Edited version of private advice

Authorisation Number: 1051971268208

Date of advice: 19 April 2022

Ruling

Subject: State/Territory body tax exempt status

Question 1

Is the Trust a State/Territory body (STB) 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 Trust was established by the Trust Deed.

The establishment of the Trust was approved by the State Treasurer.

The Trust is not established by any State or Territory legislation.

The Trust was settled pursuant to the Trust Deed to come into existence when the Trust first held assets.

Company A holds 100% of the issued units in the Trust.

The Trust is not a:

•                    municipal corporation or other local governing body,

•                    public educational institution,

•                    public hospital, or

•                    superannuation fund.

The trustee for the Trust is Company B. Company A owns 100% of the shares issued in Company B (being the Trustee).

The Trustee is governed by its Constitution.

Company A holds all the units of the Trust and also holds all the shares of the Trustee.

Company A is a State or Territory Body exempt from Commonwealth income tax under section 24AM of the Income Tax Assessment Act 1936 (ITAA 1936).

Company A is a government entity as defined in section 24AT of the ITAA 1936 for the purposes of Division 1AB, as a government entity includes 'another STB that is not an excluded STB'.

The Trust Deed defines Government Entity as the same meaning from section 24AT of the ITAA 1936.

The Trustee must hold the Assets of the Trust on trust for the Unitholders on the terms and conditions of the Trust Deed.

The beneficial interests in the Assets are to be divided into units which are held by the unitholders.

The initial Trustee is the only Trustee, and is a Government Entity, as at the commencement of the Trust.

The Trustee must be a government entity.

Only the Trustee may issue units in the Trust.

A person may only become the holder of a unit if the person is a government entity.

Distributions are to be made to Unitholders:

The operational control over the Trust vests in the Trustee.

There are provisions that the Trust must act in accordance with unanimous directions given by the Unitholders.

Upon the Trust winding up, the surplus assets of the Trust are to be distributed to the unitholders.

The unitholders have rights and powers to appoint and dismiss the Trustee.

In the Constitution for the Trustee, the term Government Entity takes its meaning from section 24AT of the Income Tax Assessment Act 1936.

Only Government Entities can be Members of the Company:

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 Trust 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 way 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 Trust is an STB is section 24AS of the ITAA 1936.

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 Trust is not a company limited solely by shares. The Trust was established as a unit trust. The beneficial interest in the assets of the Trust are held by unitholders in proportion to their unit holdings.

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

On the facts the Trust is it not established by State or Territory legislation. It was settled pursuant to the Trust Deed when the Trust first held assets.

(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.

The Trust Deed provides that:

•                    the Trustee must hold the Assets of the Trust on trust for the unitholders,

•                    the beneficial interests in the assets are to be divided into units which are held by the unitholders,

•                    a person may only become a unitholder if the person is a government entity,

•                    the term 'government entity' takes its meaning from section 24AT of the ITAA 1936, and

•                    distributions are to be made to Unitholders pursuant to the Trust Deed.

Upon the Trust winding up, the surplus assets of the Trust are to be distributed to the unitholders. As per the Trust Deed, the Trust's income or property must be applied to the Unitholders. Should the Trust be wound up, all remaining property must be paid to a government entity.

Company A is a government entity (by virtue of being an STB for the purposes of subsection 24AT) and is the sole Unitholder of the units in the trust. Unitholders of the Trust can only be government entities as required by the Trust Deed.

Therefore, all legal and beneficial interests in the Trust are considered to be held by a government entity and all the entitlements to income and distributions are 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

The unitholders have rights or powers to appoint and dismiss the Trustee pursuant to the Trust Deed.

The Trust Deed provides that operational control over the Trust vests in the Trustee, who is also a government entity, includes an absolute discretion to exercise powers akin to that of absolute owner of the Trusts' assets.

However, the Trust Deed contains provisions that the Trust must act in accordance with unanimous directions given by the Unitholders.

Company A is a government entity. It owns all the units in the Trust as well as all the shares in the Trustee. It is accepted that Company A being a government entity and the only unitholder, has all the rights or power to appoint or dismiss the entity's governing body as it has the power to appoint or dismiss the Trustee at its discretion.

For practical purposes in this case because the unitholder is also the same entity that controls the Trustee, the Trustee, as a government entity, can remove itself as Trustee if it wishes to do so provided it satisfies the requirements in the Trust Deed without requiring a unitholder vote. The new trustee would also need to be a government entity.

The unitholder is only required to have the power or right to vote if any such powers or rights exist. As there is no power or right to vote in the Trust Deed this element is satisfied in this situation.

It is accepted that the Unitholder has the ability to direct its governing body under the Trust Deed as to the conduct of its affairs as it could dismiss the Trustee that fails to follow its directions.

Section 24AN

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

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 Trust 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 Trust is not an excluded STB.

Conclusion

The Trust 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 and STB and is not an excluded STB.