Edited version of your written advice

Authorisation Number: 1051301152997

Date of advice: 14 November 2017

Ruling

Subject: Income Tax - Exempt entities - community service

Question

Is the Entity a ‘society, association or club established for community service purposes (except political or lobbying purposes)’ as per item 2.1 of the table in section 50-10 of the Income Tax Assessment Act 1997 ( ITAA 1997), thereby qualifying for income tax exemption pursuant to section 50-1 of the ITAA 1997?

Answer

Yes

Relevant facts and circumstances

1. The Entity was founded in X a long time ago as a welfare and mutual aid organisation for people from a particular foreign location (ABC).

2. Historically, the Entity provided financial support, dispute resolution, temporary accommodation (as a lodging place), a place to worship (remembrance) and a place to acquire knowledge. The Entity reinforced concepts of fellowship, traditional values and links to home. Many of these activities continue to this day.

3. The Entity was registered as a company limited by guarantee on XXXX to take over the assets and liabilities of the unincorporated society.

4. The Entity’s governing rules are largely provided by a Memorandum and Articles of Association.

5. The Memorandum of Association provides the objects for which the Entity is established and includes the following:

(a) To conduct activities which are for the altruistic benefit and welfare of the community generally, in particular foreign residents residing in X whose descendants resided from ABC (but not for the individual gain of the members of the Entity).

(b) To solely foster good relationships to render services to fellow countrymen; to collectively work for their welfare based upon the spirit of mutual help, mutual respect and mutual love and to promote cultural religious and charitable activities or pursuit.

(c) To give relief and help to those old and sick fellow countrymen in their destitution and in their sickness.

(d) To strive for collective as distinct from individual benefit.

(e) To furnish to members and permitted visitors food and liquor and goods usually available to members.

(f) To apply for registration or licences necessary to carry out any of the above objects, particularly licences for the sale and consumption of intoxicating liquors, smoking requisites and to arrange for persons to hold such licences on the Company’s behalf.

(g) To provide welfare and support to foreign residents of the Entity whose descendants resided in ABC.

6. The Memorandum of Association includes a not-for-profit clause which states that the income and property of the Entity:

(a) must be applied solely towards the promotion of the objects of the Entity; and

(b) must not be paid or given to a member, directly or indirectly, by way of dividend, bonus or otherwise,

however the above paragraphs (a) and (b) do not prevent the Entity from paying a member or officer a reasonable and proper amount with the committee’s prior approval in good faith for:

(i) goods or services supplied to the Entity;

(ii) interest on money lent to the Entity; or

(iii) rent for premises let to the Entity.

7. The Memorandum of Association includes a dissolution clause which provides that the Entity’s surplus assets, after satisfying all liabilities on wind up or dissolution:

(a) must not be paid or given to members or former members; and

(b) must be paid to one or more funds, authorities or institutions which:

(i) have objects similar to those of the Entity;

(ii) prohibit their income and property from being paid to members on at least the terms of clauses x and y, and

(iii) are income tax exempt under the Income Tax Assessment Act 1997 (Cth) if the Entity had been.

The funds, authorities or institutions are to be selected at or before wind up or dissolution:

(c) by special resolution of the members;

(d) failing paragraph (c), by resolution of the committee;

(e) failing paragraph (d), by application of the Relevant Supreme Court.

8. Activities regularly undertaken by the Entity include:

● encouraging service and donating to charities;

● promoting the service ethic of supporting and helping others, particularly by encouraging members and non-members to raise charitable funds or make personal donations, and by donating Entity income to a range of charities.

● providing a broad range of general support to a particular foreign community out of the Entity’s hall by way of language support, health advice and occasional financial advice;

● conducting cultural activities and permitting its premises to be used to rehearse and host cultural activities;

● donating items of historical and cultural significance to a particular museum;

● conducting major cultural events and celebrations with a view to fostering the continuation of historical and cultural traditions, as well as providing opportunities to raise funds to donate or use for welfare activities; and

● providing a space to the community for the worship of ancestors.

9. The Entity is a Not for Profit Organisation and is not a registered charity with the Australian Charities and Not-for-profits Commission.

10. The Entity was not established for political or lobbying purposes and does not engage in any political or lobbying activities.

11. The Entity is not carried on for the purpose of profit or gain of its individual members. At all relevant times, the Entity has not made any cash distributions or paid any dividends (or the like) to its members or directors.

12. The Entity is located solely in Australia, and incurs its expenditure and pursues its objectives in Australia.

13. The Entity has applied its income and assets solely for the purpose for which it was established.

Assumptions:

1. The Entity has always complied with all the substantive requirements in its governing rules, and will continue to do so for the year ending 30 June XXXX.

2. The Entity will continue to apply its income and assets solely to providing for the welfare, benefit and support of the community for the income year ending 30 June XXXX.

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

Income Tax Assessment Act 1997 subsection 50-70(1)

Income Tax Assessment Act 1997 paragraph 50-70(1)(a)

Income Tax Assessment Act 1997 subsection 50-70(2)

Income Tax Assessment Act 1936 subparagraph 23(g)(v)

Reasons for decision

Question

Summary

The Entity satisfies the requirements to be an association established for community service purposes (except political or lobbying purposes) as per item 2.1 of the table in section 50-10 of the ITAA 1997 and thereby qualifies for income tax exemption pursuant to section 50-1 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 item 2.1 of the table in section 50-10 of the ITAA 1997. An entity is covered by item 2.1 of the table in section 50-10 of the ITAA 1997 where:

1. it is a society, association or club;

2. it is established for community service purposes (except for political or lobbying purposes); and

3. it meets the special conditions of 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 are therefore construed according to the ordinary meaning of the words. This approach was taken in Douglas v. Federal Commissioner of Taxation 36 ATR 532; (1997) 77 FCR 112; 97 ATC 4722 whereby the court made reference to the definitions contained in the Concise Oxford Dictionary for each of these terms.

In Taxation Determination TD 95/56 the Commissioner similarly considers the definition of 'association' by reference to its ordinary meaning and states (at paragraph 2):

… The Shorter Oxford English Dictionary defines the term 'association' to be 'a body of persons associated for a common purpose; the organisation formed to affect their purpose'. The Macquarie Dictionary defines 'association' as being 'an organisation of people with a common purpose and having a formal structure'. Olsson J, in Quinton v. South Australian Psychological Board (1985) 38 SASR 523, also stated that the term 'association' has come to be regarded as attaching to a body of persons associated for a common purpose.

The Entity is a company limited by guarantee, whose members are people associated for common purposes and interests, as stated in its Memorandum of Association, and therefore meets the definition of an association.

Established for community service purposes

Taxation Determination TD 93/190 (TD 93/190) sets out the circumstances under which a society, association or club is regarded as being established for community service purposes and explains (at paragraph 2) that the purpose of enacting subparagraph 23(g)(v) of the ITAA 1936 (being the predecessor to item 2.1 of the table in section 50-10 of the ITAA 1997) 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.

Paragraph 3 of TD 93/190, like the Explanatory Memorandum to subparagraph 23(g)(v) of the ITAA 1936, confirms that the words 'community service purposes' are to be given a wide interpretation, and

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.

However, paragraph 4 of TD 93/190 notes that subparagraph 23(g)(v) of the ITAA 1936

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’.

Only when the purposes of the organisation are altruistic can they be community service purposes. This is in contradistinction to an organisation established for the purposes of advancing the common interests of its members (see paragraph 5 of TD 93/190), or organisations designed to provide a social forum for expatriates of a particular country (see examples in TD 93/190). Where there is an incidental benefit derived by members of an organisation, it will not be a disqualifying attribute if it can be shown that the organisation is established mainly to provide benefits to the community.

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 reading of its constitution: see Royal Australasian College of Surgeons v. Federal Commissioner of Taxation (1943) 68 CLR 436 (paragraph 7 of TD 93/190).

The purposes of a body must be examined in each income year to determine if it is ‘established’ for community service purposes: see FC of T v Wentworth District Capital Ltd 2011 ATC 20-253, 2010 ATC 20-202.

The Entity's constituent document provides a broad list of objectives and lists a wide range of activities that it undertakes to achieve those objectives. The activities undertaken and the services and facilities made available by the Entity predominantly have regard to the well-being and/or best interests of others in the community, particularly those who reside in X, and whose descendants resided in ABC, and are therefore consistent with that of an altruistic purpose.

Neither the Entity’s stated objectives, nor its operations and activities for the period in respect of which this ruling relates; support either a purpose of advancing the common interests of its members or the provision of a social forum for expatriates.

It is therefore accepted that the Entity is established for community service purposes (none of which include political or lobbying purposes).

Section 50-70 of the ITAA 1997- Special conditions for items 2.1

Section 50-70 of the ITAA 1997 states:

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.

The Entity satisfies the special condition in subsection 50-70(1) of the ITAA 1997 as:

● the Entity’s Memorandum of Association contains suitable non-profit and dissolution clauses which satisfy the requirement that the Entity is not carried on, as an association, for the purpose of profit or gain of its individual members; and

● for the purposes of paragraph 50-70(1)(a) of the ITAA 1997, the Entity is located solely in Australia, pursues its objectives, undertakes its activities and incurs its expenditure in Australia.

The Entity satisfies the special condition in subsection 50-70(2) of the ITAA 1997 as:

● the Entity has, as assumed for the purposes of this ruling, always complied with all the substantive requirements in its governing rules and will continue to do so for the remainder of the income year ending 30 June XXXX; and

● the Entity has always applied its income and assets solely for the purpose for which the Entity is established and, as assumed for the purposes of this ruling, will continue to do so for the remainder of the income year ending 30 June XXXX.

Conclusion

Based on the above, the Entity is covered by item 2.1 of the table in section 50-10 of the

ITAA 1997 and eligible for income tax exemption under section 50-1 of the ITAA 1997 for the relevant income years.

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