Edited version of private advice

Authorisation Number: 1051691602031

Date of advice: 2 June 2020

Ruling

Subject: Income tax exemption under 24AM of Income Tax Assessment Act 1936 - extension of private ruling

Question

Will section 24AM of Division 1AB of the Income Tax Assessment Act 1936 ("ITAA 1936") continue to apply to exempt Entity 1 as a State/Territory body from income tax?

Answer

Yes

This ruling applies for the following periods:

The year ended 30 June 2021

The year ended 30 June 2022

The year ended 30 June 2023

The year ended 30 June 2024

The year ended 30 June 2025

The scheme commences on:

1 July 2020

Relevant facts and circumstances

Entity 1 was incorporated in 2007 as an incorporated joint venture between several councils from regional and metropolitan state.

Under this structure, each of the Councils took up shares in Entity 1, a separate limited liability joint venture company.

In 2008, several councils formed Entity 2, also a company limited by shares, as a second incorporated joint venture.

Entity 1's key objective is to provide a service which is a partnership between Commonwealth, State and Local Government.

Entity 2's key objective is to identify, procure and develop a facility which is suitable to lease to Entity 1 to carry out its objective.

The shareholding in both companies is limited to local government entities only.

There was a restructure which was in line with entities still being local councils and key objectives maintained.

You have provided us a copy of the Deed.

Relevant legislative provisions

Income Tax Assessment Act 1936 - section 24AM

Income Tax Assessment Act 1936 - section 24AN

Income Tax Assessment Act 1936 - section 24AO

Income Tax Assessment Act 1936 - section 24AT

Income Tax Assessment Act 1997 - section 50-25

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

Reasons for decision

Summary

Entity 1 is a State/Territory body that is not an excluded State/Territory body, therefore its income is exempt from income tax pursuant to section 24AM of the Income Tax Assessment Act 1936 (ITAA 1936).

Detailed reasoning

Section 24AM of the ITAA 1936 provides that the income of a State/Territory body (an STB) will be exempt unless section 24AN applies to the STB.

There are five ways in which a body can be an STB. Relevantly, the first way is set out in section 24AO of the ITAA 1936 which provides that a body is an STB if:

(a)        it is a company limited solely by shares; and

(b)        all of the shares in it are beneficially owned by one or more government entities.

Section 24AN of the ITAA 1936 provides that an STB will not be exempt from income tax if it is an excluded STB which is defined in section 24AT of the ITAA 1936.

Accordingly, in order to qualify for the exemption, Entity 1 must satisfy two conditions.

1. It must be an STB pursuant to section 24AO of the ITAA 1936, and
2. It must not be an excluded STB as defined in section 24AT of the ITAA 1936.

1) Is Entity 1 an STB pursuant to section 24AO of the ITAA 1936?

Entity 1 will be an STB if it is limited by shares and owned by one or more government entities in accordance with section 24AO.

The term "government entity" is defined in section 24AT which provides:

government entity means:

(a)        a State; or

(b)        a Territory; or

(ba) a municipal corporation or other local governing body (within the meaning of section 50-25 of the Income Tax Assessment Act 1997); or

Note: the effect of this paragraph is that some bodies owned or controlled by a municipal corporation or other local governing body may be an STB even though the municipal Corporation or other local governing body is an excluded STB.

(c)         another STB that is not an excluded STB

The term "local governing body" is defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 to mean a local governing body established by or under a State Law or Territory Law. Broadly this refers to a city, town, municipal, or shire council.

In this case, Entity 1 is an Australian proprietary company limited by shares. All the shares in Entity 1 are owned by municipal councils, these councils fall within the definition of a local governing body. Future shareholders are limited in the Deed to be a Council as defined in the Deed and the relevant state legislation.

Therefore, this condition is satisfied.

Entity 1 is an STB pursuant to section 24AO of the ITAA 1936.

2. Is Entity 1 an excluded STB as defined in section 24AT of the ITAA 1936?

The term "Excluded STB" is defined under section 24AT of the ITAA 1936 which states:

Excluded STB means an STB 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 Income tax Assessment Act 1997); or

(c)         is a public educational institution to which any of paragraphs 50-55(1)(a) to (c) of the Income Tax Assessment Act 1997 applies; or

(d)         is a public hospital to which any of paragraphs 50-55(1)(a) to (c) of the Income Tax Assessment Act 1997 applies; or

(e)         is a superannuation fund.

There is no current regulation enforced prescribing excluded STBs.

Entity 1 is not a public hospital, a public educational institution, or a superannuation fund. Entity 1 is not a municipal corporation or local governing body. Its shareholders are Councils which are local governing bodies. However, the explanation at section 24AT of the ITAA 1936 provides that bodies owned or controlled by a local governing body may be an STB even though the local governing body itself is an excluded STB.

Consequently, as Entity 1 does not fall within any of the criteria for section 24AT to apply, it is not an excluded STB.

Therefore, this condition is satisfied.

In summary, Entity 1 meets all the requirements of an STB under section 24AO of the ITAA 1936 and is not an excluded STB in terms of section 24AT of the ITAA 1936.

Therefore, Entity 1 is exempt from income tax pursuant to section 24AM of the ITAA 1936.