Edited version of private ruling

Authorisation Number: 1011878939115

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Ruling

Subject: Exemption from income tax - Rebatable employer

Issue 1

Question 1

Is the entity exempt from income tax pursuant to the provisions of section 50-1 on the basis that it is a society, association or club established for community services purposes (except political or lobbying purposes) under item 2.1 of the table in section 50-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Issue 2

Question 1

Is the entity a rebatable employer under section 65J of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) on the basis that it is a non profit society, non profit association or non profit club, established for community service purposes as per paragraph 65J(1)(j) of the FBTAA.

Answer

Yes

This ruling applies for the following period

Year ended 30 June 2012
Year ended 30 June 2013
Year ended 30 June 2014
Year ended 30 June 2015

The scheme commenced on

1 July 2011

Relevant facts

The entity is established as a company limited by guarantee, not having share capital.

The entity has been set up at the direction of government as an industry ombudsman to receive, investigate and facilitate the resolution of complaints and disputes between users of public industry services, or persons affected by the industry service providers and the entity's member who are industry service providers.

The entity ombudsman has appropriate non-profit and dissolution clauses. The ombudsman provides its service free of charge to people who use or are affected by the industry providers.

The decision making process and administration of the ombudsman is independent of the members. Industry and consumers have equal roles on the board of the entity.

The members comprise the majority of service providers in the state. The entity's operation is funded by a member levy.

Relevant legislative provisions

Section 50-1 of the Income Tax Assessment Act 1997
Section 50-10 of the Income Tax Assessment Act 1997
Section 65J(1) of the Fringe Benefits Tax Assessment Act 1986

Reasons for decision

Issue 1

Summary of decision

The entity is determined to be a non profit association established for community service purposes (not being political or lobbying purposes) that also satisfies section 50-70 of Income Tax Assessment Act 1997 (ITAA 1997). Accordingly the entity is accepted as satisfying the requirements for income tax exemption under item 2.1 of section 50-10 of the ITAA 1997.

Question 1

Item 2.1 of the table in section 50-10 of the ITAA 1997 in conjunction with section 50-1 of the ITAA 1997, provides that the total ordinary income and statutory income of a society, association or club established for community service purposes (except political or lobbying purposes) is exempt from income tax, subject to the special condition detailed in section 50-70 of the ITAA 1997.

Accordingly to be an entity described in item 2.1, the entity must:

· be a society, association or club;

· be established for community service purposes; and

· satisfy the special condition in section 50-70 of the ITAA 1997.

Society, association or club

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

This approach was taken in Douglas v. Federal Commissioner of Taxation 36 ATR 532; (1997) 77 FCR 112; 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.

The entity is an organisation comprised of members with a common purpose. The entity comprises representatives of entities making up the service industry and members of the community who represent service users and persons affected by the service providers.

It is accepted that the entity is a society, club or association.

Special conditions

Section 50-70 of the ITAA 1997 states that an entity covered by item 2.1 is not exempt unless it is not carried on for the purposes or gain of its individual members, 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.

The entity is not established for the profit or gain of its members. It is an organisation which is incorporated in Australia and which pursues its objectives and expenditure solely in Australia.

The entity therefore meets the special conditions of section 50-70 of the ITAA 1997.

Established for Community Service Purposes

Item 2.1 requires the society, association or club to be established for community service purposes. The required 'community services purposes' must be the entity's main or predominant purposes (Royal Australasian College of Surgeons v F C of T (1943) 68 CLR 436; Cronulla Sutherland Leagues Club Limited v. F C of T 90 ATC 4215).

Item 2.1 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 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 whose purposes are not of an altruistic nature. Altruistic purposes are an essential element of even the widest interpretation of 'community service purposes'.

The Explanatory Memorandum for the Taxation Laws Amendment Bill (1990) which introduced subparagraph 23(g)(v) provides further guidance. The Explanatory Memorandum states that the words 'for community service purposes' are to be given a wide interpretation and that:

They extend to a range of altruistic purposes including promoting, providing or carrying out activities, facilities or projects for the benefit or welfare of the community, or of members of the community, or of any members of the community who have particular need of those activities, facilities or projects by reason of their youth, age, infirmity or disablement, poverty or social circumstances. An exclusion from the exemption will apply to bodies established for political or lobbying purposes.

The Explanatory Memorandum and TD 93/190 indicate that 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 shown 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.

The entity has been established as a free, confidential and impartial alternative dispute resolution scheme available to people who use or are affected by its members' industry services, or related activities of the industry operators.

In the case of industry ombudsmen entities ATO Interpretative Decision ATO ID 2003/721 Income tax exemption: community service purposes - Industry Ombudsman, states that:

The required 'community service purposes' must be the entity's 'main or predominant purposes' ( Royal Australian College of Surgeons v. FCT (1943) 68 CLR 436; (1943) 7 ATD 289, Cronulla Sutherland Leagues Club Limited v. FCT (1990) 23 FCR 82; 90 ATC 4215; (1990) 21 ATR 300). 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.

Taxation Determination TD 93/190 states that in relation to former subparagraph 23(g)(v) of the Income Tax Assessment Act 1936 (ITAA 1936), which is the same as item 2.1 of the table in section 50-10 of the ITAA 1997, that -

 (t)he purpose of enacting subparagraph 23(g)(v) was to create a category of exemption for community bodies whose activities are not accepted as being charitable ... but which, nevertheless, conduct activities of benefit to the community. [emphasis added]

A question that needs to be answered in this regard is 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 ( Dingle v. Turner [1972] AC 601; per Lord Cross of Chelsea at 624).

In the case of industry ombudsman entities, the arguments in favour of a finding that it is a section of the community that is benefited are based upon the proposition that 'ordinary consumers of an industry's services' is a section of the community, and that the availability of the Ombudsman's services is not too nebulous or remote to be regarded as a benefit to the community.

Where membership of the ombudsman entity is effectively compulsory for all industry service providers, it is illusory to say that 'customers of members' is a restricted class.

It is considered that where the industry ombudsman entity is established to make its Ombudsman's 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.

Accordingly as an industry ombudsman that provides its services to the public free of charge, the entity could be accepted as a community service organisation provided its services are available to ordinary industry consumers, without barring some and not others on the basis of their relationship with the ombudsman entity members.

The entity is a voluntary entity. It is not a requirement that all industry providers be a member of the entity, however the large operators are required by their franchise agreements with the government to be a member of the entity in order to operate their commercial businesses. For all other entities in the service industry, membership is not compulsory.

The entity also extends to and includes entities that do not provide a direct service to users, but that are otherwise fundamentally integral to the provision of industry services.

The entity will only consider complaints in relation to its members. The public cannot use their services to make complaints against non member service providers.

Given the majority of the state service providers are members of the entity there is a strong argument to say that the entity exists for the benefit of a section of the community, that section being the 'consumers of an industry's services'.

However, the 'voluntary' nature of membership of entity means that there will be some providers in the industry who may not be members. A customer of a non-member's services will effectively be barred from availing themselves of the services of the entity where their complaint relates to that customer/commercial relationship. Thus, as was the case in New Zealand Society of Accountants v Commissioner of Inland Revenue [1986] 1 NZLR 147 there is a bar which excludes some consumers and not others on the basis of whether or not they have a particular commercial relationship to the organisation's members.

The facts in New Zealand Society of Accountants v Commissioner of Inland Revenue [1986] 1 NZLR 147 may however be distinguished from those of the entity.

The entity assists not only the users/customers of its members, but also assists persons who are not customers of its members. Therefore persons in the state community may avail themselves of assistance from the entity despite the lack of a commercial relationship with a member, for example they may lodge a complaint regarding infrastructure or premises controlled by entity members.

This means that whilst the ability of the state's community to avail themselves of assistance from the entity is still restricted to its member's operations, not all persons assisted will have or are required to have a commercial relationship with a member of the entity such as indicates a closed or restricted relationship. Whilst benefits are available to member's customers, that are not available to customers of non-members, the benefits provided by the entity extend further than this to the whole of the state community.

Given the above, it is considered that the class of persons assisted by the entity is not closed or restricted as contemplated in Re Income Tax Acts (No 1) [1930] VLR 211 and New Zealand Society of Accountants v Commissioner of Inland Revenue [1986] 1 NZLR 147.

Taking into account the voluntary nature of the entity, the persons to whom assistance will be provided, the extent of the coverage of the service industry by members, and the intent of the Government in its establishment of the entity it is considered that the entity has been established for community service purposes.

Finally, of concern is the factor of whether the entity provides member benefits. It is evident that there may be some benefits to the members of entity. For example, the low cost resolution of disputes, allowing them to meet the terms of their franchise agreements and improved perception of the fairness of the industry. However it is considered that the entity's primary function as drawn from their constitution, charter and activities is to provide a free, impartial alternative dispute resolution scheme to people who use or are affected by the industry services. Therefore it is considered that the member benefits are incidental and do not detract from or alter the entity's main community purpose of providing assistance free of charge to the state community.

Conclusion - Exemption from income tax

As a non profit association established for community service purposes (not being political or lobbying purposes) that satisfies section 50-70 of ITAA 1997 the entity meets the requirements of item 2.1 of section 50-10 of the ITAA 1997. Accordingly the entity is accepted as a organisation established for community services purposes and is exempt from income tax pursuant to section 50-1 of the ITAA 1997.

Issue 2

Summary of decision

As an association that not a public benevolent institution, is not a health promotion charity and is covered by paragraph (j) of section 65J(1) of the FBTAA, being a non profit society, non profit association, established for community service purposes (not being political purposes or lobbying purposes) the entity is determined to be a rebatable employer.

Question 1

Section 65J(1) of the FBTAA states that an employer will be a rebatable employer if it is not a public benevolent institution, is not a health promotion charity and is covered by any one of a list of paragraphs, including at paragraph (j) a non-profit society, non-profit association or non-profit club, established for community service purposes (not being political purposes or lobbying purposes).

Accordingly the entity will satisfy this criterion if it is:

i. not a public benevolent institution and is not a health promotion charity; and

ii. a non-profit society, non-profit association or non-profit club established for community service purposes (not being political purposes or lobbying purposes).

Not a public benevolent institution, and not a health promotion charity

Taxation Ruling TR 2003/5 Income tax and fringe benefits tax: public benevolent institutions, sets out the Australian Taxation Office view on what is a public benevolent institution. TR 2003/5 states at paragraph 7:

A public benevolent institution is a non-profit institution organised for the direct relief of such poverty, sickness, suffering, distress, misfortune, disability, destitution, or helplessness as arouses compassion in the community.

Taxation Ruling TR 2004/8 Income tax and fringe benefits tax: health promotion charities at paragraph 4 provides that the characteristics of a health promotion charity are that:

· it is a charitable institution, and

· its principal activity is promoting the prevention or the control of diseases in human beings.

The entity is established for the predominant purpose of running an industry ombudsman scheme. It purpose does not fall within that required of a public benevolent institution or a health promotion charity. Accordingly the entity is accepted as not being a public benevolent institution and not being a health promotion charity.

Non-profit society, non-profit association or non-profit club established for community service purposes (not being political purposes or lobbying purposes)

As a non profit association found to be established for community service purposes (not being political purposes or lobbying purposes) under item 2.1 in section 50-10 of the ITAA 1997, the entity also satisfies the requirement of section 65J(1)(j) of the FBTAA, being a non profit association established for community service purposes (not being political purposes or lobbying purposes).

Conclusion

As an association that not a public benevolent institution, is not a health promotion charity and is covered by paragraph (j) of section 65J(1) of the FBTAA, being non-profit society, non-profit association or non-profit club, established for community service purposes (not being political purposes or lobbying purposes) the entity is determined to be a rebatable employer.