Edited version of your written advice

Authorisation Number: 1051344878134

Date of advice: 8 March 2018

Ruling

Subject: Income tax exempt status of an incorporated association

Question 1

Is the income of the Entity exempt from income tax pursuant to Item 6.3 of the table in section 50-30 of the ITAA 1997?

Answer

No

Question 2

Are membership contributions received by the Entity assessable income?

Answer

Yes

Question 3

Is the interest earned on funds loaned to members assessable income?

Answer

No

Question 4

Is the interest earned on funds on deposit assessable income?

Answer

Yes

Question 5

Is the Entity carrying on an enterprise for the purposes of A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes

Question 6

Will the Entity be required to register for goods and services tax (GST)?

Answer

No

This ruling applies for the following periods:

Income year ending 31 December 2016

Income year ending 31 December 2017

Income year ending 31 December 2018

Income year ending 31 December 2019

Income year ending 31 December 2020

The scheme commences on:

1 January 2016

Relevant facts and circumstances

1. The Entity is an incorporated association.

2. The Constitution of the Entity provides for contribution by members and a scheme of payment of financial assistance to members.

3. Members make weekly contributions.

4. The quantum of member contributions is set to ensure that the Entity is viable, can meet its objectives and function as required.

5. The Constitution provides for weekly sickness or injury payments for members for up to six months, after which payment is discretionary.

6. On the death of a member a sum will be paid to their beneficiary.

7. A payment will be made to the member on the death of a dependent family member.

8. The Entity is not run to make a profit.

9. The Constitution requires that income and property of the Entity is to be applied solely toward promoting the objects.

10. The Constitution provides that each member present or in proxy at a general meeting is entitled to vote.

11. The Constitution provides that on dissolution any surplus property must be given to another incorporated association or to a charity as determined by members.

12. The Entity is not registered under the Private Health Insurance Act 2007 (Cth) or the Private Health Insurance (Prudential Supervision) Act 2015 (Cth).

13. The Entity has provided a financial statement for the 2016 financial year. This document discloses total revenue for 2015 and 2016. Revenue consists of membership subscriptions, credit union interest and interest on loans to members.

14. The Entity has an operating surplus for the past two years.

Relevant legislative provisions

Section 6-5 of the Income Tax Assessment Act 1997

Section 6-10 of the Income Tax Assessment Act 1997

Section 59-35 of the Income Tax Assessment Act 1997

A New Tax System (Goods and Services Tax) Regulations 1999 – Regulation 23-15.01

A New Tax System (Goods and Services Tax) Regulations 1999 – Regulation 23-15.02

A New Tax System (Goods and Services Tax) Regulations 1999 - Regulation 40-5.09

A New Tax System (Goods and Services Tax) Regulations 1999 - Regulation 40-5.12

A New Tax System (Goods and Services Tax) Act 1999 – Section 9-5

A New Tax System (Goods and Services Tax) Act 1999 – Section 9-10

A New Tax System (Goods and Services Tax) Act 1999 – Section 23-15

A New Tax System (Goods and Services Tax) Act 1999 – Section 23-5

A New Tax System (Goods and Services Tax) Act 1999 – Section 40-5

A New Tax System (Goods and Services Tax) Act 1999 Subsection 188-10(2)

A New Tax System (Goods and Services Tax) Act 1999 Section 195-1

Life Insurance Act 1995 (Cth) Section 9

Life Insurance Act 1995 (Cth) Section 9A

Life Insurance Act 1995 (Cth) Section 204\

Insurance Act 1973 (Cth) Section 3

Reasons for decision

Question 1

Summary

The Entity is not exempt from income tax.

Tax exempt status

Item 6.3 of the table in section 50-30 of the ITAA 1997 provides that a private health insurer is exempt from income tax if certain requirements are met, including special conditions. A private health insurer can only be an exempt entity if it is a private health insurer within the meaning of the Private Health Insurance (Prudential Supervision) Act 2015 (PHIPS).

Section 4 of the PHIPS contains a number of definitions. A ‘private health insurer’ is defined as a body that is registered under Division 3 of Part 2 of the PHIPS. Section 12 of the PHIPS outlines the process of applying for registration. A body that is a company within the meaning of the Corporations Act 2001 and a constitutional corporation may apply to the Australian Prudential Regulation Authority (APRA) for registration as a private health insurer.

The Entity is not registered with APRA as a private health insurer so it cannot be a private health insurer within the meaning of the PHIPS.

Conclusion

As the Entity is not a ‘private health insurer’ as described in item 6.3 of the table in section 50-30 of the ITAA 1997 it is not exempt from income tax.

Question 2

Summary

Although the principal of mutuality applies to the member contributions, they are assessable income.

Detailed reasoning

Section 6-5 of the ITAA 1997 provides that assessable income includes income according to ordinary concepts, which is called ordinary income. Whether a receipt is income depends upon its quality in the hands of the recipient. Section 6-10 of the ITAA 1997 provides that assessable income also includes statutory income (amounts included by legislative provisions about assessable income).

The term ‘income’ is not defined in the Income Tax Assessment Act 1936 (ITAA 1936) or ITAA 1997. In The Bohemians Club v The Acting Federal Commissioner of Taxation [1918] 24 CLR 334 (Bohemians Club), Griffith CJ stated at 337-338:

A man is not the source of his own income, though in another sense his exertions may be so described. A man’s income consists of moneys derived from sources outside himself. Contributions made by a person for expenditure in his business or otherwise for his own benefit cannot be regarded as his income unless the Legislature expressly so declares.

The above comments of Griffith CJ have formed the basis of the principle of mutuality as it applies in Australia. A receipt by a taxpayer will not have the quality of ordinary income if the mutuality principle applies to it.

The essence of the mutuality principle is that you cannot derive any gain, and therefore income, from dealings with yourself. The mutuality principle provides that where a number of people associate for a common purpose and contribute to a common fund in which they are all interested, any surplus of those contributions remaining after the fund has been applied to the common purpose is not income or profit.

The mutuality principle was described by McTiernan J in Revesby Credit Union Cooperative Ltd v Federal Commissioner of Taxation (1965) 112 CLR 564 (Revesby Credit Union) at 574-575:

The principle of mutuality seems to me to be settled. Where a number of people contribute to a fund created and controlled by them for a common purpose any surplus paid to the contributors after the use of the fund for the common purpose is not income but is to be regarded as a mere repayment of the contributor's own money…Incorporation of the fund is not relevant…What is required is that the fund must have been created for the common purpose and owned or controlled wholly by the contributors. If it is owned or controlled by anyone else the principle cannot apply…Furthermore any contributions to the fund derived from sources other than the contributors' payments, such as interest from the investment of part of the fund, or income from a business activity conducted by the members, cannot be taken into account in computing the surplus…Also the cases establish that the principle cannot apply unless at any given point in time the contributors to the fund are identical with the beneficiaries of the distribution of the surplus.

Revesby Credit Union establishes that a mutual association has all of the following characteristics:

● Existence of a common fund controlled by the contributors for a common purpose;

● Identity between the contributors and the participants;

● Dealings are not in the nature of trade; and

● An incorporated entity must be an entity for the convenience of its members.

In Coleambally Irrigation Mutual Co-operative Ltd v FC of T 2004 ATC 4126 (Coleambally), the court found that where a constitution prohibits distribution to members on winding up, the connection between those who contributed to the common fund and those who participated in the common fund is broken so as to prevent the principle of mutuality from applying (at 4842-4843):

For the mutuality principle to apply, in one way or another (“in meal or malt”) the contributing members must be entitled to recoupment or refund of any surplus so that in the result the body corporate does not make a profit from them….

CIMCL’s constitution is such that once the contributions are made, the monies contributed can no longer be said to “belong” to the members, either in a formal or a substantive sense. The contributions may only be applied in the manner specified … whilst CIMCL is a going concern, and may not be distributed amongst CIMCL’s members on winding up. The mutuality principle requires there to be a pooling of funds which can only be expended in pursuit of the common purpose, or returned to the contributors… Rules 71 and 75 of CIMCL’s constitution are such that the sinking fund does not satisfy this description.

In response to the decision in Coleambally, section 59-35 of the ITAA 1997 was enacted to ensure that contributions from members to an entity (common fund) would continue to be treated as mutual, where, but for the constituent document of the entity preventing the distributions to its members, the amount would be a mutual receipt.

Where section 59-35 of the ITAA 1997 applies, it operates to treat what would be a mutual receipt, as non-assessable, non-exempt income.

Application of the mutuality principal to membership contributions

Common fund for a common purpose

Contributions by members are paid into a common fund. The Entity was established by the members for the common purpose of providing financial assistance to members in case of hardship. The Constitution requires that income and property of the Entity is to be applied solely toward promoting the objects. Contributing members as a class have rights. The Constitution provides that each member present or in proxy at a general meeting is entitled to vote. The Entity is owned and controlled wholly by the contributors.

These factors indicate that there is a common fund for a common purpose.

Not in the nature of trade

Although the Entity provides benefits to members in exchange for contributions, it is not in the nature of trade. The amount of contributions the Entity requires from its members is structured to cover the costs of providing benefit payments. The Entity is not run to make a profit. Any surplus generated is not provided to members, but is reinvested to further the purposes and services of the Entity.

Identity between the contributors and participants

The Constitution demonstrates that there is an ‘identity’ between the contributors to the fund and those who are entitled to participate in it.

All members contribute to the fund and all members are entitled to participate in the fund when they satisfy the fund rules.

The Constitution provides that on dissolution any surplus property must be given to another incorporated association or to a charity as determined by members. As a general principal section 59-35 of the ITAA 1997 would operate to prevent the contributions being treated as assessable income, as the contributions would be a mutual receipt but for the prohibition on distribution.

Incorporation

The Entity is an incorporated association. The incorporation does not affect the operation of the mutuality principle as it is considered that incorporation allows the Entity to pursue the common purpose of its members.

In summary, the contributions by members are mutual dealings because the following elements are present:

● there is a common fund, consisting of contributions by members, for a common purpose of providing aid for those in financial hardship;

● the common fund consists of contributions from members and is owned and controlled by members; and

● there is identity between the members as contributors and members as participants to the fund, including participation in the direction of any surplus.

Nevertheless the receipt of membership contributions may constitute assessable income if the Entity is a mutual insurance association.

Mutual insurance associations

Where the principle of mutuality applies, the effect is that generally, contributions by way of fees and subscriptions received from members for the provision of mutual services will not be included in a mutual association's assessable income. However, the premiums received by a mutual insurance association are assessable income.

Section 121 of the ITAA 1936 provides that:

(1) An association of persons formed for the purpose of insuring those persons against loss, damage or risk of any kind is taken, for the purposes of this Act, to be a company carrying on the business of insurance.

(2) The assessable income of such a company includes all premiums derived by it, whether from its members or not.

The effect of section 121 of the ITAA 1936 is that an ‘association of persons formed for the purposes of insuring those persons' is deemed to be a company carrying on the business of insurance. The assessable income of the company includes all premiums which it derives. Likewise, the company would be allowed to claim deductions under section 8-1 of the ITAA 1997 for amounts incurred in carrying on the business of insurance. These deductions would not have been allowable deductions under the principle of mutuality.

ATO ID 2005/98 Income tax: application of section 121 of the Income Tax Assessment Act 1936 to a mutual discretionary fund (ATOID 2005/98) provides guidance on the applicability of section 121 of the ITAA 1936 to associations formed for the purposes of providing financial assistance to their members. ATO ID 2005/98 provides that the expression 'formed for the purpose of insuring...persons' refers to the purpose for which the taxpayer was established and the purpose for which it is currently conducted; Cronulla Sutherland Leagues Club Ltd v FCT (1990) 23 FCR 82; 90 ATC 4215; 21 ATR 300.

The ITAA 1997 does not define 'formed for the purpose of insuring...persons', nor does it provide a definition of insurance. ATO ID 2005/98 states that the meaning of the expression 'insuring persons' is consistent with the definition of 'insurance business' found in section 3 of the Insurance Act 1973. This section defines 'insurance business' to mean:

...the business of undertaking liability, by way of insurance (including reinsurance), in respect of any loss or damage, including liability to pay damages or compensation, contingent upon the happening of a specified event, and includes any business incidental to insurance business.

Consequently, 'an association of persons formed for the purpose of insuring those persons' under section 121 of the ITAA 1936 should be read as a reference to an association that undertakes insurance liabilities.

Prudential Insurance Co v Cmr of Inland Revenue [1904] 2 KB 658 (Prudential Insurance) considered what constitutes insurance in the context of a contract. In Prudential Insurance Channell J stated at 663:

When you insure a ship or house, you cannot insure that the ship shall not be lost or the house burnt, but what you do insure is that a sum of money shall be paid on the happening of a certain event. That... is the first requirement of insurance. It must be a contract whereby for some consideration, usually but not necessarily for periodical payments called premiums, you secure to yourself some benefit, usually but not necessarily the payment of a sum of money, upon the happening of some event. Then the next thing that is necessary is that the event is one which involves some element of uncertainty. There must be either uncertainty whether the event will ever happen or not, or if the event is one which must happen at some time there must be uncertainty as to the time at which it will happen. The remaining essential is that... the insurance must be against something... that is to say, the uncertain event which is necessary to make the contract amount to an insurance must be prima facie adverse to the interest of the assured. The insurance is to provide for the payment of a sum of money to meet a loss or detriment which will or may be suffered on the happening of the event...

... A contract of insurance, then, must be a contract for the payment of a sum of money or for some corresponding benefit such as the rebuilding of a house or the repairing of a ship, to become due on the happening of an event, which event must have some amount of uncertainty about it, and must be of a character more or less adverse to the interest of the person effecting the insurance.

The three defining characteristics of a contract of insurance are:

1. Benefit and premium;

2. Uncertainty that the insured event will occur; and

3. Insurable interest.

ATOID 2005/98 provides guidance on whether a taxpayer, in making grants of discretionary assistance, was undertaking insurance liabilities by way of insurance. In Medical Defence Union Ltd v. Department of Trade [1979] 2 All ER 421 (Medical Defence Union) the Court found, that the rights that members had to grants of discretionary assistance fell short of a contractual relationship of insurance. The members' right to grants was at the sole and absolute discretion of Medical Defence Union Ltd, whereas a contract of insurance affords insured persons with the right of indemnification upon the occurrence of an insured event.

This principle was applied in Australia by Yeldham J. in Oswald v Bailey & Anor (No 1) (1986) ANZ Insurance Cases 60-704. Yeldham J at 74,204 and 74,205 expressed the view that members of the Australian Medical Defence Union (the Union) were entitled to indemnity from the Union as a right. The indemnity derived solely from the fact of membership of the Union and the provisions of the articles of association. Thus, until the constitution of the Union was changed substantially to make the granting of assistance discretionary, there was a contract of insurance in force between the Union and member. A contract of insurance existed at the relevant time despite the fact that there was no contractual document. Yeldham J stated at 74,205:

There was not at any time, nor was it usual to have, any contractual document between the Medical Defence Union and its members. Any indemnity derived solely from the fact of membership and the provisions of the Articles of Association. One feature of such a contract between a company and its members is of course that it may be varied from time to time by an appropriate resolution, and such variation may take away or modify existing rights.

In summary, where an indemnity, or grant of assistance, is discretionary, no contract of insurance can be said to exist. The lack of liability to make a payment on the happening of a specified event is detrimental. In that instance, there is no insurance business. On the other hand, where membership of and contributions to an entity result in the members receiving a right of indemnity from the association on the happening of a specific event, then the association undertakes insurance liabilities.

The Entity was formed and currently operates to provide members with a weekly sickness or injury benefit or lump sum death benefit. The Entity is liable to pay members (who comply with the Constitution) in the event that they are ill, injured or they or a dependent dies. Once a member has complied with the rules, the Entity has no discretion as to payment of the weekly benefit for illness or injury (for a period of up to six months) or in relation to payment of the death benefit. The indemnity derives solely from the fact of membership and the provisions of the Constitution. The Entity is in the business of undertaking liability, by way of insurance. The Entity is therefore an association of persons formed for the purpose of insuring its members against loss, damage and is taken, for the purposes of section 121 of the ITAA 1936, to be a company carrying on the business of insurance.

The assessable income of the Entity includes any premiums derived by it. Neither the ITAA 1997 nor the ITAA 1936 define ‘premium.’ The case of Australian Health Insurance Association Ltd v Esso Australia Pty Ltd (1993) 41 FCR 450; (1993) 116 ALR 253 (Esso Australia) considered the definition and requirements of a premium. The decision in Esso Australia confirmed the basic legal principal that a premium is the consideration given by the insured in exchange for the insurer’s promise to provide the benefits described in the contract. The judgement also confirmed that the premium does not have to be set at a commercial rate. A premium does not have to be either adequate to cover the risk or proportional to it. An inadequate premium does not prevent the arrangement from being one of insurance.

In Mildura & District Dried Fruit Growers' Hail Storm Damage Compensation Scheme v Commissioner of Taxation (Cth) [1968] HCA 70 (the Fruit Growers case) it was argued that a subscription paid by members to an association was not a premium for the purposes of section 121 of the ITAA 1936. In the Fruit Growers case a number of fruit growers had formed an association for the purpose of establishing a scheme to provide insurance against future loss caused to grape crops by hailstorms. Owen J held that the subscription paid by each member was an amount paid in consideration of a promise to afford insurance cover and therefore fell within the meaning of the word "premium."

Conclusion

The Entity is a mutual insurance association for the purposes of section 121 of the ITAA 1936. The contributions the Entity receives from members are premiums because they are the consideration given by the members in return for the Entity’s liability to pay weekly illness or injury benefits and/ or death benefits. The contributions received by the Entity are assessable income pursuant to section 121 of the ITAA 1936.

Question 3

Summary

The interest that the Entity received on loans to members is a mutual receipt and is not assessable income for tax purposes.

Detailed reasoning

The fact an association may be considered a mutual organisation for the purposes of the mutuality principle, and most of its income may be considered mutual in nature, will not prevent some of its income being excluded from the principle and assessed under the ordinary concept of income. The fact that a dealing is between members is not conclusive that it is a mutual transaction.

This exception was best explained by Lord MacMillan in the case Inland Revenue Commissioners v. Ayrshire Employers Mutual Insurance Association Ltd (1946) 1 All ER 637 at 640 when he said that:

It is not membership or non-membership which determines immunity from or liability to tax; it is the nature of the transactions.

And further, Lord Wilberforce of the Privy Council in Fletcher v. Income Tax Comr [1971] 3 All ER 1185 at 1189 said that:

Is the activity, on the one hand, a trade, or an adventure in the nature of trade, producing a profit, or is it, on the other, a mutual arrangement which, at most, gives rise to a surplus?

As discussed above, in order for a dealing to be mutual, the mutuality principle requires the existence of a common fund controlled by the contributors for a common purpose. Mutuality will not apply to activities that are considered in the nature of trade as opposed to a mutual activity. Nor will it apply where there is a distinct disparity between the contributors and the recipients of the fund.

For the principle of mutuality to apply there must be a common fund and there must be an identity between the contributors and the participants. All the Entity’s members contribute in accordance with the Constitution and it was established in question 2 above that a common fund exists. In Royal Automobile Club of Victoria v FCT (1973) 4 ATR 567 (RACV) it was accepted that if the activity was mutual, the fact that some members only took advantage of the facilities available did not affect the element of mutuality. In the Entity’s case, some members borrow from the fund, so in addition to membership contributions they also contribute interest. All members are entitled to borrow from the fund and funds are loaned only to members. As such, there is still a fund, established by contributors for the common purpose of providing financial assistance, in which contributing members as a class have rights. The fund is owned and controlled wholly by the contributors and there is an identity between the contributors and the participants.

The loaning of funds to members in financial difficulty is not considered to be in the nature of trade. The purpose for which the Entity was established as stated in its objects is to provide financial assistance to members in case of hardship. The Entity is controlled by members and exists to benefit its members. The provision of loans to those in financial difficulties is in keeping with this purpose.

Conclusion

It is considered that interest income received from loans to members is a mutual arrangement and the principle of mutuality will apply to this income. Interest receipts from members are therefore not assessable.

Question 4

Summary

Interest from bank deposits is income from non-mutual sources and is therefore assessable income for tax purposes.

Detailed reasoning

The principle of mutuality only applies to the dealings of contributors to a common fund. The common law is well developed in this regard; see Carlisle and Silloth Golf Club v. Smith - [1912] 2 KB 177; Coleambally. The principle of mutuality does not extend to include income that is derived from sources outside the group as there is not a complete identity between the contributors and the participants of the common fund.

Taxation Ruling TR 2015/3 Income tax: matters relating to strata title bodies constituted under strata title legislation (TR 2015/3) provides guidance on how interest and dividend income of a mutual organisation is treated for tax purposes.

Paragraph 36 of TR 2015/3 states that any interest, dividend or interest income derived by a strata title body from the investment of moneys held in its fund is assessable income of the body corporate unless specifically exempted by the ITAA 1936 or ITAA 1997.

Conclusion

Interest received on bank deposits held by the Entity is a non-mutual receipt. It is therefore assessable income for tax purposes.

Question 5

Summary

The Entity is carrying on an enterprise for the purposes of the GST Act.

Detailed reasoning

Subsection 9-20(1) of the GST Act defines what constitutes an enterprise for the purposes of the GST Act. Paragraphs 9-20(1)(a) and (b) of the GST Act provide that amongst other things, an enterprise is an activity or series of activities done in the form of a business or in the form of an adventure or concern in the nature of trade.

The meaning of “in the form of a business” is discussed in Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (MT 2006/1) which, together with Goods and Services Tax Determination GSTD 2006/6 Goods and services tax: does MT 2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the A New Tax System (Goods and Services Tax) Act 1999? (GSTD 2006/6), provides the Commissioner’s view on the definition of ‘enterprise’. Importantly, paragraph 170 provides:

… The meaning of this phrase has not been considered in detail by Australian courts. The definition clearly includes a business and the use of the phrase 'in the form of' indicates a wider meaning than the word 'business' on its own.

Section 195-1 of the GST Act defines a business as any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

Paragraph 175 of MT 2006/1 confirms that the above definition is the same as the definition of business in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936) and section 995-1 of the ITAA 1997. Therefore, an entity that is carrying on a business for income tax purposes will be carrying on an enterprise for GST purposes.

The ITAA 1936 definition of business is comprehensively considered in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? Although this ruling deals with carrying on a primary production business, the principles discussed in TR 97/11 apply to any business. There is no single test of whether a business is being carried on. Paragraph 12 of TR 97/11 provides:

12. Whilst each case might turn on its own particular facts, the determination of the question is generally the result of a process of weighing all the relevant indicators. …

The relevant indicators are provided at paragraph 26 of TR 97/11:

26. From the judgments it is clear that the relevant indicators of whether a business of primary production is being carried on by a taxpayer are:

● does the activity have a significant commercial purpose or character?

● does the taxpayer have more than a mere intention to engage in business?

● is there an intention to make a profit or a genuine belief that a profit will be made?

● will the activity be profitable?

● is there repetition and regularity in the activity? i.e., how often is the activity engaged in?

● how much time does the taxpayer spend on the activity?

● is the activity of the same kind and carried on in a similar way to that of the ordinary trade?

● is the activity organised in a businesslike manner?

● what is the size or scale of the activity?

● is the activity better described as a hobby, a form of recreation or a sporting activity?

Whether a business is being carried on will essentially depend on the large or general impression gained (Martin v FC of T (1953) 90 CLR 470 at 474) and whether the indicators, considered as a whole, provide the activities with a commercial flavour (Ferguson v FC of T (1979) 37 FLR 310 at 325). The weighting given to each indicator will vary from case to case.

Importantly, paragraph 220 of MT 2006/1 states the following in relation to Mutual organisations:

220. Organisations or associations whose receipts consist entirely of mutual receipts (that is receipts only from members) may not be carrying on a business but rather carrying on activities that are similar to business activities. In this context, there is an inability to profit because the objective or outcome is not profits for the entity, but rather a desire to cover expenditure and to return any surplus directly or indirectly, sooner or later, to the members. The trading activities of these organisations may amount to activities in the form of a business.

Subsection 9-20(3) of the GST Act also makes it clear that an entity may carry on an enterprise even though it can only make supplies to members of the entity.

You have provided information that in the 2016 year the Entity received member contributions. Although the Entity is a non-profit organisation, it is run in a business-like manner. The amount to be contributed weekly by each member is set to ensure that the Entity is viable, can meet its objectives and function as required. Sickness payments are only made when members have complied with the Constitution, although discretion is exercised as to the length of benefit payments beyond 6 months in special circumstances. The Entity invests funds at a credit union and also loans funds to members.

The Entity has special purpose financial statements prepared yearly and has operated at a surplus for the last two years.

It is considered that the Entity operates in a commercial manner, conducts regular activities, employs staff and operates in a business like way. Although it is not operated for a profit in the traditional sense, member contributions are designed to ensure that the fund stays viable. The last two years show a significant operating surplus.

Conclusion

The Entity is carrying on an enterprise for the purposes of the GST Act.

Question 6

Summary

The Entity is not required to register for GST as its GST turnover does not yet exceed $150,000.

Detailed Reasoning

Section 23-5 of the GST Act provides that an entity is required to be registered for GST if it carries on an enterprise and the GST turnover meets the registration turnover threshold.

It has already been established in Question 5 above that the Entity carries on an enterprise.

Section 23-15 of the GST Act provided the original registration turnover threshold, providing that a higher amount could be specified in A New Tax System (Goods and Services Tax) Regulations 1999 (The GST Regulations). Clauses 23-15.01 and 23-15.02 of the GST Regulations provide that the current GST registration turnover threshold is $75,000 (unless the entity is a non-profit) from 1 July 2007 or $150,000 for non-profit bodies. This means that if an entity is a non-profit organisation it is not required to be registered for GST unless the GST turnover of the organisation is $150,000 or more.

Non-profit organisation

“Non-profit" is not defined in the GST Act. Paragraph 74 of Goods and Services Tax Determination GSTD 2006/6 Goods and services tax: does MT 2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the A New Tax System (Goods and Services Tax) Act 1999? (GSTD 2006/6) states that the term 'non-profit body' takes its ordinary meaning in the context in which it appears. A body is a non-profit body if, by operation of law or by its constituent documents, the body is prevented from distributing its profits or assets amongst its members while the body is functional and on its winding-up.

Where it is clear from the objects, policy statements, history, activities and proposed future directions of the body that there will be no distributions to members, we accept that the non-profit test has been satisfied.

The object of the Entity is to provide financial assistance to members in case of hardship. The provision of financial assistance to members in financial hardship is the purpose of the organisation. The Constitution provides that the property and income of the Entity can only be applied to the promotion of the objects of the Entity and cannot be paid or otherwise distributed to members except in good faith in the promotion of those objects. The provision of financial assistance to members in the carrying out of the objects of the organisation is incidental to the purpose of the organisation and does not breach the non-profit principal.

The Constitution provides that if there is a surplus on the winding up or dissolution of the Entity it shall not be paid to or distributed among the members.

It is accepted that the non-profit test has been satisfied.

GST Turnover

‘GST turnover’ is defined in the GST Act with reference to whether a particular turnover threshold is met (or not met). The GST registration turnover threshold is met if the GST turnover for an enterprise meets the turnover threshold. Subsection 188-10(2) of the GST Act provides that GST turnover that does not exceed a particular turnover threshold if current GST turnover is at or below the turnover threshold, and the Commissioner is not satisfied that the projected GST turnover is above the turnover threshold.

An entity’s GST turnover will meet this threshold if either their current annual or projected annual turnover is at or above the threshold.

Current GST turnover is the total of all taxable supplies made during a particular month and the preceding 11 months. Projected GST turnover is the total of all taxable supplies made, and are likely to make, during a particular month and the following 11 months.

Section 9-10 of the GST Act provides that a supply is any form of supply whatsoever and includes a supply of a service and the creation, grant, transfer, assignment or surrender of a right.

A supply is taxable where it satisfies all the paragraphs under section 9-5 of the GST Act. Section 9-5 of the GST Act also provides that a supply is not a taxable supply to the extent that it is GST-free or input taxed.

Division 40 of the GST Act provides that financial supplies are input taxed. As such, financial supplies will be excluded from GST turnover calculations. Subsection 40-5(2) of the GST Act provides that 'financial supply' has the meaning given by the GST Regulations.

Subregulation 40-5.09(1) of the GST Regulations provides that the provision, acquisition or disposal of an interest mentioned in subregulations 40-5.09(3) or 40-5.09(4) of the GST Regulations is a financial supply if:

(a) the provision, acquisition or disposal of a supply is:

(i) for consideration;

(ii) in the course or furtherance of an enterprise, and

(iii) connected with Australia, and

(b) the supplier is:

(i) registered or required to be registered for GST, and

(ii) a financial supply provider in relation to the supply of the interest.

Member contributions

Item 6 in the table in subregulation 40-5.09(3) of the GST Regulations (Item 6) lists an interest in or under a life insurance business to which subsection 9(1) of the Life Insurance Act 1995 (LIA) applies, or a declaration under subsection 12(2) or section 12A of the LIA, applies, or related reinsurance business. It follows that the insurance offered by the Entity will be one that satisfies Item 6 if it meets the requirements of the relevant sections of the LIA.

Section 9(1) of the LIA explains the concept of a ‘life policy.’ Section 9(1) of the LIA provides that:

(1) Subject to subsection (2), each of the following constitutes a life policy for the purposes of this Act:

(a) a contract of insurance that provides for the payment of money on the death of a person or on the happening of a contingency dependent on the termination or continuance of human life;

(b) a contract of insurance that is subject to payment of premiums for a term dependent on the termination or continuance of human life;

(c) a contract of insurance that provides for the payment of an annuity for a term dependent on the continuance of human life;

(d) a contract that provides for the payment of an annuity for a term not dependent on the continuance of human life but exceeding the term prescribed by the regulations for the purposes of this paragraph;

(e) a continuous disability policy;

(f) a contract (whether or not it is a contract of insurance) that constitutes an investment account contract;

(g) a contract (whether or not it is a contract of insurance) that constitutes an investment-linked contract.

(2) A contract that provides for the payment of money on the death of a person is not a life policy if:

(a) by the terms of the contract, the duration of the contract is to be not more than one year; and

(b) payment is only to be made in the event of:

(i) death by accident; or

(ii) death resulting from a specified sickness.

As discussed above, membership of the Entity creates a contractual relationship between the Entity and the member. This contractual relationship falls within clause 9(1)(a) of the LIA. Pursuant to the Constitution, upon the death of the member a sum will be paid to their beneficiary. The Death Benefit is payable so long as the membership remains current and there are no restrictions on the death being by accident or death resulting from a specified sickness.

In relation to the weekly benefit payments, section 9A(1) of the LIA provides that a continuous disability policy is a contract of insurance:

(a) that is, by its terms, to be of more than three years’ duration; and

(b) under which a benefit is payable in the event of:

(i) the death, by accident or by some other cause stated in the contract, of the person whose life is insured (the insured); or

(ii) injury to, or disability of, the insured as a result of accident or sickness; or

(iii) the insured being found to have a stated condition or disease.

(2) A contract of insurance that is, by its terms, to be of a duration of not more than three years is taken to comply with paragraph (1)(a) if:

(a) contracts of insurance of the same kind as the contract are usually of more than 3 years’ duration; and

(b) the contract is of a lesser duration only because of the age of the owner of the policy at the time when it was entered into.

(3) A contract of insurance is not a continuous disability policy if the terms of the contract permit alteration, at the instance of the life company concerned, of the benefits provided for by the contract or the premiums payable under the contract.

(4) A contract of insurance the terms of which permit alteration, at the instance of the life company concerned, of the benefits provided for by the contract is not thereby excluded by subsection (3) from being a continuous disability policy if, by those terms, the only alterations that are permitted to be made are alterations that improve the benefits and are made following an offer made by the life company and accepted by the owner of the policy.

(5) A contract of insurance the terms of which permit alteration, at the instance of the life company concerned, of the premiums payable under the contract is not thereby excluded by subsection (3) from being a continuous disability policy if the terms of all contracts of the same kind as the contract only permit such alterations if they are made on a simultaneous and consistent basis.

(6) A contract of consumer credit insurance within the meaning of the Insurance Contracts Act 1984 is not a continuous disability policy.

(7) A contract of insurance entered into in the course of carrying on health insurance business is not a continuous disability policy.

The Constitution does not prescribe that the contract regarding payment of weekly benefits will remain in force for at least 3 years. In addition, the amount of payment and the quantum of weekly benefit can be changed by the Entity in accordance with the Constitution. As such, the weekly benefit is not a continuous disability policy.

A life insurance business is defined in section 12 of the LIA as:

(a) business that consists of any or all of the following:

(i) the issuing of life policies;

(ii) the issuing of sinking fund policies;

(iii) the undertaking of liability under life policies;

(iv) the undertaking of liability under sinking fund policies; and

(b) any business that relates to business referred to in paragraph (a).

Note: Declarations under sections 12A and 12B have the effect of extending the kinds of business that are life insurance business for the purposes of this Act.

(2) In order to avoid doubt and without limiting paragraph (1)(b), it is declared that the reference in that paragraph to business that relates to business referred to in paragraph (1)(a) includes business relating to the investment, administration and management of the assets of a statutory fund.

(3) For the purposes of this Act, the following do not constitute life insurance business:

(a) business in relation to benefits provided by a trade union for its members or their dependants;

(b) business in relation to the benefits provided for its members or their dependants by an association of employees that is registered as an organisation, or recognised, under the Fair Work (Registered Organisations) Act 2009 ;

(c) business in relation to any scheme or arrangement under which superannuation benefits, pensions or payments to employees or their dependants (and not to any other persons) on retirement, disability or death are provided by an employer or by employees, or by both, wholly through an organisation established by the employer or employees or by both;

(d) in the case of a person who issues policies to his or her employees, and not to any other persons, in Australia, the business that consists of the issue of those policies or the undertaking of liability under those policies;

(e) business in relation to a scheme or arrangement for the provision, by a person other than a life company, of benefits consisting of:

(i) the provision of funeral, burial or cremation services, with or without the supply of goods connected with such services; or

(ii) the payment of money, on the death of a person, for the purpose of meeting the whole or a part of the expenses of and incidental to the funeral, burial or cremation of the person;

and no other benefits, except benefits incidental to the scheme or arrangement.

The operation of section 12(3)(c) of the LIA prevents the Entity meeting the definition of a life insurance business.

As the Entity does not supply the death benefit as a life insurance business the Entity does not meet the requirements as listed in Item 6. Regulation 40-5.12 of the GST Regulations lists the supplies that are not financial supplies for GST purposes. Item 10 of the table in regulation 40-5.12 of the GST Regulations provides that supply of or an interest under an insurance and reinsurance business is not a financial supply unless it is mentioned in item 6 of the table in regulation 40-5.09 of the GST Regulations.

As the supply of the right to receive payments when ill, upon retirement or upon death (the Policy) are not financial supplies, it is necessary to consider whether they meet the definition of a taxable supply outlined in section 9-5 of the GST Act. The section provides that an entity makes a taxable supply if they:

(a) make the supply for consideration; and

(b) the supply is made in the course or furtherance of an enterprise they carry on; and

(c) the supply is connected with the indirect tax zone; and

(d) they are registered or required to be registered.

Section 9-10 of the GST Act provides that a supply is any form of supply whatsoever and includes a supply of a service and the creation, grant, transfer, assignment or surrender of a right. The rights created under the Policy are a supply.

When a member of the Entity pays a premium for the supply of the Policy, the payment is consideration for the supply. The Entity’s supply of the Policy is in the course or furtherance of the Entity’s enterprise and the supply is connected to an indirect tax zone as it is done in Australia.

As the provision of the Policy is a taxable supply for the purposes of the GST Act, member contributions will be used in GST turnover calculations in the 2016 year.

Interest

Goods and Services Tax Ruling GSTR 2002/2 Goods and services tax: GST treatment of financial supplies and related supplies and acquisitions (GSTR 2002/2) provides clarification on what is and is not a financial supply under Division 40 of the GST Act and the GST Regulations. Line A121 and Line B21 in Schedule 2 of GSTR 2002/2 provide that interest payments are input taxed.

Item 1of the table in Regulation 40-5.09 of the GST Regulations provides an account with an ADI is an interest in a financial supply. The credit union interest the Entity obtains is an interest in a financial supply and input taxed. Therefore is not used in GST turnover calculations.

Loans to members

Item 2 of the table in subregulation 40-5.09(3) of the GST Regulations provides that an interest in or under a credit arrangement is a financial supply if it complies with the requirements in subregulation 40-5.09(3) of the GST Regulations. Loans to members are a supply for consideration, the supply will be made in the course of an enterprise the Entity carries on and the supply is connected with the indirect tax zone as it is done in Australia. The Entity is the financial supply provider in relation to the supply of the Policy (regulation 40-5.06 of the GST Regulations). As the supply of loans to members satisfies the requirements of subregulation 40-5.09(1) of the GST Regulations the Entity is making an input taxed supply under subsection 40-5(1) of the GST Act when it supplies loans to members.

Loans to members are therefore not included in the GST turnover calculation.

Conclusion

The Entity carries on an enterprise. As a non-profit entity the Entity is not required to register for GST unless its GST turnover exceeds $150,000. Only taxable supplies are used in GST turnover calculations. Input taxed supplies, including financial supplies are not.

The interest the Entity receives on funds on deposit with the credit union and the loans to members are input taxed and not subject to GST. The interest is not used in GST turnover calculations.

As the provision of the Policy is a taxable supply, member contributions will be used in GST turnover calculations and will be subject to GST if they exceed $150,000.

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