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Edited version of private advice

Authorisation Number: 1051792994981

Date of advice: 23 December 2020

Ruling

Subject: Not-for-profit - exemption from income tax

Question 1

Is the Entity a not-for-profit organisation?

Answer

Yes.

Question 2

Is the Entity exempt from income tax pursuant to the provisions of section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following periods:

Year ended 31 December 2020

Year ended 31 December 2021

Year ended 31 December 2022

Year ended 31 December 2023

The scheme commences on:

During the year ended 31 December 2020

Relevant facts and circumstances

The Entity is governed by the rules in its constitution.

A rule in the Constitution of the Entity specifies their object of promoting the development of the specific industry and to operate as a profession association to represent members.

The Constitution of the Entity contains non-profit and dissolution rules which prevents them from distributing its profits and assets among members while it is operating and on winding up.

The Entity has a Code of Conduct which provides ethical and professional guidelines for the specific industry and states that the Entity was established as a national industry body for the specific industry.

The Entity derives income from annual membership fees, some minor bank interest and some minor and occasional advertising fees.

All funds and activities of the Entity are generated and retained in Australia.

All income and profits have been re-invested within the Entity to fund association operation costs.

No funds of any sort have been withdrawn for personal use by members.

The Entity's physical presence is wholly within Australia.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 subsection 6-15(3)

Income Tax Assessment Act 1997 section 6-23

Income Tax Assessment Act 1997 Subdivision 50-A

Income Tax Assessment Act 1997 section 50-1

Income Tax Assessment Act 1997 section 50-10

Income Tax Assessment Act 1997 section 50-30

Income Tax Assessment Act 1997 section 50-47

Income Tax Assessment Act 1997 section 50-70

Income Tax Assessment Act 1997 section 59-35

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

Reasons for decision

Question 1

Summary

The Commissioner considers that the Entity is a not-for-profit organisation.

Detailed reasoning

The Commissioner considers that to qualify as not-for-profit organisation, the entity must be prevented by law or its constitution documents from distributing its profits or assets among members, either while the entity is functional or on its winding up, and it must act consistently with those restrictions.

Paragraph 23 of the Taxation Ruling TR 97/22 - Income tax: exempt sporting club (TR 97/22) states that:

Where the law or the constituent documents do not prohibit distributions, it is a question of fact in each case as to whether the club is not carried on for purposes of profit or gain to the individual members. Factors that we consider relevant include whether distributions have been made, whether there is a stated or demonstrated policy to make or not to make such distributions and whether winding-up is contemplated. Where it is clear from the objects, policy statements, history, activities and proposed future directions of the club that there will be no distributions to members, we accept that the non-profit test has been satisfied.

The Entity contains non-profit and dissolution rules in its Constitution which prevents them from distributing its profits and assets among members while it is operating and on winding up. Therefore, it is accepted that the Entity operates on a non-profit basis and does not make any distributions to its members and therefore meets the non-profit test.

Question 2

Summary

The Entity is not an exempt entity for income tax purposes as it does not fit within any of the categories in Subdivision 50-A.

Specifically, the Entity does not meet the requirement of Item 2.1 of the Table in section 50-10 and therefore does not qualify for exemption from income tax as a community service organisation.

Detailed reasoning

Unless otherwise stated, all legislative references are to the Income Tax Assessment Act 1997.

Section 50-1 states that the total ordinary and statutory income of the entities covered by the tables in Subdivision 50-A is exempt income.

Subdivision 50-A provides for the following categories of exempt entities:

Additionally, section 50-47 effectively provides that where an entity is covered by an exempt entity category, but also meets the description of an 'ACNC type of entity', it will not be exempt from income tax unless it is registered as a charity with the Australian Charities and Not-for-profits Commission and endorsed by the ATO.

This means the Commissioner must first consider whether the Entity meets the description of an 'ACNC type of entity' before any consideration is given to whether it is exempt under another exempt entity category.

ACNC type of entity

Taxation Ruling TR 2011/4 Income tax and fringe benefits tax: charities (TR 2011/4) 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 purpose.

The Entity has multiple objectives and they all reflect promoting the development of the specific industry and to operate as a profession association to represent members or its Members who share their professional interest in the specific industry.

The Entity's Code of Conduct was established by the Entity for its Members to establish ethical and professional guidelines for the specific industry and states that the Entity was established as a national industry body for the specific industry.

It is evident that the dominant purpose of the Entity aligns with its objectives to promote the development of the specific industry and operate as a profession association to represent members. It cannot be said that the dominant purpose of the Entity is to benefit the public generally.

Therefore, the Entity is not an 'ACNC type of entity' and section 50-47 does not apply.

Exempt entities in Subdivision 50-A

The Commissioner can now consider the categories of exempt entities in Subdivision 50-A:

The Entity is not registered as a charity, and its objectives cannot (as discussed above) be considered as being for charitable purposes, it cannot meet the first category.

The only other possible category to consider for the Entity would be that of Community Service.

To be an exempt entity under this category, section 50-10 states that the entity must be a society, association or club established for community service purposes.

Community Services organisation

Subdivision 50-A includes section 50-10. Item 2.1 of the Table in section 50-10 describes a "society, association or club established for community service purposes (except political or lobbying purposes)".

Item 2.1 of the Table in section 50-10 in conjunction with section 50-1, provides that the total ordinary income and statutory income of a society, association or club established for community service purposes (except political or lobbying purposes) is exempt from income tax, subject to the special condition detailed in section 50-70.

To be an entity described in item 2.1 the entity must:

If the association fails to satisfy these requirements, it will not be exempt from income tax under section 50-1.

Society or Association

The terms "society" and "association" are not defined in the ITAA 1997.

The meaning of "association" was considered by Olney J in Douglas & Ors v FCT 97 ATC 4722 in relation to former subparagraph 23(g)(v) of the Income Tax Assessment Act 1936 (ITAA 1936) and the following was found:

As the section contains no definition of either 'society, association or club' or "community services purposes" it should be construed according to the ordinary meaning of the words used and, if necessary, after resort to the relevant explanatory memorandum and second reading speech.

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.

The Entity was established as an association and currently has a number of members.

The Entity is therefore considered to be an 'association' or 'society' for the purpose of section

50-10.

Be established for dominant purpose of community service

Section 50-10 allows income tax exemption for community service organisations.

A community service organisation is a not-for-profit society, association or club established for community service purposes except political or lobbying purposes.

The main purpose of the organisation must be community services. Any other purpose of the organisation must be incidental, ancillary or secondary to the community service purpose.

Paragraph 4 of 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 ? states:

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'.

Community service purposes are altruistic meaning that they are established and operated for the wellbeing and benefit of others.

Community service organisations promote, provide or carry out activities, facilities or projects for the benefit or welfare of the community or other members who have a particular need by reason of youth, age, infirmity or disablement, poverty or social or economic circumstances.

Organisations that seek to advance the common interests of their members are not altruistic and cannot be community service organisations.

Paragraph 5 of TD 93/190 states:

It is not accepted that common association as such is altruistic. Neither the purposes of members, nor the purposes of their organisation, are altruistic merely because the members form a non-profit organisation to advance their common interests. Members who seek to advance their common interests are not therefore motivated by an unselfish regard for others, and neither is their organisation. It follows that an organisation established for the purposes of its members is not therefore established for community service purposes. Only when the purposes of the organisation are altruistic can they be community service purposes.

To qualify for the income tax exemption as a community service organisation the main purpose of the organisation must be community service.

The Entity has multiple objectives and they all reflect promoting the development of the specific industry and to operate as a profession association to represent members or its Members who share their professional interest in the specific industry.

Therefore, it cannot be said that community service is its main purpose. Rather, its main purpose is the advancement of the specific industry and to operate as a profession association to represent members.

Special Conditions

An association will be exempt under section 50-1 from income tax if it satisfies any relevant special conditions. Section 50-10 states that the relevant special conditions for community service organisations are the conditions set out in section 50-70. The Entity will satisfy these special conditions if it:

-       has a physical presence in Australia and incurs its expenditure and pursues its objects principally in Australia; and

-       has at all times complied with all the substantive requirements in its governing rules and applied its income and assets solely for the purpose for which it was established.

The Entity has a physical presence in Australia, incurring its expenditure and pursuing its objectives solely in Australia. Further there is nothing to indicate that the Entity has not complied with the substantive requirements in its governing documents or not applied income or assets for purposes for other than which it was established. Although a not-for-profit organisation, the Entity does not qualify for income tax exemption as a community service organisation under section 50-10. Its dominant purpose aligns with its objectives to promote the development of the specific industry and operate as a profession association to represent members.

Therefore, the Entity is not entitled to the exemption provided in section 50-1 and is an assessable not-for-profit company.

 

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