Edited version of your written advice

Authorisation Number: 1012998492047

Date of advice: 15 April 2016

Ruling

Subject: Whether the Taxpayer qualifies for income tax exemption

Question 1

Does the taxpayer qualify for exemption from income tax as a public educational institution under subsection 50-5 Item 1.4 of the Income Tax Assessment Act 1997?

Answer

No

Question 2

Does the taxpayer qualify for exemption from income tax as a community service organisation under subsection 50-10 of the Income Tax Assessment Act 1997?

Answer

No

This ruling applies for the following period:

Year ended 30 June 2016

The scheme commences on:

1 July 2015

Relevant facts and circumstances

The Taxpayer is a not-for-profit organisation for engineers and scientists established to serve the community and its members. The Taxpayer aims to provide work for government organisations and also assist community groups in the future as it becomes more established.

Objectives

The organisations three main goals are:

• Develop and expand the professional network of its members by organising technical talks, seminars, conferences and professional networking events;

• Provide humanitarian and/or not-for-profit professional services based on the capabilities and expertise of its volunteer members to serve the community and provide work experience opportunities for its graduate or migrant members with no local experience, and

• Provide not-for-profit training courses for its members to be presented by its senior members.

Reasons for decision

Question 1

Does the taxpayer qualify for exemption from income tax as a public educational institution under subsection 50-5 Item 1.4 of the Income Tax Assessment Act 1997?

Summary

The Taxpayer does not qualify as a public educational institution.

Detailed Reasoning

What is a public educational institution?

Division 50 of the ITAA 1997 relates to income tax exempt entities.

A public educational institution qualifies for income tax exemption under subsection 50-5 Item 1.4 of the ITAA 1997.

Subsection 50-55(1) of the ITAA 1997 states that an entity covered by item 1.3, 1.4, 6.1 or 6.2 (of the ITAA 1997) is not exempt from income tax unless the entity:

(a) has a physical presence in Australia and 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 of the ITAA 1997; or

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

A public educational institution is an institution that is available or open to the public or a section of the public and whose sole purpose is providing education. Any other purpose of the organisation must be incidental or ancillary to providing public education. Education in this context does not extend to merely providing information or lobbying.

The two essential conditions for an "institution" to be a public educational institution are that firstly, it must be public, and secondly, it must be educational.

Meaning of "public"

Whole community or a section of the community

The expression "the public" does not necessarily mean the whole community but may mean a selection of the community, that is, a section of the public. A body may be a public body even though only persons of a certain class or qualification may be admitted, provided that their admission is not dependent upon the consent of the members of the body or of some of those members, for example, a committee.

In Taxpayers' Association of NSW v Federal Commissioner of Taxation 2001 ATC 2096, the Administrative Appeals Tribunal held that an organisation whose members were mainly accountants or small business owners that provided members with taxation information in the form of journals, seminars and telephone advice was not a public educational institution. Its membership was not considered as a "section of the public." The members may have had a common calling in the sense that they had an interest in taxation but this could not be described as a natural section of the community.

The Taxpayer's constitution states that membership is open to all professionals (university graduates and/or professionals in engineering or science with university degrees) residing in Australia, and, in particular, those from an Iranian background. Therefore membership is only open to a very narrow section of the community and cannot be considered open to the public.

Meaning of "education"

The phrase "public educational purposes" has been held to imply either mental or bodily teaching or training. The word "educational" connotes the sense of imparting knowledge or assisting and guiding the development of body or mind. It has a wide scope extending from elementary instruction in primary schools to the highest level of tertiary teaching (Chesterman v FC of T (1923) 32 CLR 362), as well as to instruction and training beyond the domain of schools and universities.

The concept of education is much wider than mere book learning and wider than any category of subjects which might be thought to comprise general education as distinguished from education in specialised subjects concerned primarily with particular occupations. For example, the purposes of the Navy League Sea Cadets have been found to be educational. Kitto J said that the training given was such as to teach a person, whose ambition lies towards a sea-going career, some of the rudiments of the intended craft and provide intellectual equipment and stimulus towards further preparation. Those purposes pursued, by a responsible body, acting in an organised and disciplined manner were essentially and predominantly educational (Lloyd v FC of T (1955) 93 CLR 645).

Training and education services are provided to members, or non-members with the required professional qualifications, which is not considered available or open to the public. Furthermore, the Taxpayer has a number of stated objectives. The provision of training and education services is not the organisation's sole purpose therefore the Taxpayer does not qualify for exemption from income tax as a public educational institution under subsection 50-5 Item 1.4 of the ITAA 1997. Associations operated for their members' professional benefit are not public educational institutions.

Question 2

Summary

The Taxpayer does not qualify for exemption from income tax as a community service organisation under subsection 50-10 of the ITAA 1997?

Detailed Reasoning

What is a community service organisation?

Subsection 50-10 of the ITAA 1997 allows income tax exemption for community service organisations.

A community service organisation is a not-for-profit society, association or club established for community service purposes except political or lobbying purposes.

The main purpose of the organisation must be community services. Any other purpose of the organisation must be incidental, ancillary or secondary to the community service purpose.

Community service purposes are altruistic meaning that they are established and operated for 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 other members who have a particular need by reason of youth, age, infirmity or disablement, poverty or social or economic circumstances.

Organisations that seek to advance the common interests of their members are not altruistic and cannot be community service organisations.

The Taxpayer's numerous objectives are listed in clause 3 of the Constitution. Objectives include but are not limited to professional training and education for members, promotion of industry relations, member networking opportunities, the provision of engineering services to government organisations or charities and collaboration with universities and research centres.

To qualify for the income tax exemption as a community service organisation the main purpose of the organisation must be community services. Any other purpose of the organisation must be incidental, ancillary or secondary to the community service purpose.

In the case at hand the Taxpayer has multiple objectives, it cannot be said community service is the main purpose. Furthermore, organisations that seek to advance the common interests of their members are not altruistic and cannot be community service organisations.

The Taxpayer does not qualify for income tax exemption as a community service organisation under subsection 50-10 of the ITAA 1997.

Taxable non-profit organisation

The Taxpayer does not qualify for exemption from income tax but following a review of its stated objectives and Constitution the Taxpayer is a taxable non-profit organisation. The following requirements must be satisfied:

• All profits made by the organisation are used to carry out its purposes;

• The organisation is not operating for the profit or gain of its individual members; and

• The organisation's constituent documents prohibit it from making any distribution - whether money, property or otherwise - to its members during the course of its operations or on dissolution.

Mutuality Principle

The mutuality principle is a legal principle established by case law. It is based on the proposition that an organisation cannot derive income from itself.

The principle provides that where a number of persons contribute to a common fund created and controlled by them for a common purpose, any surplus arising from the use of that fund for the common purpose is not income.

Section 59-35 of the ITAA 1997 states:

"An amount of *ordinary income of an entity is not assessable income and not *exempt income if:

(a) the amount would be a mutual receipt, but for the entity's constituent document preventing the entity from making any *distribution, whether in money, property or otherwise, to its members; and

(b) apart from this section, the amount would be assessable income only because of section 6-5."

The Taxpayer's constitution contains a non-profit clause which prohibits the distribution of its income and other assets amongst its members. Therefore, income from its members such as membership subscriptions (mutual receipts) will not be assessable income. Expenses incurred to derive mutual receipts are not deductible.

Income from non-members such as bank interest, dividends and rental income will be assessable.

Non-profit companies that are Australian residents have a taxable threshold. If the taxable income of a non-profit company in an income year is below the threshold (which is $416 per year), it is not required to lodge a tax return for that year. If the Taxpayer's taxable income from non-member receipts is greater than $416 it will be required to lodge a tax return.