Edited version of private ruling

Authorisation Number: 1011761455086

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Ruling

Subject: Income Tax Exemption

Question 1

Will the income tax exempt status of the entity be affected by taking on the role as a property manager under the National Rental Affordability Scheme (NRAS)?

Answer: No

This ruling applies for the following period:

1 July 2010 to 30 June 2011

The scheme commenced on:

1 July 2010

Relevant facts

The entity is registered with the Australian Securities and Investments Commission (ASIC) as an Australian public company, limited by guarantee

The entity is currently endorsed as a tax concession charity (TCC) and as a deducible gift recipient (DGR) on the basis that it qualifies as a public benevolent institution.

The entity is intending to undertake the role as a property manager under the National Rental Affordability Scheme (NRAS)

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 30-15

Income Tax Assessment Act 1997 Section 30-45

Income Tax Assessment Act 1997 Section 50-1

Income Tax Assessment Act 1997 Section 50-5

Income Tax Assessment Act 1997 Section 50-50

Income Tax Assessment Act 1997 Section 50-52

Reason for decision

The entity has, prior to their proposed involvement as a property manager under the National Rental Affordability Scheme (NRAS), been endorsed as a tax concession charity on the basis that it is a public benevolent institution as set out in item 4.1.1 of the table in section 30-45 of the Income Tax Assessment Act 1997 (ITAA 1997). As a consequence, the entity is endorsed as an income tax exempt entity pursuant to section 50-1 of the ITAA 1997.

The question at issue is whether the involvement of the entity as a property manager under the NRAS constitutes a purpose ancillary, incidental or minor to that of an entity currently endorsed as a public benevolent institution.

Public Benevolent Institution

The phrase 'public benevolent institution' is not defined in the ITAA 1997.

The characteristics of a public benevolent institution as stated under Taxation Ruling TR 2003/5 Income tax and fringe benefits tax: public benevolent institutions (TR2003/05) are:

· its dominant purpose is providing benevolent relief;

· it is set up for needs that require benevolent relief;

· it relieves those needs by directly providing services to people suffering from them;

· it is carried on for the public benefit;

· it is non-profit; and

· it is an institution.

It is not sufficient for an organisation to be 'benevolent' in dictionary terms, for its actions to be socially worthwhile, to be charitable in legal terms, or to be fully funded by government.

A public benevolent institution must provide its aid and services directly to people in need of benevolent relief. The provision of direct relief may be achieved through the work of the employees or volunteers of the organisation itself or through its agents. The Tax Office does not have the discretion to treat socially worthwhile organisations as if they were public benevolent institutions.

Dominant or main purpose of providing benevolent relief

To be a public benevolent institution an organisation must be at least predominantly for the direct relief of poverty, sickness, destitution or helplessness. Other purposes or activities must be incidental to the main purpose or minor in extent and importance.

The way an entity is characterised was confirmed by Lockhart J in Cronulla-Sutherland Leagues Club Ltd v Federal Commissioner Of Taxation (1990) 90 ATC 4215; 21 ATR 300 who said:

In my opinion the question in a case such as the present must be what is the true character and nature of the appellant. It is a question of characterising the appellant having regard to its objects, purposes and activities.

Where the objects and purposes are mixed then the character of an entity is found by establishing its main purpose or object. In the High Court case of Royal Australasian College of Surgeons v FC of T (1943) 68 CLR 436 Latham CJ quoted the Lord President in Inland Revenue Commissioners v Aberdeen Medico-Surgical Society (1931) 16 Tax Case. 237 who said:

If these objects and activities are of a mixed character, being partly professional and partly literary or scientific, then the question must be decided according to the prevalent or main character.

Only activities which are incidental or ancillary to the main objects or purposes will not affect the status of an entity. In Stratton v Simpson (1970) 125 CLR 138 (Stratton's case) Gibbs J said:

It is established that "an institution is a charitable institution if its main purpose is charitable although it may have other purpose which are merely concomitant and incidental to that purpose" or in other words if each of its objects is either charitable in itself or should be construed as ancillary to other objects which themselves are charitable. If however the non-charitable purpose is not merely incidental or ancillary to the main charitable purpose, the institution will not be charitable.

Although Gibbs J was speaking of charitable institutions, the principle is equally applicable to public benevolent institutions. To be a public benevolent institution, an entity's dominant activities have to directly provide benevolent relief. Any non-benevolent activities have to be incidental or minor in extent.

The entity has a broad range of activities from that of relief of poverty through to lease of property.

Many of these objects are in fact the powers of the organisation.

Where an entity's objects are not limited to the provision of benevolent services,

TR 2003/05 states at paragraphs 103 to 105:

Constitution and objects

103. The objects in an organisation's constituent documents can strongly indicate whether it is a public benevolent institution. For example the objects might clearly limit the organisation to the provision of direct benevolent relief, or they might be the relief of distress, sickness or suffering, or similar purposes drawn from the judgments in the Perpetual Trustee case. Where the objects are solely for public benevolent relief and the institution's operations give effect to them, it will be a public benevolent institution.

104. Even where an organisation's objects are not clearly limited to the provision of benevolent services, it might in some circumstances be a public benevolent institution. However, we encourage organisations to draft their objects to reflect their activities and real purposes.

Broad objects but operations limited to benevolent relief

105. Where the objects are broader than the provision of direct benevolent relief, its purposes, policies and activities must be predominantly to provide such relief.

As stated above, where the objects are broader than the provision of direct benevolent relief then the purposes, policies and activities of the entity will need to be considered to determine whether these would amount to the entity providing predominant benevolent relief.

The entity runs many programs which are considered to meet the requirements of providing benevolent relief as discussed in TR 2003/05.

The entity also provides services that would not be considered to be benevolent in the required sense. These include undertaking the role as a property manager under the NRAS.

In relation to these activities TR 2003/05 states at paragraph 119:

Minor non-benevolent activities

119. Some organisations predominantly provide benevolent services but also perform non-benevolent activities. They will still be public benevolent institutions if the other activities are minor in extent and importance.

Where these services do become the dominant activity TR2003/05 states at paragraph 117 and 118:

Activities incidental to benevolent relief

117. Some of a public benevolent institution's activities might not, if viewed in isolation, be characterised as benevolent operations. …. Where these activities are incidental or ancillary to the provision of direct benevolent services they will not detract from public benevolent institution status.

118. However, where they are or become dominant, the organisation will not be a public benevolent institution….

To determine whether these services are minor and not the predominant purpose of the organisation TR 2003/5 at paragraphs 100, 101 and 116 state:

Question of fact and degree

100. Deciding whether an organisation is predominantly for the provision of benevolent relief is a matter of fact and degree. It is an objective question which will involve the weighing of all relevant factors. Both the organisation's constitution and activities are relevant. As it is the character and purpose of the organisation that must be ascertained, a solely quantitative measurement would be inadequate (cf Cairnmillar Institute at 92 ATC 4312-4313; 23 ATR 321 per Tadgell J).

101. If there are changes in an organisation's constitution and operations, its status may change. This means an organisation's character upon foundation will not be determinative. However, the foundation, history and proposed future directions may all be relevant. Helpful materials and questions include:

· the constituent documents, eg memorandum and articles of association, rules, constitution, trust deed;

· occupations and relevant qualifications of the office bearers or controlling committee;

· who is the organisation set up to help?

· why do these people need help?

· what aid or services does the organisation provide to these people?

· how are recipients of services and aid selected?

· details of charges (if any) made for services, and the circumstances in which they will be waived;

· details of the day-to-day activities and operations of the organisation;

· financial statements, or for newly established organisations, estimates of future income and expenditure;

· details of fund-raising activities including applications for funding;

· pamphlets, brochures, advertisements, newsletters, annual reports, etc showing the organisation's activities.

Operations and activities

116. An organisation's objects and constitution are not treated in isolation. They need to be considered in light of what the organisation actually does. It is the reality of its purposes that must be determined. Features which help indicate whether its operations are predominantly the provision of benevolent relief include:

· the policies and procedures which guide its operations;

· the activities and operations that it actually performs, including:

· the activities of the executive body;

· the uses and sources of funds and property;

· the duties and tasks of employees and volunteers.

In considering the entity's objects and activities, the proportion of income expected to be derived under NRAS to total grants received, the number of clients which it will assist under the program and the proportion of resources dedicated to benevolent programs that the entity delivers, we accept that the entity has a predominant purpose of providing benevolent relief.

In accordance with paragraph 119 of TR 2003/5, the management of properties under NRAS is minor in extent in view of the various other benevolent programs and services it delivers.

This requirement is therefore satisfied.

Needs requiring benevolent relief

To be a public benevolent institution, the condition or misfortune that is relieved must be such as to arouse pity or compassion in the community. Not all degrees of what might be described as distress, suffering or poverty would necessarily have such an effect. In Perpetual Trustee (at 45 CLR 236) Evatt J referred to disability or distress which 'arouses pity'. In Cairnmillar Institute McGarvie J said (at 90 ATC 4761; 21 ATR 675):

'The descriptions of persons as poor, sick, suffering, helpless, in distress, or subject to misfortune or disability are relative descriptions: a person may be moderately or severely so. I consider that the test for whether relief to such persons amounts to benevolence is whether their disability or condition is of such seriousness as will arouse community compassion and thus engender the provision of relief.'

In Marriage Guidance Council of Victoria v. Commr of Pay-roll Tax (Vic.) 90 ATC 4770 at 4775; (1990) 21 ATR 1272 at 1277-1278 McGarvie J contrasted such needs with 'the stress and pain encountered in ordinary human experience associated with such things as failure, deception, loss of status and reputation, and bereavement'. Marriage guidance and counselling was not public benevolence because 'the community does not regard those who are, or have been, in marriage, successful or unsuccessful, as a general category of people with an unfortunate disability or condition arousing compassion.'

The needs relieved by public benevolent institutions might arise from sickness, suffering etc. They will not necessarily be financial or caused by poverty, and need not be susceptible to relief by way of material things. (Commr of Pay-roll Tax (Vic) v. Cairnmillar Institute 92 ATC 4307 at 4311. See also FCT v. Launceston Legacy 87 ATC 4635)

Needs that are to be met by education; training or the promotion of cultural or social objectives will not normally arouse community compassion. However, they may do so where the needs arise from poverty or helplessness (Tangentyere Council Inc v. Commr of Taxes (NT) 90 ATC 4352 at 4359).

The entity's current programs and services are wide ranging. The programs and activities that it runs are considered to meet the test that the 'condition or misfortune that is relieved must be such as to arouse pity or compassion in the community'.

The provision of providing property management services under the NRAS does not necessarily point to an undertaking associated with addressing particular needs requiring benevolent relief. Notwithstanding this however, we have considered that these particular activities while not benevolent in the required sense, are minor to the overall and established purpose of providing services which do address needs requiring benevolent relief.

It accepted that the entity meets this requirement.

Direct provision of services

Public benevolent institutions are expected to provide their aid and services directly to those people in need although it can be provided by employees, volunteers or agents as stated in paragraph 61 of TR 2003/5:

'Because the benevolence of public benevolent institutions is directed to persons in need of relief, they provide their aid and services directly to those people.'

The entity employs staff and engages volunteers to deliver its various programs and provide services directly to those in need. It is accepted that the entity meets the requirement of direct provision of services.

Public Benefit

A public benevolent institution is organised to confer benevolence upon an appreciable needy class in the community. Organisations are not public in the required sense where:

· they are carried on for the profit or gain of particular persons including the organisation's individual members;

· benefits are not provided to the public or a section of it, but rather on such grounds as personal relations, membership of a voluntary association, or an employment relationship; or

· benefits are provided on a discriminatory basis, not primarily because of need.

Where the intended recipients of the services or aid of an organisation are a private group, rather than the whole public or a section of the public, it will not be a public benevolent institution.

TR 2003/5 at paragraph 81 states:

81. Whether a class of beneficiaries comprises a section of the public is largely a question of fact and degree and can depend upon a number of factors. The number of people in the group may be relevant but is not determinative. A smaller number is more likely to indicate a private character. Strong indicators of a private character are where the intended recipients are limited by personal or family relationships, employment with a particular employer, or membership of a voluntary association (such as a trade union, cultural association or organisation like that in the case in paragraph 80). For example an organisation formed to help relieve sickness suffered by members of a social club and their dependants would not be a public benevolent institution.

The entity delivers its programs and provides services on a non discriminatory basis to assist those in need in the community. It is accepted that the entity is organised to confer benevolence upon an appreciable needy class in the community.

Non Profit

TR 2003/5 states at paragraphs 77 and 78:

77. A public benevolent institution is not carried on for the purposes of profit or gain to particular persons including the individual members (see for example Cairnmillar Institute at 92 ATC 4311; 23 ATR 319-320 and Repromed Pty Ltd v. Lucas and Commr for State Taxation (SA) 2000 ATC 4542; (2000) 44 ATR 452). This is known as the non-profit requirement. If an organisation was carried on for the profit of its members or owners, it would be for their benefit and not for the benefit of the public. This would still be the case even if, as a consequence of its operations, some needy people were better off.

78. We will accept an organisation as being non-profit where, by its constituent document or by operation of law (for example, a statute governing the organisation), it is prevented from distributing its profits or assets among members while it is operating and on its winding-up. The organisation's actions must, of course, be consistent with the prohibition.

There are two requirements implicit in the above statements. First, an entity's constituent documents must display a non-profit character. Second, the entity's actions must be consistent with this non-profit character.

The entity has acceptable clauses in its constitution that support the view that the entity operates as a non-profit organisation and its constitution also contains appropriate non profit, distribution and winding up clauses to prevent its members from benefiting whilst it is operating or in the event that it is wound up.

The entity operates to deliver various support programs and provides assistance on a non discriminatory basis to all people within the communities in which they are located.

Based on the above it is accepted that the entity does not operate for profit or gain of its members.

Institution

TR 2003/5 at paragraph 91 states:

91. No particular structure is prescribed for public benevolent institutions. An institution has been described as 'the body (so to speak) called into existence to translate the purpose as conceived in the mind of the founders into a living and active principle' ( Mayor of Manchester v. McAdam (1896) 3 TC 491 at 497; [1896] AC 500 at 511 per Lord Macnaghten). Some institutions take the form of corporations limited by guarantee, unincorporated associations or charitable trusts. Incorporation is not sufficient on its own: Trustees of the Allport Bequest. An institution may be created by will: Lemm at 66 CLR 409-410 per Williams J. Whether a particular entity is an institution is indicated by a range of factors including activities, size, permanence and recognition. All relevant factors need to be considered and whether an institution exists will depend on its particular facts.

The entity is registered with the Australian Securities and Investments Commission (ASIC) as an Australian Public Company, Limited by Guarantee and is an organised body of members instituted for the purpose as per its constitution.

It is evident from the information provided that the entity is an organised body that undertakes extensive activities to deliver services and programs directly to those in need. In view of the activities, size and permanence of the entity, it is accepted that the entity constitutes an institution.

Conclusion

While the proposed activities in respect of property management under NRAS are not benevolent activities, this is minor in extent in view of the predominant benevolent services which the entity provides.

We accept that the entity has a predominant purpose of providing benevolent relief and is a public benevolent institution that is an exempt income tax entity under section 50-1 of the ITAA 1997.