Edited version of private ruling

Authorisation Number: 1011578211623

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Ruling

Subject: Income Tax Exemption

Issue 1

Question 1

Is the entity a society, association or club established for community service purposes pursuant to item 2.1 of the table under section 50-10 of the Income Tax Assessment Act 1997 (ITAA 1997) and therefore exempt from income tax?

Answer

No.

This ruling applies for the following periods:

Income year ended 30 June 2003

Income year ended 30 June 2004

Income year ended 30 June 2005

Income year ended 30 June 2006

Income year ended 30 June 2007

Income year ended 30 June 2008

Income year ended 30 June 2009

Income year ended 30 June 2010

The scheme commenced on:

1 July 2002

Relevant facts

The entity is a not-for-profit association.

The entity is formed for the purpose to purchase land and develop a working ecologically and socially sustainable urban housing neighborhood, which will allow for a diverse socio-economic community.

The entity owned all the lots and some were sold to the developer and the remaining lots sold or tenanted on the basis that prospective owners or tenants signed up to the Management Statement

Prospective purchasers and tenants were all required to signup to the Management Statement however being a member of the entity was not a requirement

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 50-10

Income Tax Assessment Act 1997 Section 50-70

Reasons for decision

Item 2.1 of section 50-10 of ITAA 1997 Act provides that a "society, association or club established for community service purposes (except political or lobbying purposes)" shall be exempt from income tax, subject to special conditions in section 50-70.

The special conditions in section 50-70 states:

An entity covered by item 1.7, 2.1, 9.1 or 9.2 is not exempt from tax unless the entity is a society, association or club that is not carried on for the purpose of profit or gain of its individual members and that:

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

· is a society, association or club that meets the description and requirements in item 1 of the table in section 30-15; or

· is a prescribed society, association or club which is located outside Australia and is exempt from income tax in the country in which it is resident.

Society, Association or Club

The words 'society' and 'association' is not defined in the ITAA 1997. An association is a voluntary organisation having members associated together for a common or shared purpose (Douglas & Ors v FCT 97 ATC 4722). Society has an equivalent meaning (Pro-Campo v Commissioner of Land Tax (NSW) 81 ATC 4270). An association may be incorporated or unincorporated.

The entity is an incorporated entity. The entity is an organised body of members instituted for the purpose as per its constitution.

It is accepted that the entity is an association.

Political or Lobbying Purposes

Paragraph 102 in Taxation Ruling 2005/21 - Income tax and fringe benefits tax: charities (TR 2005/21) states:

An institution or fund is not charitable if its purpose is advocating a political party or cause, attempting to change the law or government policy, or propagating or promoting a particular point of view (emphasis added).

From the objects and purposes in its constitution it is accepted that the entity is not advocating a political party or cause, attempting to change the law or government policy, nor propagating or promoting a particular point of view.

It is accepted that the entity has not been established for political or lobbying purposes.

Established for Community Service Purposes

For an organisation to exist for community service purposes its purposes must be altruistic as per Taxation Determination 93/190 -'Income tax: what is the scope of the exemption from income tax provided by subparagraph 23(g)(v) of the Income Tax Assessment Act 1936?' (TD 93/190) which states:

3. ... The Explanatory Memorandum to section 23(g)(v) of the Act confirms that the words 'community service purposes' are to be given a wide interpretation. Those words extend to a range of altruistic purposes which are not otherwise charitable, such as promoting, providing or carrying out activities, facilities or projects for the benefit or welfare of the community or any members of the community who have a particular need by reason of youth, age, infirmity or disablement, poverty, or social or economic circumstances.

4. However, the provision does not give exemption from income tax to a broad range of organisations that are established within the community, but whose purposes are not of an altruistic nature. Altruistic purposes are an essential element of even the widest interpretation of 'community service purposes.'

5. It is not accepted that common association as such is altruistic. Neither the purposes of members, nor the purposes of their organisation, are altruistic merely because the members form a non-profit association to advance their common interests. Members who seek to advance their common interests are not therefore motivated by an unselfish regard for others, and neither is their organisation. It follows that an organisation established for the purposes of its members is not therefore established for community service purposes. Only when the purposes of the organisation are altruistic can they be community service purposes.

Therefore, to be considered an organisation established for community service purposes, the organisation's activities must be directed to altruistic purposes. Altruistic purposes are directed for the benefit or welfare of the community or any members of the community who have a particular need by reason of youth, age, infirmity or disablement, poverty, or social or economic circumstances. That is, a community services organisation is expected to serve at least a particular group in need such as those expressed in paragraph 3 of TD 93/190.

We consider that the primary purpose of the entity by way of consideration of its objects, namely to be established for the purpose of purchasing and developing land; ensuring buildings and activities are ecologically and socially sustainable; encouraging the development of a socially and economically inclusive neighbourhood; working together with other groups in attaining these objectives and to support the formation of a community (or residents) association, are activities engaged to further the interests of the entity in the first instance.

Furthermore, the entity restricts the uptake of housing (whether private or tenanted) to those who will abide by the 'Management Statement' of the entity.

In relation to prospective tenants, in addition to having to abide by the 'Management Statement' also have to meet requirements of a selection criteria, which in addition to having Australian residency and income as a criteria also have the following additional criteria to determine who a successful candidate for tenancy would be

It is considered that the purposes and objects of the entity does not procure particular benefits to the community or any members of the community who have a particular need by reason of youth, age, infirmity or disablement, poverty, or social or economic circumstances. It is considered that the common interests of members are advanced by the entity and any benefits that flow to the community are as a consequence of this and thus such a benefit is considered to be an indirect benefit to the community.

We therefore consider the entity is a common association consisting of like minded members seeking to build and live in a neighbourhood that is ecologically and socially sustainable, to allow for the development of a diverse socio-economic community. It exists principally to promote this aim and it effectuates this aim by:

· purchasing land for housing, agricultural and other uses;

· ensuring buildings and activities are ecologically and socially sustainable;

· encouraging the development of a socially and economically inclusive neighbourhood;

· working together with other groups in attaining these objectives; and

· supporting the formation of a community (or residents) association who will maintain these objectives.

The immediate and long term benefits which arise when members live in a community or neighbourhood developed on ecologically and socially sustainable principles are benefits which accrue firstly to members. Persons who have an interest in the principles and benefits associated with sustainable living are those who, first and foremost, would choose to be members of the entity.

While the issues and solutions surrounding social sustainability are important and worthwhile, in accordance with paragraph 5 of TD 93/190, the purposes of the entity is not altruistic as members seek firstly to advance their common interests and are not motivated by a selfless and philanthropic regard for the community beyond members.

In addition, while it is acknowledged that some housing lots may be provided to persons eligible for public housing (i.e. under the partnership agreement between the entity and the developer), the provision of low cost housing is not the entity's primary purpose, and to this extent, it cannot be said that the entity seeks to promote, provide or carrying out activities, facilities or projects for the benefit or welfare of the community or any members of the community who have a particular need by reason of youth, age, infirmity or disablement, poverty, or social or economic circumstances.

Consequently, the entity is not considered to be established for community service purposes.

Special Conditions

The special conditions in section 50-70 of ITAA 1997 requires that the organisation is not carried on for the purpose of profit or gain of its individual members and that has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia;

Non Profit

The organisation currently has clauses that limit its ability to distribute profits to members.

It is considered that the entity has an insufficient non profit clause as per TR2005/21 which states:

76. An organisation is not charitable if it is carried on for the purposes of profit or gain to particular persons including its owners or members. This is known as the non-profit requirement. If an organisation is carried on for the profit of its owners or members, it is carried on for their benefit and not for the benefit of the community. This is the case irrespective of the number of owners or members, or whether charitable consequences flow from the organisation's activities. Thus, for example, a hospital that is operated for the purpose of distributing dividends to its private shareholders would not be a charitable institution despite providing care for the sick.

77. Organisations use various mechanisms to ensure they are not entitled to be carried on for the purposes of profit or gain to particular persons. The most common way is to include provisions in the constituent documents so that the organisation is prevented from distributing its profits or assets for the benefit of particular persons while it is operating and on winding up. These are commonly called the 'non-profit' and 'winding-up' or 'dissolution' clauses.

Page 72 of the Australian Taxation Office (ATO) publication Income Tax Guide for Non Profit Organisations - NAT 7967-03.2007 (ITGNPO) provides an example of acceptable wording as:

The assets and income of the organisation shall be applied solely in furtherance of its above-mentioned objects and no portion shall be distributed directly or indirectly to the members of the organisation except as bona fide compensation for services rendered or expenses incurred on behalf of the organisation

The entity has an acceptable dissolution clause. However, as the entity has an insufficient non profit clause it does not meet the non profit requirement.

In Australia

It is accepted that the entity has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia. As a consequence, the entity meets the 'In Australia' requirement.

As the entity does not have a suitable non profit clause it does not satisfy the 'Special Conditions' requirement of section 50-70 of the ITAA 1997.

Conclusion

Based on the above, the total ordinary income and statutory income of the entity is not exempt from income tax pursuant to section 50-1 of ITAA 1997 as it does not have an acceptable non profit clause and it is not an association established for community service purposes, pursuant to item 2.1 of the table in section 50-10 of the ITAA 1997.

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