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Ruling

Subject: Income Tax Exemption - public authority constituted under an Australian law

Question 1

Is the ordinary income and statutory income of the Rulee exempt from income tax on the basis that it is a public authority constituted under an Australian law as described in item 5.2 of the table in section 50-25 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 2016
Year ended 30 June 2017
Year ended 30 June 2018
Year ended 30 June 2019

The scheme commences on:

1 July 2015

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 Commissioner previously issued two favourable rulings confirming that the applicant/Rulee qualifies as a public authority constituted under an Australian law as described in item 5.2 of the table in section 50-25 of the Income Tax Assessment Act 1997 (ITAA 1997), and therefore its ordinary and statutory income is exempt pursuant to section 50-1 of the ITAA 1997.

The applicant in its current application claims the ruling request is based in the same facts and circumstances as described in the previous applications and as provided to the Commissioner.

The applicant also confirms that there has been no significant change to the material facts or law to have an effect on the Commissioner's previous private rulings decision.

The only minor changes since the issue of the previous ruling, as confirmed by the applicant are a minor change to the relevant State Act and a minor update to the stated vision and mission of the applicant which remains reflective and consistent with the functions as set out in the previous notice of approval.

Prior to an income year of tax, the Statutory bodies jointly established by the Commonwealth and the State Government were responsible for the delivery of services to the State resource industry.

In a specified year, the relevant resource Industry Acts were repealed and the specified resource industry act was enacted which resulted in:

(a) the dissolution of the previous statutory bodies and their responsibilities ceased.

(b) the transfer of and subsequent vesting of the assets, rights and liabilities to the new approved entities.

(c) the exercise of the functions of the dissolved bodies being assumed by the new entities.

The transfer of the previous statutory bodies' functions to these new entities was as a result of the Commonwealth Government decision to withdraw from its involvement with the oversight and administration of the relevant resource industry in the relevant State.

The new resource Industry Act, provides that the State Minister for Industrial Relations (the Minister) may approve certain companies to carry out the activities and functions formerly performed by the Statutory Bodies.

The Rulee is an 'approved company' pursuant to the relevant State Act, and a wholly owned subsidiary of the main approved entity. In accordance with the approved entity's notice of approval, the approved entity was conferred with the statutory functions specified under the specific State Act. The functions stipulated in the approved entity's notice of approval reflect most of the functions previously performed by the abolished Statutory Bodies, pursuant to the repealed legislation, which paved the way for the establishment and approval of the new entities.

The principal activity of the Rulee, as a fully owned subsidiary of the main entity, has been to provide defined services and facilities for workers engaged in the State resource industry.
These are functions specified in its notice of approval and in the objects in the approved entity's constitution.

Although the main entity and its subsidiary Rulee are legally and financially independent of the State Government, provisions under the specified Act, require and allow the State Government to retain an oversight role to monitor and oversee the operations of the main entity and those of its subsidiaries, to ensure functions previously performed by the abolished statutory body, are carried over. The Rulee being an approved company by the State Minister and as a fully owned subsidiary of the main entity, provides the defined required services to the resource industry in the State.

The specified State Act includes the following measures to ensure the proper and transparent exercise of functions by approved entities:

• The specified State Act provides that the Constitutions of the approved entities, must not be altered or added to in a way that is inconsistent with Schedule unless and until resolutions have been passed by both Houses of Parliament.

• The State Act provides that the provisions of the State Act, prevail over any inconsistent provisions of an approved entity's constitution.

• The State Act provides that an approved entity may be required by the Minister to report to the Minister on various matters of workers in the resource industry, or on any other matter arising out of its functions.

• The State Act provides that an approved entity, may with the approval of the Minister make orders not inconsistent with the State Act, with respect to its functions.

• The State Act provides that where an approved entity may appoint an employee or an officer as an inspector for the purpose of assisting the company to exercise its functions, the approved company must provide the Minister with a list of the names of people so appointed.

• The State Act provides that proceedings for an offence against the Act, or the regulations may be instituted by the Minister or the Director of Public Prosecutions.

• Reserve regulation-making powers under the State Act enable the relevant Minister to regulate, among other things, acts or omissions of an approved company. This power will be subject to the Corporations Act, and other Federal legislation that applies to the operations of proprietary companies.

• The Schedule to the State Act provides that the composition of the Board of Directors are to be persons appointed by the Minister and are to be comprised of two nominees from the Industry, two nominees from the relevant workers' union, and two are nominated jointly by the resource stake holders, and the Union with those having relevant expertise. The remaining director (who is the Managing Director and Chief Executive Officer) is appointed from persons nominated by the other directors. If the directors are unable to agree on the remaining nomination, then the Minister is empowered to appoint another director to break any deadlock and enable a nomination to be made by a majority of directors.

The Rulee is a wholly owned subsidiary of the main approved entity, which in turn is an approved company and is wholly owned in equal shares by the nominated approved industry stake holders. This is in accordance with the State Act, which stipulates that an approved company must be a company that is wholly owned in equal shares by the specified approved stake holders, or by a company wholly owned by the approved stake holders.

The applicant advised that the nominated stake holders were appointed by the Minister to represent the interests of employer bodies and of employees in relation to the operation of the industry. The stake holders, together with Ministerial oversight would mean that the interests of key stakeholders would be taken into account in the main entity's and its subsidiary's operations to deliver services for the benefit of the industry and workers in the State.

The main entity, and the Rulee as its subsidiary, is companies limited by shares and their constitution provide them with the capacity to pay dividends to the respective shareholders.

The applicant has advised that while the two stakeholders are equal shareholders in the companies, neither the main entity nor its subsidiaries haves ever declared or paid dividends to those companies, and no such distributions are intended to take place and any profits derived are reinvested by those companies into carrying out their functions and providing services to the industry and the community.

The applicant contends that even if the stakeholders were to receive dividends (which is not contemplated), no private individual or body would be eligible to receive those dividends because those organizations are prevented from distributing to their members in accordance with their governing rules.

A copy of a letter notifying the stake shareholders from the Board of Directors of the main holding entity, has been provided which notifies the Board's resolution that it was not the intent on the establishment of the companies pay dividends to shareholders and the Director's policy is that no dividends shall be paid to shareholders out of profits earned by the main entity and its subsidiaries from year to year.

In support of the private ruling, the applicant has provided the following Annexures:

Annexure 1
Copy of the repealed relevant governing Act, which provided for the joint establishment by the Commonwealth and State of the abolished and replaced Statutory Body.

Annexure 2
Copy of the Industry Act.

Annexure 3
Copy of the State Act which provided for the establishment of the abolished statutory Body.

Annexure 4
The second reading speeches in relation to the Industry Repeal Bill in both the House of Representatives and the Senate

Annexure 5
Copy of the Industry Repeal Act

Annexure 6
Copy of the relevant Industry Act, which repealed the previous Industry State Acts.

Annexure 7
Extract from the State Government Gazette, which sets out :

• Notice of approval of the new companies which sets out the functions that may be carried out by the approved companies.

• Order in relation to the transfer of assets, rights and liabilities of the abolished Statutory Body, to the approved new companies.

• Order in relation the transfer of the abolished Statutory Body staff to the new approved company.

Annexure 8
Copy of the Constitutions of new approved companies.

Annexure 9
Copy of the annual reports for approved companies.

Annexure 10
Information from on the approved companies' website.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 50-1

Income Tax Assessment Act 1997 section 50-25

Reasons for decision

Summary

The Rulee is exempt from income tax pursuant to section 50-1 of the ITAA 1997 on the basis that it qualifies as a 'public authority constituted under an Australian law' under item 5.2 of the table in section 50-25 of the ITAA 1997.

Detailed reasoning

Section 50-1 of the ITAA 1997 provides that the ordinary and statutory income of entities covered by the tables listed in Subdivision 50A of the ITAA 1997 is exempt from income tax.

Section 50-25 of the ITAA 1997 is contained in Subdivision 50A of the ITAA 1997 and covers exempt government entities. Item 5.2 of the table in section 50-25 of the ITAA 1997 provides that 'a public authority constituted under an Australian law' is an exempt entity. There are no special conditions to be met under this provision.

The term 'public authority constituted under an Australian law' is not defined in the ITAA 1997.Taxation Ruling No. IT 2632 Income tax: meaning of 'public authority' in definition of 'exempt public body' in Division 16D (IT 2632) provides the Commissioner's view on whether a particular body is a 'public authority'.

IT 2632 at paragraph 14 states that in determining whether a particular body is a 'public authority' it is necessary to: 

(a) Weigh all relevant circumstances, especially the nature of the functions of the body concerned, treating the question of the status of the body as essentially a question of fact and degree to be determined in the light of the particular facts of each case.

(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. While not essential, a distinguishing characteristic is the possession of exceptional powers conferred by statute beyond those possessed by private individuals. However, the derivation of profits for distribution to shareholders or members would not ordinarily be a characteristic of a "public authority". The examination will involve a consideration of:

(i)   the significance of any features of the body clearly alien to, or inconsistent with, the concept of what is a public authority; and

(ii)   the relevant statutory context, namely, the overall statutory scheme and policy.

IT 2632 at paragraph 16 also discusses the meaning of 'constitute' and states:

16. The ordinary meaning of the word "constitute", according to the Macquarie Dictionary is "to set up or found (an institution etc)." The expression "is constituted" (emphasis added) in subparagraph (c)(i) of the definition of "exempt public body" indicates that the particular organisation or body concerned and its activities must be looked at year by year, and not merely at the time it was first set up or founded. In addition, the context of the word "constituted", indicates that the particular organisation or body concerned must be constituted as a public authority.

In FC of T v. Bank of Western Australia Limited; FC of T v. State Bank of New South Wales Limited 96 ATC 4009 at 4027, the following propositions regarding 'public authorities' were derived from case law:

1. A question whether a particular entity is an authority will be a question of fact and degree
dependent upon all the circumstances of the case: Western Australian Turf Club per Stephen J
with whom Barwick CJ agreed at ATC 4134; CLR 290. No one factor will be determinative, rather
there will be a "range of considerations'': the Fruit Marketing case at 580.

2. A private body, corporate or unincorporated, established for profit will not be an authority: Renmark Hotel at ATD 429; CLR 17 per Rich J, Silverton Tramway per Dixon CJ at ATD 297; CLR 566.

3. Incorporation by legislation is not necessary before a body may be classified as an authority: Renmark Hotel per Rich J at ATD 430; CLR 19, Western Australian Turf Club at ATC 4135; CLR 293.

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: the Fruit Marketing case at 580.

5. The body in question must perform a traditional or inalienable function of government and have governmental authority for so doing: Renmark Hotel at ATD 428; CLR 16 per Rich J, General Steel per Barwick CJ at 134, Anti-Cancer Council case at 450-451 per Mason CJ, Brennan and Gaudron JJ.

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: Renmark Hotel per Rich J at ATD 430; CLR 18. 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: Western Australian Turf Club per Stephen J at ATC 4137; CLR 297.

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: Silverton Tramway per Dixon CJ at ATD 297 and 298; CLR 565 and 567. The central concept is the ability to exercise power or command: the Fruit Marketing case per Gibbs J at 580.


Based on the principles established in case law and IT 2632, the following factors have been considered in determining whether the Rulee is a 'public authority constituted under Australian law' for the purposes of item 5.2 of the table in section 50-25 of the ITAA 1997.

Application to Rulee

Conferred by statute and of a public nature

The Commonwealth and the relevant State Government jointly established the previous Statutory Body which was abolished and which was responsible for the regulation and delivery of various services the specified State resource industry.

The approved new companies assumed the functions formerly performed by abolished statutory body.

The main entity and the applicant, as a wholly owned subsidiary, were approved by the State Minister for Industrial relations (the Minister) pursuant to the State resource Industry Act and conferred with statutory functions (in accordance with the functions set out in the resource Industry Act) to exercise specific functions previously performed by the abolished statutory bodies.

The objects of the main entity and its subsidiaries, (as stated in the Constitution) reflect only the functions in its notice of approval and provide that the main entity and the applicant subsidiary, exist to exercise functions which are in the public interest by promoting the welfare of the specified resource industry workers.

Broadly these functions include providing defined services for the specified resource industry workers, monitoring, collating, disseminating, referring matters and providing information relating to the health and safety of workers, publishing reports and information of public interest arising out of its functions, approving training schemes relating to specified services, health and safety of those workers, monitoring conditions, and establishing or administering services in respect of industry superannuation schemes for the resource industry workers.

The functions of the main entity and the applicant subsidiary are subject to government oversight under the specific resource Industry Act to ensure the proper and transparent exercise of functions. This is reflected in the following measures:

• The Act ensures that an approved company's constitution cannot be altered or added to in a way that is inconsistent with the Act, unless and until approved by both Houses of the State Parliament;

• The Act stipulates that an approved company must have directors which are to comprise of persons appointed by the Minister;

• The Act provides that an approved company must exercise functions as specified in its notice of approval which includes reporting the Minister as it thinks fit, or when requested by the Minister;

• The Act provides that Orders made by the company must be approved by the Minister;

• The Act provides upon the appointment of inspectors by the company, the Minister must be notified of the appointed inspectors;

• The Act provides that proceedings for an offence against the Act or regulations may only be instituted by the Minister or the Director of Public Prosecutions;

• The Act enables the Minister to regulate, among other things, acts or omissions of an approved company subject to the Corporations Act and other Federal legislation that applies to the operations of proprietary companies.

Further, the approved companies constitutions, requires the company to submit a draft financial operating plan in respect of each financial year to the Minister. Also the approved companies are required to note any comments on the draft plan that are made by the Minister and to consider whether the plan should be amended before adoption by the company. As such, the main entity and its subsidiaries, cannot adopt a business/operating strategy that is inconsistent with their approved functions.

Although the main entity and its applicant subsidiary are legally and financially independent of the State Government, the Government retains reserve monitoring and regulatory powers under the Act to ensure that the companies operate to support the welfare of the industry workers and
for the public interest.

In view of the above, it is evident that the Rulee as an approved wholly owned subsidiary of main approved holding company, has been conferred powers and functions under the State Act to serve the interests of the resource industry workers, and business owners as members of the public, required to operate under governmental authority to deliver defined and expected services to promote the welfare of workers and safety in the State Resource Industry.

Exercise powers and functions not possessed by the ordinary citizen

As an approved company, the main entity and its applicant subsidiary have been conferred coercive powers under the State Act. For example, if the main entity is of the opinion that the health of workers at a specified work site is endangered, or likely to be endangered by any conditions or method at the business site operations, it has powers under section the State Act to require the business owner to take specific actions to protect the health of the workers.

Pursuant to the Act, the main holding company and its subsidiaries can make orders with the approval of the Minister, provided they are not inconsistent to its functions. They also have powers of inspection to carry out searches, require information and retain books, records and documents in the exercise of their functions pursuant to the Act. It cannot be said that these are powers or functions which a private corporation possesses.

It is evident that the Rulee exercises powers and functions not possessed by the ordinary citizen.

Operates for public benefit

The Act stipulates that the main entity as an approved company must be a company that is wholly owned in equal shares by the stake holders in the Industry (workers and business owners) or by a company wholly owned by them.

The constitution of the main entity and the applicant provides the capacity for the payment of dividends to shareholders. However, the Board of the company made a formal resolution to notify the shareholders, that it was not the intent on the establishment of the company and its subsidiaries to pay dividends to shareholders and the Director's policy of the company is that no dividends shall be paid to shareholders out of profits earned by the company, from year to year.


The appointment of the stakeholders as shareholders of an 'approved company' under the Act, and conferring on them the right to nominate equal numbers of directors, was not to provide those organizations any private gain. Rather, they were appointed to represent employer and employee interests in the governance and administration of the main entity and its subsidiaries; and ensure that interests of all key stakeholders would be taken into account in their operations for the benefit of the resource industry in the State.

The main entity and its subsidiaries, assumed the functions previously performed by the abolished statutory bodies, for the benefit of the State resource industry and its workers; and not for private commercial gain for the respective shareholders.

We accept that the Rulee has not been established for the private interests of industry members, but as an approved company to operate for the industry and the section of the public involved in that industry. As such this results in the provision of a public benefit.

Conclusion

Having regard to the public duties, statutory functions and powers conferred on the Rulee, we accept that the Rulee has been established to perform a function of government to deliver services to the Industry. The Rulee as a wholly own subsidiary of the main entity does not have features that are inconsistent with the concept of a 'public authority'.

Therefore, the Rulee is exempt from income tax pursuant to section 50-1 of the ITAA 1997 on the basis that it qualifies as a 'public authority constituted under an Australian law' under item 5.2 of the table in section 50-25 of the ITAA 1997.