Edited version of private advice

Authorisation Number: 1051961670289

Date of advice: 17 March 2022

Ruling

Subject: Income tax exemption

Question

Is the Entity a State/Territory body (STB) and exempt from income tax under section 24AM of the Income Tax Assessment Act 1936?

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 re-applying for a new private ruling seeking confirmation that the Entity is an income tax exempt entity as a STB. There there has been no material changes to the facts and circumstances since the Commissioner issued the previous ruling.

The Entity was incorporated under the Corporations Act 2001 in an income year as a public company limited by guarantee and not having share capital.

The Entity is not established by State or Territory legislation.

The Entity's constitution (Constitution) states that a specific minister is the sole Member of the Entity.

The Constitution states 'that Membership may not be transferred to another person'.

The Promotion of Object Clause of the Constitution states the Entity must apply all of its income and assets solely towards the furtherance and promotion of the Objects and the Entity may not pay or transfer directly or indirectly any Entity income or assets to the Member (in the Member's capacity as a Member) or to the Directors.

The Constitution does not allow for property to be distributed to the Member on wind-up and must go to a Government Entity or a body corporate in which all legal and beneficial interests are held by Government Entities. The Constitution states that Government Entities have the same meaning as 24AT of the Income Tax Assessment Act 1936.

Under the Constitution the Member may remove or add Directors from its Board at its discretion with no reason required, provided that the number of directors is within a certain number range.

The powers of the Board under the Constitution allows for the Board to control the direction of the company.

There is no power or rights to vote in the Constitution.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 24AM;

Income Tax Assessment Act 1936 Section 24AN;

Income Tax Assessment Act 1936 Section 24AK

Income Tax Assessment Act 1936 Section 24AS;

Income Tax Assessment Act 1936 Section 24AT; and

Income Tax Assessment Act 1936 Section 24AU.

Reasons for decision

There are two conditions for the Entity to become an STB. The first is that it must fit into one of five ways that an entity can be an STB and the second that it cannot be an excluded STB.

Section 24AM of the ITAA 1936 states that 'the income of a State/Territory body (an STB) is exempt from income tax unless section 24AN applies to the STB'.

Section 24AK of the ITAA 1936 states that there are 5 different ways in which a body can be an STB and exempt from income tax unless it is an excluded STB.

The five ways that an entity can be an STB are described in sections 24AO to 24AS of the ITAA 1936. Based on the facts and circumstances, the relevant provision to determine whether the Entity is an STB is section 24AS.

Section 24AN of the ITAA 1936 provides that certain STBs are excluded from being income tax exempt under Division 1AB.

Section 24AS

Section 24AS of the ITAA 1936 states that:

A body is an STB if:

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

            (b)        it is not established by State or Territory legislation; and

            (c)        all the legal and beneficial interests (including, but not limited to, interests as to income, profits, dividends, capital and distributions of capital) in it are held only by one or more government entities; and

            (d)        all the rights or powers (if any) to vote, appoint or dismiss its governing person or body and direct its governing person or body as to the conduct of its affairs are held only by one or more government entities.

(a)        It is not a company limited by shares

The Entity is not a company limited solely by shares as it is a company limited by guarantee and does not have share capital.

(b)        It is not established by State or Territory legislation

The Entity was incorporated under the Corporations Act 2001 as a public company limited by guarantee and not having share capital.

On the facts the Entity is it not established by State or Territory legislation.

(c)        All legal and beneficial interests are held only by government entities

Under section 24AT of the ITAA 1936 a government entity is defined as:

               (a)        a State; or

               (b)        a Territory; or

               (c)        another STB that is not an excluded STB.

As the entity's income or property must be applied solely in support of its objects, there are no beneficial interests in the entity's profits while it is operating. The Member does not have any beneficial interests in its capacity as a Member. However, should the entity be wound up, all remaining property must be paid to a government entity or body corporates in which all of the legal and beneficial interests are held by one or more government entities. Considering these facts, it is accepted that all legal and beneficial interests in the Entity are considered to be held by a government entity.

(d)        All the rights or powers to vote, appoint or dismiss its governing person or body and direct its governing person or body as to the conduct of its affairs are held only by one or more government entities

Under the Constitution, the Entity has only one Member and that Member is the Minister of the Crown of a State. The Constitution also states 'that Membership may not be transferred to another person'.

Section 24AU of the ITAA 1936 states:

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.

As the Member is a Minister of the Crown of a State, the Member would be considered a government entity for section 24AS of the ITAA 1936.

It is accepted that a government entity, the Member, has all the rights or power to appoint or dismiss the entity's governing body (the Board) as it has the power to appoint or dismiss the Directors that make up the Board at its discretion. The Member is only required to have the power or right to vote if any such powers or rights exist. There is no power or right to vote in the Constitution and therefore this element is satisfied.

It is accepted that the Member has the ability to direct its governing body as to the conduct of its affairs as it could dismiss any Director that fails to follow its directions.

The Entity meets the conditions of section 24AS of the ITAA 1936 and is considered to be an STB unless it is an excluded STB.

Section 24AN

Section 24AN of the ITAA 1936 provides that certain STBs are not exempt from tax under Division 1AB. The section 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.

Section 24AT of the ITAA 1936 defines the meaning of 'excluded STB' for this Division as an entity 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(a) to (c) of the Income Tax Assessment Act 1997 applies; or

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

(e)  is a superannuation fund.

As the Entity has not been prescribed as an excluded STB and is not an entity described in paragraphs (b) to (e) of section 24AT of the ITAA 1936, the Entity is not an excluded STB.

Conclusion

The Entity is an exempt entity from Commonwealth income tax under section 24AM of the ITAA 1936 as it is a State/Territory body that fits into one of the five ways to be an STB and is not an excluded STB.