Edited version of your private ruling

Authorisation Number: 1011981441160

This edited version of your ruling will be published in the public register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.

Ruling

Subject: Community Service Organisation

Question

Is the Chamber of Commerce 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

No

This ruling applies for the following periods:

1 January 2011 to 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

The scheme commences on:

1 January 2011

Relevant facts and circumstances

The association is a Chamber of Commerce (the 'Association') seeking to confirm its status as an income tax exempt entity pursuant to item 2.1 of the table in section 50-10 of the ITAA 1997.

The period for which the Private Ruling is requested is from 1 January 2011 to 30 June 2020.

The Rules of the Association contain a non-profit clause and winding up clause, in addition to clauses stating that the Association will advocate on behalf of members, service member needs, support the business environment of the local region and protect business interests of the region.

The Association's submission included statements indicating that it is primarily for the benefit of the local and regional business community. It conducts various activities and holds functions aimed at developing business networks and promoting the region for services development. It also aims to influence decision-making , advocate for economic prosperity and lobby for innovation and change.

The Association maintains a lobbying role at Local, State and Federal Government level. It has representatives on a range of government and community groups to provide a business perspective on initiatives as well as highlighting any negative impacts on business. The Association maintains that it is apolitical.

Relevant legislative provisions

Income Tax Assessment Act 1997 50-1

Income Tax Assessment Act 1997 50-10

Income Tax Assessment Act 1997 50-70

Reasons for decision

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 conditions 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 (except political or lobbying purposes); and

· Satisfy the special conditions in section 50-70 of the ITAA 1997.

Society, association or club

The terms society, association or club are 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 Chamber of Commerce is an incorporated association comprised of members with a common purpose. The organisation comprises classes of members with the common characteristic of having an interest or concern in trade, commerce or industry in the region.

It is accepted that the Chamber of Commerce Incorporated is an association.

Established for Community Service purposes (except political or lobbying purposes)

Item 2.1 requires the society, association or club to be established for community services 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). Organisations established for political or lobbying activities are specifically excluded from exemption under this provision.

Community Service purposes

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' :

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.

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.

In the Association's case it is considered that it is established for the purpose of advancing the common interests of its members, as evidenced by its first three constitutional objects. These objects state that the Association will advocate on behalf of members, service their needs and support their goals.

As a result, it is not accepted that the Association exists for altruistic purposes. That is, the Association is not motivated by an unselfish regard for others, but rather to advance the common interests of members. While there may be flow-on benefits for the broader community, the advancement of member benefits is not an incidental or ancillary purpose of the Association. It is its primary function.

The ATO accepts that the facilitation of certain commercial services in certain circumstances is capable of amounting to community service purposes within the meaning of Item 2.1 of section 50-10 of ITAA 1997. This view was determined by the Full Federal Court's finding in Federal Commissioner of Taxation v Wentworth District Capital Limited ("Wentworth") 2011 ATC 20-253. However, that particular case turned on the facilitation of an essential commercial supply of services (banking) in a town in which it would not otherwise have been provided. This contrasts with the Association, which is not providing an essential service per se, but rather a service centred around advancing business interests in a general sense.

The stated activities of the Association are targeted at four specific areas for the development of business activities in the region. It also runs a series of functions aimed at both members and non-members. Many non-members choose to become members soon after the events are held. The events target significant business opportunities to promote local business development.

The wider community would not benefit from these activities. Instead, the expected benefits would flow mainly to business groups, business associations, business operators and industries. These activities consequently cannot be said to be for altruistic purposes.

Political or lobbying purposes

As stated in its submission, the Association has representatives on a range of government and community groups to provide a business perspective on initiatives as well as highlighting any negative impacts on business and makes submissions to Government. The Association's involvement in any Government related activities is based solely on representing the interests of businesses relating to sustainable growth and development in the region.

As well as information provided in its submission, a review of the Association's website indicates that the Association primarily has a lobbying role on behalf of tis members.

Item 2.1 specifically excludes from exemption under organisations with political or lobbying purposes. TD 93/190 expands on this point:

6. Political or lobbying activities often are said to be motivated by altruism. Even if this is so, organisations established for political or lobbying activities are excluded from exemption under the provision. Political or lobbying activities are not limited to party political activities; they include activities directed to influence changes to the law or its administration: cf National Anti-Vivisection Society v. Inland Revenue Commissioners [1948] AC 31.

In other words, lobbying activities which are aimed at influencing changes to the law or its administration automatically exclude an organisation from exemption under item 2.1. Since the Association states that its primary role is in fact lobbying it follows that the Association is not entitled to exemption under item 2.1 of the table in section 50-10 of the ITAA 1997.

Application of Aid/Watch Incorporated v. Commissioner of Taxation

In Aid/Watch v. Commissioner of Taxation ("Aid/Watch") Aid/Watch was endorsed as a charitable institution under Item 1.1 of the Table in s 50-5 of the ITAA 1997. However, after a review by the ATO, Aid/Watch's endorsement was revoked in October 2006 on the grounds that it conducted political activities to achieve its purposes. Aid/Watch sought a review in the Administrative Appeals Tribunal. The finding was appealed to the Full Federal Court and ultimately the High Court of Australia, which found in favour of Aid/Watch.

The court was of the view that the origin of the apparent "political activities" disqualification notion (i.e., Bowman v Secular Society Ltd [1917] AC 406) was decided in a context which did not take account of the Australian Constitution, and the inherent right of constituents for agitation and communication about matters affecting government, politics and policies.

The court decided that in Australia, there is no general doctrine which excludes from charitable purposes "political objects".

The court held that the concern of and attempts by Aid/Watch to promote the effectiveness of aid delivery was clearly aimed at the relief of poverty and that the promotion and generation by lawful means of public debate about matters affecting the better use of and delivery of Australian aid was a matter falling within the fourth head of charity in Commissioners for Special Purposes of Income Tax v Pemsel [1891] AC 531 ("Pemsel"), i.e., purposes beneficial to the community.

The circumstances of the Association can be distinguished from Aid/Watch. Aid/Watch was endorsed as a charitable institution, as opposed to the Association which is seeking income tax exemption on the basis that it is a community services organisation, meaning that it is not a charity. The High Court specifically left aside the question of the generation of debate about the activities of government falling outside the four Pemsel charitable heads. It is therefore the ATO's view that the generation of public debate about subject matters not falling within the four charitable heads does not fall within the ratio of the majority's decision and reasoning.

Furthermore, political and lobbying activities are specifically excluded at item 2.1 of the table in section 50-10 of the ITAA 1997. Consequently the Aid/Watch decision does not impact on the Association's case.

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 Association is an organisation which is physically present in Australia and which pursues its objectives and incurs its expenditure principally in Australia. However, as discussed, the Association carries out its activities to advance the common interests of its members, meaning it is carried on for the purposes or gain of its individual members.

The Association therefore does not meet the special conditions of section 50-70 of the ITAA 1997.

Conclusion

The Chamber of Commerce is an association. However it is not a community services organisation since:

· it is not altruistic in nature as a result of its activities being conducted for the purpose of advancing the common interests of its members,

· it has lobbying purposes as its stated primary role, and

· by virtue of being carried on for the purposes or gain of its individual members it does not meet the special conditions of section 50-70 of the ITAA 1997.

Accordingly the Association is not a community services organisation and is not exempt from income tax pursuant to section 50-1 of the ITAA 1997.