Private ruling: Income tax exemption
Date of advice: 13 May 2019
Published: July 2019
Ruling period: 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 | 1 July 2022 to 30 June 2023
Date scheme commenced: 1 July 2018

Ruling: Q1: Is the ordinary income and statutory income of the Entity exempt from income tax by reason that it is a State/Territory body under Division 1AB of Part III of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: Yes | Q2: Is the Entity exempt from income tax under section 50-25 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A2: No

Relevant facts and circumstances: 1. The Entity has function and powers over a constituted area. 2. The Entity is not a company limited by shares. 3. The Entity is established under an Act (Act). 4. The Act requires that each entity: ● is a corporation ● is to have a board of management ● may have the first board determined by the Minister ● is to have a board of three but not more than 10 members. 5. The Act stipulates the regulations may provide for election of board members. 6. The Act stipulates the government may remove the board. 7. The Act stipulates the government may abolish an entity where a board has not been elected. 8. The Act stipulates the government may wind-up a board if it has ceased to function satisfactorily or the private water board has made a request to the Minister that it to be wound up. 9. The elected Board is responsible for the ongoing management of the Entity’s operations. 10. The Constitution states the Board exercises the functions and powers granted to it pursuant to the Act, the Board may make by-laws provided they are not inconsistent with the Act or their Regulations, and the Constitution should be read in conjunction with the Act. 11. The Constitution states that the Act gives the Board the legal authority to carry out its duties and also provides guidelines under which the Board must operate. 12. The Constitution states the duties of the Board are to act within its powers under the Act. 13. The Constitution states: ● The government may remove all the members of a board if certain conditions are not met; ● The government may appoint an administrator and may call fresh elections; ● The government may abolish entity for which a board has not been elected; ● The government may wind up a board if the board requests it or if the Board has ceased to function satisfactorily; ● Once winding up is complete, the government may abolish the Board.

Relevant legislative provisions: Section 50-25 of the Income Tax Assessment Act 1997 | Division 1AB of Part III of the Income Tax Assessment Act 1936

Reasons for decision: Summary: The Entity qualifies as a State/ Territory body under section 24AQ of Division 1AB of the ITAA 1936. | Detailed Reasoning - Detailed reasoning: Section 24AM, in Division 1AB of Part III of the ITAA 1936, exempts income of a State/Territory body (STB) from income tax unless it is an excluded STB defined under section 24AT of the ITAA 1936. Sections 24AO to 24AS of the ITAA 1936 set out the five ways that a body can be an STB, however, the only relevant sections in relation to this ruling are sections 24AP, 24AQ and 24AR. Only one of these sections needs to be satisfied for the Entity to be exempt from income tax. For the Entity to be an STB under section 24AQ of the ITAA 1936, it must meet the all of the following requirements: a) be established by State or Territory legislation b) not be a company limited solely by shares c) the legislation gives the power to appoint or dismiss its direct its governing person or body to one or more government entities. The Entity meets the first and second requirements of section 24AQ since it was established under a state legislation and it is not a company with shareholders. Paragraph (c) of section 24AQ uses the term ‘government entities’. Under section 24AU of the ITAA 1936, where the power to appoint, dismiss or direct the governing body of an entity is given to a Governor of a State, a Minister of the Crown or a State or Territory, or the head of a Department of a State or Territory, the power is taken to be held by a government entity for the purposes of sections 24AQ of the ITAA 1936. The Constitution states that the Board exercises the functions and power granted to it pursuant to the Act. The Act provides that the Board may be appointed by the Minister and the Governor may order the Board to be wound up. As such, the third requirement is satisfied as a government entity, namely the State Governor has the power to appoint or dismiss the Entity’s governing body. As all of the requirements in section 24AQ of the ITAA 1936 are satisfied. Under section 24AM of the ITAA 1936, the income of an STB is exempt unless the STB qualifies as an excluded STB defined under section 24AT of the ITAA 1936. An excluded STB is includes the following type of entities listed in section 24AT: ● is prescribed by regulation to be an excluded STB ● a municipal corporation or other local governing body ● a public educational institution or a public hospital ● a superannuation fund. The Entity is not an entity of the type listed in section 24AT of the ITAA 1936 therefore it is not an excluded STB. The Entity is a STB under section 24AQ of the ITAA 1936, and is not an excluded STB under section 24AT of the ITAA, and therefore its income is exempt from income tax pursuant to section 24AM of the ITAA 1936. | Summary: The Entity is not exempt from income tax as it is not a government entity listed in the table in section 50-25 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Section 50-25 of the ITAA 1997 covers exempt government entities. The exempt entities are: ● a municipal corporation or a local governing body; ● a public authority constituted under Australi an law; and ● a constitutionally protected fund. The only exemption category the Entity might fall under is as a public authority. There are no special conditions that must be met for this item. A public authority is an entity that has been given power under state or federal statute which enables the entity to exercise powers or functions in relation to the public. The powers or functions must not be possessed by ordinary citizens. The statute must constitute the entity as a public authority. Having regard to the Act, the Entity does not have public duties and powers conferred on it. Therefore, the Entity is not exempt from income tax as a ‘public authority constituted under an Australian law’ under item 5.2 of the table in section 50-25 of the ITAA 1997.

ATO view documents: Taxation Ruling No. IT 2632 Income Tax: Meaning of ‘public authority’ in definition of ‘exempt public body’ in Division 16D