Edited version of private advice

Authorisation Number: 1051855362652

Date of advice: 25 June 2021

Ruling

Subject: Income tax exemption

Question

Is the entity exempt from income tax pursuant to section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as a public authority constituted under an Australian law as described in Item 5.2 of section 50-25 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods:

1 July 20XX to 30 June 20XX

1 July 20XX to 30 June 20XX

1 July 20XX to 30 June 20XX

1 July 20XX to 30 June 20XX

1 July 20XX to 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The entity is a company limited by shares and is responsible for the distribution of water.

The objective of the entity is to supply water and drainage services, establish and maintain reserves, enter commercial arrangements for the supply of water, and hold the necessary licences.

The infrastructure that is presently owned or controlled by the entity was once owned by the State A Government in the form of the Water Administration Ministerial Corporation, a body constituted by the Water Administration Act 1986 (State A).

The Water Management Act 2000 (State A) (Water Management Act) applies to all irrigation corporations. The entity is an 'irrigation corporation' under section 117 of the Water Management Act, as it is contained in Schedule I of the Act. Sections 118, 120 and 122 of the Water Management Act permit the entity to perform the functions that were previously undertaken by the State.

The entity has power and authority conferred on it by legislation.

The entity is prevented from distributing profits to its members.

The entity is prevented from distributing to its members any property on dissolution or winding up.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 50-1

Income Tax Assessment Act 1997 section 50-25.

Reasons for decision

Section 50-1 provides that the ordinary and statutory income of entities covered by the tables listed in Subdivision 50-A is exempt from income tax.

Section 50-25 covers exempt Government entities. Item 5.2 of the table in section 50-25 provides that 'a public authority constituted under an Australian law' is an exempt entity. There are no special conditions that must be met for this item.

The term'public authority constituted under an Australian Law' is not defined in the Income Tax Assessment Act 1997. Taxation Ruling IT 2632 entitled Income tax: meaning of 'public authority' in definition of 'exempt public body' in division 16D provides the Commissioner's view on whether a particular body is public authority.

Paragraph 14 of IT 2632 sets out the necessary considerations for determining whether a body answers the description of a 'public authority' within the Division 16D of Part III of the Income Tax Assessment Act 1936 definition as follows:

(a) Weigh all relevant circumstances, especially the nature of the functions of the body concerned, treating the question of the status of the body as essentially a question of fact and degree to be determined in the light of the particular facts of each case.

(b) Consider whether the body has one primary function or a variety of functions not all of which involve the exercise of powers and functions not possessed by the ordinary citizen and which have been conferred by statute and are essentially of a public nature.

(c) Examine all the characteristics of the body to determine whether it can be seen in general to conform to the common understanding of a public authority. To so conform a body would be expected to have public duties, functions or powers to perform and these would ordinarily be carried out under statutory authority for the benefit of the public. While not essential, a distinguishing characteristic is the possession of exceptional powers conferred by statute beyond those possessed by private individuals. However, the derivation of profits for distribution to shareholders or members would not ordinarily be a characteristic of a "public authority". The examination will involve a consideration of:

(i)            the significance of any features of the body clearly alien to, or inconsistent with, the concept of what is a public authority; and

(ii)          the relevant statutory context, namely, the overall statutory scheme and policy underlying Division 16D.

Paragraphs 15 to 19 of IT 2632 discuss the meaning of 'constituted by or under' a relevant law and essentially provides that a year by year consideration is necessary to determine whether a body is set up, founded or established as a public authority by or under the relevant law, or has acquired the attributes and qualities of a public authority.

Paragraphs 4 to 11 of IT 2632 consider a number of court decisions which have been made in relation to 'public authority' in paragraph 23(d) of the Income Tax Assessment Act 1936 (which is equivalent to section 50-25 of the Income Tax Assessment Act 1997).

In Renmark Hotel Incorporated v FC of T (1949) 79 CLR 10 at page 19, Rich J stated:

The characteristics of a public authority seem to be that it should carry on some undertaking of a public nature for the benefit of the community or of some section or geographical division of the community and that it should have some governmental authority to do so.

The entity is responsible for the distribution of water to irrigators in the allocated region.

The entity's business is governed by an operating licence granted under the Water Management Act 2000 (State A). Under the terms of the operating licence, the entity is authorised to carry on the business of supplying water provided to it by the Ministerial Corporation and to exercise its functions under the Water Management Act 2000 (State A).

The entity is permitted to take water from certain water sources and to construct and operate water supply works. These include constructing pumps, tanks, dams, pipes and channels to collect and distribute water. The entity is authorised to enter land to perform a number of functions, including the installation and reading of water meters, ascertaining whether a water supply contract has been breached, installing and replacing pipes, and rectifying defective works.

The above facts indicate that the entity is carrying on an undertaking of a public nature for the benefit of a section or geographical division of the community, being the supply of irrigation water and drainage services to the region.

The entity is a non-profit entity. Its Constitution prevents the distribution of profits to its members during its operation and upon winding up. Upon winding up any surplus property is required to be distributed to an irrigation corporation or to an institution having similar objects.

The entity is an 'irrigation corporation' under section 117 of the Water Management Act, as it is contained in Schedule 1 of the Act. Sections 118, 119, 120 and 122 of the Water Management Act permit the entity to perform the functions that were previously undertaken by the State. All of these matters indicate that the entity has the power or authority conferred upon it by legislation to do acts in relation to the public which would otherwise be beyond its power or unauthorised.

For the above reasons we consider that the entity is a public authority constituted under an Australian law as described in Item 5.2 of section 50-25. The entity is therefore exempt from income tax pursuant to section 50-1.