Edited version of private ruling

Authorisation Number: 1011587967634

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Ruling

Subject: Whether the Rulee is exempt from income tax

Facts

The entity is registered with the Australian Securities and Investment Commission as a non profit public company limited by guarantee.

The constitution of the entity lists its objects to include:

Developing and operating a Register of Practitioners

Promoting, enforcing and assisting the development of industry standards

Issuing practising certificates and developing, conducting and promoting systems for the accreditation and/or certification of Practitioners

Providing public interest information from its records

Developing, promoting and administering the standard of professional practice for Practitioners

The entity's Constitution details membership provisions of which there is only one class of members, namely corporate members. Corporate members must meet certain requirements including being a non-profit industry body in the same industry as the entity.

The entity's Constitution has valid non-profit and dissolution clauses.

The entity has also noted that the registrants included on the Register are not members, but do provide the main source of income through the payment of registration fees. Most (but not all) of these registrants are members of professional associations, which are the members of the entity, No income is received from members.

Reason for Decision

The Rulee's request has asked for confirmation that the entity is exempt from income tax as a community service purposes organisation.

A society, association or club established for community service purposes (except political or lobbying purposes) is described under item 2.1 in section 50-10 of the ITAA 1997.

To determine whether the Rulee is exempt from income tax as an entity described under item 2.1 in section 50-10 of the Income Tax Assessment Act 1997 (ITAA 1997), the following requirements must be satisfied:

· the entity must be a society, association or club

· the entity must be established for community service purposes

· the entity must satisfy the special conditions in section 50-70 of the ITAA 1997, namely

· the entity must not be carried on for the purposes of profit or gain of its individual members and

· it has a physical presence in Australia and incurs its expenditure within Australia in pursuing its objectives principally in Australia; or

· is a deductible gift recipient; or

· it is prescribed by law in the income tax regulations and it is located outside Australia and is exempt from income tax in its country of residence.

Society, association or club

The terms 'society', 'association' and 'club' are not defined in the ITAA 1997. The term should therefore be construed according to the ordinary meaning of words. The Shorter Oxford English Dictionary defines 'association' to be 'a body of persons associated for a common purpose; the organisation formed to effect their purpose'. The Macquarie Dictionary defines it as 'an organisation of people with a common purpose and having a formal structure'. This approach is also confirmed in Douglas and others v Federal Commissioner of Taxation (1997) 36 ATR 532; 97 ATC 4722 by Olney J who stated

…I would construe the collation "society, association or club" to refer to a voluntary organisation having members associated together for a common or shared purpose.

The Explanatory Memorandum for the Taxation Laws Amendment Bill (No 2) 1990 which introduced subparagraph 23(g)(v) of the ITAA 1936 states at pages 20-21:

As with sporting club, the bodies exempted include any qualifying society, association or club, whether incorporated or not.

The Rulee has been established under the Corporations Act 2001. The Rulee has a formal structure and its common purpose is stated in the objects clause of its constitution. It is an association.

Established for community services purposes

The phrase 'community service purposes' is not defined in the ITAA 1997. Subparagraph 23(g)(v) of the Income Tax Assessment Act 1936 (ITAA 1936) was the precursor of item 2.1 in section 50-10 of the ITAA 1997. Therefore, in considering whether the entity is established for community service purposes, it is relevant to refer to the explanatory memorandum for subparagraph 23(g)(v) of the ITAA 1936. It is also relevant to refer to Taxation Determination TD 93/190 Income tax: what is the scope of the exemption from income tax provided by subparagraph 23(g)(v) of the ITAA 1936?

The Explanatory Memorandum for the Taxation Laws Amendment Bill (No 2) 1990 which introduced subparagraph 23(g)(v) of the ITAA 1936 states at pages 20-21:

The words "for community service purposes" are not defined but are to be given a wide interpretation. The words are not limited to those purposes beneficial to the community which are also charitable. They extend to a range of altruistic purposes. The words would extend to 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 particular need of those activities, facilities or projects by reason of their youth, age, infirmity or disablement, poverty or social or economic circumstances. An exclusion from the exemption will apply to bodies established for political or lobbying purposes…

When purposes are directed to the benefit or welfare of members of the community in particular need, that need must arise by reason of youth, age, infirmity or disablement, poverty or social or economic circumstances…

In providing guidelines as to the scope of 'community service purposes' for the purposes of the exemption, Taxation Determination TD93/190 states:

3. The Explanatory Memorandum to subparagraph 23(g)(v) confirms that the words 'community service purposes' are to be given a wide interpretation. Those words extend to a range of altruistic purposes that 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 organisation 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.

In order to determine whether an entity is established for community service purposes it is necessary to consider its constitution, activities and purposes and to consider the circumstances and needs of those who benefit from the organisations operations.

In Victorian Healthcare Association Ltd v FCT (2010) AATA 473, the tribunal found at paragraph 22:

Notwithstanding the wording of the object of VHA in its constitution and in some of its publications which are likely to have had their origin in its attempt to satisfy the requirement of the statutes, I am satisfied that, being the peak body for its members and controlled by a board of directors made up of board members and executives of its members, its principal or dominant purpose is to provide services as directed and needed by its members. As with Navy Health its operations may result in an improvement in community health as provided by its members but that is a by-product of its principal or dominant purpose, not any altruistic purpose for which it was established.

In Navy Health Ltd v FCT (2007) 68 ATR 215, Jessup J said (at paragraph 83)

Although a composite expression, I consider that the essence of "community service" is that a service is provided to the community, or a section of the community. Here the word "service" is used in the sense of "help, benefit or advantage", particularly "the action of serving, helping or benefiting, conduct tending to the welfare or advantage of another" (OED, 2nd Ed). …

That brings me to the concept of "community". I accept, of course, that the word refers not only to the community as a whole but also to any identifiable section of the community, but it does not follow that the receipt of a service by any group of persons should be regarded as the receipt of that service by a section of the community. …

He further noted (at paragraph 84) that service;

…requires, in my view, the community, or a section of the community, to benefit by way of the receipt of some identifiable help, benefit or advantage bestowed or provided directly by the putative benefactor. Such a requirement, I consider, is not satisfied merely because, in this case, the operations of the applicant had a tendency to promote the efficiency of the armed forces, thereby benefiting the community as a whole.

With regard to bodies established to regulate a profession Lord Keith stated in General Nursing Council of England and Wales v. St. Marylebone Council [1959] AC 540 at 561, 562.

… it is said, the conditions as to training and experience imposed as a prerequisite of registration make the council a charitable organisation, because these conduce to the advancement of the nursing of sick persons, which is a charitable object. But assuming for the moment that this is a consequence of imposing these conditions, that cannot, in my opinion, be said to be the reason why they were imposed. The reason was to secure that only properly qualified persons should be registered. That clearly was the direct object indicated by the Act. We are not concerned with indirect consequences nor entitled to speculate on what ultimate purposes, if any, Parliament had in view. ….

If it is legitimate to look at the effect of the Act at all, as distinct from the actual functions imposed by the Act on the council and their content, it appears to me to be easier to say that one of its results was to raise the professional status of nurses and to protect them in the exercise of their profession, than to say the result was to advance the nursing of sick persons.

Thus an association which exists to benefit the members of an association or profession is not benefiting the public in the required sense. The association exists to benefit its members or individuals in a particular profession.

The Rulee has been established as a self regulating body in the absence of a statutory regulating body. Notwithstanding the Rulee is a peak body for its members, the primary or dominant purpose is to provide a Register of Practitioners to ensure practising professionals are complying with national standards.

It is clear that the primary or dominant purpose is directed at professionals practising in their relevant profession. Any public benefit would be an indirect consequence of the association's activities flowing from the direct benefits provided by the association to individuals in the profession. Any community service as a result of the activities of the entity will be an indirect consequence of their service to the Registered Practitioners. As such it is considered that the entity does not operate for the public benefit in the required sense.

Consequently, the Rulee does not satisfy the criteria required to be considered an entity established for community service purposes.

Special conditions

As it is considered that the Rulee does not qualify as an association that is established for community service purposes the special conditions for item 2.1 in section 50-10 of the ITAA 1997 need not be considered.

The Rulee's ruling request has asked for confirmation that the entity is exempt from income tax as a community service purposes organisation.

Section 50-1 of the ITAA 1997 exempts from income tax entities which are covered in the tables in Division 50. This includes an entity which is considered a society, organisation or club established for community service purposes (except political or lobbying purposes) under item 2.1 in section 50-10 of the ITAA 1997.

The Rulee is not considered to be a society, organisation or club established for community service purposes (except political or lobbying purposes) under item 2.1 in section 50-10 of the ITAA 1997. The Rulee is not an entity which is covered by any of the other tables in Division 50 of the ITAA 1997.

As such, the Rulee's income is not exempt from tax under section 50-1 of the ITAA 1997.

The Rulee's request has asked for advice as to the appropriate treatment of receipts received by the entity; in particular, whether any component of the receipts should be treated as mutual income.

Section 6-5 (1) of the ITAA 1997:

Your assessable income includes income according to ordinary concepts, which is called ordinary income.

Though the ITAA 1997 does not define the concept of mutuality, ordinary income does not include a receipt which is produced as a result of a mutual dealing.

The following extract from the decision of Anderson J in Royal Automobile Club of Victoria v. Federal Commissioner of Taxation 73 ATC 4153 ("RACV") at 4156 provides a guide to the application of mutuality principle:

It has been long established and many times reaffirmed that in the field of income tax the principle of mutuality may relieve wholly or in part certain associations from liability to tax. In Social Credit Savings and Loan Society Ltd v F C of T (1971) 45 ALJR 675 at 680; 2 ATR 612, Gibbs J, has succinctly described the principle. His Honour said: "Where a number of people, associated together for a common purpose, have contributed to a common fund in which all the contributors are interested, the surplus of their contributions remaining after the fund has been applied to the common purpose 'is in essence a return of their own moneys which they have overpaid and is not a profit' (Colonial Mutual Life Assurance Society Ltd v F C of T (1946) 73 CLR 604 at 618-9; 3 AITR 272, 450). This principle has found particular application in the cases of mutual investment funds and members' clubs. It may apply notwithstanding that the people thus associated have been incorporated, for the corporation is treated 'as a mere entity for the convenience of the members and policy holders, in other words, as an instrument obedient to their mandate' (English and Scottish Joint Co-operative Wholesale Society Ltd v Commissioner of Agricultural Income Tax, Assam [1948] AC 405 at 419; [1948] 2 All ER 395). Since the members of an association may at the same time engage in dealings that are mutual and business that is not, it may be necessary, and is permissible, to sever a fund which consists of receipts from mutual dealings as well as other receipts: Carlisle and Silloth Golf Club v Smith [1913] 3 KB 75; [1911-13] All ER Rep Ext 1521; Municipal Mutual Insurance v Hills (HM Inspector of Taxes) (1932) 16 TC 430; [1932]All ER Rep 979; National Association of Local Government Officers v Watkins (HM Inspector of Taxes) (1934) 18 TC 499; Revesby Credit Union Co-operative Ltd v F C of T (1965) 112 CLR 564 at 575.

Guidance regarding the required identity between contributors and participants can be found in the following extract from the decision of Mason J in Sydney Water Board Employees' Credit Union Ltd v F C of T (1974) 4 ATR 157 at 4135-4136:

Conformably with the original concept that the return of surplus funds is a refund to the contributors of their own money, it has been said that there must exist an "identity" between the contributors and the participators. In Municipal Mutual Insurance Ltd v Hills (1931) 16 TC 430, at 448; [1932] All ER Rep 979, Lord Macmillan said there must be a "complete identity". On other occasions it has been pointed out that the identity required is not an identity between individuals but an identity between classes (see The Social Credit Savings and Loans Society Ltd v F.C. of T. (supra ), at p. 4238). Again, with the same end in view, although it has not been insisted that the refund to contributors should be in precisely the same proportions in which they have contributors to the fund, it has been said that there must be "a reasonable relationship" between what a member contributes and what he may be expected or entitled to receive from the fund (Fletcher v Income Tax Commissioner (supra)).

Mutuality and taxable income (NAT 73436-06.2010) accepts a person as "…a member of an organisation where the person has:

· applied for membership (which may entail being nominated and paying the appropriate nomination fee)

· been accepted by the organisation (for example, by the board of directors), and

· paid the appropriate membership subscription."

The Rulee's Constitution details membership provisions of which there is only one class of members, namely corporate members. The persons whom the Rulee "registers" are not considered members of the entity under the entity's Constitution. The Rulee has indicated that receipts are not received from members; the main source of receipts for the entity is from the registrants.

Only those amounts received by the Rulee from members, in their capacity as members, are mutual receipts and are therefore not ordinary income under the ITAA 1997.

Receipts from 'external' sources, that is, from sources other than members, is not mutual income and is therefore not subject to the principle of mutuality. Accordingly, such income is fully assessable. In the case of the Rulee, this would include receipts from registrants.

The Rulee is not entitled to deductions under section 8-1 of the ITAA 1997 for losses or outgoings incurred in producing member receipts which are not included in assessable income.

As receipts from registrants are considered assessable income, a deduction for losses or outgoings incurred in producing these receipts will be allowable under section 8-1 of ITAA 1997, unless it is specifically denied pursuant to any other section of the ITAA 1997.

In calculating a tax loss for an income year pursuant to section 36-10 of the ITAA 1997, the net exempt income must be excluded. As such, where the Rulee has receipts and expenses which are considered mutual, these amounts will not be included in the calculation of any tax loss.

To the extent that the loss has not been incurred in producing mutual receipts (or any other exempt or non assessable non exempt income), it will be an allowable deduction pursuant to section 36-10 of the ITAA 1997, unless it is specifically denied pursuant to any other section of the ITAA 1997.

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