Edited version of your written advice

Authorisation Number: 1051441442547

Date of advice: 24 October 2018

Ruling

Subject: Income tax exemption as a state/ territory body

Question 1

Is the Entity a State / Territory Body for the purposes of Division 1AB of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

Question 2

Is the ordinary income and statutory income of the Entity exempt from income tax pursuant to section 24AM of the ITAA 1936?

Answer

Yes.

Question 3

Is the Entity an ‘exempt entity’ within the meaning of that term under subsection 995-1(1) of the Income Tax Assessment Act (ITAA 1997)?

Answer

Yes. The Entity is an ‘exempt entity’ within the meaning of that term under subsection 995-1(1) as its *ordinary income and *statutory income is exempt from income tax pursuant to section 24AM of the ITAA 1936.

This ruling applies for the following periods:

For the year ended 30 June 20xx

For the year ended 30 June 20xx

For the year ended 30 June 20xx

For the year ended 30 June 20xx

For the year ended 30 June 20xx

For the year ended 30 June 20xx

Relevant facts and circumstances

The Entity was established by X State legislation as a body corporate with perpetual succession.

The X State legislation provides the following:

● the Entity is managed by a board of directors which is appointed by the State Governor (upon nomination by the Minister). The board of directors is the board of the Entity.

● the board of the Entity is the governing body of the Entity with the authority, subject to the State legislation, in the name of the Entity to perform functions, determine the policies and control the affairs of the Entity.

● the State Governor may remove, without giving reasons, a director at any time

● the Entity is required to seek the approval of the Minister before entering into certain transactions and to consult with the Minister before undertaking a major initiative.

● the Entity is required to give effect to any written direction given by the Minister in relation to the performance of its functions.

● The Minister may also direct the Entity’s board to make changes to certain high-level strategic documents of the Entity.

The Entity is not a public educational institution, municipal corporation or other local governing body, a public hospital nor a superannuation fund.

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 1AB

Income Tax Assessment Act 1936 Section 24AK

Income Tax Assessment Act 1936 Section 24AM

Income Tax Assessment Act 1936 Section 24AO

Income Tax Assessment Act 1936 Section 24AQ

Income Tax Assessment Act 1936 Section 24AR

Income Tax Assessment Act 1936 Section 24AS

Income Tax Assessment Act 1936 Section 24AT

Income Tax Assessment Act 1936 Section 24AZ

Income Tax Assessment Act 1997 Section 11-5

Income Tax Assessment Act 1997 Section 50-1

Income Tax Assessment Act 1997 Section 50-25

Income Tax Assessment Act 1997 Subsection 995-1(1)

Reasons for decision

Question 1

Summary

The Entity qualifies as a State/ Territory body under section 24AQ or section 24AR of Division 1AB of the ITAA 1936.

Detailed reasoning

Section 24AK states that a State/ Territory body (an STB) is exempt from income tax unless it is an excluded STB. Sections 24AO to 24AS of the ITAA 1936 set out the five ways in which a body may be regarded as an STB.

Relevant to the question of the Entity’s status as an STB are the provisions in section 24AQ and section 24AR of the ITAA 1936. Each of these provisions is discussed below:

Section 24AQ

For the Entity to be an STB under section 24AQ, it must meet the all of the following requirements:

(a) be established by State or Territory legislation; and

(b) not be a company limited solely by shares; and

(c) the legislation gives the power to appoint or dismiss its direct its governing person or body to one or more government entities.

The Entity meets the requirements of the first and second requirements of section 24AQ, as set out in paragraphs (a) and (b) above. The Entity was established under X State legislation. The Entity is a body corporate created by statute and; therefore does not have any shareholders. Accordingly, the Entity is not a company limited by shares.

Paragraph (c) of section 24AQ employs the term ‘government entities’. Under section 24AU of the ITAA 1936, where the power to appoint, dismiss or direct the governing body of an entity is given to a Governor of a State, a Minister of the Crown or a State or Territory, or the head of a Department of a State or Territory the power is taken to be held by a government entity for the purposes of sections 24AQ, 24AR and 24AS.

In the present circumstances, the governing body of the Entity is the board of directors. The X State legislation provides that the directors to the board may be appointed by the State Governor (upon nomination by the Minister) and also removed by the State Governor.

As such, it is considered that the third requirement is satisfied as a government entity, namely the State Governor has the power to appoint or dismiss the Entity’s governing body i.e its board of directors.

As all of the requirements in section 24AQ are satisfied, the Entity qualifies as an STB.

Section 24AR

For the Entity to be an STB under section 24AR, it must meet the all of the following requirements:

(a) be established by State or Territory legislation; and

(b) not be a company limited solely by shares; and

(c) the legislation gives the power to direct its governing person or body as to the conduct of its affairs only to one or more government entities.

The Entity meets the requirements of the first and second requirements of section 24AR as set out in paragraphs (a) and (b) above, for the same reasons set out in the above discussion on section 24AQ.

Paragraph (c) of section 24AR refers to the power to direct the conduct of the affairs of the governing body by a government entity/ entities.

In the Explanatory Memorandum to Taxation Laws Amendment Bill (No.2) 1995 at paragraph 1.17, it is explained that it is not necessary that the power to direct the control be a specific power to give operational directions, as a more general power of direction of the conduct of the body’s affairs is sufficient.

Under X State legislation, the Minister may direct the Entity in respect of the performance of its functions which the Entity is required to give effect to. The Entity is also required to obtain the Minister’s approval regarding certain transactions and consult with the Minister concerning any major initiatives. Under X State legislation, the Minister may direct the board to make changes to certain high-level strategic documents of the Entity.

In light of the above, it is considered that the Minister, a government entity has the power to direct the conduct of the Entity’s affairs. Thereby, the third requirement is met.

Consequently, as all of the requirements in section 24AR are satisfied, the Entity also qualifies as an STB under this provision.

In conclusion, the Entity is considered to be an STB under section 24AQ or section 24AR.

Question 2

Summary

The ordinary income and statutory income of the Entity is exempt from income tax under section 24AM of the ITAA 1936.

Detailed reasoning

Under section 24AM, the income of an STB is exempt unless the STB qualifies as an excluded STB under section 24AT.

An excluded STB is defined in section 24AT to include the following type of entities:

(a) is prescribed by regulation to be an excluded STB

(b) a municipal corporation or other local governing body (within the meaning of section 50-25 of the ITAA 1997)

(c) a public educational institution or a public hospital to which any paragraphs 50-55(1)(a) to (c) applies; or

(d) a superannuation fund.

There is no current regulation enforced prescribing excluded STBs

The Entity is not a municipal corporation, local governing body, public educational institution or superannuation fund.

Consequently, as the Entity does not fall into any of the criteria for section 24AT of the ITAA 1936 to apply it is not an excluded STB.

Accordingly, as the Entity is an STB that is not an excluded STB, its income is exempt from income tax pursuant to section 24AM of the ITAA 1936.

Section 24AM refers to the ‘income of a State/ Territory body’ rather than the ‘ordinary income and statutory income of a State/ Territory body’. Nonetheless, it is submitted that the income of an STB should be read as the ‘ordinary income and statutory income of a State/ Territory body’.

Section 50-1 of the ITAA 1997 exempts from income tax the total *ordinary income and*statutory income of the entities described in the tables listed in Subdivision 50A of the ITAA 1997.

Section 50-25 of the ITAA 1997 is contained in Subdivision 50A of the ITAA 1997. Listed in the table in section 50-25 as exempt entities are municipal corporations, local government bodies and public authorities constituted under an Australian law. Additionally, section 50-25 by way of a note states that the ordinary and statutory income of a State or Territory body is exempt – see Division 1AB of the ITAA 1936.

Furthermore, section 11-5 of the ITAA 1997 contains a list of entities which are exempt from income tax, no matter what kind of *ordinary income or *statutory income they have.

One of the entities listed in section 11-5 is a State/ Territory body under sections 24AK to 24AZ of the ITAA 1936.

It was previously concluded in Questions 1 and 2 of this private ruling that the Entity is a State/ Territory body under section 24AQ or section 24AR and its income is exempt from income tax pursuant to section 24AM.

Consequently, the ordinary and statutory income of the Entity is exempt from income tax pursuant to section 24AM.

Question 3

Summary

The Entity is an income tax ‘exempt entity’ within the meaning of that term under subsection 995-1(1) of the ITAA 1997.

Detailed reasoning

The definition of ‘exempt entity’ in subsection 995-1(1) of the ITAA 1997 includes at paragraph (a) an entity all of whose ordinary income and statutory income is exempt from income tax because of this Act or because of another Commonwealth law no matter what kind of ordinary income or statutory income the entity might have.

The reference to ‘this Act’ in the definition of ‘exempt entity’ also includes the Income Tax Assessment Act 1936 (see subsection 995-1(1) and section 2-15 of the ITAA 1997).

Subsection 995-1(1) adds by way of a note to the definition of ‘exempt entity’ a reference to section 11-5 for a list of entities of the kind referred to in paragraph (a).

As mentioned previously, section 11-5 contains a list of entities which are exempt from income tax, no matter what kind of ordinary or statutory income they have.

One of those entities includes State/ Territory bodies under sections 24AK to 24AZ of the ITAA 1936 (i.e Division 1AB of ITAA 1936).

It was previously concluded that the Entity is a State/ Territory body under section 24AQ and its ordinary and statutory income is exempt from income tax pursuant to section 24AM. Accordingly, the Entity also qualifies as an income tax ‘exempt entity’ within the meaning of term under subsection 995-1(1) of the ITAA 1997.