Edited version of private advice

Authorisation Number: 1051645365592

Date of advice: 11 March 2020

Ruling

Subject: Fringe benefits tax

Question1

Was the Company a rebatable employer under section 65J of the FBTAA on the basis that it was a non-profit society or a non-profit association carrying on a hospital for the period 1 April 1997 until 31 March 2000?

Answer

Yes

Question2

Was the Company a non-profit society or a non-profit association carrying on a hospital under section 57A(4) of the FBTAA for the period 1 April 2000 until 31 March 2013?

Answer

Yes

Question3

Is the Company a rebatable employer carrying on a hospital under section 57A(4) of the FBTAA, on the basis that it meets the requirements of a society, association or club established for community service purposes in item 5 of the table in section 65J(1) of the FBTAA for the period 1 April 2013 to 31 March 2020?

Answer

No

This ruling applies for the following periods:

FBT year ending 31 March 1998

FBT year ending 31 March 1999

FBT year ending 31 March 2000

FBT year ending 31 March 2001

FBT year ending 31 March 2002

FBT year ending 31 March 2003

FBT year ending 31 March 2004

FBT year ending 31 March 2005

FBT year ending 31 March 2006

FBT year ending 31 March 2007

FBT year ending 31 March 2008

FBT year ending 31 March 2009

FBT year ending 31 March 2010

FBT year ending 31 March 2011

FBT year ending 31 March 2012

FBT year ending 31 March 2013

FBT year ending 31 March 2014

FBT year ending 31 March 2015

FBT year ending 31 March 2016

FBT year ending 31 March 2017

FBT year ending 31 March 2018

FBT year ending 31 March 2019

FBT year ending 31 March 2020

The scheme commences on:

21 April 1997

Relevant facts and circumstances

1.           The Company is not-for-profit.

2.           The Company has two operational lines:

·        Insurance business, and

·        A hospital.

3.           The Company operates from a regional area.

4.           The members of the Company are people who purchase insurance products from the Company.

5.           The Company provides a number of insurance products, including hospital cover and extras.

6.           The insurance products are available throughout Australia, but the Company does not actively promote the products outside the regional area.

7.           The Company provides reduced cost insurance products at the hospital.

8.           In addition to the hospital operated by the Company, the regional area has a public hospital.

9.           The hospital operated by the Company offers health services that are not otherwise available in the regional area.

10.        The hospital assists the private hospital with public patient management.

11.        The hospital is otherwise used by people with private health insurance and, people who self- fund.

Relevant legislative provisions

Section 57A of the Fringe Benefits Tax Assessment Act 1986

Section 65J of the Fringe Benefits Tax Assessment Act 1986

Section 50-10 of the Income Tax Assessment Act 1997

Section 50-70 of the Income Tax Assessment Act 1997

Reasons for decision

Question 1

Prior to 2000, non-profit associations and non-profit societies that operated hospitals were not entitled to the FBT exemption under section 57A of the FBTAA, instead they were only entitled to the FBT rebate as a rebatable employer under section 65J of the FBTAA. From 1 April 1997 to 31 March 2000, section 65J of the FBTAA relevantly provided:

For the Purposes of this section, an employer is a rebatable employer for a year of tax if the employer is covered by any of the following paragraphs at any time during the year of tax:

(a)     ...

(d) a hospital which is carried on by a non-profit society or a non-profit association...

Subsection 65J(5) of the FBTAA provided the meaning of non-profit society and non-profit association:

For the purposes of this section, a society, association or club is a non-profit society, non-profit association or non-profit club, as the case may be, if, and only if:

(a)     The society, association or club is carried on otherwise than for the purposes of profit or gain to individual members; and

(b)     The society association or club is neither:

(i)       an incorporated company where all stock or shares in the capital of the company is or are beneficially owned by:

(A)    The Commonwealth, a State or a Territory; or

(B)    An authority or institution of the Commonwealth, a State or a Territory; nor

(ii)      an incorporated company where the company is limited by guarantee and the interests and rights of the members in or in relation to the company are beneficially owned by:

(A)    The Commonwealth, a State or a Territory; or

(B)    An authority or institution of the Commonwealth, a State or a Territory.

A Hospital

The meaning of hospital is not provided in the FBTAA. The Commissioner considers that the word 'hospital has the following meaning (QC 52593):

A hospital is an institution in which patients are received for continuous medical care and treatment for sickness, disease or injury. Providing accommodation is integral to a hospital's care and treatment. Clinics that mainly treat ambulatory patients who return to their homes after each visit are not hospitals. However, day surgeries that provide beds for patients to recover after surgery may be hospitals. Homes providing nursing care in respect of feeding, cleanliness and the like are not hospitals. However, nursing homes for people suffering from illness are accepted as hospitals. Hospices for the terminally ill will generally be hospitals. Minor outpatient and nursing care will not prevent an institution from being a hospital.

The Commissioner accepts that for the relevant period (1 April 1997 until 31 March 2000) the private hospital was a hospital for the purposes of section 65J of the FBTAA.

Society or association

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 sections 57A and 65J of the FBTAA.

The Company was incorporated for the objects set out in its constitution, and undertake activities in furtherance of those objects.

For the relevant period (1 April 1997 until 31 March 2000), the Company was a society or association for the purposes section 65J of the FBTAA.

Non-profit society or association

To be a non-profit society or association, 65J(5) required that the entity must not be carried on for the purposes of profit or gain to individual members.

The phrase 'carried on for the purpose of profit or gain of its individual members' is not defined in the tax legislation.

In Commissioner of Taxation v Co-operative Bulk Handling [2010] FCAFC 155, the Full Federal Court considered the operation of section 50-40 of the ITAA 1997, a special condition of which is that an entity 'must not be carried on for the profit or gain of its individual members'. Mansfield and McKerracher JJ stated the following on the expression 'not carried on for the profit or gain of individual members':

...if as a consequence of pursuing the purpose, the members derive a benefit or gain..., that gain or benefit will not preclude exemption unless it is a gain produced only by reason of individual membership... In all cases of exemption, it must be the position that it is not open to the body to disburse any profits or dividends to members... (at paragraph 94).

This was also the approach of the South Australian Supreme Court in Repromed Pty Ltd v Lucas and Anor (2000) 76 SASR 575 where the court considered whether Repromed Pty Ltd was exempt from pay-roll tax on the basis that it was an employer who provided health services 'otherwise than for the purpose of profit or gain'. Debelle J held that Repromed Pty Ltd was carried on for the purpose of profit or gain as its constitution did not provide barriers to individual profit, and profits could find their way into pockets of individuals (at paragraph 35).

The above authorities indicate that the phrase 'not carried on for the purpose of profit or gain to its individual members' requires an absolute prohibition against profits or gains arising to individual members.

The Commissioner has adopted this approach in Taxation Ruling TR 2011/4 Income tax and fringe benefits tax: charities (TR 2011/4), which states the following on the phrase 'not carried on for the purpose of profit or gain to its individual members':

235. Institutions use various mechanisms to ensure they are not entitled to be carried on for the purposes of private profit or gain. The most common way is to include clauses in the constituent documents that prevent the institution from distributing its profits or assets for the benefit of particular persons while it is operating and on winding up... The courts have tended to regard these clauses as an essential aspect of the constituent documents.

...

241. An institution's actions must be consistent with a prohibition on the institution's funds or assets finding their way to particular persons such as owners, their associates or nominees, or members, in a private capacity. Such distributions... are inconsistent with the institution not being carried on for the purpose of private profit or gain.

At all times during the relevant period (1 April 1997 until 31 March 2000), the governing documents of the Company prohibited the distribution of profits to members, while it operated and on winding-up. There is no evidence that the company acted contrary to the prohibition.

Further, the interests and rights of the members in the Company were not beneficially owned by the Commonwealth, a State or a Territory, or an authority or institution of the Commonwealth, a State or a Territory.

For the relevant period (1 April 1997 until 31 March 2000), the Company was a non-profit society or association.

Therefore, for the period 1 April 1997 until 31 March 2000 the Company was a rebatable employer for the purposes of subsection 65J of the FBTAA.

Question 2

From 1 April 2000 to 30 June 2013, subsection 57A(4) of the FBTAA provided that:

A benefit provided in respect of the employment of an employee is an exempt benefit if the employer of the employee is a hospital carried on by:

(a) a society that is a non-profit society for the purposes of section 65J; or

(b) an association that is a non-profit association for the purposes of section 65J.

Subsection 65J(5) of the FBTAA provided the meaning of non-profit society and non-profit association:

For the purposes of this section, a society, association or club is a non-profit society, non-profit association or non-profit club, as the case may be, if, and only if:

(a)     The society, association or club is carried on otherwise than for the purposes of profit or gain to individual members; and

(b)     The society association or club is neither:

(i)       an incorporated company where all stock or shares in the capital of the company is or are beneficially owned by:

(A)    The Commonwealth, a State or a Territory; or

(B)    An authority or institution of the Commonwealth, a State or a Territory; nor

(ii)      an incorporated company where the company is limited by guarantee and the interests and rights of the members in or in relation to the company are beneficially owned by:

(A)    The Commonwealth, a State or a Territory; or

(B)    An authority or institution of the Commonwealth, a State or a Territory.

A Hospital

As discussed in question 1, it is accepted by the Commissioner that in the relevant period the Company carried on a hospital for the purposes of subsection 57A(4) of the FBTAA.

Society or association

As discussed in question 1, the Company was incorporated for the objects set out in its constitution, and undertake activities in furtherance of those objects.

For the relevant period (1 April 2000 to 31 March 2013), the Company was a society or association for the purposes subsection 57A(4) of the FBTAA.

Non-profit society or association

As discussed in question 1, the governing documents of the Company prohibited the distribution of profits to members, while it operated and on winding-up, and there is no evidence that the company acted contrary to the prohibition.

Further, the interests and rights of the members in the Company were not beneficially owned by the Commonwealth, a State or a Territory, or an authority or institution of the Commonwealth, a State or a Territory.

For the relevant period (1 April 2000 to 31 March 2013), the Company was a non-profit society or association.

Therefore, for the period 1 April 2000 to 31 March 2013 the company was a non-profit society or association that carried on a hospital for the purposes of subsection 57A(4) of the FBTAA.

Question 3

From 1 April 2013, subsection 57A(4) of the FBTAA provides that 'a benefit provided in respect of the employment of an employee is an exempt benefit if the employer of the employee is a hospital carried on by a society or association that is a rebatable employer.

Section 65J of the FBTAA sets out the meaning of 'rebatable employer', and provides:

(1)     An employer is a rebatable employer for a year of tax if the employer:

(a)     Is exempt from income tax at any time during the year of tax under any of the provisions set out in the following table; and

(b)     Satisfies the special conditions (if any) set out in the following table.

Relevantly the table in subsection 65J(1) provides:

Item 5 Type of Employer

A society association or club:

(a)   Established for community service purposes ( except political or lobbying purposes); and

(b)   Covered by item 2.1 of the table in section 50-10 of the Income Tax Assessment Act 1997

Subsection 65J(5) of the FBTAA sets out the special conditions for item 5 of the table in section 65J(1):

(5) a Society association or club is not covered by table item... 5 ... in subsection (1) for a year of tax if it is:

(a) ...

(b) an incorporated company where the company is limited by guarantee and the interests and rights of the members in or in relations to the company are beneficially owned by:

(i) the Commonwealth, a State or a Territory; or

(ii) an authority or institution of the Commonwealth, a State or Territory.

Item 2.1 of the table in section 50-10 of the ITAA 1997 refers to a society, association or club established for community services purposes (except political or lobbying purposes). Item 2.1 also requires an entity to satisfy the special conditions in section 50-70 of the Income Tax Assessment Act 1997.

A Hospital

As discussed in question 1, it is accepted by the Commissioner that in the relevant period the Company carried on a hospital for the purposes of subsection 57A(4) of the FBTAA.

Society or association

As discussed in question 1, the Company was incorporated for the objects set out in its constitution, and undertake activities in furtherance of those objects.

The Company is a society or association for the purposes subsection 57A(4) of the FBTAA.

Community service purposes

In Douglas & Ors v Federal Commissioner of Taxation 97 ATC 4722, Olney J said the following on the meaning of 'community service':

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

The Explanatory Memorandum circulated by the then Treasurer upon the introduction of the Taxation Laws Amendment Bill (No 2) 1990 states...

... The words 'for community service purposes' are not defined but are to be given a wide interpretation. 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 on 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...

When purposes are directed to the benefit or welfare of members of the community in particular need, that need must arise by reason of youth, age, infirmity or disablement, poverty or social or economic circumstances...

In Navy Health Ltd v Federal Commissioner of Taxation [2007] FCA 931, Jessup J said the following on the meaning of 'community service' after referring to the meaning provided in the explanatory memorandum:

... it is clear that the words are not limited to charitable purposes. But neither should the paragraph be applied, in my view, merely as a fall back position for anybody which almost, but not quite, achieves recognition as a charity

Although a composite expression, I consider that the essence of 'community service' is that a service is provided to the community, or a section of the community. Here the word "service" is used in the sense of 'help, benefit or advantage', particularly 'the action of serving, helping or benefiting, conduct tending to the welfare or advantage or another'... I consider that the sale of a product at normal market rates is inconsistent with this understanding of the word service (at paragraphs 82- 83).

Jessup J went onto discuss the meaning of 'community' and said:

I accept, of course, that the word refers not only to the community as a whole but also to an identifiable section of the community, but it does not follow that the receipt of a service by any group of persons should be regarded as the receipt of that service by a section of the community... Section 65J(1)(j) deals with 'service' in a much more concrete setting, and requires, in my view, the community, or a section of the community, to benefit by way of the receipt of some identifiable help, benefit or advantage... (at paragraph 84).

In Commissioner of Taxation v Wentworth [2011] FCAFC 42 (Wentworth), the Full Federal Court considered whether an entity which facilitated the provision of a face-to-face banking service in a small rural community was established for community service purposes. The Court found that the activities of Wentworth were within the exemption:

... the main or dominant purpose for which it was established was a community service. Here the community service purpose was the facilitation of face-to-face banking services which provided a substantial benefit to the community of Wentworth that was both real and tangible..."service" imports delivery of some practical help, benefit or advantage... (at paragraph 43)

The Commissioner's view on the meaning of 'community service purposes' is stated in Taxation Determination TD 93/190 Income tax: what is the scope of the exemption from income tax provided by sub-paragraph 23(g)(v) of the Income Tax Assessment Act 1936?, which provides that 'community service purposes' has a broad meaning, and extends to a range of altruistic purposes such as:

3....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'.

Main or dominant purpose

In Cronulla-Sutherland Leagues Club Ltd v Commissioner of Taxation 90 ATC 4215, a case concerning exemption under section 23(g)(iii) of the Income Tax Assessment Act 1936 as a society, club or association established for the encouragement of a game or sport, Lockhart J stated the following regarding entitlement to the exemption from income tax (which is relevant to the operation of section 50-10 of the ITAA 1997):

For a society, association or club to qualify for the exemption granted by sec. 23(g)(iii) it must be one that has as its main object or purpose the encouragement or promotion of an athletic game or athletic sport in which human beings are the sole participants. It may have other objects or purposes which are merely incidental or ancillary thereto or which are secondary or even unrelated to the main object or purpose without disqualifying the body from the exemption. 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 (at 4225).

For the relevant period (1 July 2013 to 31 March 2020), the Company conducted a health insurance business, and operated a hospital.

The regional area benefits by the operations of the private hospital. The private hospital provides health services that are not otherwise available in the region (and provides facilities that enable specialists to operate in the region), and supports the public system in providing a number of health services. If the hospital services were not available, the burden on the public system would be significant The Company also provides services at reduced cost at the hospital that benefit members who use the hospital.

However, to be a rebatable employer, the community service purpose must be the principal purpose of the Company. The above analysis shows that although the services of the hospital are significant, the Company's principal purpose is the insurance business and the hospital services are incidental to that purpose. The operation of the hospital by the Company does not change the nature of the company's main purpose as an insurance provider offering insurance products to the public for purchase.

In Navy Health the court stated that the sale of a product at normal market rates is inconsistent with the word 'service'. In Wentworth the court stated that 'a service provided for reward is not a community service, at least where there is no element of subsidisation' (at 287-288). The Company provides reduced cost services to members that use the hospital. However, the benefits are not available to the broader community. A person must be a member to receive the reduced cost services. This arrangement with the hospital is similar to arrangements entered into between a health insurance business and private hospital and service providers to ensure they provide their members with competitive insurance products.

Further, the members of the Company are consumers that have made a consumer choice (they have chosen to purchase insurance from the Company). In this way they are not a section of the community as described in Navy Health, where the court did not consider that receipt of a service by a group of persons (e.g. consumers) was enough to be a service received by the community or a section of the community. Members of the company are not a community or a section of the community (although they do come principally from the regional area), but rather are individual consumers who have made a choice about an insurance provider.

There are sufficient differences in the circumstances of the Wentworth case and those of the Company to distinguish the two. In Wentworth the entity did not undertake a commercial business but provided facilities to facilitate banking in the area (a community service), whereas the Company exists principally to operate a health insurance business, and has a secondary purpose to operate the hospital that provides services to both members and the local community, but also enhances the insurance purpose. Further, in Wentworth the activities of the entity were only concerned with benefiting the Wentworth community by facilitating face-to-face banking in Wentworth and making it commercially viable for banking services to operate in Wentworth, whereas the Company is principally concerned with operating a business and offering competitive services that benefit members, and the benefits to the community that come from its services (such as the hospital) are incidental to that purpose.

Based on the foregoing, it is considered that for the relevant period (1 April 2013 to 31 March 2020) the principal purpose the Company was to run an insurance business, and any community service purpose of the Company is incidental to that main purpose.

As such, from 1 April 2013 to 31 March 2020 the Company is not a rebatable employer under section 65J, and is therefore also not a rebatable employer that carries on a hospital for the purposes of subsection 57A(4) of the FBTAA.

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