Edited version of your written advice

Authorisation Number: 1051185842398

Date of advice: 10 February 2017

Ruling

Subject: 23AG - Government Authority

Question

Is the entity an 'Australian Government Agency' for the purposes of section 995-1 of the Income Tax Assessment Act 1997 (Cth)?

Answer

No

This ruling applies for the following periods:

Income year ending 30 June 2017

Income year ending 30 June 2018

Income year ending 30 June 2019

Income year ending 30 June 2020

The scheme commences on:

The scheme has commenced.

Relevant facts and circumstances

● The entity is a private company incorporated under the Corporations Act 2001 (Cth).

● All the shares in the entity are owned by the head entity, which is an Australian government agency.

● Consideration payable by the head entity to the entity for the provision of services under the services agreement is a service fee calculated on an amount equal to the cost of all staff engaged under the agreement.

● No other service agreement has been executed by the entity. The entity does not presently derive profits from any other sources.

Relevant legislative provisions

Income Tax Assessment Act 1936

● section 23AG

Income Tax Assessment Act 1997

● section 6-20

● section 995-1

Acts Interpretation Act 1901 (Cth) (AIA).

Reasons for decision

Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) defines an 'Australian Government Agency' to mean:

(a) the Commonwealth, a State or a Territory; or

(b) an authority of the Commonwealth or of a State or a Territory.

The terms 'Commonwealth' and 'State' are defined under section 2B of the Acts Interpretation Act 1901 (Cth) (AIA) as follows:

(a) 'Commonwealth' means the Commonwealth of Australia…, and

(b) 'State' means a State of the Commonwealth.

The entity is a private company, incorporated and as such does not fall within the meaning of 'the Commonwealth' or 'the State'. It is therefore not an 'Australian Government Agency' by virtue of paragraph (a) of the definition of 'Australian Government Agency' in section 995-1 of the ITAA 1997.

The following considers the application of paragraph (b) of the definition of 'Australian Government Agency' in section 995-1 to the entity.

The expressions 'authority of the Commonwealth', 'authority of a State' and 'authority' have been considered in common law.

In Committee of Direction of Fruit Marketing v. Australian Postal Commission (1980) 144 CLR 577 (the Fruit Marketing case) the High Court unanimously decided that the Committee of Direction of Fruit Marketing was an authority of the State of X for the purposes of the Postal Services Act 1975. Specifically Gibbs J stated at 580:

“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 that 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 the 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 interests 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 FC of T v. Bank of Western Australia Ltd; FC of T v. State Bank of New South Wales Ltd 96 ATC 4009; (1995) 133 ALR 599 the meaning of the word 'authority' was considered by the Full Federal Court in the context of the phrase 'the official use,... and not for sale by,... an authority which is completely controlled by,... a State' in the Sales Tax (Exemptions and Classifications) Acts 1935 and 1992. In that case Hill J looked at a number of Australian cases as to the meaning of the word 'authority'. He derived the following propositions from those cases:

● The question is one of fact and degree dependent upon all the circumstances of the case: The Western Australian Turf Club v. FC of T 78 ATC 4133; (1978) 139 CLR 288 (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.

● A private body, corporate or unincorporated, established for profit will not be an authority: Renmark Hotel Inc v. FC of T (1949) 8 ATD 424; (1949) 79 CLR 10 (Renmark Hotel) per Rich J at ATD 429; CLR 17, FC of T v. Silverton Tramways Co Ltd (1953) 10 ATD 295; (1953) 88 CLR 559 (Silverton Tramways) per Dixon CJ at ATD 297; CLR 566.

● 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.

● 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.

● The body in question must perform a traditional or inalienable function of government and have governmental authority for so doing: Renmark Hotel per Rich J at ATD 428; CLR 16, General Steel Industries Inc v. Commissioner for Railways (NSW) (1964) 112 CLR 125 per Barwick CJ at 134, Re Anti-Cancer Council of Victoria; Ex parte the State Public Services Federation (1992) 175 CLR 442 per Mason CJ, Brennan and Gaudron JJ at 450-451.

● 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.

● 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 Tramways 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.

The determination in this matter is made of the entity as an entity in its own right. Paragraph 27 of IT 2632 provides as follows:

In determining whether the wholly owned entity is a public authority, undue weight should not be placed on the fact that it is wholly owned by a public authority. The wholly owned entity must be able, in its own right, to be described as a public authority after due consideration of the guidelines set out in paragraph 14 of this Ruling.

In light of the abovementioned principles, the facts of the present case support the view that the entity is not an 'Australian Government Agency' as defined in section 995-1 of the ITAA 1997. This view takes into consideration the following factors:

1. The entity is an incorporated company.

2. The entity is a company established for profit. This is supported by their constitution.

3. The profit derived by the entity is from the service fee calculated on an amount specified under the services agreement and payable by the head entity.

4. The entity is a party to a contract enabling it to conduct a profit-making business. The general character of the company remains that of a body constituted for profit, notwithstanding that the services it provides is in aid of a government objective.

5. The entity's constitution and the terms of its services agreement support the view that it is it is engaged to provide services as an independent contractor rather than as an authority of the government.