Edited version of private advice

Authorisation Number: 1052175573161

Date of advice: 6 October 2023

Ruling

Subject: Income tax exempt - state and/or territory body

Question

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

Answer

Yes

This ruling applies for the following periods:

Income year ending 30 June 2024

Income year ending 30 June 2025

Income year ending 30 June 2026

Income year ending 30 June 2027

Income year ending 30 June 2028

The scheme commenced on:

1 July 2023

Relevant facts and circumstances

1.    The Trust was established via an initiative of the State Government and the formation of the Trust was expressly consented to by the State Treasurer.

2.    The Trust was established on XX July 20XX as a unit trust not having share capital. Company A owns 100% of the shares issued in the Trustee.

3.    Company A owns 100% of the units issued in the Trust.

4.    The Trust is not established by State or Territory legislation and the Trust Deed provides that the Trust commences at the earliest time that there are assets held in trust.

5.    Company A is a State or Territory Body exempt from Commonwealth income tax under section 24AM of the ITAA 1936.

6.    The Trust Deed provides that the Trustee must hold the assets of the Trust on trust for the Unitholders and that the beneficial interest in the assets are to be divided into units which are held by the Unitholders.

7.    The Trust Deed provides that, upon winding up, the surplus assets of the Trust are to be distributed to the Unitholders.

8.    The Trust Deed provides that distributions are made to Unitholders.

9.    The Trust Deed provides that distributions are made to Unitholders that are presently entitled.

10.  The Trust Deed provides that a person may only become a holder of a unit if the person is a government entity.

11.  The Trust Deed states that the term 'government entity' takes its meaning from section 24AT of the ITAA 1936.

12.  The Trust Deed provides that only the Trustee may issue units in the Trust.

13.  The Trust Deed provides that operational control over the Trust vests in the Trustee.

14.  The Trust Deed provides that the initial trustee must be a government entity.

15.  The Trustee Deed provides that the Trustee may be removed as Trustee by a unanimous resolution of the Unitholders.

16.  The Trustee must act in accordance with unanimous directions given by the Unitholders:

17.  The Trustee Constitution provides that at all times members of the trustee must be 'government entities':

Relevant legislative provisions

Income Tax Assessment Act 1936 section 24AK

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 24AP

Income Tax Assessment Act 1936 section 24AQ

Income Tax Assessment Act 1936 section 24AR

Income Tax Assessment Act 1936 section 24AS

Income Tax Assessment Act 1936 section 24AT

Income Tax Assessment Act 1936 section 24AU

Reasons for decision

Summary

The Trust is a STB under section 24AM of the ITAA 1936 and is therefore income tax exempt.

Detailed reasoning

There are two conditions for the Trust to become a State/Territory Body (STB). The first is that it must fit into one of five ways that an entity can be an STB and the second is that it cannot be an excluded STB.

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

Section 24AK of the ITAA 1936 states that there are five 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 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 of Part III of the ITAA 1936.

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.

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 one Unitholder.

It is not established by State or Territory legislation

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

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

(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 Trust Deed provides that:

•                     the Trustee must hold the assets of the Trust on trust for the Unitholder,

•                     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.

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 Trust's 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(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 (the Income Tax (Excluded STBs) Regulations was repealed by the Treasury Laws Amendment (2015 Measures No. 1) Regulation 2015), and the Trust is not a municipal corporation or other local governing body, a public educational institution, a public hospital, or a superannuation fund. As such, 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 or Territory body that fits into one of the five ways to be an STB and is not an excluded STB.