Edited version of private advice

Authorisation Number: 1052222204020

Date of advice: 29 February 2024

Ruling

Subject:Income tax exemption

Question

Is the entity a tax exempt entity pursuant to item 2.1 of section 50-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following periods:

Income year ended 30 June 20XX

Income year ended 30 June 20XX

Income year ended 30 June 20XX

Income year ended 30 June 20XX

Income year ended 30 June 20XX

The scheme commenced on:

20XX

Relevant facts and circumstances

XX was incorporated in Australia in July 20XX as a company limited by guarantee.:

XX has been established in accordance with the Treasury Laws Amendment (Putting Consumers First - Establishment of the Australian Financial Complaints Authority) Act 2018. The scheme is authorised by the Minister for Revenue and Financial Services and is overseen and regulated by ASIC.

The objective of XX was and has always been to simplify the structure of financial services dispute resolution in Australia and thus provide a more effective and efficient service that is more accessible for XX members and consumers.

XX has been established to provide an independent national external dispute resolution (EDR) body. Membership to XX is limited to members who are financial services providers that operate in Australia.

Where consumers have disputes relating to financial products with a member, XX will assist the consumer to resolve the dispute and make determinations which are binding on its members in line with the 'Rules' as defined in the Constitution.

The EDR framework will ensure that consumers and small businesses are able to access an EDR scheme that provides fast and fair resolution of financial complaints in a way that is binding on the Financial Firms. This is provided for consumers and small businesses free of charge. In relation to superannuation complaints, limited rights of appeal on a question of law will be maintained. Alternatively, complainants (consumers and small business) may reject a determination of XX and proceed with any other remedy available - such as bringing an action in court - if they are not satisfied with the decision.

XX main sources of funding are from dispute/complaint fees and membership levies collected from its members. The Constitution provides it with the power to raise levies from its members from time to time for the purposes of operating the entity. Members pay the dispute fees/complainant handling fees if a complaint is raised against them.

A review of the XX 20XX funding model was performed in the 20XX-20XX income years and from 1 July 20XX, the final funding model came into effect. The main change from the 20XX funding model is the removal of the superannuation levy.

The Constitution states the objectives for which the entity is established.

The Constitution sets out the restriction on the way in which income and property of XX can be applied.

The clause in the Constitution dealing with winding up the entity is clause X.

XX was granted and issued a private binding ruling in May 20XX confirming its tax-exempt entity pursuant to item 2.1 of section 50-10 of the Act for the income tax years ended 30 June 20XX through to 20XX inclusive.

Minor Changes from the Initial Application

No amendments have been made to the "Objects" or "Winding up" clauses.

Amendments to the Constitution are administrative in nature only.

Changes have been made to the Scheme Rules since 20XX. The changes are administrative in nature, no amendments have been made to materially alter the way in which the XX scheme operates under the Scheme Rules.

The establishment of the Compensation Scheme of Last Resort (CSLR) and its interaction with XX

On DD June 20XX the Australian Parliament passed the Treasury Laws Amendment (Financial Services Compensation Scheme of Last Resort) Bill 2023, the Financial Services Compensation Scheme of Last Resort Levy Bill 2023 and the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2023 (collectively, the CSLR Acts) which together established the Compensation Scheme of Last Resort (CSLR).

The CSLR arose out of the Supplementary Final Report to the Ramsay Review as it was observed that existing arrangements were not adequate to ensure that users of the financial system were compensated for losses. The issue of financial misconduct is compounded in situations of the financial firm being insolvent and as such, the consumers who are awarded damages are ranked as unsecure creditors.

As such, the CSLR Scheme intends to facilitate the payment of up to $xxx,xxx in compensation to eligible consumers who have received an XX determination awarding compensation in relation to complaints in one of four areas where the relevant entity has not paid: personal financial advice, credit intermediation, securities dealing or credit provision.

The CSLR is expected to commence operation in MM 20XX. As a transitional arrangement whilst the CSLR Operator is established, XX has been providing services to the CSLR since around 20XX. These services consist of administrative, legal, financial and project management support. XX has received an allocation grant funding to provide reimbursement for costs expended on CSLR. As noted above, once the CSLR Operator commences operations, it is intended that the entity will operate independently from XX (with the exception of the board member) and these service arrangements will cease.

Assumption

The entity will comply with the substantive requirements of its governing rules.

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

Reasons for decision

Section 50-1 states that:

The total ordinary income and statutory income of the entities covered by the following tables is exempt from income tax. In some cases, the exemption is subject to special conditions.

The table in section 50-10 provides the following:

Table 1: Exemptions from income tax

As is relevant section 50-70 states the following:

(1) An entity covered by item... 2.1... is not exempt from income 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).

(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.

Society, association or club

The term society, club or association is not defined in the ITAA 1997. The term should therefore be construed according to the ordinary meaning of the words.

This approach was taken in Douglas v. Federal Commissioner of Taxation (1997) 77 FCR 112; 97 ATC 4722; (1997) 36 ATR 532. Reference was made by the court to the definitions contained in the Concise Oxford Dictionary for each of these terms. Society, association or club was accepted by the court as referring to a voluntary organisation having members associated together for a common or shared purpose.

XX comprises members who are entities who carry on a financial services business in Australia. XX has been formed for the purpose of resolving disputes pertaining to the financial services industry therefore the members of XX, in becoming members, have this as their common or shared purpose. XX is society, club or association.

Established for community service purposes

The required community service purposes must be the entity's main or predominant purposes. It is a question of fact in each case as to whether any benefits derived by members are merely incidental to a main community service purpose of the industry ombudsman entity.

Item 2.1 of section 50-10 is the equivalent of subparagraph 23(g)(v) of the Income Tax Assessment Act 1936 (ITAA 1936). Guidelines on the scope of the exemption provided by subparagraph 23(g)(v) are provided by 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? (TD 93/190).

TD 93/190 states that the purpose of enacting the provision was to create a category of exemption for community bodies whose activities are not accepted as being charitable because they do not fall within one of the four heads of charitable purpose.

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.

To determine whether an association is established for community service purposes it is necessary to consider its constitution, its current operations and activities, and also the circumstances and needs of those who benefit from the operations. If it can be established that an entity is established mainly to provide benefits to the community, it will not be a disqualifying attribute if there is an incidental benefit derived by members.

It is necessary to consider, therefore whether it is

•         a section of the community or

•         a closed and restricted class of persons

that receives benefits from the industry ombudsman entity. This is a question of degree.

Where membership of the ombudsman entity is effectively compulsory for all industry service providers, it is less likely that the section of the community being the customers of the members is a restricted class.

Where the industry ombudsman entity is established to make its ombudsman services available to ordinary industry consumers, without barring some and not others on the basis of their relationship with ombudsman entity members, it can reasonably be said that these entities are established for community service purposes in a wide sense. They are altruistic to the extent that they provide their service for the benefit of the community free of charge.

The Explanatory Memorandum to the Treasury Laws Amendment (Putting Consumers First - Establishment of the Australian Complaints Authority) Bill 2017 provides the following explanation in relation to the new EDR framework:

1.12 On May 20XX, the Government announced the creation of a new framework for dispute resolution with a 'one stop shop' EDR scheme which will be known as XX...

1.13 A key benefit of a one stop shop is that it enables consumers to approach a single scheme to resolve all financial disputes.

1.14 The Government announced that XX will be based on an ombudsman model and will be established by industry as a company limited by guarantee.

XX has been established for the purpose of providing a dispute resolution scheme free of charge, to consumers and small business, to resolve disputes pertaining to the financial services industry in Australia.

Financial Firms, being certain firms that provide financial and credit services, are required to be members therefore making membership of XX effectively compulsory.

The resolution of financial complaints is binding on Financial Firms who are members of XX. They are not binding on complainants.

These matters indicate that XX is altruistic and that community service purposes are the main or predominant purpose of XX.

Special Condition

XX has been established as an independent national EDR body within Australia. It is incorporated in Australia and will incur its expenditure and pursue its objectives principally in Australia.

The constitution of XX contains clauses to prevent distributions to members both whilst XX is operating and upon its winding up. Therefore, XX is not established for the profit or gain of its members.

XX will comply with the substantive requirements of its governing rules.

XX satisfies the special condition in section 50-70.

Therefore, as all the relevant conditions are satisfied, XX is a tax-exempt entity pursuant to item 2.1 of section 50-10.

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