Edited version of private advice

Authorisation Number: 1012650113467

Ruling

Subject: Income Tax - exempt entities - community service

This ruling applies to

An entity

Question 1

Is the ordinary and statutory income of the entity exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) under item 2.1 of the table in section 50-10 of the ITAA 1997?

Answer

Yes

Question 2

Can the entity self-asses its income tax exemption status?

Answer

Yes

This ruling applies for the following period

1 July 20CC to 30 June 20DD

The scheme commenced on

The scheme has commenced

Relevant facts

The entity was registered as an incorporated association.

The association has been set up as a not-for-profit organisation which offers a service to participants and the wider community.

The entity receives the majority of its income from participant's payments for this service and government subsidies.

Approximately 80% of its revenue is paid out in the form of salaries and wages and other staff related costs. The balance of the revenue is spent on the operating costs of the entity's premises offering this service.

A copy of the rules for the entity has been provided and the rules indicate that:

• the entity has been established to provide quality service to its' participants and the wider community

• the entity has been established as a 'not for profit' organisation in which the association must not distribute any surplus, income or assets directly or indirectly to its members

• membership is open to participants of the entity

• funds may be derived from joining fees, annual subscriptions, donations, fund-raising activities, grants, interest and any other sources approved by the committee.

• upon winding up of the entity any surplus assets must not be distributed to any members or former members of the association

• any surplus assets present upon winding up must be given to a body that has similar purposes and which is not carried on for the profit or gain of its individual members

Relevant legislative provisions

Income Tax Assessment Act 1936 subparagraph 23(g)(v)

Income Tax Assessment Act 1997 section 50-1

Income Tax Assessment Act 1997 section 50-10

Income Tax Assessment Act 1997 section 50-70

Reasons for decision

Question 1

Summary

The entity can claim exemption from income tax.

Detailed reasoning

Section 50-1 of the ITAA 1997 exempts from income tax the total ordinary and statutory income of an entity covered by section 50-10 of ITAA 1997. Item 2.1 of the table in section 50-10 of the ITAA 1997 states that a society, association or club, established for community service purposes, (except political or lobbying purposes) shall be exempt from income tax, subject to the special conditions in section 50-70 of the ITAA 1997.

Accordingly, to be exempt from income tax under item 2.1 of the table in section 50-10 of the ITAA 1997, an entity must:

• be a society, association or club;

• be established for community service purposes (except political or lobbying purposes); and

• meet the special conditions specified 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 Macquarie Online Dictionary (Sixth edition) defines an association as 'an organisation of people with a common purpose and having a formal structure'. 'Society' has an equivalent meaning as discussed at length in Pro-Campo Limited v. Commissioner of Land Tax (NSW) 81 ATC 4270 at 4279; (1981) 12 ATR 90 at 35.

The entity is an organisation of people with a common purpose acting under an incorporated association therefore for the purposes of determining whether the entity can be described as a 'society, association or club' it fulfills the initial requirement.

Established for community service purposes

Item 2.1 in section 50-10 of the ITAA 1997, is the equivalent of subparagraph 23(g)(v) of the Income Tax Assessment Act 1936 (ITAA 1936). Guidelines for the exemption provided by that subparagraph are located in 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).

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': In accordance with the Macquarie Online Dictionary (Sixth edition) 'altruistic' means regardful of others; having regard to the wellbeing or best interests of others.

TD 93/190 considers the meaning of a community service purpose and states at paragraphs 3-5:

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 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) of the ITAA 1936 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.

TD 93/190 indicates that an entity can be considered to be providing eligible activities for 'community service purposes' where the community or members of the community have a particular need. The ruling offers examples of associations which are considered exempt because they have demonstrated by their current operations and activities that they are established for community service purposes. Example 7(a) of the ruling includes 'non-profit child care centres, including those providing long day care facilities, after school care and day child care in activity caravans'.

The entity qualifies to be considered an association established for community service purposes under this example.

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.

It is accepted that the entity has been established for community service purposes and not for political or lobbying purposes.

Special Conditions

Section 50-70 of the ITAA 1997 states that there are special conditions which must be satisfied for entities to be considered for income tax exemption under section 50-10 (Item 2.1) of the ITAA 1997.

The conditions state that an entity covered by item 2.1 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 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 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.

The entity has a non-profit clause in its rules which states:

• The association must not distribute any surplus, income or assets directly or indirectly to its members

The entity also has a dissolution clause in its rules which states:

• The association may be wound up voluntarily by special resolution.

• In the event of the winding up or the cancellation of the incorporation of the association, the surplus assets of the association must not be distributed to any members or former members of the association.

• Subject to the Act and any court order…the surplus assets must be given to a body that has similar purposes to the association and which is not carried on for the profit or gain of its individual members

It is accepted that the entity is an association which operates in a non-profit manner.

For the entity to satisfy the conditions 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 has a physical presence in Australia.

Accordingly, the entity satisfies the 'Special Conditions' specified in section 50-70 of the ITAA 1997.

Conclusion

Based on the information provided, the total ordinary income and statutory income of the entity is exempt from income tax under section 50-1 of the ITAA 1997 as it is a society, association or club established for community service purposes under item 2.1 of the table under section 50-10 of the ITAA 1997.

Question 2

Summary

The entity can self asses its income tax exempt status.

Detailed reasoning

Information provided on the Australian Taxation Office (ATO) website states that:

Organisations that are not charities can self-assess their entitlement to income tax exemption. They do not need to be endorsed by the ATO to be exempt from income tax. Most have additional tests and rules that must be met before the organisation can be exempt.

If you work out that your organisation meets all the requirements for income tax exemption, all of the following applies:

• your organisation will not need to pay income tax, capital gains tax or lodge income tax returns, unless specifically asked to do so

• you do not need to get confirmation of this exemption from us

• you should carry out a yearly review to check if your organisation is still exempt - you should also do this when there are major changes to your organisation's structure or activities.