Edited version of your written advice

Authorisation Number: 1013134182007

Date of advice: 5 December 2016

Ruling

Subject: Income Tax - State and Territory Bodies

Question 1

Is XYZ Corporation Pty Ltd (XYZ) 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

Subject to the satisfaction of the 'same business test' under section 165-13 of the Income Tax Assessment Act 1997 (ITAA 1997) and adjustment for the net exempt income derived in the period that XYZ is a STB, are the tax losses incurred by XYZ during the period before it became a STB available for offset against taxable income derived by XYZ for an income year in the period after it is no longer a STB?

Answer

Decline to rule - see 'Reasons for Decision'.

This ruling applies for the following period:

1 July 2017 to 30 June 2020

Relevant facts and circumstances

(as per ruling application)

The purpose of this application is to seek a Private Binding Ruling that income derived by XYZ will continue to be exempt from Commonwealth income tax after 30 June 20ZZ under section 24AM of the Income Tax Assessment Act 1936.

XYZ seeks to continue the ruling that any tax losses incurred before the State acquired XYZ and during the period it was income tax exempt should be available for offset against future taxable income if XYZ is no longer an STB.

In 20UU you (the ATO) wrote to XYZ notifying it that it was exempt from Commonwealth income tax under section 24AM of the Income Tax Assessment Act 1936 for the years ending 30 June 20VV, 20WW and 20XX. This was further extended for the three years ending 30 June 20ZZ.

The State of X continues to own all shares in XYZ and nothing has changed to alter the conclusion that XYZ is a State/Territory Body (STB) and the ruling that income earned by the Company should be exempt under section 24AM of the Income Tax Assessment Act 1936.

Further, you notified XYZ that subject to satisfying the same business test under section 165-13 of the Income Tax Assessment Act 1997 any tax losses incurred before became an STB and during the time it is income tax exempt will be available for offset against income derived by XYZ in the period after it is no longer an STB.

Further information

The applicant has confirmed via fax dated in 20YY that a change in the ownership of XYZ is not under consideration.

Relevant legislative provisions

Income Tax Assessment Act 1936.

Division 1AB

Section 24AK

Section 24AL

Section 24AM

Section 24AN

Section 24AO

Section 24AP

Section 24AQ

Section 24AR

Section 24AS

Section 24AT

Section 24AU

Section 24AV

Taxation Administration Act 1953

Division 359

Section 359-5

Reasons for decision

Question 1

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 24AO of the ITAA 1936 provides that 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.

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 ); 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, XYZ is a company limited solely by shares and all of those shares are beneficially owned by the State of X, which is a government entity within the meaning set out under section 24AT of the ITAA 1936.

Further, XYZ does not fall within the categories of excluded STBs set out under section 24AT of the ITAA 1936, in that XYZ 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 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 XYZ is a state or territory body (STB) exempt from Commonwealth income tax under section 24AM of the ITAA 1936.

Question 2

The Commissioner may decline to rule if a scheme is not under serious contemplation and the issues raised are merely hypothetical. You have indicated that at the present time there is no change of ownership of XYZ Corporation Pty Ltd (XYZ) being contemplated.

Therefore the Commissioner has not determined 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 a 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. We have attached a copy of Taxation Ruling TR 1999/9 that sets out the Commissioner's view of the SBT.

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.