Edited version of your written advice

Authorisation Number: 1013003884710

Date of advice: 5 May 2016

Ruling

Subject: Income tax exemption - community service purposes

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') pursuant to item 2.1 of the table in section 50-10 of the ITAA 1997 as a community service organisation?

Answer

No

Summary

The entity is not exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 ('ITAA 1997') as it is not a society, association or club established for community service purposes within item 2.1 of the table in section 50-10 of the ITAA 1997.

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 the ITAA 1997. 

Item 2.1 in the table in section 50-10 of the ITAA 1997 includes a society, association or club established for community service purposes (except political or lobbying purposes). Item 2.1 is also subject to the special conditions in section 50-70 of the ITAA 1997.

Special conditions in section 50-70 of ITAA 1997

The income tax exemption provided under section 50-10 of the ITAA 1997 is subject to the special conditions listed in section 50-70 and further necessitate that an entity complies with all the substantive requirements in its governing rules and applies its income and assets solely for the purpose for which the entity is established. The special conditions in section 50-70 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.

Non-profit requirement as a society, association or a club

The entity is a Company Limited by Guarantee. It is accepted the entity fits the description of "society, association" for the purposes of the operation of section 50-10 of ITAA 1997.

The entity must not be carried on for the purposes of profit or gain of its individual members. Its constituent document must contain clauses that prevent it from distributing its profits or assets among members on a daily operational basis and on its winding up. This provision must also be reflected in its activities.

On the basis of the information provided, including financial statements and the not-for-profit and winding up clauses of its constitution which prohibits distribution, payment or transfer of income or property to a member whilst the entity is functional and upon its winding up, it is accepted that the entity operates as a not for profit entity.

Established for community service purposes, except for political or lobbying purposes

The term "community service purposes" is discussed 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 at paragraph 2 that in relation to former subparagraph 23(g)(v) of the Income Tax Assessment Act 1936 (ITAA 1936), which preceded item 2.1 of the table in section 50-10 of the ITAA 1997, that -

the purpose of enacting subparagraph 23(g)(v) 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 to the community. [emphasis added]

TD 93/190 further states at paragraphs 3 to 5:

3. There are four heads of charitable purpose, one of which is other purposes beneficial to the community; but this is limited by the common law to those purposes which are also charitable within the meaning of the Statute, 43 Elizabeth, Ch. 4. The term 'community service purposes' has a broader meaning than other purposes beneficial to the community which are also charitable. The Explanatory Memorandum to subparagraph 23(g)(v) confirms that the words 'community service purposes' are to be given a wide interpretation. Those words extend to a range of altruistic purposes that 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.

Paragraph 7 states:

"The purposes for which an organisation is established are demonstrated by its current operations and activities, which may show different purposes to those suggested by a cursory reading of its constitution: cf Royal Australasian College of Surgeons v. Federal Commissioner of Taxation (1943) 68 CLR 436."

In order for an organisation to be exempt under section 50-1 of the ITAA 1997 it must be a society, association or club established for community service purposes. TD 93/190 stresses the need for a community service organisation to have purposes that are of an altruistic nature. Organisations that seek to advance the common interests of their members are not altruistic, and so cannot be community service organisations.

Where an organisation has mixed purposes, the approach in TD 93/190 is that it is the main or dominant purpose of the organisation that must be community service.

Determining an organisation's purpose

"Main purposes" and "indicator of purposes" are discussed at paragraphs 41 to 48 of Taxation Ruling TR 97/22 Income tax: exempt sporting club.

Main purpose

41. To be eligible for the exemption, the club's main purpose must be to encourage a game or sport. Difficulties can arise where the club conducts other activities, particularly social or commercial activities.

42. Where the other activities are merely ancillary or incidental, or secondary, to the encouragement of the game or sport we accept that the main purpose may be that encouragement. Lockhart J in Cronulla Sutherland Leagues Club Limited v. FC of T 90 ATC 4215 at 4225; (1990) 21 ATR 300 at 312 said:

'It [the club] may have other objects or purposes which are merely incidental or ancillary thereto or which are secondary and even unrelated to the main object or purpose without disqualifying the body from the exemption.'

43. However, if the main purpose becomes the carrying out of those other activities, the club is not exempt. Nor is it exempt if it continues to be involved in the game or sport to a substantial degree but is equally involved with another purpose or purposes. As Lockhart J said at ATC 4225; ATR 312:

'But if it has two co-ordinate objects, one of which is outside the exemption, the exemption cannot apply because it would be impossible to say that one object is the main or predominant object.'

44. Therefore, the fact that a sporting club also encourages social and other activities does not, of itself, preclude the club from being exempt. The club is still exempt provided the encouragement of a game or sport is the club's main purpose. By contrast, where the club's main purpose is providing social amenities and licensed club facilities to its members, the exemption does not apply.

…

47. The determination of a club's main purpose in the relevant year of income is a matter of fact and degree. In Cronulla Sutherland, Lockhart J in the Full Federal Court said, at ATC 4225; ATR 312:

'The material facts and circumstances which should be examined to characterise the main purpose of the relevant body include its constitution, its activities, its history and its control. These may alter from time to time and the purpose of establishment may correspondingly change. It is not sufficient to look to the formation of the body and to ascertain what was at that time, the purpose of its formation. The statute gives a periodic operation to the words and directs the inquiry to a particular time, namely, the year of income so that consideration must be given not only to the purpose for which the society was established but also the purpose for which it is currently conducted.'

48. Section 50-45 looks to the year of income to determine whether each of its elements is satisfied. Evidence of the purpose for which the club was originally or later set up is helpful but the club must demonstrate by reference to its activities in the year of income that it has as its main purpose the encouragement of the game or sport. "

Purpose

The constitution expresses objects that promote the support of other entities for the benefit of the community in Australia. However examination of the activities, history and control of the applicant are also required to determine its dominant purpose.

Activities:

These include:

• trading in commodities, and

• providing loans and other financial assistance to other entities.

Through consideration of the applicant's objects, activities, history and control it is evident that it has two distinct purposes. It has a purpose to support other entities by trading in and managing intangible assets for them. It also has a purpose to provide support through its grant program and special assistance.

Altruistic purpose

Trading in intangible assets is a commercial activity. The conduct of commercial activities would generally not support a community services purpose, unless the commercial conduct is only an incidental and ancillary purpose of the organisation and the dominant purpose is for community service purposes. As stressed in Tax Determination 93/190 and the Explanation Memorandum, a positive requirement for a community service organisation is that the organisation's purposes must be mainly altruistic such that the service provided is a practical or tangible help or advantage conferred on the community or an identifiable section thereof.

An altruistic purpose involves promoting, providing or carrying out activities, facilities or projects for the benefit or welfare of the community. Furthermore, as per Royal Australasian College of Surgeons v. Federal Commissioner of Taxation 68 CLR 436; 17 ALJ 342; [1943 ALR 377]; 7 ATD 289 and Cronulla Sutherland Leagues Club v. Federal Commissioner of Taxation 23 FCR 82; 90 ATC 4215; 21 ATR 300 the community service purpose must be the entity's main or predominant purpose. In making this assessment, it is necessary to consider the entity's actual activities.

For there to be altruism towards the community it must be shown that the community or a significant portion of it derives a benefit from the applicant carrying out its purposes.

The applicant provides a commercial service to other entities that is aimed at assisting them in carrying an aspect of their commercial business operation. Through the operation and management of intangible assets the entity is fostering their commercial business operations In addition, it allows the other entities to meet their commitments to government which they must do to be able to carry out their enterprises. There is also commercial intent, if the commitments were not met then the other entities would not be able to conduct their operations on their premises and would miss out on profits. The encouragement of the carrying on of commercial business operations is generally not regarded as being altruistic.

The 'community services purpose' was considered in a commercial context in FC of T v Wentworth District Capital Ltd 2011 ATC 20-253; 2010 ATC 20-202 ("Wentworth"), The Full Federal Court held that the taxpayer's income was exempt. The provision of banking services to customers of a commercial bank could not be the provision of a community service, but that was not the service provided by the taxpayer. The service the taxpayer provided was the creation of circumstances that would make it possible for a commercial bank to operate in Wentworth. The main or dominant purpose for which the taxpayer was established, i.e. the facilitation of face-to-face banking services in the town, was a community service that provided a substantial benefit to the community of Wentworth that was both real and tangible.

Importantly, however, the Court rejected the proposition that the facilitation of the commercial supply of services in a town, that would otherwise not be provided, would always be a community service [2011] FCAFC 42 at paragraph 40; [2010] FCA 862 at paragraph 63 states:

"…It is not to be thought that the facilitation of the commercial supply of services which would otherwise not be provided is always a community service. Had WDCL been incorporated to facilitate the provision of a toy shop in Wentworth it might be doubted that the community was much thereby served. The question in each case is whether the facilitation of the service in question provides a real or tangible benefit to the community. If it does, then a community service is established. Naturally, questions of degree are involved. There may be a difference between facilitating the bringing of a doctor to an outlying district and the bringing of a florist. Other examples may lie closer to the line. Further, where the service already exists in the location in question the tangible benefit may be more difficult to discern."

It is the ATO's view in a Decision Impact Statement that whether or not the facilitation of a particular commercial supply of services in a town that would not otherwise be provided will amount to a community service depending on the facts and circumstances of each case.

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 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 on a year to year basis and will turn on the facts of each case.

Relevantly in Wentworth, the Federal Court said that the provision of banking services to customers of a commercial bank could not be the provision of a community service. The purpose of the taxpayer was not to provide a banking service in the town and it did not do so. The taxpayer was incorporated to provide a solution to the problem of the absence of a face to face banking service in the town. The facilitation of such a service provided substantial benefits to the community.

The applicant circumstances are distinguishable from Wentworth. The applicant is providing a commercial service to other entities that do not wish to own intangible assets. In Wentworth the facilitation of the commercial supply of services may be a community service if it results in providing a real or tangible benefit to the community in the sense that an essential service is delivered that could not otherwise be provided to the community. Whether a real or tangible benefit is provided is a question of degree. The provision of support to clubs in Victoria generally does not have the same degree of real or tangible benefit as expressed in Wentworth where the examples of bringing of a doctor or facilitation of face-to-face banking services in remote rural towns were used. Further the applicant is actually providing commercial services rather than only facilitating the supply of commercial service that provides a real or tangible benefit to the community.

The term "community service" is considered in Navy Health Ltd v DFC of T - Federal Court citation: [2007] FCA 931 ("Navy Health") which states:

"…The essence of "community service" was that a service was provided to the community, or a section of the community. Here the word "service" was used in the sense of "help, benefit or advantage", particularly the action of serving, helping or benefiting, conduct tending to the welfare or advantage of another. The sale of a product at normal market rates was inconsistent with this understanding of the word "service". The taxpayer's operations during the years in question, therefore, should not be regarded as the provision of a "service" to its contributors. Neither was there any other person, or group of persons, with respect to whom those operations might have been regarded as the provision of a service.

…Those who actually received the taxpayer's services in the years in question were not a section of the community - they were those who, by their own consumer choices, purchased the taxpayer's products. "

By entering into agreements and arrangements with the applicant the other entities are making their own consumer choices to engage with that applicant. As with 'Navy Health' the provision of the commercial services by the applicant are to their consumer's rather than a section of the community.

The fact that the applicant provides a small proportion of its profits to entities in Australia, and provides financial means through intangible assets to entities to generate income, does not change the commercial character nor change the purposes for which the business is undertaken, that is, mainly for the management and operation of intangible assets for the benefit of other entities.

It is considered that the applicants operations in trading in and managing the operation of intangible assets is a distinct purpose and it is not altruistic due to its commercial nature. Also the applicant provides these services to its consumers rather than a section of the community. Further, since the other entities are established for the purpose of benefiting their members and therefore not altruistic in nature, a purpose to provide support to the other entities is also not altruistic Taking into account the commercial nature of the purpose itself and also the resulting outcome of services being provided to members of the entities member bodies, it is concluded that the purpose of supporting other entities through trading in and managing the operation of intangible assets is not altruistic in nature.

Accordingly, it is considered that the conduct of a commercial enterprise for the benefit of other entities in Australia by the applicant does not fall within the description of the term 'community service purposes' as contemplated in item 2.1 of the table in section 50-10 of ITAA 1997.

Another purpose of the applicant is to support other entities through its grant program and special assistance. The granting of support or assistance is not linked to any commercial relationship with the applicant. However the beneficiaries of this support are other entities that are established with the purpose to benefit their members. While there is acceptance that these other entities generally are beneficial to the community, in the legal technical sense the other entities set up for the benefit of members are not altruistic in nature and cannot have a community services purpose. Similarly an organisation set up solely to benefit organisations that are not altruistic in nature cannot be altruistic itself. The fact that an organisation may benefit the community indirectly in a general sense is not sufficient to justify that the organisation as a whole has altruistic purposes and should be regarded as a community service organisation.

The applicant itself does not directly interact with members of the community to address community issues.

Dominant Purpose

The entity's main source of income is from the operation and management of intangible assets and its commercial operation is extensive based on the scale of the operation.

Relative to the resources it applies to the operation and management of intangible assets the direct financial assistance and support made to other entities through the grants and special assistance programs could not be described as dominant. .

Significantly, in Cronulla where the Club only provided financial support to a football club the Full Federal Court determined that the leagues club was not entitled to the exemption.

In Cronulla the encouragement of sport was limited to financial support. This financial support was found to be significant and the evidence made it clear that in the absence of that support the football club could not have continued to operate.

Despite these findings, on the facts the majority in Cronulla found that the club was not entitled to the exemption. The Court considered that, notwithstanding the financial support to the football club, the main purpose of the leagues club was to provide licensed social facilities for its members and guests.

The applicant's provision of grants is insignificant when compared to the scale of its commercial activity.

In determining the dominant purpose for which the entity is established, we consider that the activities in operating and managing intangible assets are much more significant than the activities relating to provision of grants. In this regard, the applicant operates a significant commercial activity for the benefit of its consumers. The applicants involvement in community service activities itself and associated benefits to the community groups are not considered to be significant activities to support that it is the dominant purpose.

In Wentworth, the Court noted that the taxpayer had other purposes, which included the distribution of generated profits through the community grants programme; providing additional services to the elderly in the form of a weekly visit by a staff member to the aged care facility and the provision of banking visits to school. The collated benefit was considered by the Court as an incidental benefit of the taxpayer's organisation rather than the principal purpose of the taxpayer.

Similarly, any benefits to the community in the present case cannot be seen as a central purpose of the applicant but at best an incidental and indirect benefit of its operation. It is accepted that the operation and management of intangible assets is the means by which the entity finances the grants and special assistance, however the operation and management of intangible assets for benefit of other entities is a distinct purpose and given the scale of those activities it is the applicant's dominant purpose.

Conclusion

The applicant's main or dominant purpose is the operation of a commercial enterprise for the benefit of other entities which is not altruistic due to its commercial nature and also due to supporting other entities which are not altruistic in nature. Therefore the main or dominant purpose of the applicant does not constitute a community service purpose.

The applicant has an ancillary purpose to provide non-commercial support to other entities through grants and special assistance. This is also not altruistic in nature and not a community service purpose.

Accordingly, the entity is not a society, association or club established for community service purposes within item 2.1 of the table in section 50-10 of the ITAA 1997.

Consequently, the ordinary and statutory income of the entity is not exempt from income tax under section 50-1 of the ITAA 1997.

ATO view documents

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?"

Taxation Ruling TR 97/22 Income tax: exempt sporting club

Subject: Income tax exempt - sporting organisation

Question 2

Is the entity exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as an association established for the encouragement of a game or sport pursuant to item 9.1(c) of section 50-45 of the ITAA 1997?

Answer

No

This ruling applies for the following period

30 June 2015 to 30 June 2030

The scheme commences on

30 June 2015

Relevant legislative provisions

Section 50-45 Income Tax Assessment Act 1997

Reasons for Decision

Paragraph 12 of Taxation Ruling TR 97/22: Income tax: exempt sporting clubs (TR 97/22) indicates that in considering any application for a private ruling on this subject, the words game or sport should be given their ordinary meaning.

Paragraph 24 of TR 97/22 states:

There is no special definition of what constitutes a "game" or "sport" for the purposes of section 50-45. Accordingly, those words should be given their ordinary meanings.

Paragraph 38 of TR 97/22 provides a non-exhaustive list of examples of activities that are considered to be a sport for those purposes of section 50-45 of the ITAA 1997.

There is no "game" or "sport" being undertaken by the applicant within the meaning of section 50-45 nor does it fall within any of the examples of activities within TR 97/22.

Is the entity established for the encouragement of the sport?

For an organisation to be exempt from income tax as a sporting club under section 50-45 item 9.1(c) of the ITAA 1997 it is essential that the main or dominant purpose of a club is the encouragement or promotion of a game or sport. The encouragement of sport is not only the participation in sporting activities. Encouragement or promotion can occur:

 directly, by providing the necessary facilities, coordinating activities or improving the abilities of participants; - through the improvement of the standard of trainers and coaches or by encouraging increased and improved performances. It also includes the direct involvement by the club in coaching, player development, player payments, providing team equipment, involvement in sport administration bodies, organising teams and providing referees or umpires and having awards for champion players.

and

 indirectly, such as through the marketing of the game or sport to encourage funding, or by initiating or facilitating research and development in the game or sport.

TR 97/22 covers the circumstances under which a club is regarded as being established for the encouragement of a game or sport.

For a club to be exempt from income tax under section 50-45, it needs to satisfy three tests:

1. It cannot be carried on for the purposes of profit or gain to its individual members.

2. It must be for the encouragement of a game or sport.

3. That encouragement must be the club's main purpose.

TR 97/22 states at paragraph 8 that where a club does not satisfy all three requirements, it is not exempt from income tax.

1. Non-Profit

The non-profit clause in the constitution prevents the distribution of property or income to its members.

The winding up clause requires that any surplus property on winding up be distributed to another association having objects similar to the objects of the entity and which also prohibit the distribution of its property to its members.

The entity meets the non-profit requirement.

2. Whether encouragement of a game or sport is the main purpose

Paragraph 15 of TR 97/22 lists the features that are highly persuasive in supporting a conclusion that the main purpose of the club is to encourage a game or sport. They include:

• the club conducts activities in the relevant year that are directly related to the game or sport;

• the sporting activities encouraged by the club are extensive;

• the club uses a significant proportion of its surplus funds in encouraging the game or sport; and

• the club's constituent document emphasises that the club's main purpose is to encourage a game or sport and the club operates in accordance with those documents.

It is necessary to determine whether the entity has the highly persuasive features of being established for the encouragement of a game or sport. Paragraph 57 of TR 97/22 indicates what the courts have considered relevant, though not determinative, to support the main purpose of a sporting club:

A high level of participation by members in the sport or game encouraged by the club would also support the club's main purpose being the encouragement of the game or sport.

While it is not considered that the encouragement or promotion of sport need be the exclusive object or purpose of the club, it does need to show this to be the main or predominant purpose.

Purposes/Activities

While the members of the applicant company are income tax exempt this is not sufficient for the entity itself to meet the requirements under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as an association established for the encouragement of a game or sport pursuant to item 9.1(c) of section 50-45 of the ITAA 1997.

The applicant does not meet any of the highly persuasive features listed in paragraph 15 of TR 97/22 and cannot be considered to be established for a particular game or sport. Although the applicant provides some incidental financial support to other entities its main purpose and activity is to operate and manage intangible assets.

Conclusion

The applicant does not satisfy the requirements of TR 97/22 for a club to be exempt from income tax as a sporting club. It is not exempt from income tax under section 50-1 of the ITAA 1997 as an association established for the encouragement of a game or sport according to the ordinary meaning of the words pursuant to item 9.1(c) in section 50-45 of the ITAA 1997.