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Date of advice: 19 October 2017

Ruling

Subject: Income tax exemption

Question 1

Does the corporation remain an income tax exempt entity pursuant to section 50-1 of the ITAA 1997 in light of the activities?

Issue 1

Before entering into the activities, is the corporation still an income tax exempt entity pursuant to section 50-1 of the ITAA 1997?

Summary

The corporation is still an income tax exempt entity pursuant to section 50-1 of the ITAA 1997 before entering into the activities.

Detailed Reasoning

Section 50-1 of the ITAA 1997 provides that the total ordinary income and statutory income of certain entities is exempt from income tax. Item 2.1 of the table in section 50-10 of the ITAA 1997 provides that a society or association established for community service purposes (except political or lobbying purposes), is an exempt entity.

‘Society or association’

In the previous private ruling, it was determined that the corporation was an ‘association’ on the basis that it was registered as a company limited by guarantee and was an organised body of members instituted for the objects as per its constitution.

On the same basis, the corporation is still an ‘association’ for the purposes of section 50-10 of the ITAA 1997.

Is the purpose for which the corporation was established a ‘community service purpose’?

In the previous private ruling, it was determined that the corporation was established for a ‘community service purpose’ on the basis that the corporation’s principal purpose was to facilitate the reintroduction of services by making it commercially viable for another corporation to operate in the region. This was an application of the decision in FC of T v Wentworth District Capital Ltd 2011 ATC 20-253; 2010 ATC 20-202 (Wentworth) where it was held that the facilitation of the provision of banking services in Wentworth by making it commercially viable for a bank to return to Wentworth was a ‘community service purpose’.

However, as the decision in Wentworth also makes clear, the purposes of the entity must be examined each income year to determine if it is ‘established for community service purposes’. Because there are no other entities offering the services in the region, and the corporation continues to operate as a franchise of the other corporation, the corporation’s purpose for the purposes of item 2.1 in section 50-10 of the ITAA 1997 remains the same, and is a ‘community service purpose’.

‘Political or lobbying purposes’

Item 2.1 in section 50-10 of the ITAA 1997 provides an exception for community service purposes, excluding political or lobbying purposes.

The Explanatory Memorandum to Taxation Laws Amendment Bill (No. 2) 1990 explains ‘political or lobbying purposes’:

Political or lobbying purposes include standing candidates for election, campaigning for changes to the law or to government policy, and the like. Community service organisation 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.

From the information provided, the corporation does not appear to conduct any of the activities above. The corporation has not been established for political or lobbying purposes.

Special condition – section 50-70

Section 50-70 provides special conditions for entities covered by item 2.1 in section 50-10 of the ITAA 1997:

● The entity is not carried on for the purpose of profit or gain of its individual members; and

● The entity has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia; or

● The entity is a society, association or club that meets the description and requirements in item 1 of the table in section 30-15; or

● The entity 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

Because the corporation’s Constitution contains the necessary non-profit and dissolution clauses, we accept that the corporation is not carried on for the purpose of profit or gain of its individual members. The corporation’s activities outlined in its annual report also support this conclusion. The first special condition is met. The corporation is an entity that has its physical presence in Australia, pursues its objectives in Australia, and incurs its expenditure in Australia.

The corporation will meet the special conditions in section 50-70 of the ITAA 1997.

Special condition – section 50-47

Section 50-47 of the ITAA 1997 provides a special condition that if an entity that is covered by one of the items in subdivision 50-A is an ‘ACNC type of entity’, they will not be exempt from income tax unless they are registered under the Australia Charities and Not-for-profits Commission Act 2012.

‘ACNC type of entity’ is defined in subsection 995-1(1) of the ITAA 1997 as 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. Column 1 of the table in subsection 25-5(5) of the Australian Charities and Not-for-profits Commission Act 2012 describes a charity. The Charities Act 2013 provides a definition of ‘charity’ that applies to all Commonwealth laws.

The definition of ‘charity’ in section 5 of the Charities Act 2013 provides that ‘charity’ means an entity:

a) That is a not-for-profit entity; and

b) All of the purposes of which are:

i. Charitable purposes that are for the public benefit; or

ii. Purposes that are incidental or ancillary to, and in furtherance or in aid of, purposes of the entity covered by subparagraph (i); and

c) None of the purposes of which are disqualifying purposes; and

d) That is not an individual, a political party or a government entity

It has been concluded that the corporation is a not-for-profit entity. Charitable purposes are listed in section 12 of the Charities Act 2013. It has also been concluded that the corporation’s purpose is to facilitate the reintroduction of services by making it commercially viable for the other corporation to operate in the region. This will not qualify as one of the charitable purposes listed and the corporation will not be an ‘ACNC type of entity’.

Accordingly, section 50-47 of the ITAA 1997 will not apply.

Issue 2

Does entering into the activities change the corporation’s income tax exempt status?

Summary

The corporation remains an income tax exempt entity pursuant to section 50-1 of the ITAA 1997 in light of the activities outlined in the facts.

Detailed Reasoning

In order for the activities to change the conclusion that the corporation is an income tax exempt entity pursuant to section 50-1 of the ITAA 1997, the activities need to have either altered the corporation’s purpose for which it was established or the outcomes of any of the special conditions.

Purpose

It was concluded that the purpose for which the corporation was established was to facilitate the reintroduction of services by making it commercially viable for the other corporation to operate in the region. This was a community service purpose and was the corporation’s main or predominant purpose, as required by Cronulla Sutherland Leagues Club Limited v. FC of T 90 ATC 4215 (Cronulla).

However, this does not preclude an entity from having other purposes. In Cronulla at 4225, Lockhart J stated that an entity may have purposes incidental, ancillary, or secondary to the main purpose without disqualifying the entity from income tax exemption. However, his Honour also stated that if the entity has two co-ordinate objects, the exemption cannot apply if one of the objects is outside the exemption.

Entering into the activities is merely incidental and ancillary to the corporation’s main purpose. It is an isolated activity for which they require approval from the other corporation to enter into. There is no evidence to suggest that they enter into such activities regularly so as to detract from their main purpose of facilitating services by making it commercially viable for the other corporation to operate in the region.

Furthermore, we also accept that the activities fall within ‘community service purpose’. ‘Community service purpose’ is not defined in the ITAA 1997. The Explanatory Memorandum for the Taxation Laws Amendment Bill (No.2) 1990 explained the meaning of ‘for community service purposes’ in the context of subparagraph 23(g)(v) of the Income Tax Assessment Act 1936 (ITAA 1936), which is the predecessor of section 50-10 of the ITAA 1997:

The words are not limited to those purposes beneficial to the community which are also charitable. They extend to a range of altruistic purposes. The words would extend to promoting, providing or carrying out activities, facilities or projects for the benefit or welfare 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 or economic circumstances.

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? Also provides guidance on the scope of the exemption. Paragraphs 3 and 4 state:

3. 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 organisation 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’.

It is clear that altruism is an essential element of ‘community service purpose’. In agreeing to take on the activities without recompense, the corporation is assisting a not-for-profit entity further its purpose. In acting in this role in an altruistic manner, the corporation is promoting and facilitating the provision of activities within the meaning of ‘community service purpose’.

In conclusion, entering into the activities is merely incidental to the corporation’s main purpose. Even if the activities were the corporation’s main or coordinate purpose, the corporation would still fall within item 2.1 of the table in section 50-10 of the ITAA 1997 as entering into the activities had a community service purpose.

Special Conditions – section 50-70 and 50-47

Entering into the activities will not change the outcome of any of the special conditions. The corporation remains a not-for-profit entity with a physical presence in Australia, incurs its expenses and pursues its objectives in Australia, and is not an ‘ACNC type of entity’.

Conclusion

The corporation is exempt from income tax under section 50-1 of the ITAA 1997 as an entity that falls within item 2.1 of the table in section 50-10 of the ITAA 1997. The corporation remains an income tax exempt entity in light of the activities.