Edited version of private ruling

Authorisation Number: 1011695131302

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Ruling

Subject: Income tax exemption

What this ruling is about:

Is the Entity entitled to income tax exemption under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as a society, association or club established for the encouragement of community service purposes (except political or lobbying purposes) pursuant to item 2.1 in section 50-10 of the ITAA 1997?

Ruling:

The Entity does not meet all the requirements of item 2.1 of section 50-10 of the ITAA 1997 and is therefore not entitled to income tax exemption under section 50-1 of the ITAA 1997.

This ruling applies for the following period

1 July 2009 to 30 June 2010

1 July 2010 to 30 June 2011

1 July 2011 to 30 June 2012

The scheme commenced on

1 July 2009

The scheme that is subject to the ruling:

The Entity is incorporated in Australia as a company limited by guarantee.

The Entity's constitution contains acceptable non-profit and dissolution clauses.

The Entity's purpose as stated in its constitution is the provision of social activities to members and of peak body support to accredited member organisations.

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

Issue 1

Question 1

Is the Entity entitled to income tax exemption under section 50-1 of the ITAA 1997 as a society, association or club established for the encouragement of community service purposes (except political or lobbying purposes) pursuant to item 2.1 in the table in section 50-10 of the ITAA 1997?

Detailed reasoning

The Entity has requested a private ruling on whether it is exempt from income tax under item 2.1 of section 50-10 of the ITAA 1997 as a society, association or club established for the encouragement of community service purposes (except political or lobbying purposes).

For the Entity to fall within item 2.1 of section 50-10 of the ITAA 1997, it needs to:

1. be a society, association or club;

2. be established for community service purposes

3. meet the special conditions of section 50-70 as it relates to the Entity being:

a. not be carried on for the purpose of profit or gain of its individual members; and

b. has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia.

(1) Society or association

The words 'society' and 'association' are not defined in the ITAA 1997. An association is a voluntary organisation having members associated together for a common or shared purpose (Douglas & Ors v. FCT 97 ATC 4722). Society has an equivalent meaning (Pro-Campo v. Commissioner of Land Tax (NSW) 81 ATC 4270). An association may be incorporated or unincorporated.

The Entity was incorporated as a company limited by guarantee and has been conducting activities permissible under its objects.

This requirement is therefore satisfied

(2) Community service purposes

The Entity needs to be established for community service purposes.

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, provides the ATO view on the circumstances under which a society, association or club is regarded as being established for community services purposes.

Paragraph 4 of TD 93/190 states that having altruistic purposes is an essential element of even the widest interpretation of community service purposes. Paragraph 5 of TD 93/190 states that a common association such as members advancing their common interests is not altruistic as it is considered that such an entity is formed for the purposes of its members.

The Entity's is established as a social club for its members and as a peak body for accredited member clubs whose purposes are also the provision of social activities for their members.

Paragraph 186 of Taxation Ruling TR 2005/21 Income tax and fringe benefits tax: charities, provides guidance on determining the purpose of peak bodies stating:

186. As this case illustrates, it is not necessary that a charity play a 'direct' role. It shows that a purpose can be for the public benefit even where the organisation does not deal directly with members of the public. Also, the interrelation of the peak body and its members can help show a commonality of purposes, notwithstanding the different ways the bodies pursue them. Given that the association in Ziliani was set up to protect, promote and coordinate a number of other bodies, their character (as being for charitable purposes) was highly relevant in characterising the association itself as a charity. For many peak bodies there will be a similar degree of integration and commonality of purpose.

Therefore to characterise the Entity's purpose it will also be necessary to consider the character of the clubs it supports. The Entity's dominant purpose as drawn from its objects and those of the purpose of the clubs its supports is to promote social interaction among the clubs' members.

TD 93/190 states in paragraphs 3, 4 and 5 that:

3.There are four heads of charitable purpose, one of which is other purposes beneficial to the community; but this is limited by the common law to those purposes which are also charitable within the meaning of the Statute, 43 Elizabeth, Ch. 4. The term 'community service purposes' has a broader meaning than other purposes beneficial to the community which are also charitable. The Explanatory Memorandum to subparagraph 23(g)(v) confirms that the words 'community service purposes' are to be given a wide interpretation. 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.

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'.

5. 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.

Paragraph 7 of TD 93/190 lists examples of organisations that are not considered to be exempt under this provision. Included in this list are clubs that provide a social forum for retired and semi-retired business people, senior public servants and the like.

It determined that the Entity's purpose falls within the example in paragraph 7 of TD 93/190 of providing a social forum for retired business people and the like.

Accordingly the Entity does not meet the requirement of being established for community service purposes.

(3) Section 50-70 of the ITAA 1997

Item 2.1(c) of section 50-45 of the ITAA 1997 states that there are special conditions under section 50-70 of the ITAA 1997 which must be satisfied. Section 50-70 of the ITAA 1997 states:

50-70 Special conditions for items 1.7, 2.1, 9.1 and 9.2

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.

The constitution of the Entity contains suitable non profit and winding up clauses.

It has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia. It satisfies item 50-70(a).

The requirements of section 50-70 are therefore satisfied.

Conclusion

As the Entity does not meet the requirement of being established for community service purposes it is not exempt from income tax as a community service organisation pursuant to item 2.1 in the table in section 50-10 of ITAA 1997.