Edited version of private ruling

Authorisation Number: 1011602817259

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Ruling

Subject: Whether the Rulee is exempt from income tax

Facts

The Rulee is a not for profit association incorporated under the Associations Incorporation Act 1984.

The Rulee's stated objective is to create opportunities for business to flourish within a defined, sustainable local economy. In meeting its objectives, the Rulee works with its members and state government authorities and councils, education and health institutions and local resident, community and cultural groups.

The Rulee will undertake a number of strategies to achieve its objects, including:

· Building the Rulee's management capacity

· Building the Rulee's reputation as a key player in local issues by (for example establishing advisory expert panels in key subject areas affecting local businesses)

· Strengthening the membership base of the Rulee

· Providing its membership with tools and resources to improve their business operations

· Supporting major events which reinforce the area's key retail and cultural offerings

· Leveraging retail and cultural promotions to build resident, student and tourist markets

· Developing a communication strategy which reinforces the area's brand.

· Informing and encouraging business operators to attend seminars, forums, government resources and training opportunities through a member website.

The Rulee is funded by council grants and also receives membership fees from local businesses (and may receive donations).

Detailed reasoning

The Rulee has asked if it "…is liable for income tax". The Rulee has not identified an exempting taxation provision and accordingly we have addressed the Rulee's request under item 2.1 in section 50-10 of the ITAA 1997.

To be an 'exempt entity' as described under Item 2.1 of section 50-10 of the ITAA 1997 the following requirements must be satisfied:

1. the entity must be a society, association or club

2. the entity must be established for community service purposes

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

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

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

ii. is a deductible gift recipient; or

iii. 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. Consequently, the terms should be given their ordinary meaning. The Macquarie Dictionary defines an 'association' as 'an organisation of people with a common purpose and having a formal structure'.

The Rulee is an association incorporated under the Associations Incorporation Act 1984. The Rulee's stated objective is to create opportunities for business to flourish within a defined, sustainable local economy.

It is accepted that the Rulee is an association for the purposes of item 2.1 in section 50-10 of the ITAA 1997.

Established for community service purposes

The phrase 'community service purposes' is not defined in the ITAA 1997. In considering whether an entity has been established for community service purposes it is useful to refer to subparagraph 23(g)(v) of the Income Tax Assessment Act 1936 (ITAA 1936), the precursor to item 2.1 in section 50-10 of the ITAA 1997.

The Explanatory Memorandum for the Taxation Laws Amendment Bill (No 2) 1990 which introduced subparagraph 23(g)(v) of the ITAA 1936 explains at page 13 that:

[T]he 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.…

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. [emphasis added]

Guidance on whether an entity has been established for 'community service purposes' can also be found in 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 Income Tax Assessment Act 1936. Taxation Determination TD 93/190 states:

3. … [T]he 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'. [emphasis added]

In its simple dictionary meaning, altruism may be defined as 'the principle or practice of seeking the welfare of others' (The Macquarie Dictionary, [Multimedia], version 5.0.0, 1/10/01) or 'unselfish concern for other people' (The Australian Oxford Dictionary, 2004, 2^nd edn, Oxford University Press, Melbourne).

Community services purposes then are altruistic which means that a community services organisation is established and operated with regard to the well-being or best interests of others. To qualify under Item 2.1 of section 50-10 of the ITAA 1997 for exemption from income tax, as well as being non-profit, the organisation must also be altruistic.

In order to determine whether the Rulee is established for community service purposes it is necessary to consider its governing documents, activities and purposes and to consider the circumstances and needs of those who benefit from the Rulee's operations.

In Navy Health Ltd v FCT (2007) 68 ATR 215, Jessup J 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. [emphasis added]

The Rulee has been established to create opportunities for business to flourish within a sustainable local economy through providing a voice for business; supporting the viability and skills base of local businesses and marketing the unique difference of the area. In meeting its objectives, the Rulee works with its members and state government authorities and councils, education and health institutions and local resident, community and cultural groups. The Rulee will achieve its objects by:

· Building its management capacity

· Building its reputation as a key player in local issues by (for example, establishing advisory expert panels in key subject areas affecting local businesses)

· Providing membership tools and resources to improve business operations

· Supporting major events which reinforce the precincts key retail and cultural offerings

· Informing and encouraging business operators to attend seminars, forums, government resources and training opportunities through a member website

· Leveraging retail and cultural promotions to build resident, student and tourist markets

The Rulee's objects and strategies show that they are operated to benefit business owners in the local area. The Rulee may benefit the local community but this would be a consequence of the benefits directed to business owners. We consider that the Rulee has not been established and is not operated with regard to the well-being or best interests (welfare) of the local community.

The Rulee does not satisfy the criteria required to be considered an entity established for community service purposes under item 2.1 of section 50-10 of the ITAA 1997; it is not established for community service purposes.

Special conditions

It is accepted that the Rulee satisfies the special conditions set out in section 50-70 of the ITAA 1997 as there is no evidence that the organisation is carried on for the profit or gain of its members and it has a physical presence in Australia.

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