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Ruling

Subject: Income Tax Exemption

Question 1

Is the entity a society, association or club established for community service purposes pursuant to item 2.1 of the table under section 50-10 of the Income Tax Assessment Act 1997 (ITAA 1997) and therefore exempt from income tax?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 2012

The scheme commences on:

27 October 2011

Relevant facts and circumstances

The entity is an Australian public company limited by shares, registered in Queensland, Australia.

The entity has an ABN.

Prior to 30 June 2009 the entity's constitution contained non-profit, dissolution clauses and objects relating to its purpose as a mutual society.

From July 2009 to October 2011 the entity's constitution did not contain any non-profit, dissolution clauses and objects.

In October 2011, the entity amended its constitution to include objects, non-profit and dissolution clauses.

The entity's objects are directed at building a strong community sector characterised by increased financial inclusion and capability, which in turn assists the community sector to deliver positive social impacts.

The entity's goal is to employ community finance and social investment strategies to service and support people, organisations and communities who have limited access to mainstream financial options.

The entity's activities include the following:

1. Funding activities for:

· Not for profits

· Individuals

· Social enterprises

· Research

2. Advisory role to Government and other key stakeholders

3. Service based activities:

· Publications

· Events

· Consulting services

· Referral service

· Latest news

Relevant legislative provisions

Section 50-10 of ITAA 1997

Section 50-70 of the ITAA 1997

Reasons for decision

Item 2.1 of section 50-10 of ITAA 1997 of the ITAA 1997 provides that a 'society, association or club established for community service purposes (except political or lobbying purposes)' shall be exempt from income tax, subject to special conditions in section 50-70.

The special conditions in section 50-70 states:

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.

Society, Association or Club

The words 'society', 'association' or 'club' are not defined in the ITAA 1997 and have their ordinary meaning.

The Shorter Oxford English Dictionary defines 'association' to be 'a body of persons associated for a common purpose; the organisation formed to effect their purpose. The Macquarie Dictionary defines it as 'an organisation of people with a common purpose and having a formal structure'. 'Society' has an equivalent meaning (Pro-campo Ltd v. Commr of Land Tax (NSW) 81 ATC 4270 at 4279; (1981) 12 ATR 90 at 35).

This approach is also confirmed in Taxation Determination TD95/56, which refers to the decision by Olsson J, in Quinton v. South Australian Psychological Board (1985) 38 SASR 523, who also stated that the term 'association' has come to be regarded as attaching to a body of persons associated for a common purpose.

The Macquarie Dictionary defines 'club' as a 'group of persons organised for a social, literary, sporting, political, or other purpose, regulated by rules agreed by its members'.

The interpretations of 'society', 'association' or 'club' as described above, emphasise on a 'body of persons' and 'an organisation of people' with a 'common purpose'.

The entity is registered as a public company limited by shares and is an organised body of members instituted for the objects as per its constitution.

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

Political or Lobbying Purposes

The Explanatory Memorandum to Taxation Laws Amendment Bill (No. 2) 1990 states what is considered to be 'political or lobbying purposes':

Political or lobbying purposes include standing candidates for election, campaigning for changes to the law or to government policy, and the like. Community service organisations may engage in political or lobbying activities, provided these are no more than merely incidental to other purposes beneficial to the community. But a body will be unable to claim exemption from income tax under this subparagraph if its only undertakings for the benefit of the community are political or lobbying ones.

The entity undertakes an advisory role to Government and makes submissions related to the delivery of its activities to the public. Therefore, the entity does engage in political and lobbying activities. However, these activities are relatively minor and considered to be incidental to the entity carrying out objects.

The entity has not been established for political or lobbying purposes.

Established for Community Service Purposes

For an organisation to exist for community service purposes its purposes must be altruistic as per Taxation Determination 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) which states:

3.... The Explanatory Memorandum to section 23(g)(v) of the Act confirms that the words 'community service purposes' are to be given a wide interpretation. Those words extend to a range of altruistic purposes which 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 association 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.

Therefore, to be considered an organisation established for community service purposes, the organisation's activities must be directed to altruistic purposes. Altruistic purposes are directed 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. That is, a community services organisation is expected to serve at least a particular group in need such as those expressed in paragraph 3 of TD 93/190.

In FC of T v Wentworth District Capital Ltd 2011 ATC 20-253, reference was made at paragraph 33 to the Federal Court decision, in which the trial judge stated what 'purposes' were considered 'community service purposes':

'Community service purposes include the purpose of providing a community service, although the purposes contemplated are not limited solely to the act of provision. The expression is broad and may extend to encompass any activity whose purpose has a reasonable connection to the delivery of a community service. Facilitation and promotion, therefore are purposes that are squarely within s 50-10…'

Therefore a community service purpose is not just limited to the provision of a community service but the facilitation and promotion of a community service.

The primary purpose of the entity by way of consideration of its objects is to help build a strong and sustainable social sector, that is characterised by increased financial inclusion and capability, which in turn assists the community sector to deliver positive social impacts. The entity proposes to do this by employing community finance and social investment strategies to service and support people, organisations and communities who have limited access to mainstream financial options.

The entity undertakes the following activities to effectuate its objects:

1. Funding activities for:

· Not for profits

· Individuals

· Social enterprises

· Research

2. Advisory role to Government and other key stakeholders

3. Service based activities:

· Publications

· Forthcoming events

· Consulting services

· Referral Service

· Latest news

Based on the above, the entity demonstrates a purpose that is directed for the benefit and welfare of the community. The individuals and organisations that the entity provide their services to would meet the definition of a section of the community who have a particular need by reason of youth, age, infirmity or disablement, poverty, or social or economic circumstance. The entity is considered to have an altruistic purpose that is beyond that of a common association of people as it has been established service and support people, organisations and communities who have limited access to mainstream financial options.

Consequently, the entity is established for community service purposes.

Special Conditions

The special conditions in section 50-70 of the ITAA 1997 requires that the organisation is not carried on for the purpose of profit or gain of its individual members and that has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia.

Non Profit

Section 50-10 of the ITAA 1997 requires that the association not be carried on for the purposes of profit or gain to its individual members. This is known as the non-profit requirement. Where members, in their individual capacity, are to receive benefits from an association it will fail the non-profit test. An association usually ensures they operate on a non-profit basis by including non-profit clauses in their constituent documents. It is also necessary that an association's actions are consistent with their constituent documents.

In Cremation Society of Australia Ltd v Commissioner of Land Tax (NSW) [1973] NSWLR 704 (Cremation Society), the appellant argued there was no element of private profit in the conduct of its activities even though it did not have the required clauses. The Supreme Court did not accept this, despite the fact that the appellant was owned by a company with suitable non-profit clauses. Elise-Mitchell J said that:

'…in the absence of some provision in the memorandum or articles of association of the appellant or the declaration of some trust by it or its directors in the respect of the subject land, I am unable to accept the submission that the element of private gain has been excluded.'

Following the decision in Cremation Society, the constituent documents of a 'non-profit' association should in most cases include appropriate non-profit clauses. Paragraph 240 of Taxation Ruling 2011/4 states that in limited circumstances an entity may be accepted as non-profit without the required clauses this includes where a corporation is formed by statute and its provisions make it not-for-profit, or where a trust is established under a deed or will providing the property can be used for charitable purposes only.

During the period from July 2009 to October 2011 the entity was a company limited by shares whose constitution did not contain objects, a non-profit clause or a dissolution clause. In such circumstances it is not possible to conclude that the entity was non-profit during this period, even if it did not pay dividends or make any distributions to shareholders.

The entity amended its constitution in October 2011 to include objects and acceptable non-profit and dissolution clauses. It is considered that the entity was a non-profit association only from the time it changed its constitution in October 2011.

In Australia

For an entity to be considered 'in Australia', it must have a 'physical presence' in Australia and, to that extent, incur its expenditure and pursues its objectives principally in Australia.

From the information provided, the entity is located in Queensland, Australia, pursues its objects solely in Australia and incurs all its expenditure in Australia. Accordingly, the entity has a physical presence in Australia and satisfies the 'In Australia' requirement.

The entity satisfies the 'Special Conditions' requirement of section 50-70 of the ITAA 1997.

Conclusion

Based on the above, the total ordinary income and statutory income of the entity is exempt from income tax pursuant to section 50-1 of ITAA 1997 as it is an association established for community service purposes, pursuant to item 2.1 of the table in section 50-10 of the ITAA 1997.