Edited version of private advice

Authorisation Number: 1052275280521

Date of advice: 20 August 2024

Ruling

Subject: Income tax exempt entity - community services purpose

Question

Is the Committee exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as a society, association or club established for community service purposes under item 2.1 in section 50-10 of the ITAA 1997?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

The Committee is an unincorporated association.

The Committee is located in Australia and pursues its objects at that location.

The Committee is governed by a Constitution (Governing document).

The objects of the Committee are set out in the Constitution.

The Committee's constitution includes:

•         not-for-profit clauses, and

•         wind up, and dissolution of assets clauses prohibiting distribution to its members.

The Committee conducts activities for the benefit of its own community, who bears a need.

The Committee uses its surplus funds generated from its activities to provide equipment and amenities for its target demographic.

Information provided

The Committee has provided information in a variety of documents including:

•         the Private ruling application

•         an email providing:

o   the original Constitution

o   the current Constitution

o   a history of changes to the Constitution since 20YY

o   the proposed changes to the Constitution in 20YY

Relevant legislative provisions

Retirement Villages Act and Regulations S98

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

Income Tax Assessment Act 1997 section 50-1

Income Tax Assessment Act 1997 section 50-10

Income Tax Assessment Act 1997 section 50-10 item 2.1

Income Tax Assessment Act 1997 section 50-47

Income Tax Assessment Act 1997 section 50-70

Income Tax Assessment Act 1997 section 995-1

Australian Charities and Non-for-profits Commission Act 2012 section 25-5

Charities Act 2013 section 5

Charities Act 2013 section 6

Charities Act 2013 section 12

Charities Act 2013 section 15

Reasons for decision

Issue 1

Question 1

Detailed reasoning

Section 50-1 of the ITAA 1997 states:

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 tables referred to in section 50-1 of the ITAA 1997 are contained in sections 50-5 to 50-45 of the ITAA 1997. A society, association or club established for community service purposes (except political or lobbying purposes) is listed at item 2.1 in the table at section 50-10 of the ITAA 1997. The society, association or club must meet the special conditions detailed in section 50-70 of the ITAA 1997 and the special condition in section 50-47 of the ITAA 1997.

An entity is therefore exempt from income tax as a society, association or club established for community services purposes if:

•         is a society, association or club,

•         is established for community service purposes (except political or lobbying purposes), and

•         satisfies the special conditions.

If the association fails to satisfy all of the above criteria, it will not be exempt from income tax under this provision.

Society, association or club

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

In Douglas v. Federal Commissioner of Taxation 97 ATC 4722 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 (at 4726).

In Pro-campo Ltd. v. Commr of Land Tax (NSW) 81 ATC 4270 the court considered the meaning of 'society, club or association'. The court stated at 4279:

In Theosophical Foundation Pty Ltd v. Commr of Land Tax (NSW) [1966] 67 SR (NSW)...Sugerman JA stated at 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'...

The meaning of "society" as the Oxford English Dictionary definition shows can be the equivalent of "association" and I do not think that any relevant distinction in nature exists between the two. It merely seems to have happened that some organisations are called "associations", others are called "societies" but no meaningful difference can be detected between the two...Although clubs can in some respects and in some instances be seen to be distinguishable by reason of their purposes from societies or associations, they nevertheless fall squarely within the dictionary definition of "society" set out above. In short the three words are describing bodies made up of groups of persons who have come together to implement common purposes and objects...

The meaning of society, association or club as described above, emphasises a 'body of persons' and 'an organisation of people' with a 'common purpose'.

Application to your circumstance

The Committee is an unincorporated association. The Committee is managed by its governing committee. The Committee pursues a common purpose and is governed by the rules outlined in its Constitution.

The Committee is a society, association or club for the purposes of section 50-45 of the ITAA 1997.

Established for community service purposes

Community service purposes

The ITAA 1997 does not provide a definition of what constitutes a community service purpose for the purposes of section 50-10. Accordingly, the words should be given their ordinary meanings.

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) describes the circumstances in which the Commissioner will consider a society, association or club as to be established for community services purposes.

Paragraph 3 of TD 93/190 outlines that a community service purpose is to be given a wide interpretation and the words extend to a range of altruistic purposes that are otherwise not charitable. These purposes include the carrying out of activities for the benefit or welfare of the community or for members of the community who have a particular need by reason of age, infirmity or disablement, social or economic circumstances.

Paragraph 4 of TD 93/190 notes that subparagraph 23(g)(v) of the ITAA 1936 does not give exemption from income tax to a broad range of organisations that are established within the community, but whose purposes are not of an altruistic nature. Altruistic purposes are an essential element of even the widest interpretation of 'community service purposes'.

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

As per paragraph 7 of TD 93/190, the purposes for which an organisation is established are demonstrated by its current operations and activities, which may show different purposes to those suggested by a reading of its constitution. This is best reflected in Royal Australasian College of Surgeons v. Federal Commissioner of Taxation (1943) 68 CLR 436.

Whether an entity is 'established' for community service purpose is considered each income year as stated in Federal Commissioner of Taxation v Wentworth District Capital Ltd (2011) ATC 20-253 (Wentworth). The activities undertaken in the relevant year must be considered, alongside the objects and purposes for which the body was incorporated. Per Gilmour and Gordon JJ in Wentworth at paragraph 30, 'an entity might be established for the requisite purpose in one year, but not another'.

Relevantly at paragraph 33, the trial judge identified the following principles as presently relevant:

The kind of community service referred to in s 50-10 is a practical or tangible help, benefit or advantage conferred on the community or an identifiable section thereof: Navy Health Ltd v Federal Commissioner of Taxation [2007] FCA 931 at [83] and [84] (Navy Health); Victorian Women Lawyers' Association Inc v Federal Commissioner of Taxation [2008] FCA 983 at [163] and [164] (Victorian Women Lawyers' Association).

A service provided for reward is not a community service, at least where there is no element of subsidisation: Navy Health at [83].

Community service purposes include the purpose of providing a community service, although the purposes contemplated are not limited solely to the act of provision. The expression is broad and may extend to encompass any activity whose purpose has a reasonable connection to the delivery of a community service. Facilitation and promotion, therefore, are purposes that are squarely within s 50-10:

The entity claiming the exemption must be established for those purposes. That requires an analysis of what the entity is doing in the relevant year of income, both as a matter of its constitutive documents, and also by reference to its actual activities.

The purpose must be the entity's main or dominant purpose. The existence of other purposes will not lead to a different conclusion so long as a matter of true characterisation, the main or dominant purpose is still reasonably connected to the delivery of a community service:

InVictorian Women Lawyers' Association Inc v Commissioner of Taxation (2008) ATC 20-035 the concept of a community service association is considered by the Court. Relevantly, at paragraphs 162 and 163 the Court reflects on the Commissioner's submission and outlines that:

"The Commissioner submitted that the concept of "community service" is similar to that of "public benefit" in the law of charitable trusts. It would not follow that receipt of a service by any group of persons should be regarded as the receipt of that service by a section of the community. In the Commissioner's submission "community service" requires the community or a section of the community to benefit by way of receipt of some identifiable help, benefit or advantage bestowed or provided directly by the putative benefactor. Such a requirement is not satisfied, it was submitted, merely because an association's activities or some of them might have a tendency to benefit the community as a whole or a section of it. In this regard the commissioner relied upon the observation of Jessup J where he found that the community service requirement was not satisfied merely because the operations of the organisation had a tendency to promote the efficiency of the armed forces thereby benefiting the community as a whole.

In my opinion the concept of "community service" was intended to pick up a broader range of organisations than those covered by the concept of "charitable institution" and in particular that class of charitable institution falling within the rubric "beneficial to the community". However, an organisation may be beneficial to the community without delivering a "community service" in the sense contemplated by that term as explained in the explanatory memorandum. For the reasons I have already expressed, I am of the view that the purposes of VWL are beneficial to the community in the sense necessary to qualify it as a charitable institution. The concept of "community service" does seem to import the notion of the delivery of some practical "help, benefit or advantage" in the sense used by Jessup J. That criterion is not necessarily met by an organisation whose purpose is to change practices and attitudes in such a way as to facilitate the entry and advancement of women within the profession generally."

Furthermore, in Navy Health, His Honour Jessup J at paragraphs 83 and 84 discusses the concept of community service:

"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 of another" (OED, 2^nd Ed). I consider that the sale of a product at normal market rates is inconsistent with this understanding of the word "service". The applicant's operations during the years in question, therefore, should not be regarded as the provision of a "service" to its contributors. Neither was there any other person, or group of persons, with respect to whom those operations might have been regarded as the provision of a service.

That brings me to the concept of "community". I accept, of course, that the word refers not only to the community as a whole but also to any 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. Those who actually received the applicant's services in years in questions were not a section of the community: they were those who, by their own consumer choices, purchased the applicant's products. Neither, in my opinion, is the broad concept of community benefit upon which the judgment of Walsh J in Downing was based transferable into the context of s 65J(1)(j) of the FBTA Act. His Honour held that, by having a purpose of providing aid, comfort or encouragement to existing or former members of the armed forces, a benefactor (or, in this case, an institution) likewise had the purpose of benefiting the community as a whole, in the sense of promoting the efficiency of those forces. But that is a concept quite different from the one with which I am presently concerned. 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 bestowed or provided directly by the putative benefactor. Such a requirement, I consider, is not satisfied merely because, in this case, the operations of the applicant had a tendency to promote the efficiency of the armed forces, thereby benefiting the community as a whole."

Applied to your circumstances

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 Committee. This is a question of degree.

Membership to the association is only conferred to a person upon taking up residence within the village. Clause 6 of the Committee's constitution outlines that only a resident of the village can become a member of the Committee. It is therefore a reasonable conclusion that the objects and activities of the Committee as per their governing document are concerned with undertaking activities for the welfare, benefit and support of their own enclosed and exclusive community. Considering the operation of TD 93/190, in particular at paragraph 5, the Commissioner does not accept that mere common association of members who have formed a non-profit organisation to advance their common interests constitutes a measure of altruism.

Continued in paragraph 5, an association of members who seeks to advance their own interests are not motivated by an unselfish regard for others and neither is their organisation. An organisation that has been established for the purposes of its members has not been established for community services purposes. This was best observed in Navy Health at paragraph 83 where Jessup J stated that the service undertaken must be undertaken for serving, helping or benefiting, conduct tending to the welfare or advantage of another. The key word in this context is that of "another". In the Committee's context, they are not undertaking their actions for the benefit of 'another', but for themselves and their own enclosed community.

This position is further bolstered by the Court in Wentworthwhere the entity must be established for community services purposes, and it must be the main or dominant purpose.

Considering the activities conducted by the Committee have been undertaken for the benefit of their own enclosed community, there is a distinct lack of altruistic intent. Reflecting on Royal Australasian College of Surgeons v. Federal Commissioner of Taxation, it is immaterial that the constitution states that the Committee is non-profit and for the benefit of a community with an identified need, if that community is working to advance its own interests.

Consequently, the Committee does not meet the criteria of being established for a community services purpose under item 2.1 of section 50-10 of the ITAA 1997 as its activities are not undertaken in an altruistic manner.

Special conditions

Section 50-47 of the ITAA 1997

Section 50-47 of the ITAA 1997 provides a special condition for all entities covered by section 50-1 of the ITAA 1997, it states:

An entity that:

(a) is covered by any item; and

(b) is an ACNC type of entity;

is not exempt from income tax unless the entity is registered under the Australian Charities and Not-for profits Commission Act 2012.

Broadly, an entity that can be registered as a charity with the Australian Charities and Not-for profits Commission (ACNC) is an 'ACNC type of entity'. The Charities Act 2013 (CA) sets out the requirements to be a charity.

Section 5 of the CA defines a charity as an entity:

(a)           this is a not-for-profit entity and

(b)           all of the purposes of which are

(i)            charitable purposes that are for the public benefit, or

(ii)            purposes that are incidental or ancillary to, and in furtherance or in aid of, purposes of the entity covered by subparagraph (i)

Subsection 6(1) of the CA outlines that a purpose an entity has is for the public benefit if:

(a)           the achievement of the purpose would be of public benefit and

(b)           the purpose is directed to a benefit that is available to the members of:

(i)            the general public; or

(ii)            a sufficient section of the general public

Subsection 6(3)(a) of the CA provides that the benefit must be widely available.

Section 12 of the CA provides purposes that are a 'charitable purpose' and includes purposes such as advancing social or public welfare.

Paragraph 15(2)(a) of the CA then outlines that the purpose of advancing social or public welfare includes the purposes of caring for and supporting the aged.

Application to your circumstance

As the Committee has not satisfied the community service purpose requirement under item 2.1 of section 50-10 of the ITAA 1997, consideration of the above conditions is not required to be considered.

Section 50-70 of the ITAA 1997

Subsection 50-70(1) of the ITAA 1997 states that an entity covered by item 2.1 is not exempt from income tax unless the entity is not carried on for the profit or gain of its members (not-for-profit requirement) and:

•         it has a physical presence in Australia and, to that extent it pursues its objectives and incurs its expenditure principally in Australia; or

•         it is a deductible gift recipient; or

•         it is prescribed by law in the income tax regulations and it is located outside Australia and is exempt from income tax in its country of residence.

Non-profit requirement

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 Ltd (2010) 81 ATR 312, the Full Federal Court considered the operation of section 50-40, 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 Court in Repromed Pty Ltd v. Lucas and Anor (2000) 44 ATR 452 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.

Application to your circumstances

As the Committee has not satisfied the community service purpose requirement under item 2.1 of section 50-10 of the ITAA 1997, consideration of the above conditions is not required to be considered.

Has a physical presence in Australia and, to that extent it pursues its objectives and incurs its expenditure principally in Australia

The Committee is a resident of and is located within Australia. The Committee carries on its activities in Australia. It pursues its objectives and incurs its expenditure in Australia and therefore satisfies this requirement as per Taxation Ruling TR 2019/6 Income tax: the 'in Australia' requirement for certain deductible gift recipients and income tax exempt entities.

Comply with substantive requirements in its governing rules

Subsection 50-70(2) of the ITAA 1997 provides that the Association must:

•         comply with all the substantive requirements in its governing rules; and

•         apply its income and assets solely for the purpose for which the entity is established.

Taxation Ruling TR 2015/1 Income tax: special conditions for various entities whose ordinary and statutory income is exempt (TR 2015/1)provides guidance in respect of the conditions in subsection 50-70(2) of the ITAA 1997. Paragraph 9 of TR 2015/1 provides that an entity's 'governing rules' are those rules that authorise the policy, actions and affairs of the entity. Paragraphs 18 and 19 of TR 2015/1 explain that the substantive requirements in an entity's governing rules are those rules that define the rights and duties of the entity and include rules such as those that:

•         give effect to the object or purpose of the entity.

•         relate to the non-profit status of the entity.

•         set out the powers and duties of directors and officers of the entity.

•         require financial statements to be prepared and retained.

•         set out the criteria for admission as a member of an entity.

•         require an entity to maintain a register of members, and

•         relate to the winding-up of the entity.

Application to your circumstances

As the Committee has not satisfied the community service purpose requirement under item 2.1 of section 50-10 of the ITAA 1997, consideration of the above conditions is not required to be considered.

Applies its income and assets for its purpose

Paragraphs 33 to 35 of TR 2015/1 states that 'the income and assets condition requires an entity to apply its income and assets 'solely' for the purpose for which the entity is established. This means that the entity must exclusively or only apply its income and assets for that purpose'.

Application to your circumstances

As the Committee has not satisfied the community service purpose requirement under item 2.1 of section 50-10 of the ITAA 1997, consideration of the above conditions is not required to be considered.

Conclusion

The Committee is not considered to be a society, association or club established for community services purposes as required under item 2.1 of section 50-10 of the ITAA 1997. As such, the income of the Committee will not be exempt from income tax under s50-1 of the ITAA 1997.

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