Edited version of your written advice

Authorisation Number: 1051233208477

Date of advice: 06 June 2017

Ruling

Subject: 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 as a community service organisation?

Advice

The Entity is exempt from income tax under section 50-1 of the ITAA 1997 as it is a society, association or club established for community service purposes within item 2.1 of the table in section 50-10 of the ITAA 1997.

This advice applies for the following periods:

01 July 2016 to 30 June 2017

01 July 2017 to 30 June 2018

01 July 2018 to 30 June 2019

01 July 2019 to 30 June 2020

01 July 2020 to 30 June 2021

01 July 2021 to 30 June 2022

01 July 2022 to 30 June 2023

01 July 2023 to 30 June 2024

01 July 2024 to 30 June 2025

01 July 2025 to 30 June 2026

The arrangement commences on:

01 July 2016

Relevant facts and circumstances

1. The Entity is a proposed entity.

2. The Entity is in Australia.

3. The Entity will be a registered public company limited by guarantee.

4. The Entity will own real property.

5. The Entity will not be conducting any business or commercial enterprise.

6. The Entity’s only income will be lease payments received in return for the use of its property assets.

7. The Entity’s constitution states in its object clause that the dominant purpose of the organisation is to benefit the Entity’s community.

8. The Entity’s constitution stops the company from paying any dividends to members.

9. The Entity’s constitution has an appropriate not-for-profit clause.

10. The Entity’s constitution has appropriate company powers.

11. The Entity’s constitution has appropriate membership provisions.

12. The Entity’s constitution has appropriate director appointment/eligibility provisions.

13. The Entity’s activities will include funding, support and promotion of local community organisations, including organisations that are not charitable.

14. The Entity will advertise to the community that they can apply for donations and other support. Applications for donations and support are available to the whole community.

15. The Entity will review and consider these applications and decide where and how to allocate the funds and provide support.

16. The Entity will comply with all the substantive requirements in its governing rules

17. The Entity will apply its income and assets solely for the purpose for which the entity is established.

Summary

The Entity is exempt from income tax under section 50-1 of the ITAA 1997 as it is a society, association or club established for community service purposes within item 2.1 of the table in 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 in the table in section 50-10 of the ITAA 1997 includes a society, association or club established for community service purposes (except political or lobbying purposes). Item 2.1 is also subject to the special conditions in section 50-70 of the ITAA 1997.

Special conditions in section 50-47 of the ITAA 1997

The income tax exemption provided under section 50-10 of the ITAA 1997 is subject to the special conditions in section 50-47. The special condition is in relation to Australian Charities and Not-for-profits Commission (ACNC) type entities, the section states:

An entity that:

(a) is covered by any item; and

(b) is an * ACNC type of entity;

is not exempt from income tax unless the entity is registered under the Australian Charities and Not-for-profits Commission Act 2012 .

Special conditions in section 50-70 of the ITAA 1997

The income tax exemption provided under section 50-10 of the ITAA 1997 is subject to the special conditions listed in section 50-70 and further necessitate that an entity complies with all the substantive requirements in its governing rules and applies its income and assets solely for the purpose for which the entity is established. The special conditions in section 50-70 are:

50-70(1)

An entity covered by item 1.7, 2.1, 9.1 or 9.2 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;

and the entity satisfies the conditions in subsection (2).

50-70(2)

The entity must:

(a) comply with all the substantive requirements in its governing rules; and

(b) apply its income and assets solely for the purpose for which the entity is established.

Non-profit requirement

The Entity must not be carried on for the purposes of profit or gain of its individual members. Its constituent document must contain clauses that prevent it from distributing its profits or assets among members on a daily operational basis and on its winding up. This provision must also be reflected in its activities.

The Entity has the required not-for-profit and winding up clauses in the Constitution which prohibits distribution, payment or transfer of income or property to a member whilst the Entity is functional and upon its winding up. It is therefore accepted that the Entity will operate as a not-for-profit entity.

Society, association or club

The term 'society, association or club’ is not defined in the ITAA 1997. The term is therefore construed according to the ordinary meaning of the words.

In Douglas v Federal Commissioner of Taxation 36 ATR 532; (1997) 77 FCR 112; 97 ATC 4722 reference was made by the court to the definitions contained in the Concise Oxford Dictionary for each of these terms. 'Society, association or club’ was accepted by the court as referring to a voluntary organisation having members associated together for a common or shared purpose.

In Pro-Campo Ltd v Commr. of Land Tax (NSW) 81 ATC 4270, which concerned exemption from New South Wales land tax, Lee J said the following on the meaning of society, association and club:

The three words “society, club or association” are words in frequent use in our community and societies, clubs and associations are well-known entities…

In Theosophical Foundation Pty Ltd v Commr. of Land Tax (1966-1967) 67 SR 70 … Sugerman JA stated at p.82

“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, etc: an association.’ (Oxford English Dictionary,…) A society as thus described, in which the common element pertains to areas concerned with religion, may aptly be described as a religious society.”

… the three words are describing bodies made up of groups of persons who have come together to implement common purposes and objects… (at 4278–4279).

Although Pro-Campo Ltd v Commr. of Land Tax was considered in the context of State land tax, it is instructive as to the meaning of the terms contained in section 50-10 of the ITAA 1997.

The Entity will be a registered public company limited by guarantee and will be formed as a not-for-profit entity established for the benefit of the local community by supporting, improving, promoting, fostering and assisting local community interests. It is accepted that the Entity fits the description of “society, club or association” for the purposes of the operation of section 50-10 of ITAA 1997.

Established for community service purposes, except for political or lobbying purposes

The term “community service purposes” is discussed 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 states at paragraph 2 that in relation to former subparagraph 23(g)(v) of the Income Tax Assessment Act 1936 (ITAA 1936), which preceded item 2.1 of the table in section 50-10 of the ITAA 1997, that:

the purpose of enacting subparagraph 23(g)(v) was to create a category of exemption for community bodies whose activities are not accepted as being charitable ... but which, nevertheless, conduct activities of benefit to the community. [emphasis added]

TD 93/190 further states at paragraphs 3 to 5:

3. There are four heads of charitable purpose, one of which is other purposes beneficial to the community; but this is limited by the common law to those purposes which are also charitable within the meaning of the Statute, 43 Elizabeth, Ch. 4. The term 'community service purposes' has a broader meaning than other purposes beneficial to the community which are also charitable. 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.

Paragraph 7 states:

The purposes for which an organisation is established are demonstrated by its current operations and activities, which may show different purposes to those suggested by a cursory reading of its constitution: cf Royal Australasian College of Surgeons v. Federal Commissioner of Taxation (1943) 68 CLR 436.

In order for an organisation to be exempt under section 50-10 of the ITAA 1997 it must be a society, association or club established for community service purposes. TD 93/190 stresses the need for a community service organisation to have purposes that are of an altruistic nature. Organisations that seek to advance the common interests of their members are not altruistic, and so cannot be community service organisations.

As per TD 93/190 paragraph 3 quoted above, a community service includes 'promoting, providing or carrying out activities, facilities or projects for the benefit or welfare of the community or any members of the community’. This shows that in order for a society, association or club to be established for community service purposes they must perform a community service.

The Entity is providing funding and other support to community organisations. The Entity therefore is considered to be established for community service purposes.

Special conditions in section 50-47 of ITAA 1997

The Entity supports a broad range of activities and entities including sporting organisations which are not charitable. The Entity therefore does not have a solely charitable purpose and is not an ACNC type entity. As such the Entity does not need to be registered with the ACNC and can be income tax exempt under section 50-10.

Special conditions in section 50-70 of ITAA 1997

As stated above the income tax exemption provided under section 50-10 of the ITAA 1997 is subject to the special conditions listed in section 50-70. Section 50-70(1) requires the Entity to have a physical presence in Australia and, to that extent it pursues its objectives and incurs its expenditure principally in Australia. Section 50-70(2) requires the Entity to comply with all the substantive requirements in its governing rules and applies its income and assets solely for the purpose for which the entity is established.

Has a physical presence in Australia and, to that extent it pursues its objectives and incurs its expenditure principally in Australia

The Entity is based in a town in Australia. The Entity owns property in this town. It is accepted therefore that the Entity satisfies the condition that it has a physical presence in Australia and, to that extent it pursues its objectives and incurs its expenditure principally in Australia.

Complies with all the substantive requirements in its governing rules and applies its income and assets solely for the purpose for which the entity is established.

The Entity has yet to be established however it is accepted as part of the facts that the Entity will comply with all the substantive requirements in its governing rules and that the Entity will apply its income and assets solely for the purpose for which the Entity is established.

Conclusion

The Entity is a society, club or association. The Entity is providing a service to the community and is altruistic in nature. The Entity is established for a community service purposes as they are providing a service to the community through a community grants program and they will support and promote local community organisations. The Entity satisfies the special conditions in section 50-70 of the ITAA 1997 and the not-for-profit requirements.

The Entity’s ordinary and statutory income is therefore exempt from income tax under section 50-1 of the ITAA 1997 pursuant to item 2.1 of the table in section 50-10 of the ITAA 1997 as a community service organisation.

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