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Ruling

Subject: Community Service Organisation

Item 2.1 of the table in section 50-10 of the Income Tax Assessment Act 1997 (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 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 TD 95/56, 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 Company is registered as a company limited by guarantee and is an organised body of members instituted for the objects as per its constitution.

It is accepted that the Company 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 case of the Company the purpose of its establishment can be found in its constitution, which indicates that it was established to provide services to the local community which would otherwise be unavailable.

These purposes can be likened to those of Wentworth District Capital Ltd, an organisation in the Wentworth District that was established due to a lack of face-to-face banking services available in the region. In FC of T v Wentworth District Capital Ltd 2011 ATC 20-253; 2010 ATC 20-202 (Wentworth) the entity was held to be established for community services purposes. The taxpayer was incorporated in 1998 by certain members of the small town of Wentworth (population 1,400) to establish a community bank in conjunction with Bendigo Bank. The taxpayer provided the premises, staff and equipment; Bendigo Bank granted a franchise to one of its wholly owned subsidiaries to operate the branch. The income generated was first used to repay all of the money which originally had been pledged by the town members, and later to fund a grants scheme under which community groups (such as football clubs, schools and the Rotary Club) could apply for and receive grants.

The Federal Court held (and the Full Federal Court agreed) that the taxpayer's income was exempt. The provision of banking services to customers of a commercial bank could not be the provision of a community service, but that was not the service provided by the taxpayer. The service the taxpayer provided was the creation of circumstances that would make it possible for a commercial bank to operate in Wentworth, a regional district. The main or dominant purpose for which the taxpayer was established, i.e. the facilitation of face-to-face banking services in the town, was a community service that provided a substantial benefit to the community of Wentworth that was both real and tangible.

The circumstances of the Company have similarities to those of Wentworth. It was established to facilitate services which would otherwise be unavailable.

Consequently the ATO accepts that the Company was originally established for a community service purpose.

The word 'established' is past tense. On its face, it appears to indicate the time at which the body was first established. In the Wentworth appeal JJ Emmett and Gilmour explained further:

It was common ground, however, as the trial judge stated, that the issue of whether a body in question was "established" was to be addressed in each income year by looking at its activities in that year while at the same time it was relevant to look at the objects or purposes for which the body was incorporated, including the clauses in its memorandum of association or constitution: see
Cronulla Sutherland Leagues Club Limited v Commissioner of Taxation 90 ATC 4215; (1990) 23 FCR 82 at 89-90 and 116-117 (which considered s 23(g)(iii) of the Income Tax Assessment Act 1936 (Cth), the predecessor to Item 2.1 of s 50-10), s 4-1 of the 1997 Act and the Explanatory Memorandum to the Taxation Laws Amendment Act (No 2) 1990 (Cth), cl 6. Thus, an entity might be established for the requisite purpose in one year, but not another: see Cronulla at 89-90 and 116-117. The word established therefore means existing in the year of income.

In other words, the purposes of an entity must be examined in each income year to determine if it is 'established' for community service purposes.

This reasoning circumvented some practical difficulties identified by the Commissioner with the judgement in the Wentworth case, chiefly that Wentworth would enjoy a competitive advantage over any other entity which proposed to facilitate the introduction of a competitor to Bendigo Bank in Wentworth.

However, since an entity's tax status is to be addressed in each income year by looking at its activities in that year, the introduction of a competitor would effectively alter the purpose for which the entity exists. In other words, Wentworth, for instance, would no longer exist in order to facilitate face-to-face banking in a locale in which face-to-face banking otherwise would not exist. Whether or not Wentworth would have tax exempt status in other years in which the circumstances are different does not demonstrate that it does not have tax exempt status in the years in question. (JJ Emmett and Gilmour).

In the Company's case it operates in an area in which no other similar services were available during the 2012 income year. It can therefore be concluded that in the year of income the Company was established for a community service purpose.

Political or lobbying purposes

The Explanatory Memorandum to Taxation Laws Amendment Bill (No. 2) 1990 confirms the words 'political or lobbying purposes' to mean:

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.

From the information provided, the Company appears not to have any role in advocating to government.

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

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 (the non-profit requirement), 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 constitution of the Company includes acceptable non-profit and dissolution clauses. It is considered that the Company is a non-profit association.

The Company is an organisation which is physically present in Australia and which pursues its objectives and incurs its expenditure principally in Australia.

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

Conclusion

The Company is a non-profit association that was established to facilitate services in an area in which such a service would otherwise not be provided. In accordance with the Wentworth decision, this purpose is a community service purpose.

Since, in the 2012 income year, there were no other entities facilitating such services, the Company was established for a community service purpose in accordance with item 2.1 of the table in section 50-10 of the ITAA 1997.

The Company also satisfies the special conditions contained in section 50-70 of the ITAA 1997 and is therefore an income tax exempt entity for the 2012 income year.