House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Chapter 3 - Income tax exemption for local government businesses

Outline of chapter

3.1 Schedule 2 to this bill amends the ITAA 1936 to extend to local government businesses the income tax exempt status currently available to bodies at the State and Territory level. This amendment supports the National Competition Policy, which encourages local government bodies to operate separate businesses, so as to improve their efficiency and service delivery.

3.2 Schedule 2 also makes a minor technical amendment to correct a legislative reference in section 24AT of the ITAA 1936.

Context of amendments

Income tax exemption for local government businesses

3.3 Division 1AB of the ITAA 1936 exempts wholly-owned STBs from income tax. This Division was designed to meet the needs of STBs which operate as separate business entities.

3.4 A government entity is defined in section 24AT of the ITAA 1936 as a State, a Territory or another STB that is not an excluded STB. The current definition does not extend to a municipal corporation or a local governing body. This means that sections 24AO to 24AS, which specify the 5 ways in which an entity can be an STB, do not apply to businesses that are owned or controlled at the local government level.

3.5 Section 50-25 of the ITAA 1997 provides an exemption for the income of a municipal corporation or a local governing body. However, a business that is owned or controlled by a local governing body does not qualify for exemption under this section.

3.6 The practical effect of the current law is that a local government business which is owned or controlled at the local government level does not qualify for exemption under the provisions mentioned in paragraphs 3.4 and 3.5. This is because the exemption currently available under Division 1AB is limited to entities at the State and Territory level and the exemption available under section 50-25 is limited to municipal corporations and local governing bodies and does not include businesses owned or controlled by those bodies.

Explanation of amendments

Income tax exemption for local government businesses

3.7 This amendment ensures that where a municipal corporation or local governing body (which itself is exempt by virtue of section 50-25 of the ITAA 1997) owns or controls a business, that business is also exempt under Division 1AB of the ITAA 1936 if it meets one of the 5 ways of becoming an STB. Without this amendment a business owned or controlled, at the local government level, would not be exempt under either Division 1AB of the ITAA 1936 or section 50-25 of the ITAA 1997.

3.8 A new paragraph has been inserted in section 24AT of the ITAA 1936, which extends the definition of government entity to include a municipal corporation or other local governing body. This amendment ensures that the five ways of becoming an STB (sections 24AO to 24AS) will also apply to businesses owned or controlled at the local government level. [Schedule 2, item 2, paragraph 24AT(ba)]

3.9 This amendment supports the National Competition Policy which is designed to improve the efficiency and service delivery of businesses at the local government level.

Technical correction

3.10 This technical correction makes a minor change to the definition of excluded STB in section 24AT of the ITAA 1936. It replaces the existing reference to paragraph 23(d) of the ITAA 1936 with a reference to section 50-25 of the ITAA 1997. The amendment correctly aligns Division 1AB with section 50-25 which is the appropriate exemption provision for municipal corporations and local governing bodies. Paragraph 23(d) of the ITAA 1936 was rewritten as section 50-25 of the ITAA 1997 as part of the Tax Law Improvement Project and this amendment simply updates the reference. [Schedule 2, item 1]

Application and transitional provisions

3.11 The amendments apply to income derived after 30 June 2000. [Schedule 2, item 3]