Edited version of your written advice

Authorisation Number: 1013127476625

Date of advice: 25 November 2016

Ruling

Subject: Income Tax Exemption

Question 1

Is the total ordinary income and statutory income of the Society exempt from income tax in terms of section 50-1 of the Income Tax Assessment Act 1997 subject to the special conditions in section 50-70 being met?

Answer

No.

This ruling applies for the following periods:

Income years ended 30 June 20XX to 30 June 20YY

The scheme commences on:

The scheme has commenced.

Relevant facts and circumstances

A copy of the Certificate of Incorporation of the Society was provided.

A copy of the Constitution of the Society was provided.

In order to undertake its activities, the Society has a long-term aim to acquire premises with that acquisition being funded by membership subscription fees and donations.

The Society will charge members a monthly membership fee.

Additional funds will be raised by fees for participation in certain Society activities, such as public talks.

The Society will operate solely in Australia, will maintain premises in Australia and does not propose to distribute any funds to foreign entities or in pursuit of any objectives in a foreign jurisdiction.

Office bearers of the Society

The office bearers of the Society are yet to be appointed, it is anticipated that these officers will be appointed at the inaugural annual general meeting.

Activities of the Society

The prospective members of the Society are already carrying on the activities identified in the application for private ruling. These individuals are yet to formally join the Society. This will take place in the lead up to the inaugural annual general meeting.

Lending Library

The lending library is currently housed in premises made available to the Society by a prospective member.

Dates and locations of meetings and reading groups

Bi-weekly meetings are held on weekday nights. Additional meetings take place at the weekend.

Reading groups take place at the night meeting. The reading groups have focused on studying aspects of X's writing. Further reading groups for potential new members are scheduled.

In addition the Society has regularly explored X's cross-genre works, including X consecutive meetings devoted to the study of such works.

Relevant legislative provisions

Income Tax Assessment Act 1997

Section 50-1

Section 50-45 Item 9.1

Section 50-47

Section 50-70

Subsection 995-1(1)

Reasons for decision

Summary

The relevant provisions of the law are section 50-1, section 50-45 item 9.1, section 50-47 and section 50-70 of the Income Tax Assessment Act 1997 (ITAA 1997) each of which is examined and discussed.

The critical provision to be met is section 50-45 item 9.1 which requires that the Society be established for the encouragement of one of the subjects listed in item 9.1. In this case it is the encouragement of literature as listed at paragraph (d) in item 9.1 for which the Society seeks exemption.

The arguments advanced by the applicant in support of the application and the applicant's interpretation of the law are based in part on the ATO document titled “Income tax guide for non-profit organisations” (the Guide) which was published in the past but is no longer published. However, much of the information which appeared in the Guide has been reproduced in other current ATO documents. The applicant also relies upon an edited version of a private ruling for the income years ended 30 June 2011, 2012 and 2013 in which excerpts from the Guide are quoted.

The terms “society, association or club”, “for the encouragement of”, and “literature” are all used in item 9.1 of the table in section 50-45 but none is defined in the legislation. Accordingly, it is necessary to look elsewhere for a definition of each term; a court case, a dictionary and an ATO publication are respectively the source of each definition. However, with respect to “literature” the definition is expanded by reference to dictionary definitions.

Though, not all dictionary definitions of “literature” are relevant and thus some are excluded.

Yet ultimately it is considered not to be necessary to determine whether the writings of X fall within any particular dictionary definition of “literature”.

This is because the purpose of the Society is to engage in an integrated study of X's writings and other cross-genre works which takes the Society out of the type of entity to which the legislation applies, that is, it is not a society, association or club established for the encouragement of literature. It is established for other purposes.

Accordingly, the Society is not an exempt entity in terms of item 9.1 of the table in section 50-45.

Therefore the total ordinary income and statutory income of the Society is not exempt from income tax in terms of section 50-1.

Detailed reasoning

In the following discussion all legislative references are to provisions of the ITAA 1997 unless otherwise specified.

Division 50 (section 50-1 to section 50-110) relates to income tax exempt entities.

Section 50-1, section 50-45, section 50-47 item 9.1 and section 50-70 are relevant in this case,

It is proposed to deal with the section 50-47 special condition and the section 50-70 special conditions before determining whether the critical issue of satisfying section 50-45 is met. This is because if those special conditions are not met the entity would not be accepted as an exempt entity and hence it would not be necessary to consider the more complex provisions of section 50-45 item 9.1.

Section 50-47 special condition

In order to determine whether section 50-47 applies to the Society it is necessary to consider whether the Society is an ACNC type of entity.

An ACNC type of entity is defined in subsection 995-1(1) as follows:

ACNC type of entity means an entity that meets the description of a type of entity in column 1 of the table in subsection 25-5(5) of the Australian Charities and Not-for-profits Commission Act 2012

“Charity” is the type of entity in column 1 of the table in subsection 25-5(5) of the Australian Charities and Not-for-profits Commission Act 2012. However, the Society does not have a charitable purpose and thus cannot be an ACNC type of entity. Accordingly the special condition in section 50-47 does not apply to the Society.

Section 50-70 special conditions

Subsection 50-70(1) prescribes that in order for an entity to be an exempt entity it must not be carried on for the purpose of the profit or gain of its members.

In practical terms this means that the constituent document of the entity must prohibit the distribution of money or assets to members both whilst the entity is operating or upon its winding up. However, this is subject to the exception where the member provides goods or services to the entity and the distribution represents appropriate payment for such goods or services.

The Constitution of the Society contains prohibitions against such distributions and thus the Society is a not-for-profit entity.

Further subsection 50-70(1) requires that the not-for-profit entity meet one of three conditions. The first of which is relevant and it requires that the entity has a physical presence in Australia and to that extent incurs its expenditure and pursues its objective principally in Australia.

The Society will operate solely in Australia, will maintain premises in Australia and does not propose to distribute any funds to foreign entities or in pursuit of any objectives in a foreign jurisdiction.

However, subsection 50-70(1) is subject to the condition that the entity satisfies the conditions in subsection 50-70(2).

Subsection 50-70(2) requires that the entity must comply with all the substantive requirements of its governing rules and apply its income and assets solely for the purpose for which it is established.

On one hand the Society has not yet held its first annual general meeting and consequently no office bearers have been appointed and no members have been formally admitted to the Society.

On the other hand the Society has begun to conduct activities. First, the Society has a library of X's works, Secondly, regular meetings of prospective members take place. Thirdly, reading groups have been held in conjunction with the meetings.

In view of the way in which the Society is currently functioning and given the brief period since its incorporation it is not possible to verify that the requirements of subsection 50-70(2) are being met. However, there is nothing to suggest that they will not be met.

In these circumstances it is accepted that the terms of subsection 50-70(1) are satisfied and that the requirements of subsection 50-70(2) will be satisfied.

Section 50 45 Item 9.1

The applicant cites and relies upon an ATO publication titled “Income tax guide for non-profit organisations” (the Guide) and upon an edited version of a private ruling in which excerpts from the Guide were quoted. The ruling given in that edited version was in respect of a photography club and the ruling applied to the income years ended 30 June 2011, 2012 and 2013. The Guide is no longer published by the ATO. However, much of the information which appeared in the Guide has been reproduced in other ATO documents.

The current ATO view of the relevant law regarding exempt entities is contained in documents which appear on the ATO website at www.ato.gov.au. It is that current ATO view which has been considered in making this ruling.

Turning to the law in question in this case, the general exemption provided by section 50-1 is evident from the language of that provision. It is considered that it is not necessary to examine that provision in detail as the critical determinants of the exempt status of an entity are found in item 9.1 in section 50-45.

Item 9.1 relates to a society, association or club established for the encouragement of any subject listed in paragraphs (a) to (e) of that item.

The term “society, association or club” is not defined in the ITAA 1997. Accordingly it is necessary to look elsewhere for a definition.

The term was considered in Douglas and Others v FC of T (1997) 77 FCR 112; (1997) 36 ATR 532; (1997) 97 ATC 4722 by Olney J who said (at 97 ATC 4726):

Unassisted by authority I would construe the collation “society, association or club” to refer to a voluntary organisation having members associated together for a common or shared purpose. Such a description is consistent with various dictionary definitions of the several words used. The following examples can be found in the Concise Oxford Dictionary:

Society: Association of persons united by a common aim or interest or principle;

Association: Organised body of persons for a joint purpose;

Club: Association of persons united for some common interest, usually meeting periodically for shared activity

In accordance with the above and given that the Society is an incorporated association it is accepted that the Society comes within the composite term “society, association or club” in item 9.1 of the table in section 50-45.

The compound term “for the encouragement of” is not defined in the legislation and thus dictionary definitions of the components of that compound term will be used.

The Macquarie Dictionary defines “encouragement” to mean:

1 the act of encouraging

2 the state of being encouraged

3 that which encourages

In turn The Macquarie Dictionary defines “encourage” to mean:

1 to inspire with courage, spirit or confidence

2 to stimulate by assistance, approval etc.

In the ATO document titled “Cultural Organisations” on the ATO website there is a definition of “encouragement” which reads as follows:

Encouragement can include training, performing, displaying, providing information, studying, judging and critiquing. …

The same document also provides a definition of “Literature” as follows:

Literature includes a wide range of written or printed works. It includes works in different languages, on particular subjects or by particular authors.

These definitions in the “Cultural Organisations” document also appeared in the Guide.

However, other definitions of “literature” from dictionaries have been considered.

The Macquarie Dictionary which is available online defines “literature” to mean:

1 writings in which expression and form, in connection with ideas of permanent and universal interest are characteristic or essential features, as poetry, romance, history, biography, essays etc.; belles-lettres.

2 the entire body of writings of a specific language, period, people, subject etc.

3 the writings dealing with a particular subject.

4 the profession of a writer or author.

5 literary work or production

6 Colloquial printed matter of any kind, as circulars or advertising matter.

7 Rare polite learning or literary culture.

In the present case the definitions provided in The Macquarie Dictionary will be used. However, it is considered that the term “literature” in the legislation is not intended to include all the definitions provided in The Macquarie Dictionary.

Clearly the colloquial meaning for printed matter of any kind, for example, is not relevant to the issue here as “literature” of that nature is considered not to be within the intent of the legislation.

Yet ultimately it is considered not to be necessary to determine whether the writings of X fall within any particular dictionary definition of “literature”.

It is accepted that the Society will encourage its members to study the books and other writings by and about X. As part of this activity the commentary upon and analysis of X's written work which has been made by other writers will be reviewed in order to interpret and understand the body of work produced by X.

Further, it is accepted that an entity established for the encouragement of any subject listed in item 9.1 may engage in other incidental activities without putting at risk or jeopardising its status as an entity established for the particular purpose which qualifies it as an exempt entity. However, it is considered that this is not the case with respect to the Society and its activities.

The inclusion of the encouragement of other activities, being the exploration of X's cross-genre works, in the manner and to the degree carried out by the Society to date is considered to be beyond the mere incidental. Consequently, the pursuit of these activities removes the Society from being an entity established for the encouragement of literature.

In these circumstances, the way in which the Society presently operates leads to the conclusion that the Society is not established for the encouragement of literature or any other exempt purpose within item 9.1 of the table in section 50.45.

Accordingly, the Society is not an exempt entity in terms of item 9.1 of the table in section 50-45.

Therefore the total ordinary income and statutory income of the Society is not exempt from income tax in terms of section 50-1