Edited version of private ruling

Authorisation Number: 1011568105565

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Income Tax Exemption

Issue 1

Question 1

Will the project which is proposed by the entity be merely concomitant and incidental to it's charitable purpose such that the entity continues to be covered by item 1.1 of the table in section 50-5 of the Income Tax Assessment Act 1997 (ITAA 1997) and exempt from income tax under section 50-1 of the ITAA 1997?

Answer

Yes

Issue 2

Question 1

Alternatively, if the entity is not a charitable institution covered by item 1.1 of the table in section 50-5 of the ITAA 1997, will the project be merely concomitant and incidental to the entity's purpose such that the entity would be covered by item 8.2 of the table in section 50-40 of the ITAA 1997 and exempt from income tax under section 50-1 of the ITAA 1997?

Answer

No

This ruling applies for the following periods:

Income year ended 31 December 2010

Income year ended 31 December 2011

Income year ended 31 December 2012

Income year ended 31 December 2013

The scheme commences on:

30 June 2010

Relevant facts

The entity is an association incorporated under the provisions of various Acts. It is also constituted under these Acts and its own 'Objects and Rules'.

The entity is formed for the purpose of promoting and encouraging the development of certain resources.

The entity is intending to undertake a project in relation to its property.

Specific provisions of the various Acts the entity is incorporated and constituted under relate to non profit and dissolution requirements.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 50-1

Income Tax Assessment Act 1997 Section 50-5

Income Tax Assessment Act 1997 Section 50-40

Income Tax Assessment Act 1997 Section 50-50

Income Tax Assessment Act 1997 Section 50-52

Income Tax Assessment Act 1997 Section 50-105

Reasons for decision

Section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) states:

The total ordinary income and statutory income of the entities covered by the following tables is exempt from income tax. In some cases, the exemption is subject to special conditions.

Item 1.1 in the table in section 50-45 of the ITAA 1997 states that an entity is exempt from income tax if it is a charitable institution.

The phrase 'charitable institution' is not defined in any Act.

In the High Court case of Young Men's Christian Association v. Federal Commissioner of Taxation (1926) 37 CLR 351 Higgins J said:

The very recent case of Chesterman v. Federal Commissioner of Taxation (1925) 37 CLR 317, on appeal to the Judicial Committee, shows that we are to consider the word "charitable" in the technical sense, and not in any popular sense of eleemosynary, etc.

In the High Court case of Incorporated Council of Law Reporting (Queensland) v. Federal Commissioner of Taxation (1971) 125 CLR 659; 2 ATR 515 (Incorporated Council case) Barwick, CJ said:

The Act (Income Tax and Social Services Contribution Assessment Act 1936-1962) attempts no definition of charity or of what for its purposes will be charitable. But having regard to the decision of the Privy Council in Chesterman v Federal Commissioner of Taxation (1925), 37 CLR 317, it must be taken that whether or not the institution is relevantly charitable will be determined according to the principles upon which the Court of Chancery would act in connexion with an alleged charity. That means that the indications contained in the preamble to the Statute of Elizabeth 1601 and the classifications in Lord MacNaughten's speech in Commissioner for Special Purposes of Income Tax v Pemsel [1891] AC 531, at p 583; [1891-4] All ER Rep. 28, at p 55, are to be observed in deciding whether or not the institution is charitable for the purposes of the Act.

The classifications in Lord MacNaughten's speech, in Pemsel's case, to which Barwick CJ referred were expressed by His Lordship as:

"Charity" in its legal sense comprises four principal divisions: trusts for the relief of poverty; trusts for the advancement of education; trusts for the advancement of religion; and trusts for other purposes beneficial to the community, not falling under any of the preceding heads.

Based on common law the characteristics of a charity are:

· it is an entity that is also a trust fund or an institution

· it exists for the public benefit or the relief of poverty

· its purposes are charitable within the legal sense of that term

· it is non-profit, and

· its sole or dominant purpose is charitable.

It is accepted the entity has, prior to its involvement in the project, met all the characteristics of a charity.

Consideration will therefore be given as to whether the entity will continue to meet all the characteristics of a charity as a consequence of its involvement in the project.

Institution

There must be an entity that is an institution.

In Stratton's case Gibbs J stated:

In its ordinary sense 'institution' means 'an establishment, organisation, or association, instituted for the promotion of some object, especially one of public utility, religious, charitable, educational, etc.' (The Shorter Oxford English Dictionary). It is, as was said Mayor etc. of Manchester v McAdam (1896) AC 500, at p 511, 'an undertaking formed to promote some defined purpose…. or 'the body (so to speak) called into existence to translate the purpose as conceived in the mind of the founders into a living and active principle'. Although its meaning must depend on its context, it would not ordinarily connote a mere trust (cf Minister of National Revenue v. Trusts and Guarantee Co Ltd (1940) AC 138, at p 149).

In undertaking the project, the entity continues to promote a defined purpose.

It is therefore accepted that the entity will continue to be an institution.

Public Benefit

A charitable institution provides benefits to the community generally. An exception is the purpose of the relief of poverty.

In the High Court case of Thompson v. Federal Commissioner of Taxation (1959) 102 CLR 315 Menzies J. said:

So too in Inland Revenue Commissioners v. Baddeley (1955) AC 572 , the House of Lords decided that a trust for the social and physical training and recreation of Methodists resident in two county boroughs was not charitable because the necessary element of public benefit was lacking. Viscount Simonds went further and said that a trust "cannot qualify as a charity within the fourth class in Income Tax Commissioners v. Pemsel (1891) AC 531 if the beneficiaries are a class of persons not only confined to a particular area but selected from within it by reference to a particular creed." (1955) AC, at p 592

In the same case, Dixon C.J. said:

Not a little difficulty has been felt in defining the conception of "public", "public charity" or "public benefit" which this involves but the contrast is, of course, to private advantage.…… In re Scarisbrick; Cockshott v. Public Trustee (1951) Ch 622 Jenkins LJ set out five general propositions upon this subject, in relation however to a case concerned with the relief of poverty. His Lordship in doing so said: "An aggregate of individuals ascertained by reference to some personal tie (e.g., of blood or contract, such as the relations of a particular individual, the members of a particular family, the employees of a particular firm, the members of a particular association, does not amount to the public or a section thereof for the purposes of the general rule" (1951) Ch, at p 649 (The italics are mine) (at p322)

Page 34 of the Australian Tax Office's publication Income tax guide for non-profit organisations (ITGNPO) states:

Charities are altruistic and exist for the benefit of the community or the relief of poverty….If an entity limits benefits on the basis of family ties, employment with a particular employer or membership of a particular association, it will not be a charity unless its purpose is to relieve poverty.

The entity's constitution and based on the information provided by the applicant in the application, it is accepted that membership is open to the public on a non-discriminatory basis.

Based on further information provided it is also accepted that the entity, in engaging in the project, would continue to meet the requirement that it exists for the public benefit.

Not Carried on for the Profit or Gain of Members

A charitable institution is carried out without purpose of private gain for particular persons including its individual members. If an organisation was carried on for the profit of its members or owners, it would be for their benefit and not for the benefit of the public. This would still be the case even if, as a consequence of its operations, some needy people were better off.

The constituent documents or rules governing the institution's activities must state that any income or property cannot be distributed to members. This includes preventing transfers to other organisations which do not have the appropriate non profit clauses in their constitutions or rules.

Page 35 of the ITGNPO states:

An entity is not charitable if it is carried on for profit or gain to particular persons, including its owners or members. This is the case, irrespective of the number of owners or members, or whether charitable consequences flow from the entity's activities.

Page 8 of the ITGNPO states:

The Tax Office accepts an organisation as non-profit where its constituent or governing documents prevent it from distributing profits or assets for the benefit of particular people. This applies both while the organisation is operating and when it winds up.

Paragraphs 74 to 92 of TR 2005/21 provide guidance on the Commissioner's view that a charitable institution not be carried on for the profit or gain of its individual members (a requirement that is inherent in the meaning of 'charitable purpose'), and that carrying on activities for the profit or gain of individual members is not a charitable purpose.

It is accepted that the entity, in engaging in the project, will continue to meet the requirement that it is not carried on for the profit or gain of its individual members.

Sole or Dominant Charitable Purposes

Charitable Purposes

As stated above, charitable trusts have been classified into four principle divisions by Lord Macnaghten in Income Tax Special Commissioners v. Pemsel (1601) 43 Eliz I c 4; ie

(a) the relief of poverty;

(b) the advancement of education;

(c) the advancement of religion; and

(d) other purposes beneficial to the community as a whole.

Paragraph 218 of TR 2005/21 states:

Many other purposes have been accepted by the courts as charitable. The following are groups of those decisions. In each case the public benefit requirement had also been satisfied.

The list is not exhaustive:

· promoting industry, commerce and agriculture: horticulture, agriculture,³¹⁹ ..

Footnote 319 refers to the case decision for Inland Revenue Commissioners v. Yorkshire Agricultural Society [1927] All ER Rep 536 (Yorkshire).

In Yorkshire it was observed by Atkin L.J. that:

…I myself have no doubt at all that if the question of validity had to be considered with regard to a bequest for the general improvement of agriculture, including, if you please, specific mention of the encouragement or holding of an agricultural show, such a bequest would be held to be a charitable bequest. I myself, therefore, have no doubt that in this case this Society was established, and was established for charitable purposes.
And Lawrence L.J. observed that:

…the…question in this appeal is whether the appellant Society was established for the promotion of agriculture generally or was what has been conveniently called a members' society, established for the promotion of the interests of its members in their respective businesses. If the former be the case I am clearly of opinion that the Society was established for charitable purposes only within the legal acceptation of that expression. Agriculture is an industry not merely beneficial to the community but vital to its welfare.

And

…It is plain to my mind that the general improvement of agriculture is a charitable purpose falling within the fourth class of Lord Macnaghten's well known classification of legal charities in Pemsel's case.

Based on the facts presented and on application of the judicial observations presented in Yorkshire, it is accepted that the entity, is engaged in purposes which are charitable in nature, and for purposes beneficial to the community.

Page 35 of the ITGNPO states:

The sole or dominant purpose of the entity must be charitable……Purposes which, when viewed in isolation, would not be charitable, must be incidental or ancillary to the charitable purpose.

If an entity has purposes that are not part of or incidental to its charitable purpose, it is not a charity. This is the case even if those purposes are secondary.

The way an entity is characterised was confirmed by Lockhart J in the full Federal Court case of Cronulla-Sutherland Leagues Club Ltd v. FC of T (1990) 90 ATC 4215; 21 ATR 300 who said:

In my opinion the question in a case such as the present must be what is the true character and nature of the appellant. It is a question of characterising the appellant having regard to its objects, purposes and activities.

Only activities which are incidental or ancillary to the main objects or purposes will not affect the status of an entity. In the High Court case of Stratton v. Simpson (1970) 125 CLR 138 (Stratton's case) Gibbs J said:

It is established that "an institution is a charitable institution if its main purpose is charitable although it may have other purpose which are merely concomitant and incidental to that purpose" or in other words if each of its objects is either charitable in itself or should be construed as ancillary to other objects which themselves are charitable. If however the non-charitable purpose is not merely incidental or ancillary to the main charitable purpose, the institution will not be charitable.

The ascertainment of the main object requires an examination of the activities. In the High Court case of Revesby Credit Union Co-Operative Ltd v. Federal Commissioner of Taxation (1965) 112 CLR 564; 38 ALJR 358 McTiernan J said:

The main test to be adopted in ascertaining the primary object is to ask what the actual activities of the appellant society indicate it to be.

TR 2005/21 advises in relation to purpose, objects and activities as follows:

176….Where an institution has some objects which are not, on their face, charitable, its activities may assist in showing that the objects are merely incidental to charitable purposes.

177. Such an approach is illustrated by the High Court's decision in Royal Australasian College of Surgeons v. FC of T (1943) 68 CLR 436. At issue was whether the College was a scientific institution. To determine whether the College's dominant purpose was advancing science the Court considered the objects in the College's constituent document and also its activities. The objects set out in the constituent document were partly for the promotion of surgical knowledge and practice and partly for the promotion of professional interests. They were not exclusively for science. … In light of the activities, the objects that, in isolation, could have been to promote the professional interests of members, were incidental to the purpose of advancing science. Accordingly, it was apparent that the College's purpose was for science, and any other features were merely incidental.

178. …. To be charitable, an institution's purposes must be charitable, and its objects must be at least incidental or ancillary to such purposes. For example, if the objects in the Royal Australasian College of Surgeons case were not reducible to the scientific purpose, the College would not have been a scientific institution.

In Royal Australasian College of Surgeons v. Federal Commissioner of Taxation (1943) 68 CLR 436, Williams J states:

When the principal activities which the College has carried on since its incorporation such as the holding of periodical conferences of surgeons for the discussion and study of surgical matters and the dissemination of surgical knowledge, the collection and collation of records of clinical cases occurring in hospital and private practice, the giving of evening lectures in surgical subjects, the provision of a technical library upon surgical subjects, the publication and distribution of a quarterly periodical known as the Australian and New Zealand Journal of Surgery, and research work in surgery are examined, it becomes clear that the College is in fact essentially an institution engaged in the promotion of the science of surgery in both a theoretical and practical sense. It is for this purpose that it has exercised its powers to purchase land, erect buildings, acquire a library and print and publish a scientific journal and other works.

It is considered that in undertaking of this project, the entity facilitates a certain object which is limited to the purposes of the entity. In facilitating the object the entity continues to further its charitable purposes. The project is therefore not a purpose ancillary or incidental to the entity's charitable purpose but an undertaking executed to further its charitable purpose.

Application of FCT v. Word Investments Pty Ltd

Reference was made by the applicant to the recent High Court decision in FCT v. Word Investments Pty Ltd 2008 HCA 55, Gummow, Hayne, Heydon and Crennan JJ at paragraph 13 which states as follows:

"the Commissioner submitted that if an entity claiming to be a charitable institution made a profit "as an incidental activity, or as concomitant and ancillary to the conduct" of the entity's charitable activities, it would not cease to be a charitable institution. But he said that if the profit-generating activity went beyond the incidental or the ancillary, the institution was not charitable. The Commissioner relied on the following statement by Gibbs J (Barwick CJ, Menzies and Walsh JJ concurring) in Stratton v Simpson:

"It is established that 'an institution is a charitable institution if its main purpose is charitable although it may have other purposes which are merely concomitant and incidental to that purpose' or in other words if each of its objects is either charitable in itself or should be construed as ancillary to other objects which themselves are charitable. If however the non-charitable purpose is not merely incidental or ancillary to the main charitable purpose, the institution will not be charitable."

Reference is also made by the applicant that the Commissioner of Taxation in this case additionally relied on the following statement of Williams J about the Royal Australasian College of Surgeons:

"in order to determine what is the main or dominant purpose of the College, it is a mistake to examine the objects contained in the memorandum in [a] disjunctive fashion. They should be examined in conjunction with one another and in the light of the circumstances in which the College was formed and of the manner in which the College is fulfilling the purposes for which it was incorporated."

The applicant notes the High Court response to the Commissioner of Taxation's argument, at paragraph 24, which stated that:

"It is therefore necessary to reject the Commissioner's arguments so far as they submitted that Word had a "commercial object of profit from the conduct of its business" which was "an end in itself" and was not merely incidental or ancillary to Word's religious purposes. Word endeavoured to make a profit, but only in aid of its charitable purposes. To point to the goal of profit and isolate it as the relevant purpose is to create a false dichotomy between characterisation of an institution as commercial and characterisation of it as charitable."

And that the majority of the High Court concluded at paragraph 26 that:

"…The activities of Word in raising funds by commercial means are not intrinsically charitable, but they are charitable in character because they were carried out in furtherance of a charitable purpose."

It is noted that the entity, unlike Word Investments Pty Ltd, is not conducting an on-going business activity nor is it directing surpluses to another entity with similar purposes.

The project involves the entity furthering its charitable purpose i.e. to promote and encourage the development of certain resources.

Special conditions

Sections 50-50 and 50-52 of the ITAA 1997 must be satisfied in order to qualify for endorsement as a charitable institution under item 1.1.

Section 50-50 of the ITAA 1997 states:

An entity covered by item 1.1 or 1.2 is not exempt from income tax unless the entity:

(a) has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia; or

(b) is an institution that meets the description and requirements in item 1 of the table in section 30-15; or

(c) is a prescribed institution which is located outside Australia and is exempt from income tax in the country in which it is resident; or

(d) is a prescribed institution that has a physical presence in Australia but which incurs its expenditure and pursues its objectives principally outside Australia.

Section 50-52 of the ITAA 1997 provides that an entity is 'not exempt from income tax unless the entity is endorsed as exempt from income tax under Subdivision 50-B.'

The entity has a physical presence in Australia and conducts all its activities and incurs all its expenditure in Australia. This will continue to be the case during the project period. As a consequence the entity satisfies subsection 50-50(a) of the ITAA 1997.

Conclusion

As a consequence of its involvement in the project, it is accepted that the entity continues to have a purpose of promoting and encouraging the development of certain resources.

It is accepted that the entity, as a consequence of its involvement in the project, will continue to further a charitable purpose.

Question 2

Section 50-52 of ITAA 1997 states as follows:

(1) An entity covered by item 1.1, 1.5, 1.5A. 1.5B or 4.1 is not exempt from income tax unless the entity is endorsed as exempt from income tax under Subdivision 50-B.

The note to this section states:

This means that an entity covered both by an item other than 1.1, 1.5, 1.5A, 1.5B or 4.1 and by one of those items is not exempt from income tax unless the entity is endorsed under Subdivision 50-B as exempt from income tax and the entity meets the requirements of whichever sections 50-50, 50-57 and, 50-60 and 50-72 is relevant.

The Commissioner of Taxation has considered that the entity is a charitable institution covered by item 1.1 of the table in section 50-5 of the ITAA 1997.

The entity is therefore not an entity that would be covered by item 8.2 of the table in section 50-40 of the ITAA 1997 and exempt from income tax under section 50-1 of the ITAA 1997.

This question is therefore not required to be addressed.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).