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Ruling

Subject: Exempt Entity

Question 1

Will reimbursements by the Entity of travel, accommodation, meal and educational expenses actually incurred by its Members in accordance with the Entity's Constitution cause the Entity to fail the special conditions of the exempt entity status under a particular item in Division 50 of the Income Tax Assessment Act 1997 ('ITAA 1997')?

Answer

No

This ruling applies for the following periods:

1 July 20XX to 1 July 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Entity is a public company registered under the Corporations Act 2001.

The Entity is currently an exempt entity under Division 50 of the ITAA 1997.

Under the Entity's constitution ('the Constitution'), the Members of the Entity will be individuals who, in their own capacity, are elected or appointed as Members and who agree to observe and perform the Constitution; and whose names are entered on the Register of Members

As Members, these individuals must exercise the powers of the Entity in good faith in the best interests of the Entity, for a proper purpose, and in a manner that best promotes the objects of the Entity.

The Constitution provides that the application of income and property of the Entity must:

§ Be applied solely towards the promotion of the objects of the Entity.

§ Not directly or indirectly, by way of dividend, bonus or otherwise paid to the Members.

However, the Constitution does not:

Prevent payment of good faith remuneration to Members in return for personal services and goods, interest on loans made to the Entity and rent on premises leased to the Entity in the ordinary course of business.

The Members will not receive fees or remuneration for their roles.

All Members will be volunteers who receive no fees for providing personal services to the Entity.

The Constitution provides that income and property of the Entity can be applied to the reimbursement of expenses properly incurred by any Member on behalf of the Entity and expressly includes reimbursement of certain types of expenses properly incurred by Members in order to attend general meetings.

The Constitution sets out the entitlement of Members to reimbursement of:

§ Reasonable travelling and accommodation expenses properly incurred by Members to attend information briefings convened by the Entity.

§ Reasonable education expenses which are necessarily incurred by Members to understand their roles as a Member and are approved in advance by the Entity.

The Members would attend a number of meetings per year, comprising the Annual General Meeting of the Entity, information briefings and seminars or courses that cover relevant topics, etc.

The reimbursement is for actual or out-of-pocket expenditure of the Members, where there will be guidelines as to what is considered reasonable expenditure, for example, taxi fares, parking fees, petrol, economy class air fares, meals and not staying in '5 star' accommodation etc.

By way of example it is anticipated that the actual expenses of the Member to attend a meeting at the Entity's offices would comprise:

§ return economy class airfare

§ taxi fare from airport

§ taxi fare from home to airport

§ taxi fare airport to Entity's offices

§ taxi fare to hotel accommodation

§ cost of modest evening meal

§ cost of breakfast

§ taxi fare from hotel to airport

§ taxi fare from airport to home

The Entity has proposed procedures for reimbursement of expenses that require Members to provide proof of their expenditure (such as actual invoices or extracts from credit card statements) to the Entity in order to be reimbursed for their outgoing.

Alternatively, in some cases, the Entity may directly incur the cost in respect of the Member. For example, the Entity may book and pay for the return economy flight of the Member.

The education expenses will be strictly on a 'needs basis' and subject to approval being granted in advance by the Entity. The educational expenses will be seminars and courses which relate to the Members understanding their role as Members. They will not be courses which are merely for the individual interest of the Members. These seminars and courses will be conducted by industry bodies or authorised educational institutions.

Relevant legislative provisions

Income Tax Assessment Act division 50

Income Tax Assessment Act section 50-1

Reasons for decision

Section 50-1 of the ITAA 1997 exempts from income tax the total ordinary and statutory income of an entity listed in division 50 of the ITAA 1997.

The particular item in division 50 of the ITAA 1997 provides that to be an exempt entity, the entity must not be carried on for the profit or gain of its individual members.

The Entity has advised that it is currently treated as an exempt entity under section 50-1 of the ITAA 1997.

This ruling considers whether the reimbursements by the Entity for travel, accommodation, meal and education expenses will, of themselves, cause the Entity to fail the particular special condition division 50 of the ITAA.

Paragraph 78 of Taxation Ruling TR 2003/5 provides:

"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…"

A non-profit organisation may still make a profit but this profit must be used to carry out its purposes; the profits must not be distributed to owners, members or other private people.

This ruling considers whether the reimbursements constitute a distribution of profits to members that would cause the Entity to fail the particular special condition in division 50 of the ITAA 1997.

The Constitution provides that the income and property of the Entity, from wherever it is derived, must be applied solely towards the promotion of the objects.

The Constitution provides that, subject to above rule, no part of the income or property of the Entity may be paid directly or indirectly, by way of dividend, bonus or otherwise to the Members. The Constitution provides that the rule does not prevent the reimbursement of expenses properly incurred by any Member on behalf of the Entity, including the reimbursement of reasonable travelling and accommodation expenses properly incurred by Members to attend general meetings.

The Constitution provides that each Member is entitled to reimbursement of:

1. reasonable travelling and accommodation expenses properly incurred to attend information briefings convened by [the Entity] and

2. reasonable educational expenses:

a) necessarily incurred to understand their role as a Member; and

b) approved in advance by [the Entity].

The Entity contends that the reimbursed expenses are the expenses of the Entity that are incurred by the Members on behalf of the Entity.

The Entity is proposing to implement procedures for the reimbursement of expenses requiring Members to provide proof of their expenditure (such as actual invoices or extracts from credit card statements) to the Entity in order to be reimbursed for their outgoing. Alternatively, in some cases, the Entity may directly incur the cost in respect of the Member.

Taxation Ruling TR 92/15: Income tax and fringe benefits tax: the difference between an allowance and a reimbursement, discusses the meaning of reimbursement as follows (emphasis added):

3. A payment is a reimbursement when the recipient is compensated exactly (meaning precisely, as opposed to approximately), whether wholly or partly, for an expense already incurred although not necessarily disbursed. In general, the provider considers the expense to be its own and the recipient incurs the expenditure on behalf of the provider. A requirement that the recipient vouch expenses lends weight to a presumption that a payment is a reimbursement rather than an allowance. A requirement that the recipient refunds unexpended amounts to the employer adds further weight to that presumption.

4. The meaning of the word "reimburse" includes payments made in advance of expenditure as long as those payments possess the characteristics outlined in paragraph 3.

9. The word "reimburse" is defined under subsection 136(1) of the FBTAA to include any act having the effect or result, direct or indirect, of a reimbursement. Since neither the FBTAA nor the ITAA provides a more descriptive definition beyond that, the ordinary meaning of the word applies. The Macquarie dictionary defines the word "reimburse" as a repayment for expense or loss incurred, or a refund.

10. The ordinary meaning of the word "reimburse" implies that the recipient is to be compensated exactly for an expense already incurred although not necessarily disbursed. The definition of "reimburse" under subsection 136(1) of the FBTAA is wide enough to include payments made before expenses are incurred. However, whether payment is made before or after expenses are incurred by the recipient, it qualifies as a reimbursement when the provider considers the expense to be its own and the recipient incurs the expense on behalf of the provider. As a result, a requirement that the recipient vouches or substantiates expenses lends weight to a presumption that a payment is a reimbursement rather than an allowance. A further indication of a reimbursement is where the recipient is required to refund unexpended amounts to the provider.

Page 4 of the ATO publication entitled "Guide for non-profit organisations and individuals - Volunteers and tax" (NAT 4612-04.2008) provides:

A payment is a reimbursement for tax purposes where it is a precise compensation, in part or full, for an expense already incurred, even if the expense has not yet been paid. A payment is more likely to be a reimbursement where the recipient is required to substantiate expenses and/or refund unexpended amounts.

In this case, the reimbursements received by Members pursuant to the Constitution are not considered to represent a distribution of income or assets of the Entity. For tax purposes, the payments are considered reimbursements of expenses incurred by Members on behalf of the Entity.

Consequently, the Commissioner considers that the reimbursement provisions by the Entity for travel, accommodation, meal and educational expenses actually incurred by its Members, in accordance with the Constitution, of themselves, will not cause the Entity to fail the special condition of its exempt entity status under division 50 of the ITAA 1997.