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Ruling

Subject: Income tax exempt status

Question 1

Will the ordinary and statutory income of the Taxpayer be exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) on the basis that the Company is a society, association or club established for community service purposes pursuant to item 2.1 in the table in section 50-10 of the ITAA 1997?

Answer

Yes

This ruling applies for the following periods:

Numerous income years beginning 1 July 2005

The scheme commences on:

Within the year beginning 1 July 2005

Relevant facts and circumstances

The Taxpayer is a company.

Prior to the Taxpayer's establishment the local community lacked the services facilitated by the taxpayer. Members of the community were forced to travel to another town in order to access these services.

The Taxpayer was established in order to facilitate the supply of a service for the benefit of members of the community.

The Taxpayer entered into an Agreement with a service provider in order for the provision of the service to be made possible in the community. The Agreement governs the establishment and operation of the facility.

The Agreement specifies the costs that the Taxpayer will bear in respect of the operation of the facility and the proportion in which net income from the facility will be shared between the Taxpayer and the service provider.

No other commercial service of its kind has operated in the community since the facility commenced operations.

The Taxpayer's objects as stated in its constitution indicate that it is established to facilitate the establishment of the facility in the community.

The Taxpayer's constitution indicates it is not carried on for the purpose of profit or gain of its individual members.

The constitution allows for members to make a loan to the Taxpayer in return for a reasonable rate of interest.

In addition to its primary object, the constitution of the Taxpayer states that it will direct any surplus to support the local community.

The financial statements of the Taxpayer show that it has established a Community Grants Program.

Relevant legislative provisions

Income Tax Assessment Act 1997 subdivision 50-A,

Income Tax Assessment Act 1997 section 50-1,

Income Tax Assessment Act 1997 section 50-10 and

Income Tax Assessment Act 1997 section 50-70.

Reasons for decision

Section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) states that the ordinary income and statutory income of entities covered by subdivision 50-A of the ITAA 1997 is exempt from income tax.

If a society, association or club established for community service purposes falls under item 2.1 of the table in section 50-10 of the ITAA 1997, its income is exempt from income tax.

The exemption is subject to the special conditions outlined in section 50-70 of the ITAA 1997. The special conditions are that the entity is not carried on for the purpose of profit or gain of its individual members and that it:

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 deductible gift recipient falling under item 1 of the table in section 30-15 of the ITAA 1997; 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 a resident.

Each of the requirements will be considered in turn:

Non-profit society, club or association

An 'association' is defined in the Macquarie Dictionary as:

an organisation of people with a common purpose and having a formal structure.

The Taxpayer, being a company formed with a number of members for a common purpose, is considered to be an association.

The association must also be non-profit. That is it must not be carried on for the purposes of profit or gain to its individual members. An association is accepted as non-profit where its governing documents contain a prohibition against a distribution of profits and assets among members while the association is functional and on its winding up. The association's actions must also be consistent with this requirement.

The Taxpayer is a company limited by guarantee. It is prohibited by legislation from making a dividend to its members. The constitution will be amended further to remove any possible ambiguity.

The second point of consideration is the Taxpayer's actions.

The Taxpayer was established with the financial assistance of members of the community. Loans from members were repaid at rates comparable to market rates and so are considered to be reasonable.

It is accepted that the Taxpayer is not carried on for the purpose of profit or gain of its individual members.

Established for community service purposes

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 provides guidance on the term 'community service purpose'.

To be eligible for the exemption the association's main purpose must be community service purposes. In working out an association's main purpose the consideration is given its governing document, activities, use of funds and history. Any other purpose of the organisation must be incidental, ancillary or secondary to the community service purpose.

Community service purposes are altruistic - that is, community service organisations are established and operated with regard to the wellbeing and benefit of others.

Community service organisations promote, provide or carry out activities, facilities or projects for the benefit or welfare of the community or any members who have a particular need by reason of youth, age, infirmity or disablement, poverty or social or economic circumstances.

In FC of T v. Wentworth District Capital Ltd (2011) ATC 20-253 it was held that the Wentworth District Capital Ltd (WDCL), formed to facilitate the reestablishment of face-to-face banking in the town of Wentworth, New South Wales was a community service organisation.

The Full Federal Court concluded that the main purpose for which WDCL was established was to create the circumstances which would make it possible for a commercial bank to operate in Wentworth. It was also held that the facilitation of a face-to-face banking service had provided a substantial benefit to the community of Wentworth and that the benefit was both real and tangible.

The Decision Impact Statement DIS NSD 1144 of 2010 outlines that the court did not go so far as to hold that every community bank will qualify as providing a community service within item 2.1 of section 50-10 of the ITAA 1997. It will be necessary to examine the purpose for which the relevant entity is established and a consideration of the circumstances of the relevant community to determine if the facilitation of the provision of face to face banking activities provides sufficient real and tangible benefit to the community to qualify as a community service. This is to be determined in a year to year basis and will turn on the fact of each case.

The facts in this case are similar to those of WDCL. It is accepted that the dominant purpose of the Taxpayer is the facilitation of a service and that this purpose is a community service purpose.

Special conditions

For a community service organisation to be exempt from income tax, it must pass one of the following tests from section 50-70 of the ITAA 1997:

· physical presence in Australia

· deductible gift recipient test; or

· prescribed by law test.

The Taxpayer is not a deductible gift recipient, nor seeking to be prescribed by law so it must meet the physical presence in Australia test.

The physical presence in Australia test has two elements. One is that the organisation has a physical presence in Australia. The second is that it must pursue its objectives and incur its expenditure principally in Australia.

The Taxpayer is established in Australia. It operates in Australia and incurs it expenditure in Australia so it is accepted as meeting the physical presence in Australia test.