government agencies in accordance with its constitution and the relevant government legislation.

The government agencies and associations are established under the relevant legislation.

Membership of the agencies and associations is restricted by the types of members noted in their respective rules.

Entity A advised that both of the government agencies and associations are exempt from income tax as public authorities which are constituted under an Australian law pursuant to item 5.2 of section 50-25 of the Income Tax Assessment Act 1997 (ITAA 1997).

Relevant legislative provisions

Income Tax Assessment Act 1936 section 24AO.

Income Tax Assessment Act 1936 section 24AT.

Income Tax Assessment Act 1936 section 24AQ.

Income Tax Assessment Act 1936 section 24AM.

Income Tax Assessment Act 1936 section 24AN.

Income Tax Assessment Act 1997 section 50-25.

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part IVA general' in the search box on the top right of the page, then select: 'Part IVA: the general anti-avoidance rule for income tax'.

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Entity A seeks a private binding ruling (PBR) that it is a state/territory body (STB) and subsequently exempt from income tax pursuant to section 24AM of the ITAA 1936.

Pursuant to section 24AO of the ITAA 1936, a body is an STB if:

(a) it is a company limited solely by shares; and

(b) all the shares in it are beneficially owned by one or more government entities.

Entity A's constitution states that it is a company limited by shares and all the shares are beneficially owned by the relevant government agencies, associations and a company.

Section 24AT of the ITAA 1936 defines a 'government entity' as:

(a)  a State; or

(b) a Territory; or

(ba) a municipal corporation or other local governing body (within the meaning of

section 50-25 of the Income Tax Assessment Act 1997); or

Note: The effect of this paragraph is that some bodies owned or controlled by a

Municipal Corporation or other local governing body may be an STB even

though the municipal corporation or other local governing body is an

excluded STB.

(c) another STB that is not an excluded STB.

'Municipal corporation' is not defined in the ITAA 1997 or ITAA 1936.

In the High Court case of Federated Engine-Drivers and Firemen's Association of Australasia v. Broken Hill Pty Co Ltd (1911) 12 CLR 398, Isaacs J in reference to municipal corporations said that:

   '...a corporation is constituted as a regulating agent for certain purposes, and for those purposes is entrusted with governmental powers.'

His Honour then said:

'For the purpose of non-interference with their governmental functions, a municipal corporation might fairly claim to stand as ... 'extending ... the shield of the Crown to what might more fitly be described as the public government of the country.'

It is therefore concluded that a municipal corporation must be constituted to exercise governmental function and is considered to be part of the Government.

As provided for in the constitution of the relevant government agencies, it is considered a 'municipal corporation', and therefore, a 'government entity' in accordance with section 24AT of the ITAA 1936.

Section 24AQ of the ITAA 1936 states that: a body is an STB if:

(a) it is established by State or Territory legislation; and

(b) it is not a company limited solely by shares; and

(c) the legislation gives the power to appoint or dismiss its governing person or body only to one or more government entities.

The government agencies and associations are incorporated associations in accordance with the relevant associations' incorporation legislation. Both are also constituted under the rules of a relevant industrial organisation registered under the relevant legislation.

Both of these bodies are companies not limited solely by shares as they are statutory bodies without share capital.

These government agencies are considered STBs pursuant to section 24AQ of the ITAA 1936, and therefore, 'government entities' in accordance with section 24AT of the ITAA 1936.

Membership of this association consists of the relevant government agencies only.

The association is considered an STB pursuant to section 24AQ of the ITAA 1936, and therefore, a 'government entity' in accordance with section 24AT of the ITAA 1936.

Section 24AM of the ITAA 1936 states that the income of a STB is exempt from income tax unless section 24AN of the ITAA 1936 applies to the STB.

Section 24AN above states that income derived by an STB is not exempt from income tax under Division 1AB of the ITAA 1936 if, at the time that it is derived, the STB is an excluded STB.

Section 24AT of the ITAA 1936 defines an excluded STB as one that:

(a) at a particular time, is prescribed as an excluded STB in relation to that time; or

(b) is a municipal corporation or other local governing body (within the meaning of section 50-25 of

the Income Tax Assessment Act 1997 (ITAA 1997); or

(c) is a public educational institution to which any of paragraphs 50-55(a) to (c) of the ITAA 1997

applies; or

(d) is a public hospital to which any of paragraphs 50-55(a) to (c) of the Income Tax Assessment Act 1997 applies; or

(e) is a superannuation fund.

Therefore, it is considered that both government agencies associations are not 'excluded STBs' as defined in section 24AT of the ITAA 1936 because neither fall within the categories listed in this section.

Conclusion

In accordance with section 24AO of Part III of Division IAB of the ITAA 1936, Entity A is a STB, being that of a company limited solely by shares, wherein all the shares in it are beneficially owned by one or more government entities as follows:

(a) the relevant government agencies as 'municipal corporations'

(b) both government agencies and associations as another STB that is not an excluded STB.

Therefore, Entity A is exempt from income tax pursuant to section 24AM of the ITAA 1936.