Edited version of private advice

Authorisation Number: 1051775827801

Date of advice: 02 November 2020

Ruling

Subject: Exemption from income tax

Question

Is each Trust exempt from income tax pursuant to section 24AM of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 2021

Year ending 30 June 2022

Year ending 30 June 2023

Year ending 30 June 2024

Year ending 30 June 2025

Year ending 30 June 2026

Year ending 30 June 2027

Year ending 30 June 2028

Year ending 30 June 2029

Year ending 30 June 2030

The scheme commences on:

1 July 2020

Relevant facts and circumstances

The Trusts are public entities established by state legislation (the Act) to serve the community by providing and maintaining specific public services.

There are five Trusts.

Each Trust has members that operate as its Board.

The Act gives powers to the State Governor to appoint and remove members of the Trust on the recommendation of a Minister. The Act also gives the secretary of a government department powers in relation to the operations and affairs of each Trust.

The Trusts otherwise operate independently of Government subject to the requirements of the Act.

The Act states that the Trusts do not represent the Crown.

Each Trust is governed by Rules set out in State regulations.

Relevant legislative provisions

Division 1AB of the Income Tax Assessment Act 1936

Section 24AM of the Income Tax Assessment Act 1936

Section 24AN of the Income Tax Assessment Act 1936

Section 24AQ of the Income Tax Assessment Act 1936

Section 24AT of the Income Tax Assessment Act 1936

Section 24AU of the Income Tax Assessment Act 1936

Reasons for decision

Section 24AM of the ITAA 1936 states:

The income of a State/Territory body (an STB) is exempt from income tax unless section 24AN applies to the STB.

Section 24AN states:

Income derived by an STB is not exempt from income tax under this Division if, at the time that it is derived, the STB is an excluded STB.

Notes: 1. For the definition of excluded STB see section 24AT.

2. Even though an excluded STB is not exempt from income tax under this Division, it may still be exempt under another provision of this Act.

There are 5 ways an entity can be a STB as described in sections 24AO to 24AS of the ITAA 1936.

STB under section 24AQ

Based on the facts and circumstances, the relevant provision to determine whether each Trust is an STB is section 24AQ.

Section 24AQ of the ITAA 1936 provides:

A body is an STB if:

(a)  it is established by State or Territory legislation; and

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

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

Each Trust was established by State legislation. The Trusts are not incorporated as companies limited solely by shares. Therefore, each Trust meets the first and second requirements of section 24AQ, as set out in paragraphs (a) and (b) above.

In addition, for a body to be a STB, paragraph (c) of section 24AQ requires 'government entities' to have the power to appoint or dismiss the governing person or body. The meaning of "government entities" is in section 24AT of the ITAA 1936, 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.

"Territory" is defined in section 24AT to mean:

... the Northern Territory or the Australian Capital Territory.

"State" is not defined in the ITAA 1936, however, section 2B of the Acts Interpretation Act 1901 provides that in any Act:

"State" means a State of the Commonwealth.

Section 24AU of the ITAA 1936 states that:

For the purposes of sections 24AQ, 24AR and 24AS, if the power to appoint, dismiss or direct the governing body is given to, or is held by:

(a)  a Governor of a State; or

(b)  a Minister of the Crown of a State; or

(c)   a Minister of a Territory; or

(d)  the head of a Department of a State or a Territory; or

(e)  any combination of paragraphs (a) to (d);

the power is taken to be given to, or held by, a government entity.

The Act provides the State Governor on the recommendation of the Minister, with the power to appoint the members of each Trust.

By virtue of the Act, the State Governor on the recommendation of the Minister, may at any time remove a member of a Trust from office.

Specific sections of the Act provide the Secretary of a Department with a number of powers in relation to the operation and affairs of Trusts.

Therefore, since the Governor only has power to appoint and remove members of the board of the Trusts, the requirement of paragraph 24AQ(c) are met.

Accordingly, all the requirements in section 24AQ are satisfied and each Trust is an STB as defined in section 24AQ.

Not an Excluded STB

Section 24AT of the ITAA 1936 states that:

"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.

The Trusts are not prescribed as excluded STBs.

The term "municipal corporation" is not defined in the ITAA 1936 or the ITAA 1997. In Federated Engine-Drivers and Firemen's Association of Australasia v Broken Hill Pty Co Ltd 12 CLR 398, a High Court case, Barton J said:

"... a municipal corporation is a part of the governmental power of the State ..."

In the same case Isaacs J considered the nature of the Melbourne City Council and said:

"The Melbourne City Council ... is primarily constituted for the purposes of municipal government, and in respect of its functions of legislation and administration may be said to be a subordinate local agent for the purposes of government."

...

"... a corporation is constituted a regulating agent for certain purposes, and for those purposes is entrusted with governmental powers ... "

Later Issacs J said:

Local government is true government, it is as much a subordinate branch of the Sovereign legislative power to make a by-law or declare a rate as the order of a local justice of the peace is a subordinate branch of the Sovereign judicial power. For the purposes of non-interference with their governmental functions, a municipal corporation might fairly claim to stand as ... 'extending ... the shield of the Crown to what might more fitly be described as the public government of the country.' ...

The Trusts operate services and are operationally independent of government. They do not possess any powers to perform governmental or administrative functions in respect of a local or municipal district. The Act also states that 'a trust does not represent and is not to be taken to be part of the Crown'. Accordingly, the Trusts are not part of the governmental power of the State and therefore are not municipal corporations.

"Local governing body" is defined in subsection 995-1(1) of the ITAA 1997 as a local governing body established by or under a State or Territory law. The Trusts do not possess any powers to enable it to operate as a local governing body and consequently it is not a local governing body.

The Trusts are not public educational institutions.

The Trusts are not public hospitals.

The Trusts are not superannuation funds.

Therefore, the Trusts are not excluded STBs.

In conclusion, each of the Trusts is exempt from income tax pursuant to section 24AM of ITAA1936.