Private ruling: Income tax exemption
Date of advice: 6 June 2017
Published: October 2017
Ruling period: 1 July 2017 to 30 June 2018 | 1 July 2018 to 30 June 2019 | 1 July 2019 to 30 June 2020 | 1 July 2020 to 30 June 2021 | 1 July 2021 to 30 June 2022
Date scheme commenced: 1 July 2017

Ruling: Q1: 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? | A1: Yes.

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, establish and maintain reserves, invest moneys for replacement of supply and drainage infrastructure, enter commercial arrangements for the supply of water, and hold the necessary licences. 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: Summary: Please note that all legislative references referred to below are in relation to the Income Tax Assessment Act 1997 unless otherwise specified. 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. The objective of the entity is to supply water, establish and maintain reserves, invest moneys for replacement of supply and drainage infrastructure, enter commercial arrangements for the supply of water, and hold the necessary licences. The entity is carrying on an undertaking of a public nature for the benefit of a section of the community. The entity is a non-profit entity. 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 and therefore exempt from income tax pursuant to section 50-1.