Edited version of your private ruling

Authorisation Number: 1012404565628

Ruling

Subject: Income tax exempt status of the Applicant

Income tax exemption.

Mutuality.

Tax file number.

Issue 1

Income tax exempt status of the Applicant.

Question 1

Is the Applicant an exempt entity for the purposes of Item 2.1 of section 50-10 of the Income Tax Assessment Act 1997 ("ITAA97")?

Answer

No.

Question 2

Are members of entities who are members of the Applicant considered members for the purposes of income tax and mutuality?

Answer

No.

Question 3

Can the Applicant apply for a Tax File Number?

Answer

Refuse to rule.

This ruling applies for the following periods

Financial year ending 30 June 2012.

Financial year ending 30 June 2013.

Financial year ending 30 June 2014.

Financial year ending 30 June 2015.

The scheme commences on

On or after 1 September 2011.

Relevant facts and circumstances

1. The Applicant

a. is an association;

b. was registered on a date;

c. is governed by its constitution and the terms contained therein;

d. has members who have satisfied the rules and requirements of the Applicant and been accepted as members; and

e. accepts membership fees from its members of $X per annum;

2. The objects of the Applicant are contained in its constitution and accompanying documents.

Relevant legislative provisions

Associations Incorporations Act 1985 (SA).

Income Tax Assessment Act 1936 section 202B.

Income Tax Assessment Act 1936 section 202BA.

Income Tax Assessment Act 1997 section 6-5.

Income Tax Assessment Act 1997 section 50-10.

Income Tax Assessment Act 1997 section 50-70.

Reasons for decision

Issue 1

Question 1

Summary

An entity's ordinary and statutory income is exempt from income tax where the requirements of sub-division 50-A of the ITAA97 are satisfied. An entity whose ordinary and statutory income is exempt from income tax is called an exempt entity.

An entity which is established for community service purposes is an exempt entity provided that it is not established for political or lobbying purposes. The Applicant was established to carry out political and lobbying activities on behalf of its members. Specifically in the context of State planning laws, regulations and transparent government decision making. This is evidenced by documents provided to the Commissioner in the Applicant's application and subsequent information received. Accordingly, the Applicant is not an exempt entity for the purposes of sub-division 50-A of the ITAA97.

Detailed reasoning

1. Division 50 of the ITAA97 - Exempt entities

1.1. Depending on the activities it conducts and the purpose for its establishment, an entity's ordinary and statutory income is exempt from income tax where it satisfies the requirements of sub-division 50-A of the ITAA97.

1.2. A community service entity's ordinary and statutory income is exempt from income tax where it

a. is a society, association or club established for community service purposes;

b. is not established for political or lobbying purposes; and

c. satisfies the conditions contained in section 50-70 of the ITAA97.¹

Society, association or club

1.3. The phrase 'society, association or club' is not defined in tax law. Accordingly, it takes on its plain ordinary meaning. In Theosophical Foundation Pty. Ltd. v. Commr. of Land Tax (1966-1967) 67 S.R. 70, Sugerman JA cites the relevant dictionary meaning to determine the appropriate construction of the phrase. His Honour says that

'A society, in the relevant sense, is `a number of persons associated together by some common interest or purpose, united by a common vow, holding the same belief or opinion, following the same trade or profession...'²

1.4. In Pro-Campo Limited v Commissioner of Land Tax (N.S.W) 81 ATC 4270 ("Pro-Campo"), Lee J cites with approval, the approach of Sugerman JA. His Honour indicated that

'The meaning of ``society'' as the Oxford English Dictionary definition shows can be the equivalent of ``association'' and I do not think that any relevant distinction in nature exists between the two. It merely seems to have happened that some organisations are called ``associations'', others are called ``societies'' but no meaningful difference can be detected between the two. It is, I believe, the fact that most organisations which are non-profit making in the sense that the members make no profit from the activities carried on will be found to be called societies, clubs or associations'.³

1.5. Further, in Pro-Campo, Lee J indicates that a society, association or club may be incorporated or unincorporated.⁴

1.6. Although this case law is specifically on the matter of State stamp duties, they are instructive as to the construction of the requisite phrase contained in section 50-10 of the ITAA97.

1.7. The Applicant is a group of like-minded entities who have collectively joined to pursue a common interest. Further, it is an incorporated association associated by the provisions of the Associations Incorporations Act 1985 (SA) and is governed by the rules contained in its constitution and accompanying documents.

1.8. Indeed, the Applicant has done so within the rules and regulations created and administered by them.

1.9. Accordingly, the Applicant is a society, association or club.

Community service purposes

1.10. The phrase 'community service purposes' is not defined in the tax law. It is given its plain ordinary meaning. In Navy Health Ltd v Federal Commissioner of Taxation (2007) 163 FCR 1, Jessup J said that

'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 or another'.⁵

1.11. In this regard, His Honour went onto say that the benefit provided must not be vague. Specifically, His Honour said 'community service'

'...deals with 'service' in a much more concrete setting, and 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...'

1.12. This approach accords with the Explanatory Memorandum of the Taxation Laws Amendment Act (No 2) 1990. It says

'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 on activities, facilities or projects for the benefit or welfare of the community, or of 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.'

1.13. In this context, the identifiable benefits or advantages which the Applicant seek to aid or support are transparent governance and decision making and appropriate resourcing for regulatory and enforcement procedures. Specifically with regard to the planning processes of State and local government. Accordingly, the Applicant was established for community service purposes.

Political or lobbying purposes

1.14. A society, association or club does not provide community services where it is established primarily for political or lobbying purposes.⁶

1.15. Political or lobbying purposes are those which relate to an exercise, or seeking to exercise, of influence or power over government, legislatures or public affairs specifically on particular causes or interests.

1.16. The question as to the true nature or character of the entity is to be assessed having regard to its objects, purposes and activities in an integrated and holistic sense.⁷

1.17. The objects of the Applicant are

a. to campaign for ethical and transparent governance including the provision of genuine information to communities;

b. to lobby for reform of planning, development and related legislation to ensure participative decision making with real community engagement;

c. to lobby for sufficient resources for reform of compliance and enforcement of relevant legislation and regulations and procedures; and

d. to act as an advocate for residents associations and community groups.

1.18. Further, in a media release on the launch of the Applicant, it details that the group was established as an advocacy group to lobby government for genuine community consultation. In particular, in the planning processes and decisions made by the State government.

1.19. In a document entitled 'Workshop Number 1' dated 8 March 2012, two topics of discussion are important factors in this context. Specifically, 'identification of resources required to assist campaign activities' and 'influencing State Parliament & how this dovetails with community campaigning'.

1.20. In a document entitled 'Workshop Number 2' dated 31 May 2012, a group "Q&A" was scheduled to identify 'How community groups can influence councils'.

1.21. Finally, in a platform for change document from August 2012, the Applicant identifies some of its lobbying methods by way of publication of documents which seek to influence community expectations and attitudes towards State planning laws.

1.22. Accordingly, the Applicant was established for political or lobbying purposes and continues to carry out such purposes by way of its activities. Therefore, it can not be an exempt entity for the purposes of section 50-10 of the ITAA97.

Conditions contained at section 50-70 of the ITAA97.

1.23. As the Applicant does not satisfy the political or lobbying exemption contained in section 50-10 of the ITAA97, it is already disqualified as an exempt entity. Therefore, it is not necessary to consider the conditions contained at section 50-70 of the ITAA97.

Question 2

Summary

A member for mutuality purposes is an entity who is a member of a society, association or club seeking to apply the mutuality principle. The Applicant defines, in their Constitution and related documents, who is a member organisation. The Applicant has requirements which must be satisfied for entities to be considered members. Entities who do not satisfy these requirements are not considered members. Accordingly, individual members of member organisations are not members of the Applicant for the purposes of mutuality because they have not satisfied the Applicant's membership requirements.

Detailed reasoning

2. Members for mutuality purposes

2.1. A member for mutuality purposes is an entity who is a member of a society, association or club seeking to apply the mutuality principle.

2.2. In the Applicant's constitution, a 'member organisation' is defined as '...any association or group which is a member of the association'.⁸

2.3. To become a member of the Applicant and therefore, a 'member organisation', entities must -

a. Be proposed by one existing member and seconded by one existing member;

b. Be either incorporated or unincorporated;

c. Make their application in writing signed by an authorised person;

d. Be accepted by the carrying of a motion at the Applicant's general meeting; and

e. Pay the appropriate annual fee.⁹

2.4. By definition, a member for mutuality purposes can not include a natural person because the Applicant restricts its membership to associations or groups.

2.5. This approach is consistent with a previous Private Binding Ruling which has been issued by the Commissioner.¹⁰ In that instance, the Commissioner considered a member for mutuality purposes was confined to the definition contained in the society, association or club's constituent documents.

2.6. The Commissioner accepts, for the purposes of mutuality, that an entity is a member of a society, association or club if the entity has

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

b. been accepted by the organisation (for example, by the board of directors); and

c. paid the appropriate membership subscription.¹¹

2.7. It follows that only entities who have satisfied these requirements can be members for mutuality purposes.

a. The Applicant has supplied a list of entities which it considers member organisations.

2.8. The abovementioned entities have satisfied the requirements of the Applicant to become members as required by clause 5.1 of the Applicant's constitution.

2.9. No other entities have satisfied the requirements to become members.

2.10. Accordingly, only these entities are members for the purposes of mutuality. Members of entities who are members of the Applicant are not considered members for the purposes of income tax and mutuality.

Question 3

We have refused to rule on your question relating to whether Applicant requires a Tax File Number. This is because our response would be a restatement of the law and involve no interpretative action.

Assumptions

1. For the approved period, the Applicant will continue to conduct its activities in accordance with its constitution.

2. If the Applicant amends its constitution in any material matter, it will advise the Commissioner accordingly and seek approval with respect to any ruling made with regard to the 'mutuality' principle.

3. Should there be a requirement to return a surplus of funds to its members on any wind up of the company, there is an equitable basis of returning the excess funds to members on the basis of the proportion of funds originally contributed by members.

4. The established membership rules as notified to the Commissioner are not amended or altered in any material way.

5. Entities who wish to become members follow the established membership rules of the Applicant.

¹ Income Tax Assessment Act 1997 section 50-10.

² Theosophical Foundation Pty. Ltd. v. Commr. of Land Tax (1966-1967) 67 S.R. 70 at pg 82.

³ Pro-Campo Limited v Commissioner of Land Tax (N.S.W) 81 ATC 4270 at 4279.

⁴ Pro-Campo Limited v Commissioner of Land Tax (N.S.W) 81 ATC 4270 at 4278.

⁵ Navy Health Ltd v Federal Commissioner of Taxation (2007) 163 FCR 1 at 33.

⁶ Income Tax Assessment Act 1997 section 50-10

⁷ Royal Australian College of Surgeons v Federal Commissioner of Taxation (1943) 68 CLR 436; Cronulla Sutherland Leagues Club Ltd v Commissioner of Taxation 90 ATC 4215.

⁸ Applicant's constitution at Clause 2 - Definitions.

⁹ XXXX Inc Constitution, clause 5.1.

¹⁰ Private Binding Ruling <Receipt ID 1011610553793>.

¹¹ Mutuality and taxable income: Meaning of member < http://www.ato.gov.au/nonprofit/content.aspx?menuid=0&doc=/content/00246133.htm&page=13&H13> (Accessed 17 January 2013).

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