Edited version of your written advice

Authorisation Number: 1012974144344

Date of advice: 22 February 2016

Ruling

Subject: Exempt entity

Question 1

Is the Company exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) on the basis that it is an exempt entity under item 5.2 of the table in section 50-25 of the ITAA 1997 because it is a public authority constituted under an Australian law?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2015

The scheme commences on:

The scheme has commenced.

Relevant facts and circumstances

The Company was incorporated under the Corporations Act 2001 as an Australian public company limited by guarantee.

The Company has one member. The Member appoints the Company Board of Directors, which then operates independently in accordance with the Company's objects, but directors are subject to removal and replacement by the Member.

Relevant legislative provisions

Income Tax Assessment Act 1997

Section 50-1

Section 50-25

Section 50-47

Section 995-1

Reasons for decision

Summary

In reaching our decision we have considered section 50-1, item 5.2 of the table in section 50-25, section 50-47 and subsection 995(1) of the Income Tax Assessment Act 1997.

In determining whether the Company is a public authority the decisions in the court cases you cited and relied upon have been considered. It was found that the most significant was the judgement of Hill J in FC of T v Bank of Western Australia (1995) 96 ATC 4026 (Bank of WA).

From your reading of the Taxation Ruling IT 2632, the withdrawn taxation ruling SST 10 and Class Ruling CR 2015/61 you present five (5) principles that you identify as emerging from those documents and that you consider are summarised in the judgement by Hill J in Bank of WA.

We have considered those principles and have found that the principle regarding the Company possessing exceptional powers is not met. Accordingly, the Company is not a public authority.

Despite this finding which means that the question posed must be answered in the negative we have considered the balance of the legislation and your arguments in support of your view.

With respect to the issue as to whether the Company is "constituted under an Australian law" we have concluded that it is not. This outcome is in accordance with the comments of Rich J in Renmark Hotel Inc v FC of T (1949) 79 CLR 10.

The conclusion is that the Company is not a public authority constituted under an Australian law.

Accordingly, the ordinary income and the statutory income of the Company are not exempt from income tax.

Detailed reasoning

Legislation

In the following discussion all legislative references are to provisions of the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated. To find definitions of asterisked terms see the Dictionary starting at section 995-1.

Section 50-1 in Subdivision 50-A provides that the total ordinary income and statutory income of an entity covered by item 5.2 of the table in section 50-25 is exempt from income tax. In some cases this is subject to special conditions.

Section 50-25 in Subdivision 50-A relates to Government and the exempt entity listed at item 5.2 in the table is "a public authority constituted under an *Australian law".

Subsection 995-1(1) defines Australian law to mean a *Commonwealth law, a *State law or a *Territory law. In turn each defined term respectively means a law of the Commonwealth, a law of a State, or a law of a Territory.

There are no special conditions imposed by section 50-25.

However, the exemption for an entity in section 50-25 is subject to the special condition in section 50-47 which applies to all items in all tables in Subdivision 50-A.

Section 50-47 reads:

An entity that:

(a) is covered by any item: and

(b) is an *ACNC type of entity:

is not exempt from income tax unless the entity is registered under the Australian Charities and Not for profits Commission Act 2012.

The provisions listed above will be examined in the order listed.

The operation of section 50-1 is self-evident and requires no further comment.

Therefore we turn to the description of the exempt entity in item 5.2 of the table in section 50-25.

The term "a public authority" is not defined in the legislation.

Accordingly it is necessary to look elsewhere for a definition of this term.

Court cases

The courts have considered the term "authority" and "public authority" in a number of cases.

A leading case is FC of T v Bank of Western Australia (1995) 96 ATC 4009 (Bank of WA) in which Hill J at 96 ATC 4026 said:

Although a number of cases have determined whether particular bodies were or were not authorities or public authorities it is fair to say that no test of universal application has emerged.

Hill J continued:

Perhaps the closest any judicial comment has come to attempting a definition of the word "authority" is in the judgment of Gibbs J in Committee of Direction of Fruit Marketing v Australian Postal Commission (1980) 144 CLR 577 at 580 where his Honour said:

"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 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 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 interest 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."

In Bank of WA Hill J examined a number of Australian cases most of which considered the meaning of the word "authority" in the context of the expression "public authority". The cases included Incorporated Council of Law Reporting of Queensland v FC of T (1924) 34 CLR 580 (Incorporated Council of Law Reporting) ; Renmark Hotel Inc v FC of T (1949) 8 ATD 424; (1949) 79 CLR 10 (Renmark Hotel); FC of T v Silverton Tramways Co Ltd (1953) 10 ATD 295; (1953) 88 CLR 559 (Silverton Tramway); General Steel Industries Inc v Commissioner of Railways (NSW) (1964) 112 CLR 125 (General Steel); The Western Australian Turf Club v FC of T 78 ATC 4133; (1977-1978) 139 CLR 288 (Western Australian Turf Club); Committee of Direction of Fruit Marketing v Australian Postal Commission (1980) 144 CLR 577 (Fruit Marketing); Re Anti-Cancer Council of Victoria, Ex parte the State Public Services Federation (Anti-Cancer Council) (1992) 175 CLR 442.

With the application you provided a list of cases which you believe to be the leading cases to have considered the terms "authority" and "public authority". You list Incorporated Council of Law Reporting; Renmark Hotel; Western Australian Turf Club; and Bank of WA, to which was added the later decision in Coal Mining Industry (Long Service Leave Funding) Corp v FC of T (1998) 85 FCR 401; (1998) 98 ATC 4885 and (1998) 41 ATR 374, That latter case applied the decision in Bank of WA.

In Bank of WA Hill J at 96 ATC 4026 - 4027 said:

A number of propositions can be derived from the cases.

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 Australia 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 Australia 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.

Taxation Rulings

You refer to the withdrawn Taxation Ruling IT 2632 "Income Tax: Meaning of 'public authority' in definition of 'exempt public body' in Division 16D" dated 26 April 1991 (where you state that Division 16D ceased to apply from 1 July 2007), the withdrawn Taxation Ruling SST 10 "Sales tax: authorities and public authorities for the purposes of Item 126 and 127" dated 10 June 1998 and Class Ruling CR 2015/61 "Income tax: Queensland Rural Fire Brigades - exempt entities; Public Authorities" dated 12 August 2015.

Your identification of relevant principles

From your reading of those documents you contend that five (5) principles emerge and you consider they have been summarised by Hill J in Bank of WA as follows:

(i) The entity should be an agency or instrument of government set up to achieve a government purpose.

(ii) The entity should either exercise control, power or command for the public advantage, or execute a function in the public interest.

(iii) The entity should perform a traditional or inalienable function of government and have governmental authority for doing so.

(iv) It is not necessary that the entity should have coercive powers.

(v) But the entity should possess some exceptional powers.

These principles are examined below.

(i) and (ii) Government Purpose and Public Interest

In the application it is argued, amongst other things, that the facts demonstrate that the Company is under the sole control of one person who exercises that control on behalf of all governments; and that the Company has been set up to achieve a common purpose of all Australian governments; and further that purpose is clearly in the public interest.

All of those arguments are accepted in our conclusion that the Company is an instrument of government set up to execute a function in the public interest.

Our reasons are explained below.

In this case the entity in question, the Company, is a company limited by guarantee incorporated under the Corporations Act 2001, a Commonwealth act.

It is accepted that the Company is an instrument of government.

It is accepted that the role of the Company is in the public interest.

The activities which the Company will undertake to achieve its objective are set out in its constitution.

The Company is fulfilling a government purpose.

It is therefore concluded that the Company will execute a function in the public interest and achieve a government purpose.

(iii) Traditional Function and Governmental Authority

The Company performs a traditional function of government.

With respect to the matter of the Company having governmental authority it is accepted that such governmental authority is conferred upon the Company.

It is therefore concluded that the Company is performing a traditional function of government and has governmental authority for doing so.

(iv) Coercive Powers Not Necessary

The Company is not endowed with coercive powers.

(v) Exceptional Powers

The powers of the Company as described in its constitution are said to be the same as those of a natural person. A natural person does not have a broad power to direct or control the affairs of others. Nor does a natural person generally possess exceptional powers. This means that the powers of the Company are not exceptional in their nature.

You argue in support of your application that the Company does possess exceptional powers.

We have considered your argument and examined the documents you cite however we do not share your view that the Company has "exceptional powers".

Note that the term "exceptional powers" in this case is taken to mean powers that will influence the behaviour and actions of participants.

Therefore as it is concluded that the Company lacks exceptional powers it does not meet this requirement and thus cannot be a public authority.

Despite this finding that the Company is not a public authority the balance of the arguments you put will be addressed.

Is the Company constituted under an Australian law?

Subsection 995-1(1) defines Australian law to mean a *Commonwealth law, a *State law or a *Territory law. In turn each defined term respectively means a law of the Commonwealth, a law of a State, or a law of a Territory.

The Company is incorporated under the Corporations Act 2001, which is a Commonwealth law, as a company limited by guarantee.

Although it has been found above that the Company is not a public authority and therefore it cannot be a public authority constituted under an Australian law it is necessary for the sake of completeness to consider the meaning of the compound term "constituted under an Australian law".

This means that the issue under consideration here is whether the Company is "constituted under an Australian law".

In Renmark Hotel Inc v FC of T (1949) 79 CLR 10 Rich J at first instance at p 19 said:

The word 'constituted' is not the same as 'incorporated'. For the purposes of s.23 (d) it is conceivable that an unincorporated body might be constituted under a State Act so as to satisfy the exemption. On the other hand, mere incorporation under an Act does not constitute the body. The word 'constituted' immediately follows 'public authority'. It means constituted as a public authority.

In view of the above commentary by Rich J the Company is not constituted under an Australian law.

Finally, with respect to section 50-47 that provision does not apply because the Company is not an ACNC type of entity for the purposes of section 50-47.

Conclusion

The Company is not a public authority constituted under an Australian law. Accordingly, the ordinary income and the statutory income of the Company are not exempt from income tax.