Edited version of your written advice

Authorisation Number: 1012773183929

Ruling

Subject: Income Tax: Exemption, state or territory body under section 24AM of the ITAA 1936

Question 1

Is The Trust a state or territory body (STB) exempt from Commonwealth income tax under section 24AM of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

Question 2

Assuming The Trust becomes tax exempt from 4 July 2013 is The Trust required to prepare a part year tax return.

Answer

Yes

Question 3

Are the tax losses incurred by The Trust during the period before it became a state or territory body available for offset against taxable income derived by The Trust for an income year in the period after it is no longer a STB?

Answer

Yes

This ruling applies for the following periods

4 July 2013 to 30 June 2014

1 July 2015 to 30 June 2016

1 July 2016 to 30June 2017

1 July 2017 to 30 June 2018

The scheme commences on

4 July 20XX

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 trust is a discretionary trust incorporated under a Trust Deed.

• In 20XX a deed of settlement was entered into between two parties which upon completion will give one party 100% shareholdings and voting rights to the organisation.

• Subsequently, one party will become the sole beneficiary. The effective date of the deed poll is defined as the date of completion under the deed of settlement.

• The trust has carried forward tax losses.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 161(1)

Income Tax Assessment Act 1936 Section 24AM.

Income Tax Assessment Act 1936 Section 24AN.

Income Tax Assessment Act 1936 Section 24AO.

Income Tax Assessment Act 1936 Section 24AT.

Income Tax Assessment Act 1936 Section 24AY.

Income Tax Assessment Act 1936 Section 24AW

Income Tax Assessment Act 1936 Section 24AS

Income Tax Assessment Act 1936 Section 24AB.

Income Tax Assessment Act 1997 Section 36-10.

Income Tax Assessment Act 1997 Section 36-17.

Income Tax Assessment Act 1997 Subsection 36-15

Income Tax Assessment Act 1997 Subsection 165-13

Income Tax Assessment Act 1997 Subsection 165-12

Income Tax Assessment Act 1997 Subsection 36-25

Income Tax Assessment Act 1997 Subdivision 165-E

Income Tax Assessment Act 1997 Section 165-210.

Income Tax Assessment Act 1997 Subsection 50-25

Income Tax Assessment Act 1997 Subsection 50-55

Reasons for decision

Question 1

Is The Trust a state or territory body (STB) exempt from Commonwealth income tax under section 24AM of the Income Tax Assessment Act 1936 (ITAA 1936)?

Detailed reasoning

Section 24AM of the Income Tax Assessment Act 1936 (ITAA 1936) states that income of a State or Territory Body (STB) is exempt from income tax unless section 24AN applies to the STB.

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

Further, sections 24AO to 24AS of the ITAA 1936 provide five ways in which a body can be regarded an STB. In particular, section 24AS of the ITAA 1936 provides that a body is an STB if:

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

 (b)  it is not established by State or Territory legislation; and

 (c)  all the legal and beneficial interests (including, but not limited to, interests as to income, profits, dividends, capital and distributions of capital) in it are held only by one or more government entities; and

 (d)  all the rights or powers (if any) to vote, appoint or dismiss its governing person or body and direct its governing person or body as to the conduct of its affairs are held only by one or more government entities.

Section 24AT of the ITAA 1936 defines the meaning of 'excluded STB', 'government entity' and 'territory', and provides that in this Division:

excluded STB is an entity 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); or

(c) is a public educational institution to which any of paragraphs 50-55(a) to (c) of the Income Tax Assessment Act 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.

government entity means:

(a) a State; or

(b) a Territory; or

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

In your circumstances, the trust is not established by state or territory legislation and as stated in the Deed of Settlement all the legal and beneficial interests in the trust are held by an entity which is a government entity; and all the rights or powers to vote, appoint or dismiss its governing person or body and direct its governing person or body as to the conduct of its affairs are held by a government entity. The trust is therefore a government entity within the meaning set out under section 24AS of the ITAA 1936.

Further, the trust does not fall within the categories of excluded STB set out under section 24AT of the ITAA 1936, in that it is not:

• at a particular time, prescribed as an excluded STB in relation to that time, or

• 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

• a public educational institution to which any of paragraphs 50-55(a) to (c) of the ITAA 1997 applies, or

• a public hospital to which any of paragraphs 50-55(a) to (c) of the ITAA 1997 applies, or

• a superannuation fund.

Therefore, it is considered that the trust is a state or territory body (STB) exempt from Commonwealth income tax under section 24AM of the ITAA 1936.

Question 2

Assuming The Trust becomes tax exempt from 4 July 2013 is The Trust required to prepare a part year tax return?

Detailed Reason

Subsection 161(1) of the ITAA 1936 states:

Every person must, if required by the Commissioner by notice published in the Gazette, give to the Commissioner a return for a year of income within the period specified in the notice.

Table L of the Legislative instrument 2009, registered for the purposes of subsection 161(1), states:

Where the trustee of a trust estate has derived income (including capital gains) and the trustee is not covered by Tables M, N or O, a trust return is required to be lodged by the trustee resident in Australia. If there is no trustee resident in Australia, the return is to be lodged by the trust's public officer or, where no public officer is appointed, by the trust's agent in Australia.

Tables M, N or O of the Legislative instrument do not apply to the trust.

If no income is derived within a given income year and any of the other requirements in the Legislative Instruments to lodge an income tax return are not met and the Commissioner does not specify a requirement to lodge an income tax return, then no income tax return is required to be lodged by the trustee for that particular year.

Examples as contained in the Legislative Instruments where an income tax return may be required to be lodged even though no income has been derived are:

Table A, paragraph 2:

Where the trustee has incurred a tax loss or made a net capital loss or is entitled to deduct a tax loss or apply a net capital loss of an earlier year of income, or being a company or trust estate has undeducted tax losses or unapplied net capital losses of any earlier year of income where those losses exceed $1,000.

Table A, paragraph 3:

Where the trustee has carried on a business

Table A, paragraph 5:

Where the trustee had an individual interest in the net income or partnership loss of a partnership which operated a primary production business (as defined) in Australia.

Although the Legislative Instrument states who is required to lodge a return and does allow for exemptions, it also specifically states, as follows, that the instrument does not remove the Commissioner's power to require lodgment of a return:

Nothing in this Instrument prevents the Commissioner or an authorised officer of the Australian Taxation Office from issuing a notice, pursuant to section 162 or 163 of the Income Tax Assessment Act 1936, requiring a person to give the Commissioner, in the approved form, a return, or further returns, or any information, statement or document about the person's financial affairs for any year of income.

Every person must, where required by the Commissioner by a notice published in the Gazette, give the Commissioner a return for a year of income within the period specified in the notice.

The Trust is therefore required by the Commissioner to lodge an Income Tax return for the 2013 year.

Question 3

Are the tax losses incurred by The Trust during the period before it became a state or territory body available for offset against taxable income derived by

The Trust for an income year in the period after it is no longer a STB?

Detailed reasoning

Prior year tax losses

Division 1AB of the ITAA 1936 operates to, among other things, exempt the income of wholly-owned state and territory bodies from income tax. Subdivision B of Division 1AB operates to ensure that any losses made by an STB in the period from 1 July 1995 until the body is sold to private interests, are extinguished when the body is privatised.

There is no stated intention in explanatory material accompanying the introduction of the relevant legislation, nor any explicit provisions within Division 1AB, to affect the availability of tax losses made in income years prior to the income year in which a company commences to be an STB.

Section 36-17 of the ITAA 1997 sets out the rules on how corporate tax entities may deduct tax losses from a loss year in a later income year.

Subsection 36-17(2) of the ITAA 1997 applies if a company had no net exempt income in a later year and the company's total assessable income exceeds the entity's total deductions (a recoupment year), the entity may choose to offset any amount of the available loss.

Subsection 36-17(3) of the ITAA 1997 applies if a company has net exempt income in a later year and the company's total assessable income exceeds the entity's total deductions (a recoupment year). This subsection requires that you first deduct the tax loss from your net exempt income.

Subsection 36-17(4) of the ITAA 1997 deals with the situation where you have net exempt income, however your deductions in an income year exceed your total assessable income (a loss). Similarly to Subsection 31-17(3), you are required to offset the excess of the deductions against net exempt income.

The entity may also choose to offset any amount of, or none of (nil), the available loss under subsections 36-17(2) and (3), however that choice is limited by circumstances set out under subsection 36-15(5), which provides:

The choice that the entity has under subsection (2) or (3) for the later income year is subject to both of the following:

(a) the entity must choose a nil amount if, disregarding the tax loss and other tax losses of the entity, the entity would have an amount of excess franking offsets for that year;

(b) if, disregarding the tax loss and other tax losses of the entity, the entity would not have an amount of excess franking offsets for that year - the entity must not choose an amount that would result in the entity having an amount of excess franking offsets for that year.

In other words, you can only deduct a tax loss from your total assessable income to the extent that the tax losses are not required to be deducted from the net exempt income in accordance with subsections 36-17(3) and (4) of the ITAA 1997.

An exception to this is contained in section 24AY of the ITAA 1936, which provides that prior year tax losses are not deductible:

If a body is an STB on the last day of a year of income in which it incurs a tax loss, the tax loss is not allowable as a deduction from the body's assessable income of a later year of income unless the body is an STB on the first day of that later year of income.

Section 36-25 of the ITAA 1997 provides special rules about tax losses of certain entities. This section states that where a company wants to deduct a tax loss, it cannot do so unless it passes the Continuity of Ownership Test (COT) or, if the entity does not satisfy the COT, the company satisfies the Same Business Test (SBT).

The SBT is set out under Subdivision 165-E of the ITAA 1997, where section 165-210 provides that:

165-210(1) A company satisfies the same business test if throughout the same business test period it carries on the same business as it carried on immediately before the test time.

165-210(2) However, the company does not satisfy the same business test if, at any time during the same business test period, it derives assessable income from:

(a) a business of a kind that it did not carry on before the test time; or

(b) a transaction of a kind that it had not entered into in the course of its business operations before the test time.

165-210(3) The company also does not satisfy the same business test if, before the test time, it:

(a) started to carry on a business it had not previously carried on; or

(b) in the course of its business operations, entered into a transaction of a kind that it had not previously entered into;

and did so for the purpose, or for purposes including the purpose, of being taken to have carried on throughout the same business test period the same business as it carried on immediately before the test time.

165-210(4) So far as the same business test is applied for the purpose of Subdivision 165-B (which is about working out the taxable income and tax loss for the income year of change of ownership or control), the company also does not satisfy the test if, at any time during the same business test period, it incurs expenditure:

(a) in carrying on a business of a kind that it did not carry on before the test time; or

(b) as a result of a transaction of a kind that it had not entered into in the course of its business operations before the test time.

As the SBT operates in relation to analysis of specific events and specific times in the course of carrying on a business throughout a specific period, and certain of those necessary events and times relevant to the test have not yet occurred; it cannot be determined at this time whether The Trust satisfies the SBT under section 165-210 of the ITAA 1997.

Therefore, subject to the satisfaction of the same business test under section 165-13 of the ITAA 1997 and adjustment for the net exempt income derived in the period that the Trust is a STB, the tax losses incurred by the Trust during the period before it became a STB will be available for offset against taxable income derived by the Trust in the period after it is no longer a STB.

Further issues for you to consider

The Commissioner has not determined within your ruling whether you pass the Continuity of Ownership Test (COT) under section 165-12 of the ITAA 1997; or, whether you satisfy the Same Business Test (SBT) under section 165-13.

Generally the SBT is performed at each time you want to apply any prior year tax losses that may be available at the end of an income year against a profit arising in an income year (this is often referred to as a recoupment year). The SBT may allow your losses to be deductible, despite change in the ownership or control of the company's shares. The SBT is only available after ascertaining that you do not pass the COT.

Satisfying the SBT relies on examination and comparison of the business that you are carrying on with the business you have carried on in the past, at certain points in time.

You may request a private ruling on this matter at the time you need to ascertain whether you satisfy the COT or SBT for a recoupment year.