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Ruling

Subject: Income Tax Exemption

Question 1

Is the entity a public educational institution under to item 1.4 of the table under section 50-5 of the Income Tax Assessment Act 1997 (ITAA 1997) and therefore exempt from income tax under section 50-1 of the ITAA 1997?

Answer

No

This ruling applies for the following periods:

1 July 2010 - 30 June 2011

1 July 2011 - 30 June 2012

1 July 2012 - 30 June 2013

The scheme commences on:

1 July 2010

Relevant facts and circumstances

· The entity is registered as a company limited by guarantee and was incorporated in the late 1990's.

· The entity operates a business college providing courses in business education.

· The entity also operates a scholarship fund, providing financial assistance to students. Financial assistance is provided according to financial need rather than academic grounds.

· The number of students that attend the college for the past three years has been under 50 students per year.

· The fees are not subsidised by HECS/HELP and requires the students to make full private contributions. However, it is anticipated that the number of students will increase once the entity is approved for HELP funding.

· The entity operates from leased premises in Australia.

· The current members of the entity comprise of X persons. Y members are related.

· The board of directors comprise of Z persons who are all related.

· The objects of the entity are directed at establishing and carrying on a business and commercial college in Australia.

· The governing documents of the entity have appropriate non-profit and winding-up clauses.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 50-1

Income Tax Assessment Act 1997 Section 50-5

Income Tax Assessment Act 1997 Section 50-55

Reasons for decision

For an entity to be exempt from income tax pursuant to section 50-1 of the ITAA 1997 as a public educational institution, an entity must:

1. be a public educational institution under item 1.4 of the table in section 50-5 of the ITAA 1997; and

2. meet the special conditions in section 50-55 of the ITAA 1997.

1. Public educational institution

'Public educational institution' is not a phrase defined in the legislation. The phrase is a composite term and it is necessary to give full effect to all the component parts. In considering each of the component parts in 'public educational institution', the following characteristics arise:

· The purpose is the advancement of education

· Education is for the public or a section of it

· There is an institutional character

· The entity is non-profit

· The sole purpose is to provide education

2. Education

The concept of 'education' is to be interpreted widey. It embraces processes of 'imparting knowledge or assisting and guiding the deployment of body or mind (Chesterman v FC of T (1923) 32 CLR 362).

In the Income tax guide for non-profit organisations, public educational institutions include:

· Universities or colleges managed by public bodies

· Grammar schools

· Primary and secondary schools run by churches or religious bodies

· Non-profit business colleges

Senior Member Roach in Case W43 at 423, argued that what is educational must be viewed in terms of current circumstances hence, 'educational' was 'not to be considered as confined to "classical studies" or to the pursuits of those intellectually disposed to learning. Nor is it to be considered as a term to be construed in contrast to terms such as training...'

The objects of the entity as stated in its governing documents are to establish and carry on a business and commercial college in Australia. The entity effectuates it objects by providing business courses.

It is therefore considered that the entity is involved in activities that come under the broad concept of education.

Public

The term 'public' does not necessarily refer to the whole community, and it will be sufficient if the institution serves a section of it.

Lowe J in Re Income Tax Acts (No 1) [1930] VLR 211 at 222-3 said:

'There is…one element connoted by the word "public" in relation to...institutions which justifies the use of the word. It is the carrying on of the institution for the benefit of the public generally or at least of a definitely ascertainable section of the public, where the benefit of the institution is available without discrimination to every member of the public or of that section of it.'

The business courses offered by the entity are advertised to the public at wide. It is considered that the entity offers its education to the public without discrimination.

Institution

To qualify under item 1.4 an entity must not only be 'public' and 'educational; but must be an 'institution. There is no statutory definition the word 'institution', and therefore its ordinary meaning must be considered.

Taxation Rulings 2011/4 and 2003/5 consider the word 'institution', in relation to charitable institutions and public benevolent institutions. In those rulings, case law was considered in determining whether the entity was an 'institution'.

In paragraph 165 and 168 of TR 2011/4, it states:

165. In Stratton v. Simpson (1970) 125 CLR 138, Gibbs J considered the meaning of 'institution' and said at 157-158:

In its ordinary sense 'institution' means 'an establishment, organisation, or association instituted for the promotion of some object, especially one of public utility, religious charitable, educational etc' (The Shorter Oxford English Dictionary). It means, as was said in Mayor etc of Manchester v. McAdam, 'an undertaking formed to promote some defined purpose...' or 'the body (so to speak) called into existence to translate the purpose as conceived in the mind of the founders into a living and active principle'. Although its meaning must depend on its context, it would not ordinarily connote a mere trust'.

168. A structure controlled and operated by family members and friends will not be accepted as an institution where it has a small and exclusive membership and undertakes limited activities: Pamas Foundation (Inc) v. Commissioner of Taxation (1992) 35 FCR 117; 92 ATC 4161; (1992) 23 ATR 189 ( Pamas ). In Pamas , a foundation incorporated by a doctor and operated and controlled by the doctor, his family and close friends was not accepted as a religious institution. In reaching its decision, the Court took into account the fact that the membership of the Foundation was small and exclusive and the scale of its activities was relatively small.

A similar view on the meaning of 'institution' is taken at paragraph 91 of TR 2003/5 regarding public benevolent institutions. In both Taxation Rulings, whether an entity is an institution is determined by looking at the whole of the entity's circumstances. Relevant factors include an entity's activities, size, permanence and recognition.

Each of these factors will be considered in turn.

Activities

The entity offers a range of business courses to the public. However, the number of students at the college is limited due to the size of the college facilities and that the fees are not subsidised under the HECS/HELP scheme. Nevertheless, it is evident the college undertakes a number of activities associated with the provision of business education.

Size

The size of an entity's membership and an entity's controllers is an important factor in determining whether it is an institution. In TR 2005/3 and TR 2011/4 reference is made to the case Pamas Foundation (Inc) v. Commissioner of Taxation (1992) 35 FCR 117; 92 ATC 4161; (1992) 23 ATR 189 (Pamas), which considered entity's controlled and operated by families and friends.

In TR 2005/3 and TR 2011/4 reference is made to the case Pamas Foundation (Inc) v. Commissioner of Taxation (1992) 35 FCR 117; 92 ATC 4161; (1992) 23 ATR 189 (Pamas), which considered entity's controlled and operated by families and friends.

In Pamas, Beaumont and Lee JJ referred to Christian Enterprises Ltd v Commissioner of Land Tax (1968) 88 WN (Pt 2) NSW (Christian Enterprises) at 4167:

Walsh J.A. (at 119) rejected a submission that every company with charitable objects is a charitable institution. He went on to say (at 120):

``At the relevant time the appellant had only seven members. But I do not think that the question before the court [i.e. whether it was a `religious society'] turns in any way on that fact. One cannot say that if it had had a hundred members or some other selected number of members it would be a religious society but that, with only seven members, it is not. For example, I think that the Franciscan Order of Friars Minor, which has a large membership, would undoubtedly be properly described as a religious society. Cf: Perpetual Trustee Co. (Ltd.) v Wittscheibe... But I think also that it was already a religious society at the time when St. Francis of Assisi and his then quite small group of followers had joined together in a community, with the common purpose of devoting themselves to preaching, as well as to poverty and prayer. It may well be that, in the ordinary use of the language, one would speak of the Franciscans as being now, but not being in those early days, an `institution'. But, in the term `religious society' I find no notion that size or numbers are of importance.''

(emphasis added)

…

In our opinion, the reasoning of Walsh J.A. in the Christian Enterprises case on the meaning of ``institution'' is applicable in the circumstances of the present case. His Honour said (at 119):

``I find myself in agreement with the statement of Nagle J., who said: `Wide and flexible as the word "institution" may be, I do not think it applies to the appellant company in the present situation'.''

As has been seen, Walsh J.A. went on to say that it may well be that, in the ordinary use of language, one would speak of the Order of Franciscans as being now, but not in their early days, an ``institution''. In our opinion, these observations are also apposite here. The context in which the expression ``religious institution'' appears includes the juxtaposed term ``public benevolent institution'' which tends to suggest that the word ``institution'' is to be given a meaning greater than a structure controlled and operated by family members and friends.

The fact that the Foundation is a body corporate by virtue of its incorporation under the provisions of the Association Incorporations Act 1895-1969 (WA) does not mean that as a corporation it is also an institution, The Foundation has a small and exclusive membership which is limited to Dr. Staer, his family and some close friends. The scale of its activities is relatively small. Looking at the whole of the circumstance, in our option, the Foundation is not a religious institution to which s.3 of the Debits Tax Administration Act 1982 applies. We would dismiss the appeal accordingly.

In determining whether an organisation was an' institution' Walsh JA found that 'size or numbers are of importance' and in that context stated "It may well be that, in the ordinary use of the language, one would speak of the Franciscans as being now, but not being in those early days, an 'institution'". Therefore, 'size' in the context of Christian Enterprises is a reference to the size of the membership and not the persons that they served. In that case, the size of the membership consisted of 7 persons and this was not enough to constitute an institution.

In Pamas, Beaumont and Lee JJ agreed at 4167 with the statements of Walsh JA in Christian Enterprises, and said that the observations given were appropriate in the present case. Considering an entity with a small membership alongside an entity with a controlling body and membership consisting of family and friends, leads to the examination of the membership of an entity as of critical importance.

In the context of Pamas and Christian Enterprises, 'membership' was a reference to the people who subscribed to the organisation. In Pamas, 'membership' was not defined in terms of the people who the organisation served, but rather those who participated in the organisation and who had the ability to vote at general meetings.

In this case, membership of the company comprises of X persons. The board of directors comprise of Z persons. With the exception of one of the members, the members and the board of directors comprise of persons belonging to the same family.

It is considered that the entity is currently controlled and operated by one family. Therefore, we cannot conclude that the entity is greater than a structure controlled and operated by family and friends. Further, the entity has a small and exclusive membership that predominantly consists of family members.

Permanence

The entity was incorporated as a company in the late 1990's and was established to provide business education to students. Since its inception, it has operated under its current objects to provide education to students in Australia.

Recognition

The entity was originally established a business college to provide its students with qualifications in business, management, tourism and hospitality. The qualifications awarded to the students in some cases are credited towards their university degrees.

It is considered that the entity is recognised by the public and is capable of being separately indentified.

Summary

In considering the whole circumstances above, it is accepted that the entity undertakes educational activities and is recognised as a business college in Australia. However, similar to the circumstances found in Pamas and comments made in Christian Enterprises, the entity is considered to have a small and exclusive membership and it is not greater than a structure controlled and operated by family. Therefore, the entity is not an 'institution'.

Non-profit

We will accept an organisation as being non-profit where, by its constituent document or by operation of law it is prevented from distributing its profits or assets among members while it is operating or upon its winding-up. The organisation's actions must also be consistent with the prohibition.

The entity has appropriate non-profit and winding up clauses in its governing documents which prevent members from receiving benefits during its operation and upon winding up. The Financial Statements for previous income years report that as there are no shares, no dividends were paid. Further, all surpluses are legally required to be retained in the business to further its principal object to provide education.

Sole purpose

According to the Income tax guide for non-profit organisations, the sole purpose of the organisation must be providing education. Every other purpose must be incidental or ancillary to the sole purpose.

The objects and activities of the entity indicate that its purpose is to carry on a business college by offering business education courses. It is evident that the entity will directly provide the education to students and does not merely have a casual link to education.

The entity also maintains a scholarship fund to assist financially disadvantaged students with their educational costs whilst attending the college. Students receive financial assistance according to financial need rather than academic grounds. It is considered that maintaining a scholarship fund is ancillary to providing education as it enables students to be able to attend the college.

Special Conditions

An entity covered by item 1.4 is not exempt from income tax unless the entity:

a) has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia; or

b) is an institution that meets the description and requirements in item 1 of the table in section 30-15; or

c) is prescribed institution which is located outside Australia and is exempt from income tax in the country in which it is resident.

The objects of the entity state that it has been established to carry on a business and commercial college in Australia. Supporting documents also demonstrate that the entity carries on its activities and pursues its objects in Australia.

Therefore, the special conditions in section 50-55 are satisfied.

Conclusion

The entity is not exempt from income tax as a public education institution under item 1.4 of the ITAA 1997 as it is not considered to be an institution.