Edited version of your written advice

Authorisation Number: 1051249041082

Date of advice: 11 July 2017

Ruling

Subject: Tax exempt community services organisation

Question 1

Is The Entity exempt from income tax pursuant to section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) on the basis that it is a society, association or club established for community services purposes under item 2.1 of section 50-10 of the ITAA 1997?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2017

The scheme commences on:

1 July 2016

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

1. The Entity is an incorporated association.

2. The Entity has a constitution.

3. The Constitution requires that the income and property of The Entity will be applied solely to the purposes set out in the Constitution and no portion shall be paid or distributed directly or indirectly to the members of the organisation except in good faith for expenses incurred or services rendered.

4. The Constitution provides that in the event that The Entity is wound or dissolved, the assets of The Entity must not be distributed to Members of The Entity, but must be transferred to another not for profit organisation having similar purposes to The Entity.

5. The Constitution provides that the Board of Directors has responsibility for the management of the business and affairs of The Entity.

6. The Entity has a strategic plan.

7. The Entity undertakes a number of projects.

8. You state that the income and property of The Entity is applied solely towards the promotion of the purposes set out in your Private ruling application.

Relevant legislative provisions

Income Tax Assessment Act 1997 (Cth) Section 50-1

Income Tax Assessment Act 1997(Cth) Section 50-10

Income Tax Assessment Act 1997(Cth) Section 50-47

Income Tax Assessment Act 1997(Cth) Section 50-70

Income Tax Assessment Act 1997(Cth) Section 995-1

Australian Charities and Not-for-profits Commission Act 2012 Section 25-5

ATO view documents

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 Ruling TR 2015/1 Income tax: special conditions for various entities whose ordinary and statutory income is exempt

Taxation Determination TD 95/56 Fringe benefits tax: can a body which is formed by government, is controlled by government and performs functions on behalf of government be an 'association' for the purposes of section 65J of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Taxation Ruling TR 2011/4 Income tax and fringe benefits tax: charities

Case law

Pro-campo Ltd v Commr of Land Tax (NSW) 81 ATC 4270

Douglas and Others v. FCT (1977) 77 FCR 112; 97 ATC 4722; 36 ATR 532

Quinton v. South Australian Psychological Board (1985) 38 SASR 523

Cronulla Sutherland Leagues Club Limited v FC of T 90 ATC 4215

Royal Australian College of Surgeons v. FCT (1943) 68 CLR 436; 7 ATD 289,

Victorian Healthcare Association v FC of T 2010 ATC 10-141

Reasons for decision

Summary

The total ordinary income and statutory income of The Entity is not exempt from income tax pursuant to section 50-1 of ITAA 1997 as it is not an association established for community services purposes, pursuant to item 2.1 of section 50-10 of the ITAA 1997.

Detailed reasoning:

Section 50-1 of the ITAA 1997 provides that the ordinary income and statutory income of certain entities is exempt from income tax. Item 2.1 of section 50-10 of the ITAA 1997 provides that a society, association or club established for community services purposes (except political or lobbying purposes) shall be an exempt entity, subject to special conditions in section 50-70 of the ITAA 1997.

Accordingly, to be an exempt entity described in item 2.1 of section 50-10 of the ITAA 1997, an entity must:

(a) be a society, association or club;

(b) be established for community services purposes (except political or lobbying purposes); and

(c) meet the special conditions specified in section 50-70 of the ITAA 1997.

(a) Society, Association or Club

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

Guidance on the terms 'society’, 'association' and 'club’ can be found in Douglas and Others v. FCT (1977) 77 FCR 112; 97 ATC 4722; 36 ATR 532 (Douglas case). In that case, Justice Olney made reference to the definitions contained in the Concise Oxford Dictionary for each of these terms as follows:

Unassisted by authority I would construe the collation 'society, association or club’ to refer to a voluntary organisation having members associated together for a common or shared purpose. Such a description is consistent with various dictionary definitions of the several words used. The following examples can be found in the Concise Oxford Dictionary:

Society: Association of persons united by a common aim or interest or principle;

Association: Organised body of persons for a joint purpose;

Club: Association of persons united for some common interest, usually meeting periodically for shared activity.

A society or association can be incorporated or unincorporated. The status of the entity’s incorporation does not have any bearing on whether the entity is considered a society or an association. In Pro-Campo Limited v. Commissioner of Land Tax (NSW) (1981) 81 ATC 4270; 12 ATR 26, Justice Lee stated:

The three words ``society, club or association'' are words in frequent use in our community and societies, clubs and associations are well-known entities. One knows that many organisations which give themselves the title society or association or club are as often incorporated as they are unincorporated.

The interpretations of 'society’, 'association’ or 'club’ as described above, emphasise a 'body of persons’ and 'an organisation of people’ with a 'common purpose’. The Entity is an incorporated association and is brought into existence by its members, a body of persons, to pursue a common purpose as stated in The Entity’s constitution. The Entity is a society, association or club.

(b) Established for community services purposes

Item 2.1 of the table in section 50-10 of the ITAA 1997 requires the society, association or club to be established for community service purposes (except political or lobbying purposes). The required 'community service purposes' must be the entity's main or predominant purposes (Cronulla Sutherland Leagues Club Limited v. FCT (1990) 90 ATC 4215 (Cronulla)).

The phrase 'community service purposes' is not defined in the ITAA 1997. The meaning of the phrase was discussed in Douglas, where Olney J stated at ATR 536 that:

The absence of a statutory definition and the very broad ambit of the words 'community service’ justify resort to the explanatory memorandum to identify more precisely the legislative intention.

Item 2.1 of the table in section 50-10 of the ITAA 1997 is the equivalent of its predecessor provision, subparagraph 23 (g)(v) of the Income Tax Assessment Act 1936 (ITAA 1936). The Explanatory Memorandum for the Taxation Laws Amendment Bill (No.2) 1990 which introduced subparagraph 23(g)(v) into the ITAA 1936 provides that the words 'for community service purposes' are to be given a wide interpretation and that:

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 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. An exclusion from the exemption will apply to bodies established for political or lobbying purposes.

The Commissioner’s view on the scope of the exemption provided by subparagraph 23(g)(v) of the ITAA 1936 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?.

Relevantly, paragraphs 2, 3 and 4 of TD 93/190 states:

2. 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 for the purposes of subparagraph 23(e), but which, nevertheless, conduct activities of benefit to the community. In other words, some organisations that do not qualify for exemption under subparagraph 23(e) may, nevertheless, be exempt under subparagraph 23(g)(v).

3. 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'.

Consequently, it is only when the purposes of the organisation are altruistic that they can be community services purposes. An altruistic purpose involves promoting, providing or carrying out activities, facilities or projects for the benefit or welfare of the community. That is, a community service organisation is expected to serve at least a particular group in need such as those expressed in paragraph 3 of TD 93/190 extracted above. Whether an entity has the requisite “community service purposes” is to be determined not merely by reference to whether a service is provided or available to the community, but also the motive by which it is provided. 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.

There is a distinction to be drawn between an association that is advancing its members' interests and an association advancing some community interests. The fact that an organisation conducts activities outside its main purpose as a community services organisation does not, of itself, preclude a club from being exempt. In Cronulla the court considered the operation of former section 23(g)(iii) of the ITAA 1936. The court found that, for an entity to qualify for the income tax exemption, the society, association or club must have as its main object or purpose the purpose specified in the exempting provisions. This purpose does not have to be the organisations only purpose. Lockhart J at 4225 noted that where a club conducts other activities, which are merely ancillary or incidental or secondary to the exempting purpose this will not disqualify the organisation from the exemption.

Lockhart J went on to state in Cronulla at 4225:

But if it has two co-ordinate objects, one of which is outside the exemption, the exemption cannot apply because it would be impossible to say that one object is the main or predominant object.

Therefore, to be considered an organisation established for community service purposes, the dominant purpose of the organisation's activities must be directed to altruistic purposes and this altruistic purpose must not be a political or lobbying purpose.

Application to facts

We have reviewed the purposes listed in The Entity’s Constitution. A number of these purposes are altruistic in nature, or result in a benefit to the community. A number of these purposes would also benefit members.

A number of the purposes outlined in the Constitution promote members interests. They may also result in a benefit to the community.

The Constitution is therefore indicative of two main purposes, one being the promotion of member’s interests and the other being an altruistic community services purpose. The Constitution does not support a finding that the dominant purpose of The Entity is altruistic.

However, paragraph 7 of TD 93/190 states that the purposes for which an organisation is established are demonstrated by its current operations and activities. These purposes may be different than the purposes suggested by a cursory reading of an organisations constitution and may be different than the organisations formation or history suggest. Therefore, it is necessary to consider whether the current activities undertaken by The Entity demonstrate a dominant altruistic purpose.

You have provided a list of the current projects being undertaken by the Entity. You have also provided a copy of the current Strategic Plan. This plan is also indicative of the activities that will be undertaken by The Entity.

The activities outlined in the current projects and the Current and Prior Strategic Plans do not indicate that The Entity is established predominantly for an altruistic purpose. Similarly to the purposes outlined in the Constitution, the current activities demonstrate both an altruistic purpose and a purpose to benefit members.

Your private ruling application (Application) also indicates that The Entity has a number of purposes.

The fact that operations undertaken by The Entity for the benefit of members may result in a community benefit does not give activities that were undertaken for the benefit of members an altruistic purpose. In Victorian Healthcare Association v FC of T 2010 ATC 10-141 the Court considered whether a healthcare association had been established for community service purposes. In finding that it was not so established the Court stated [at 22]:

…it’s principal or dominant purpose is to provide services as directed and needed by its members… it’s operations may result in an improvement in community health as provided by its members but that is a by-product of its principal or dominant purpose, not any altruistic purpose for which it was established.

After careful consideration of the Constitution, the Current Strategic Plan, the Prior Strategic Plan, the Annual Reports and the current projects being undertaken by The Entity has been determined that The Entity has two co-ordinate purposes. The Entity has an altruistic community services purpose and undertakes a number of activities designed to benefit the community. It also has a purpose of benefiting members and to this end undertakes a number of activities to benefit its members. The benefits The Entity provides to its members cannot be considered merely incidental to the community services purpose. Rather, the extent of the activities and the Constitution itself indicates one of the principal purposes for which The Entity was established is to benefit members.’ While operations undertaken by The Entity for the benefit of members may result in a community benefit, that does not give those activities an altruistic purpose. Because the Entity has two co-ordinate purposes and one of the principal purposes is to provide benefits to members, it cannot be said that the dominant purpose of the organisation's activities are directed to altruistic purposes. Therefore, The Entity is not a community services organisation.

(c) Special Conditions

Section 50-70 of the ITAA 1997 sets out the special conditions for item 2.1. Subsection 50-70(1) of the ITAA 1997 states:

(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).

Not carried on for the profit or gain of its members

Subsection 50-70(1) of the ITAA 1997 requires that the association not be carried on for the purpose of profit or gain to its individual members. This is known as the non-profit requirement. Where members, in their individual capacity, are to receive benefits from an association it will fail the non-profit test. An association usually ensures they operate on a non-profit basis by including non-profit clauses in their constituent documents. An association’s actions must also be consistent with the non-profit requirement.

The Entity has the necessary non-profit clause and dissolution clauses in its constitutional document, either explicitly or through operation of law. The Entity’s constitution provides that all assets and income of The Entity is to be applied exclusively to the promotion of its objects. No portion is to be paid or distributed directly or indirectly to the members except as good faith remuneration for expenses incurred or services rendered.

The Entity’s constitution provides that on winding up or dissolution of The Entity, the remaining assets of The Entity shall be distributed to organisations having similar purposes to The Entity. These organisations must also prohibit distribution of income or property amongst members.

Therefore The Entity has the appropriate not for profit clauses in its constitution that prevent individual members from receiving benefits. It is accepted that The Entity is not carried on for the profit or gain of its members.

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

For The Entity to meet this condition, it must have a 'physical presence’ in Australia and, to that extent, incur its expenditure and pursues its objectives principally in Australia.

The Entity has a physical presence in Australia. It is located in Australia and incurs its expenditure and pursues its purposes principally in Australia.

Governing rules and application of income and assets

Subsection 50-70(2) of the ITAA 1997 provides that the Association 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.

Taxation Ruling TR 2015/1 Income tax: special conditions for various entities whose ordinary and statutory income is exempt (TR 2015/1) provides guidance in respect of the conditions in subsection 50-70(2). Paragraph 9 of TR 2015/1 provides that an entity’s 'governing rules’ are those rules that authorise the policy, actions and affairs of the entity. Paragraphs 18 and 19 of TR 2015/1 explain that the substantive requirements in an entity’s governing rules are those rules that define the rights and duties of the entity and include rules such as those that:

● give effect to the object or purpose of the entity

● relate to the non-profit status of the entity

● set out the powers and duties of directors and officers of the entity

● require financial statements to be prepared and retained

● set out the criteria for admission as a member of an entity

● require an entity to maintain a register of members, and

● relate to the winding-up of the entity.

Paragraphs 33 to 35 of TR 2015/1 provide that an entity must solely apply its income and assets for the purpose for which the entity is established. However, where the misapplication or misapplications of part of the income or assets are immaterial in amount and are a one-off misapplication or occasional misapplications, the income and assets condition will still be satisfied.

After a review of The Entity’s Constitution, Financial Reports and the activities conducted by the entity, it is accepted that ARV complies with the substantive requirements in its Constitution in the pursuit of its objects as set out in its Constitution. Accordingly, it is accepted that The Entity complies with all substantive requirements of its governing rules and applies its income and assets solely for the purposes for which it was established. Accordingly, The Entity satisfies the 'Special Conditions’ specified in section 50-70 of the ITAA 1997.

ACNC type entity condition

Section 50-47 of the ITAA 1997 provides that an entity that is covered by any item and 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 ('ACNC Act’). Section 50-47 of the ITAA 1997 provides:

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.

The expression 'ACNC type of entity’ is defined in subsection 995-1(1) of the ITAA 1997 to mean an entity which meets the description of a type of entity in column 1 of the table in subsection 25-5(5) of the ACNC Act.

Broadly, an entity capable of being a registered charity is an ACNC type of entity.

In Taxation Ruling TR 2011/4 Income tax and fringe benefits tax: charities sets out the Commissioner’s views on the meaning of 'charitable' in the terms 'charitable institution' and 'fund established for public charitable purposes' by reference to principles established by court decisions. Paragraph 26 of TR 2011/4 provides that an institution is charitable if it’s main or predominant or dominant' purpose is charitable in the technical legal meaning and it was established and is maintained for that charitable purpose. Any other purpose can only be incidental or ancillary to the charitable purposes.

The Entity’s Constitution sets out the purposes of The Entity. The Constitution provides that one of the purposes of The Entity is to promote members interests. As The Entity has a non-charitable purpose, it is not capable of being a registered charity. The Entity is therefore not an ACNC type of entity and section 50-47 of the ITAA 1997 is not applicable.

Conclusion

Based on the above, the total ordinary income and statutory income of The Entity is not exempt from income tax pursuant to section 50-1 of ITAA 1997 as it is not a society, association or club established for community services purposes, pursuant to item 2.1 of section 50-10 of the ITAA 1997.

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