Edited version of your written advice

Authorisation Number: 1013066471197

Date of advice: 10 August 2016

Ruling

Subject: Community Service Organisation

Question

Is the X Corporation exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) on the basis that it is a community service organisation as described in section 50-10 of the ITAA 1997?

Answer

No

This ruling applies for the following periods:

30 June 20WW to 30 June 20YY

The scheme commences on:

30 June 20WW

Relevant facts and circumstances

The constitution dated 20XX states the following objectives:

a) Develop enterprises that will result in employment opportunities for a particular group

b) Help facilitate management, including issues surrounding leasing and town planning activities.

c) Advocate for the governance rights

d) Interface with external stakeholders in pursuit of (a), (b) and (c) above.

e) To do any other thing or be involved in any other enterprise that helps achieve the

objectives of the corporation.

The constitution dated 20XX has the following non-profit clause:

10.1 Use of funds to Carry Out Business

Directors can use the money and property of the corporation to carry out its business.

10.2 No distribution of profits until July 20ZZ

Until July 20ZZ, the assets and income of the corporation must be applied only toward the corporation's objectives, and no assets or income may be distributed to members except as a reasonable payment:

(a) in their capacity as an employee of the corporation; or

(b) under a contract for goods or services provided.

10.3 Distribution of profits on or after July 20ZZ

On or after July 20ZZ, the directors may from time to time approve the distribution of the corporation's assets or income to members, provided that:

(a) no distribution has been made in the 12 month period immediately preceding the date of the distribution; and

(b) the assets or income are not required to meet the operational and capital expenditure needs of the corporation

(c) The distribution is approved by a consensus decision of a fairly assembled quorum of members and estate authorities, which together include at least: …

Note: These rules do not stop the corporation from making reasonable payment to:

a member in their capacity as an employee a member under a contract for goods or services provided.

The constitution dated 20XX has the following winding up clause:

The winding up of the corporation will follow the Relevant Act.

11.1 Resolutlon to distribute surplus assets

Subject to rule 11.2, where:

a) the corporation is wound up

b) after all debts and liabilities have been taken care of, and costs of winding up have been paid, surplus assets of the corporation exist, the members may pass a special resolution relating to the distribution of the surplus assets of the corporation.

11.2 No distribution of surplus assets to members

The distribution of surplus assets must not be made to any member or to any person to be held on trust of any member

The objects of the Company as stated in its constitution dated 20VV are as follows:

2. The charitable purposes of relieving the poverty, destitution, misfortune, disadvantage, distress, disposition and suffering and to promote the health, education, housing, employment and welfare of the members of the X Community, including by:

a) assisting members of the X Community to fulfil their responsibilities according to X Tradition.

b) assisting members of the X Community in relation to their social and cultural interests, including in relation to funerals and other ceremonies.

c) providing educational, sporting and training assistance to members of the X Community

d) assisting members of the X Community to gain employment.

e) assisting members of the X Community in relation to the establishment and maintenance of their residences.

f) assisting members of the X Community in relation to their personal transport and communications.

g) assisting members of the X Community to manage their personal financial and other assets and resources.

h) subject to the foregoing objects, distributing property and income of the Corporation to or for the benefit of the members of the X Community, including income received in consideration of the Peoples rights and interests according to X Tradition such as their rights and interest in Traditional Lands, and

i) such means as the Corporation considers to be incidental to sub paragraphs (a) to (h) above; and

2.2. To act as a trustee of any trust which has all or some of the same objects as are referred to in paragraph (2.l) above.

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 X Corporation is not exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) on the basis that it is a community service organisation as described in section 50-10 of the ITAA 1997.

Detailed reasoning

Section 50-1 of the ITAA 1997 provides an entity is exempt from income tax where it is a society, association or club established for community service purposes pursuant to item 2.1 of the table in section 50-10 of the ITAA 1997.

An organisation will be exempt from income tax as a community service organisation if it meets all of the following requirements:

• it is not a registered charity

• it is established for community service purposes (except political or lobbying purposes)

• it is a non-profit society, association or club

• it satisfies the special conditions.

Registered Charity

If an organisation is a registered charity it must be endorsed to be exempt from income tax.

The Corporation is not a registered charity with the Australian Charities and Not-for-profits Commission (ACNC).

Community Services Purposes

The main purpose of the organisation must be community service purposes. To determine an organisation's main purpose, consideration is given to the organisation's constituent documents, activities, use of funds and history. Any other purpose of the organisation must be incidental, ancillary or secondary to the community service purpose.

The ATO view of what constitutes community service organisation is expressed 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? and the Income tax guide for non profit organisations (QC 27150).

Paragraph 4 of TD 93/190 states that having an altruistic purpose is an essential element of even the widest interpretation of community service purposes. That is, community service organisations are established and operated with regard to the wellbeing and benefit of others.

Community service organisations promote, provide or carry out activities, facilities or projects for the benefit or welfare of the community or any members who have a particular need by reason of youth, age, infirmity or disablement, poverty or social or economic circumstances.

Organisations that seek to advance the common interests of their members are not altruistic and so cannot be community service organisations. If an organisation's main purpose is lobbying or political, its income will not be exempt.

TD 93/190 provides the following examples of community service organisations at paragraph 7:

Traditional service clubs such as Apex, Rotary, Lions, Zonta, Quota and the like and community service organisations such as the Country Women's Association of Australia and its constituent Associations are considered to be exempt from income tax under 23(g)(v).

The objects of the Company as stated in its constitution dated 20VV are as follows:

2. The charitable purposes of relieving the poverty, destitution, misfortune, disadvantage, distress, disposition and suffering and to promote the health, education, housing, employment and welfare of the members of the X Community, including by:

a) assisting members of the X Community to fulfil their responsibilities according to X Tradition.

b) assisting members of the X Community in relation to their social and cultural interests, including in relation to funerals and other ceremonies.

c) providing educational, sporting and training assistance to members of the X Community

d) assisting members of the X Community to gain employment.

e) assisting members of the X Community in relation to the establishment and maintenance of their residences.

f) assisting members of the X Community in relation to their personal transport and communications.

g) assisting members of the X Community to manage their personal financial and other assets and resources.

h) subject to the foregoing objects, distributing property and income of the Corporation to or for the benefit of the members of the X Community, including income received in consideration of the Peoples rights and interests according to X Tradition such as their rights and interest in Traditional Lands, and

i) such means as the Corporation considers to be incidental to sub paragraphs (a) to (h) above; and

2.2. To act as a trustee of any trust which has all or some of the same objects as are referred to in paragraph (2.l) above.

The constitution dated 20VV has broad charitable objects, directed at promoting the social, cultural and economic welfare of the relevant X community. However, the Corporation is not a registered charity. This is a decision made by the Australian Charities and Not-for-profits Commission (ACNC) which was established in December 2012, and not by the Australian Taxation Office.

The objects of the Company as stated in its constitution dated July 20XX are as follows:

a) Develop enterprises that will result in employment opportunities for a group

b) Through proper processes, resource and help facilitate management, including issues surrounding leasing and town planning activities.

c) Advocate for the governance rights of the estate authorities,

d) Interface with external stakeholders in pursuit of (a), (b) and (c) above.

e) To do any other thing or be involved in any other enterprise that helps achieve the

objectives of the corporation.

The objects of the Corporation under the constitution above are directed at the development of enterprises that will result in employment opportunities for particular traditional X people groups. Based on the information submitted, the Corporation was primarily established as a structure to manage the finances and business operations of particular traditional X people members.

The X people who are members of the Corporation would meet the definition of a section of the community who have a particular need by reason of poverty, or social or economic circumstance. We consider that the Corporation has an altruistic purpose that is beyond that of a common association of people as it has been established to improve the standard of living of the members.

Consequently, the Corporation has been established for community service purposes.

Society or association

The words 'society' and 'association' are 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 Corporation was established under the Corporations (X and Relevant Act 2006. The Applicant is an organised body of members associated for a common purpose. It is accepted that the Corporation is an association.

Non-profit requirement

A non-profit organisation does not operate for the profit or gain of its individual members, whether these gains would have been direct or indirect. This applies both while the organisation is operating and when it winds up.

Any profit made by the organisation goes back into the operation of the organisation to carry out its purposes and is not distributed to any of its members.

We accept an organisation as non-profit where its constituent or governing documents prevent it from distributing profits or assets for the benefit of particular people - both while it is operating and when it winds up. These documents should contain acceptable clauses showing the organisation's non-profit character.

The organisation's actions must be consistent with this requirement.

The constitution effective from July 20XX permits the distribution of profits on or after July 20ZZ. A non-profit clause must not permit the distribution of profits to members at any time; therefore the Corporation does not satisfy this requirement.

Special conditions

For a community service organisation that is not a registered charity to be exempt from income tax, it must pass one of the following tests outlined in section 50-70 of the ITAA 1997:

• physical presence in Australia test

• DGR test

• prescribed by law test.

An organisation that exists, operates and incurs its expenditure solely and entirely in Australia will meet the physical presence in Australia test.

The Company is limited by guarantee in a state of Australia. It conducts its activities and incurs expenditure in Australia.

The Company satisfies the physical presence in Australia test. The other tests do not need to be considered. The special conditions of section 50-70 of the ITAA1997 are satisfied.

Conclusion

The X Corporation is not a community service organisation and is not exempt from income tax because it fails the non-profit requirement.

ATO view documents

Income tax guide for non-profit organisations ((QC 27150)

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?

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