Edited version of your written advice

Authorisation Number: 1012813598266

Ruling

Subject: Income Tax - community service organisations - income tax exemption

Question

Is the ordinary and statutory income of the entity exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) pursuant to item 2.1 of the table in section 50-10 of the ITAA 1997?

Answer

Yes

This ruling applies for the following periods:

1 July 20XX to 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The township

The township is a small community in a remote location.

The size and geographic isolation of the community means that community facilities (including restaurant, function and accommodation facilities) are limited.

The property is the largest venue in the town, and is the only combined-services venue that offers food, drink and accommodation.

The entity

The entity is an unlisted public company limited by guarantee established to enable a group of local people to purchase the freehold premises.

The purchase of the local (and only) property was funded by a debenture, which was fully paid back by the entity approximately 20 years after the debentures were issued. The purchase was made not-for-profit because the continuation of the venue would provide a real benefit to the community.

Article 2 of the entity's Memorandum of Association records that the entity was established to include the following objects:

• to carry on the business

• to hold the freehold premises

• to provide facilities for social intercourse for the residents of the district council and to provide athletic and amusement facilities and advantages for such residents;

• in doing charitable and benevolent work in the area of the district council and such other places as the directors may from time to time think fit and in improving the public and semi-public institutions therein;

• for the purpose of assisting recreation, sport, education, art, charity, science and literature in the area of the district council and such other places as the directors may from time to time think fit

• for promoting and fostering the interests of the town and such other places as the directors may from time to time think fit and for the improvement of the said area and such other places.

The entity's objects as stated in its Memorandum of Association are achieved by the following activities:

• the entity provides a forum for policy development, networking and communication, and promotes the industry in various areas;

• the entity works with other local organisations to promote the social, lifestyle and recreational aspects of the town;

• the entity promotes business activity within the community, and facilitates important aspects of tourism in the local area; and

• the entity provides an important hub and gathering place for the residents of, and visitors to, the town.

A copy of the entity's Memorandum of Association has been provided.

The board of directors (the board) of the entity is constituted of a committee of men and women from all walks of the community, with a minimum of five and maximum of seven. The original board included a manager, farmer, newspaper worker and various local businessmen. The current board is constituted by X directors, a number of whom reside in the town.

The membership of the entity is open to any person or organisation that has an interest in the entity. At present, the entity has XX members, XX of whom are residents of the town.

The entity's registered office and principal place of business addresses are in Australia, and the activities of the entity are primarily conducted in Australia.

The property

The entity's main source of income is lease payments for the leasehold on the property, which is a public bar and restaurant with accommodation. The property was established in 18XX as the first and only public house in the township.

When the entity purchased the property it was a struggling enterprise that had ceased to be commercially viable. When a purchaser could not be found, the then-owners proposed to close the property. Closure of the only public property as such in the town was likely to present significant inconvenience to the residents and to potential tourists of the town.

The members of the entity decided to band together to fund the purchase because, in the absence of the community stepping in to maintain the property, the community would have lost an essential meeting place for community events and general socialising.

In 200X the property was leased by the entity for a term of 25 years.

Not-for-profit classification and donations

The entity is run as a not-for-profit entity. This status is enshrined in the entity's Memorandum of Association, which provides that:

• no portion of the income or property of the entity is to be distributed by way of profit to its members (Article 4(1));

• the income and property of the entity shall be applied to the objects of the entity (Article 4(2)); and

• any surplus property after winding-up is not to be distributed to members but is to be applied for the benefit of the town and the District Council.

Every year the entity donates money to the community for such purposes as equipment for the local hospital/sporting bodies, trophies for sporting events, upgrading facilities to community buildings and sporting facilities. The recipient and purpose of the donations is decided on an annual basis by the board.

Donations are only made within the council area.

Annually the Board advertises in the local paper for community organisations to apply for funding.

The entity is currently working on funding an aged care/retirement living program in conjunction with the community hospital and community health organisations with a focus on dementia related support and services. Funding focuses within program include equipment purchases and it is anticipated that the program will commence implementation during the near future.

The following documents have been provided in support of the continued income tax exempt status of the organisation:

• a list of 'life members' as at the ruling date

• a current extract of the company's Australian Securities and Investments Commission registration which shows the current directors

• a list of donations made by the organisation since 1985 and,

• a list sponsored events during the ruling year.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 50-1

Income Tax Assessment Act 1997 section 50-10

Income Tax Assessment Act 1997 section 50-70

Reasons for decision

Summary

The total ordinary income and statutory income of the entity is exempt from income tax pursuant to section 50-1 of the ITAA 1997 as it is a society, association or club established for community service purposes pursuant to item 2.1 of the table under section 50-10 of the ITAA 1997.

Detailed reasoning

Section 50-1 of the ITAA 1997 exempts from income tax the total ordinary and statutory income of an entity covered by section 50-10 of the ITAA 1997. Item 2.1 of the table in section 50-10 of the ITAA 1997 states that a society, association or club established for community service purposes (except political or lobbying purposes) shall be exempt from income tax, subject to the special conditions in section 50-70 of the ITAA 1997.

Accordingly, to be exempt from income tax under item 2.1 of the table in section 50-10 of the ITAA 1997, an entity must:

• be a society, association or club;

• be established for community service purposes (except political or lobbying purposes); and

• meet the special conditions specified in section 50-70 of the ITAA 1997.

Society, association or club

The words 'society', 'association' or 'club' are not defined in the ITAA 1997 and have their ordinary meaning.

The Macquarie Online Dictionary defines an association as 'an organisation of people with a common purpose and having a formal structure'. 'Society' has an equivalent meaning as discussed at length in Pro-campo Ltd v. Commr of Land Tax (NSW) 81 ATC 4270 at 4279; (1981) 12 ATR 90 at 35.

The entity is an unlisted public company limited by guarantee. As an incorporated entity brought into existence by its members to pursue a common purpose, as stated in its articles and memorandum of association, the entity is accepted as an association.

Established for community service purposes

Item 2.1 in section 50-10 of the ITAA 1997, is the equivalent of subparagraph 23(g)(v) of the Income Tax Assessment Act 1936 (ITAA 1936). Guidelines for the exemption provided by that subparagraph are located 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? (TD 93/190).

TD 93/190 states that the purpose of enacting the provision was to create a category of exemption for community bodies whose activities are not accepted as being charitable because they do not fall within one of the four heads of charitable purpose. The provision does not give exemption from income tax to a broad range of organisations that are established within the community whose purposes are not of an altruistic nature. Altruistic purposes are an essential element of even the widest interpretation of 'community service purposes': In accordance with the Macquarie Online Dictionary 'altruistic' means regardful of others; having regard to the wellbeing or best interests of others.

TD 93/190 considers the meaning of a community service purpose and states at paragraphs 3-5:

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 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.

The Explanatory Memorandum for the Taxation Laws Amendment Bill (1990) which introduced subparagraph 23(g)(v) of the Income Tax Assessment Act 1936 (ITAA 1936) provides further guidance. The Explanatory Memorandum states that the words 'for community service purposes' are to be given a wide interpretation and that:

They extend to a range of altruistic purposes including promoting, providing or carrying out activities, facilities or projects for the benefit or welfare of the community, or of members 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 circumstances. An exclusion from the exemption will apply to bodies established for political or lobbying purposes.

The Explanatory Memorandum and TD 93/190 indicate that to determine whether an association is established for community service purposes it is necessary to consider its constitution, its current operations and activities, and also the circumstances and needs of those who benefit from the operations. If it can be shown that an entity is established mainly to provide benefits to the community, it will not be a disqualifying attribute if there is an incidental benefit derived by members.

In FC of T v Wentworth District Capital Ltd 2011 ATC 20-253, 2010 ATC 20-202 (Wentworth) it was discussed whether the wording in the legislation in relation to 'established' meant when an entity is initially established or whether it refers to its current activities. In the Wentworth appeal JJ Emmett and Gilmour explained:

It was common ground, however, as the trial judge stated, that the issue of whether a body in question was "established" was to be addressed in each income year by looking at its activities in that year while at the same time it was relevant to look at the objects or purposes for which the body was incorporated, including the clauses in its memorandum of association or constitution: see Cronulla Sutherland Leagues Club Limited v Commissioner of Taxation 90 ATC 4215; (1990) 23 FCR 82 at 89-90 and 116-117 (which considered s 23(g)(iii) of the Income Tax Assessment Act 1936 (Cth), the predecessor to Item 2.1 of s 50-10), s 4-1 of the 1997 Act and the Explanatory Memorandum to the Taxation Laws Amendment Act (No 2) 1990 (Cth), cl 6. Thus, an entity might be established for the requisite purpose in one year, but not another: see Cronulla at 89-90 and 116-117. The word established therefore means existing in the year of income.

In other words, the purposes of an entity must be examined in each income year to determine if it is 'established' for community service purposes.

In the case of the entity the purpose of its establishment can be found in its Articles and Memorandum of Association, which indicates that it was established to:

• carry on the business

• acquire the property premises

• manage the resources of the premises and stock

• hold stocks and bonds

• to provide facilities for social intercourse between the residents

• improving the public and semi-public institutions therein;

• assist recreation, sport, education, art, charity, science and literature and

• for promoting and fostering the interests of the town

The entity no longer carries on the business. The premises are now leased to another entity for the conduct of business. The principal purpose for the entity is now the provision of premises in which a business can be conducted which is used by a wide range of the community. The proceeds of the lease have continued to be applied for the benefit of the community.

The entity was established by a group of local businessmen who had an interest in the welfare of the town and the community in general. The Articles of Association contain a non-profit clause which prevents the members of the entity from gaining personal profit from their roles in the entity. The articles of association also recognise that no portion of income from the entity can be paid or indirectly benefit the members of the entity. Any funds raised are to benefit the community at large. The wind-up clause states that if there remains any surplus upon winding up the entity the amounts cannot be distributed amongst the members but must be applied for the benefit of the community.

The property has benefited the community in a twofold manner. Historically the premises have provided a venue for numerous social, business and tourist requirements. Without the original purchase of the property by the entity the community would have lost all capacity to hold events for large groups including and not limited to business meetings, conferences, presentations and training as well as social events such as birthdays, weddings and other occasions for the community.

The debenture which funded the purchase of the business and premises was paid off after approximately 20 years. Subsequently the entity was able to commence donating funds to the community. The funds are applied to members or representatives of the community following an application for funding lodged with the committee. There is a public advertisement for expressions of interest for funding. The request is then processed in accordance with strict guidelines set down by the committee and the funding available is then distributed for the benefit of the community.

In the current situation the entity no longer conducts the property enterprise. The entity has leased the premises to another entity in return for lease fees. The property business is still conducted and the facilities are still provided to community groups free of charge to support the community.

The change in role for the entity to landlord has increased the income derived by the entity and has provided more funding to be available for community services. This is demonstrated by the list of donated funds which has been provided.

The entity now considers that it provides the facility by which the property business which is so vital for the amenity of the community to be conducted. As a consequence of leasing the premises it has access to greater funds to give back to the community.

The size of the township and its remote location as detailed in the facts of the case indicates that the community may be considered to have particular needs in their social and economic circumstances due to remoteness.

TD 93/190 indicates that an entity can be considered to be providing eligible activities for 'community service purposes' where the community or members of the community have a particular need. In Wentworth it was considered that 'need' arising from economic circumstances could include varied matters such as living in a remote area.

In Wentworth, reference was made at paragraph 33 to the Federal Court decision, in which the trial judge stated what 'purposes' were considered 'community service purposes':

'Community service purposes include the purpose of providing a community service, although the purposes contemplated are not limited solely to the act of provision. The expression is broad and may extend to encompass any activity whose purpose has a reasonable connection to the delivery of a community service. Facilitation and promotion, therefore are purposes that are squarely within s50-10…'

Therefore a community service purpose is not just limited to the provision of a community service but the facilitation and promotion of a community service. The entity originally owned and operated the property and premises on which the business was conducted however the property business is now conducted by other entities.

As established in the Wentworth case, the community owns the premises through which the business can be conducted. This has enabled the continuation of the business which was conducted by the non-profit organisation to be run on a commercial basis with the ownership of the property still giving control to the entity over the manner in which the property is utilised, with greater profitability (from lease payments) and the profits have continued to be applied to the community through donations.

These purposes can be likened to those in the Wentworth case where an organisation in the Wentworth District was established due to a lack of face-to-face banking services available in the region. In Wentworth the entity was held to be established for community services purposes. The taxpayer was incorporated in 1998 by certain members of the small town of Wentworth (population 1,400) to establish a community bank in conjunction with Bendigo Bank. The taxpayer provided the premises, staff and equipment; Bendigo Bank granted a franchise to one of its wholly owned subsidiaries to operate the branch. The income generated was first used to repay all of the money which originally had been pledged by the town members, and later to fund a grants scheme under which community groups (such as football clubs, schools and the Rotary Club) could apply for and receive grants.

The Federal Court held (and the Full Federal Court agreed) that the taxpayer's income was exempt. The provision of banking services to customers of a commercial bank could not be the provision of a community service, but that was not the service provided by the taxpayer. The service the taxpayer provided was the creation of circumstances that would make it possible for a commercial bank to operate in Wentworth, a regional district. The main or dominant purpose for which the taxpayer was established, that is the facilitation of face-to-face banking services in the town, was a community service that provided a substantial benefit to the community of Wentworth that was both real and tangible.

The circumstances of the entity have similarities to those of Wentworth. It was established to provide facilities and services which would otherwise be unavailable in a remote community.

An entity's tax status is to be addressed in each income year by looking at its activities in that year, for example in Wentworth's case the introduction of a competitor would effectively alter the purpose for which the entity exists. That entity would no longer exist in order to facilitate face-to-face banking in a locale in which face-to-face banking otherwise would not exist. Whether or not Wentworth would have tax exempt status in other years in which the circumstances are different does not demonstrate that it does not have tax exempt status in the years in question: JJ Emmett and Gilmour.

In the entity's case it operates in an area in which no other similar services were available during the rulings income years. It can therefore be concluded that in the ruling's years of income the entity was established for community service purposes and the funds raised by the entity are applied for community service purposes.

The service provided by the entity can readily be distinguished from the circumstances found in Douglas & Ors v FC of T 97 ATC 4722. In that case the property owners claimed an income tax exemption based on the fact that they held a property known as a Protestant Hall which was made available for use by organisations identified in the trust deed. These entities were limited to two named lodges and other bodies not disapproved of by the trustees. It was found on appeal to the Federal Court that they did not undertake any activity which could be properly be described as being for the benefit or welfare of the community

As established in Wentworth's case, the facilitation of providing premises for the township to utilise for social interaction remained its purpose. The service provided was the creation of circumstances that made the operation of the venue which held important social significance to the town possible.

The entity holding and leasing the premises which continue to be used for wide ranging recreational purposes and donations made by the entity from the proceeds of leasing the premises which it previously used to directly provide services continues to fall within the definition of being established for community service purposes.

Political or lobbying purposes

The Explanatory Memorandum to Taxation Laws Amendment Bill (No. 2) 1990 confirms the words 'political or lobbying purposes' to mean:

Political or lobbying purposes include standing candidates for election, campaigning for changes to the law or to government policy, and the like. Community service organisations may engage in political or lobbying activities, provided these are no more than merely incidental to other purposes beneficial to the community. But a body will be unable to claim exemption from income tax under this subparagraph if its only undertakings for the benefit of the community are political or lobbying ones.

From the information provided, the entity appears not to have any role in advocating to government.

The entity has not been established for political or lobbying purposes.

Special conditions

Section 50-70 of the ITAA 1997 states that there are special conditions for which must be satisfied for entities considered for income tax exemption under section 50-10 (Item 2.1) of the ITAA 1997.

The condition states that an entity covered by item 2.1 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:

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

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

(c) 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.

The entity has a non-profit clause in its Articles of Association which states:

No portion of the income or property of the Company whencesoever derived shall he paid or transferred directly or indirectly by way of dividend, bonus or otherwise howsoever by way of profit to the members of the Company, provided however that this Article shall not prevent the Company from paying interest on debentures or other securities issued or given by the Company to any persons who are also members of the Company.

The entity also has dissolution clause in its Articles of Association which states:

If upon winding-up or distribution there remains any surplus property the same shall not be distributed amongst the members of the Company but shall be applied for the benefit of the Town and the District Council …

It is accepted that the entity operates in a non-profit manner.

For the entity to meet the first condition it must have a 'physical presence' in Australia and, to that extent, incur its expenditure and pursues its objectives principally in Australia.

From the information provided, the entity has a physical presence in Australia. It incurs its expenditure and pursues its purposes principally within the community defined in its Memorandum of Association which is located in Australia.

Accordingly, the entity satisfies the 'Special Conditions' specified in section 50-70 of the ITAA 1997.

Conclusion

Based on the above, the total ordinary income and statutory income of the entity is exempt from income tax pursuant to section 50-1 of the ITAA 1997 as it is a society, association or club established for community service purposes pursuant to item 2.1 of the table under section 50-10 of the ITAA 1997 for the duration of this ruling.

Further issues for you to consider

Entities created and carried on for community service can self-assess whether they are exempt from income tax. Further information on self-assessment can be obtained from the Australian Taxation Office website located at www.ato.gov.au then search for 'income tax exemption- non-profit organisations'.

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