Edited version of your written advice

Authorisation Number: 1012977894074

Date of advice: 2 March 2016

Ruling

Subject: Exempt entity - community service association

Question 1

Is the entity a community service organisation covered by section 50-10 of the Income Tax Assessment Act 1997 (ITAA 1997) and exempt from income tax under section 50-1?

Answer

Yes.

This ruling applies for the following periods:

1 July 20VV to 30 June 20ZZ

The scheme commences on:

1 July 20VV

Relevant facts and circumstances

The purpose of the entity is to provide a domestic utility to a number of rural houses.

There is a physical isolation of the community to which the utility is supplied and low availability of any alternative utility source. This is why the entity was created.

The entity maintains the utility system and facilities and covers the power expenses. It then issues an invoice to the houses connected to the system for their share of the expenses.

The entity does not put any margin on the invoices it issues and there have been no profits to date.

If there were profits, the entity would use these to cover future expenses relating to the utility system and reduce future invoices to the connected households.

The entity is a Not for Profit Organisation established solely for Community Service purposes.

The entity does not distribute any cash to any current or former member.

If the entity is wound up, any distribution of surplus property will not be made to or for the benefit of any current or former member.

The entity is not registered as a charity under the Australian Charities and Not-for-profits Commission Act 2012.

The entity is located solely in Australia and incurs its expenditure pursuing its purpose in Australia.

The entity is governed by relevant sections of relevant state legislation (the State Act) under which it was established. Relevant sections cover the following:

• the constitution, alteration, addition to and excision from the entity

• operation of the board

• construction and taking over of utility supply works

• when compensation for land should and shouldn't be paid

• rates and charges for the utility

• allocation, supply, discontinuation of supply of utility

• effect of new subdivisions

• meetings of landholders

• finance

• transformation of utility entitlements

The entity complies with its governing rules largely provided by relevant sections of the State Act.

It is a requirement of the State Act that the entity have a board of management. The entity's board of management currently comprises the required number of landholders or their representatives.

The board of management ensures the entity operates in accordance with the requirements of the State Act, including the setting of rates, and provides advice to members relating to issues that may concern them. The State Act requires that the board sets rates in order to recover the costs of the entity operating the utility delivery service.

The entity currently services the properties under a licence granted by a government department. The licence allows for domestic/household use of the utility only.

The entity is open to new members seeking to use the service as long as there is adequate capacity. The entity is in the process of seeking to add adjacent landholders to the service. In the first instance the management board considered the request to add these new members and deemed that it should be supported by the wider entity membership. In order to officially adjust the boundary of the utility service the management board is required, by the State Act, to petition the responsible state Minister.

The entity has applied its income and assets solely for the purpose for which it was established (to provide a domestic utility to the community) since its incorporation in the year ending 30 June 20XX and will continue to do so for the whole of the current income year ending 30 June 20ZZ.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 50-1

Income Tax Assessment Act 1997 section 50-10

Income Tax Assessment Act 1997 subsection 50-70(1)

Income Tax Assessment Act 1997 subsection 50-70(2)

Income Tax Assessment Act 1936 section 161

Taxation Administration Act 1953 section 357-110 of Schedule 1

Reasons for decision

Issue 1

Question 1

Summary

The entity is a community service organisation covered by section 50-10 of the Income Tax Assessment Act 1997 and exempt from income tax under section 50-1.

Detailed reasoning

Section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) exempts from income tax the total ordinary and statutory income of an entity covered by section 50-10.

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 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 defines an association as 'an organisation of people with a common purpose and having a formal structure'.

The entity is an incorporated entity whose members are people with a common purpose and therefore meets the definition of an association.

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.

The entity was established solely to provide a domestic utility for the benefit of the community and not for political or lobbying purposes.

Established for community service purposes

Item 2.1 in section 50-10 of the ITAA 1997, is the equivalent of former subparagraph 23(g)(v) of the Income Tax Assessment Act 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 but which nevertheless, conduct activities of benefit for the community.

TD 93/190 considers the meaning of a community service purpose 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 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 FC of T v Wentworth District Capital Ltd 2011 ATC 20-253, 2010 ATC 20-202 (Wentworth) it was considered that 'need' arising from economic circumstances could include varied matters such as living in a remote area.

Whether the wording in the taxation legislation in relation to 'established' meant when an entity is initially established or whether it refers to its current activities was discussed in Wentworth. In the Wentworth appeal JJ Emmett and Gilmour explained:

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…………. The word established therefore means existing in the year of income.

Applying the entity's circumstances

The entity is not a charity so correctly comes under Item 2.1 in section 50-10 of the ITAA 1997.

Persons living in a remote area meet the definition of a section of the community who have a particular need by reason of economic circumstance. The community within the utility supply area is a small isolated community with low availability of any alternate source of the utility. Their need is therefore by reason of economic circumstance.

The entity was not established for political or lobbying purposes. It was established to provide a private domestic utility supply.

It can be said that the entity has an altruistic purpose that is beyond that of a common association of people as it is providing a facility, a utility, which would otherwise be unavailable in the remote community. The activities of the entity provide an identifiable practical help and a real and tangible benefit to the community.

The licence permits the entity to provide a utility supply for domestic use to households within the utility supply area. This section of the community can all be connected to the service. In other words, connection to the utility supply is not offered to a closed or restricted class of persons. The entity is also open to new members in need of the utility supply. The management board is in the process of seeking to add adjacent landholders which will require the board to petition the responsible state minister to have the boundary of the utility supply area adjusted.

No current or former members benefit financially. The entity has not made any profit. If there were profits the entity would use them to cover future expenses relating to the utility system and reduce future invoices to the connected households. On winding-up any distribution of surplus property will not be made to or for the benefit of any current or former member.

The entity was established in the income year ending 30 June 20XX for the purpose of providing a domestic utility supply. The operations and activities of the entity to date have been solely for that purpose comprising connecting homes to the supply, maintaining the system and facilities, paying the power expenses then invoicing the homeowners accordingly. The entity will continue to undertake these operations and activities throughout the current income year.

All these things lend support to the entity being an association that is advancing community interests not solely its member's interests.

Accordingly, it is assessed that the entity is an association established for community service purposes for the income years ending 30 June 20XX, 20YY and 20ZZ.

Special conditions

The special conditions in section 50-70 of the ITAA 1997 are:

50-70(1)

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;

and the entity satisfies the conditions in subsection (2).

50-70(2)

The entity must:

(a) comply with all the substantive requirements in its governing rules; and

(b) apply its income and assets solely for the purpose for which the entity is established.

Sub section 50-70(1)

The entity meets the definition of an association. We accept that the entity is not carried on for the purpose of profit or gain of its members as:

• the entity is a Not for Profit Organisation

• the entity does not distribute any cash to any current or former member

• if there were profits, the entity's management board would use these to cover future expenses relating to the utility system and to reduce future invoices for all connected households

• upon winding up, distribution of any surplus property will not be made to or for the benefit of any current or former member.

The entity is located solely in Australia and pursues its objectives and incurs its expenditure in Australia.

Sub section 50-70(2)

(a) The entity's governing rules are largely provided by relevant state legislation (the State Act). The entity complies with the rules provided under relevant sections of the State Act including the requirement to have a board of management, the operation of the entity, construction of the utility supply, the setting of rates, providing advice to members on issues that may concern them and following the process for admission of new members.

As applicable, the entity also applies the sections in the State Act concerning compensation, allocation, the discontinuation of the utility supply, effect of new subdivisions, meetings of landholders, finance and transformation of utility entitlements.

These adopted rules, along with the entity's object and purpose, wind-up arrangements and non-profit status clauses, form the substantive requirements in its governing rules. Details provided of activities carried on by the entity and its board of management demonstrate their compliance with these substantive requirements.

(b) The entity has applied its income and assets to the provision of a domestic utility to the community from its date of incorporation to date. The entity will continue to apply its income and assets to providing the domestic utility for the community for the remainder of the income year ending 30 June 20ZZ. This is the sole purpose for which the entity was established in each of the income years for the ruling.

The entity therefore satisfies the special conditions specified in subsections 50-70(1) and 50-70(2) of the ITAA 1997.

Accordingly, the entity meets both requirements for a Community service entity covered by Item 2.1 in section 50-10 of the ITAA 1997.

Conclusion

The entity is a community service organisation covered by section 50-10 of the ITAA 1997 and exempt from income tax under section 50-1 for the income years ending 30 June 20XX, 20YY and 20ZZ.

Exemption from lodging returns

For the income years covered by this ruling the entity is exempt from income tax and the requirement to lodge tax returns. However, as per Note 2 to section 50-1 of the ITAA 1997, even if you are an exempt entity, the Commissioner can still require you to lodge an income tax return or information under section 161 of the Income Tax Assessment Act 1936.