Edited version of private ruling

Authorisation Number: 1011601760264

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Ruling

Subject: Income Tax Exemption - Community Service Purpose

Question:

Is the entity eligible for income tax exemption under 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as an association established for community service purposes pursuant to item 2.1 in section 50-10 of the ITAA 1997.

Answer: Yes.

This ruling applies for the following periods:

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

The scheme commences on:

1 July 2009

Relevant legislative provisions

Income Tax Assessment Act 1997 (ITAA 1997) Section 50

Income Tax Assessment Act 1997 (ITAA 1997) Section 70

Income Tax Assessment Act 1997 (ITAA 1997) Section 75

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Entity X is a company limited by guarantee. It is governed by a memorandum and articles of association.

The objects clause in the Memorandum outlines the objects for which the entity is established. A broad range of welfare activities for people born in Country A and their descendants.

There are more 30 objects listed in clause X of the Memorandum. They come under the four broad categories which follow.

Community service activities as stated by the entity

Activities are targeted at the elderly, young children and teenagers other individuals in need of help. The entity listed numerous activities.

Donations by entity

The entity assists members of the community by running fundraising events to support those in need. Several examples were provided.

Other altruistic activities as stated by the entity

Activities promoting culture of Country A to the general public as stated by the entity.

Non profit and winding up clauses

The memorandum of association contains the clauses which address financial and winding up arrangements.

Reasons for decision

Summary

The applicant is eligible for income tax exemption under 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as an association established for community service purposes pursuant to item 2.1 in section 50-10 of the ITAA 1997.

Detailed reasoning

Item 2.1 of the table in Section 50-10 of the ITAA 1997 provides that the income of a society, association or club that is established for community service purposes (not being political purposes or lobbying purposes) is exempt from income tax subject to satisfying certain special conditions.

Taxation Determination TD 93/190 considers the scope of the exemption from income tax provided by subparagraph 23(g)(v) of the ITAA 1936 (corresponds to Item 2.1 of the table in section 50-10 of the ITAA 1997) for associations established for community service purposes (not being political purposes or lobbying purposes).

Paragraph 3 of TD 93/190 refers to the Explanatory Memorandum which confirms that the words 'community service purposes' are to be given a wide interpretation which extends to a range of altruistic purposes.

The EM also stated:

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

TD 93/190 goes on to say:

Those words extend to a range of altruistic purposes that are not otherwise charitable, such as 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.

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".

Altruism is defined in the Macquarie dictionary as "the principal or practice of seeking the welfare of others".

It is still essential that the organisation's purpose be altruistic to satisfy the widest interpretation of 'community service purposes'. Only when the purposes of the organisation are altruistic can they be community service purposes.

TD 93/190 lists organisations that would not be considered to be established for community service purposes and includes:

clubs that provide a social forum for expatriates of a particular country;

If the entity had the characteristics of a club that provides a social forum for members of a particular community with some altruistic purposes it would not be exempt from income tax as a community service organisation.

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: see Royal Australasian College of Surgeons v. Federal Commissioner of Taxation (1943) 68 CLR 436. For the organisation to have a community service purpose, its constituent documents, activities, use of funds and history must point to it having altruistic purposes.

The activities for the aged and the youth are described in detail and there are other services, namely the work of the welfare provider to assist community members in need, the volunteer service that gives lessons in basic reading and writing, and to liaise with the High Commissioner for functions regarding family relocation and passport applications.

The entity's objectives as stated in its constituent document are broad and it lists a wide range of activities that it undertakes to achieve its objectives. The information indicates that the activities and services made available are predominantly altruistic for the benefit and welfare of the aged, youth, those needing welfare assistance, reading and language help, consular advice and help. These activities are organised, regular and ongoing. The altruistic objects are predominant among the list of objects stated in the objects clause.

As the entity qualifies as an organisation for community service purposes, consideration of whether it satisfies the special condition under section 50-70 of the ITAA 1997 is necessary. This section states:

Section 50-70 - Special conditions for items 2.1

An entity covered by item 1.7, 2.1, 9.1 or 9.2 is not exempt from 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.

As the entity is allowed under its winding up clause to distribute surplus fund overseas this could impact on its compliance with section 50-70. However, an organisation may still meet the physical presence in Australia test even if it does not, in fact, pursue its purposes and incur its expenditure principally in Australia, to the extent it has a physical presence in Australia. This will depend on its distribution of its disregarded amounts.

Section 50-75 - Certain distributions may be made overseas

50-75(1)

In determining for the purposes of this Subdivision whether an institution, fund or other body incurs its expenditure or pursues its objectives principally in Australia, distributions of any amount received by the institution, fund or other body as a gift (whether of money or other property) or by way of government grant are to be disregarded.

50-75(2)

In determining for the purposes of this Subdivision whether an institution, fund or other body incurs its expenditure or pursues its objectives principally in Australia, distributions of any amount from a fund that is referred to in a table in Subdivision 30-B and operated by the institution, fund or other body are to be disregarded.

50-75(3)

In determining for the purposes of section 50-60 whether a fund:

(a) incurs, and has at all times since 1 July 1997 incurred, its expenditure principally in Australia and pursues, and has at all times since 1 July 1997, pursued its charitable purposes solely in Australia; or

(b) distributes solely, and has at all times since 1 July 1997 distributed solely, to a charitable fund, foundation or institution described in subparagraph 50-60(c)(i) or (ii);

distributions of any amount received by the fund as a gift (whether of money or property) or by way of government grant are to be disregarded.

This section is the legislative embodiment of the disregarded amounts test. Disregarded amounts are amounts that the organisation

receives as:

· gifts, including testamentary gifts (that is, gifts made under a will)

· proceeds from raffles, dinners, auctions, jumble sales and similar fundraising activities, or

· government grants.

Distributions of these amounts are disregarded when working out where the entity pursues its objectives and incurs its expenditure.

The Tax Office assumes any offshore distributions are made first from any disregarded amounts that are able to be distributed offshore. The assumption does not apply if a disregarded amount cannot be distributed offshore. For example, government grants made only for use in Australia, or if a gift of land is physically in Australia, are not assumed to be distributed offshore.

The effect of making this assumption is that offshore distributions can be made up to the total of these amounts without jeopardising entitlement to exemption.

As a consequence, in the unlikely event that a distribution should be made overseas, the entity would not be in breach of the provisions.

The entity meets the requirement under paragraph 50-70(a) whereby it has a physical presence in Australia and it incurs its expenditure and pursues its objectives principally in Australia.

ATO view documents

Taxation Determination TD 93/190. (ATO View)

Other references (Non ATO view - example court cases, etc):

Royal Australasian College of Surgeons v. Federal Commissioner of Taxation [1943] ALR 377.

Does Part IVA or any other anti-avoidance provision apply to this ruling?

No.