Edited version of your written advice

Authorisation Number: 1051373752241

Date of advice: 15 May 2018

Ruling

Subject: Income tax exempt entity

Question

Is the entity a tax exempt entity pursuant to item 2.1 of section 50-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

20XX

Relevant facts and circumstances

The Entity was incorporated in Australia as a company limited by guarantee and provides services.

The Entity’s constitution has been provided and includes clauses restricting the way in which income and property can be applied and dealt with upon winding up.

Assumption

The entity will comply with the substantive requirements of its governing rules.

Relevant legislative provisions

Income Tax Assessment Act 1997, section 50-1

Income Tax Assessment Act 1997, section 50-10

Income Tax Assessment Act 1997, section 50-70

Reasons for decision

All references made in these reasons for decision are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated.

Summary

The total ordinary and statutory income of the entity is exempt from income tax as it is a tax exempt entity pursuant to item 2.1 of section 50-10.

Detailed reasoning

Section 50-1 states that:

The total ordinary income and statutory income of the entities covered by the following tables is exempt from income tax. In some cases, the exemption is subject to special conditions.

The table in section 50-10 provides the following:

As is relevant section 50-70 states the following:

(1) An entity covered by item ... 2.1 ... is not exempt from income 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).

(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.

Society, association or club

The term society, club or association is not defined in the ITAA 1997. The term should therefore be construed according to the ordinary meaning of the words.

This approach was taken in Douglas v. Federal Commissioner of Taxation (1997) 77 FCR 112; 97 ATC 4722; (1997) 36 ATR 532. Reference was made by the court to the definitions contained in the Concise Oxford Dictionary for each of these terms. Society, association or club was accepted by the court as referring to a voluntary organisation having members associated together for a common or shared purpose.

The members of the entity, in becoming members, have a common or shared purpose therefore it is society, club or association.

Established for community service purposes

The required community service purposes must be the entity's main or predominant purposes. It is a question of fact in each case as to whether any benefits derived by members are merely incidental to a main community service purpose of the industry ombudsman entity.

Item 2.1 of section 50-10 is the equivalent of subparagraph 23(g)(v) of the Income Tax Assessment Act 1936 (ITAA 1936). Guidelines on the scope of the exemption provided by subparagraph 23(g)(v) are provided by 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? (TD93/190).

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 because they do not fall within one of the four heads of charitable purpose.

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.

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 established 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.

We have concluded that community service purposes are the main or predominant purpose of the Entity.

Special Condition

The Entity has been established to provide services within Australia. It is incorporated in Australia and will incur its expenditure and pursue its objectives principally in Australia.

The constitution of the Entity contains clauses to prevent distributions to members both whilst it is operating and upon its winding up. Therefore, it is not established for the profit or gain of its members.

The Entity will comply with the substantive requirements of its governing rules.

The Entity satisfies the special condition in section 50-70.

Therefore as all of the relevant conditions are satisfied the Entity is a tax exempt entity pursuant to item 2.1 of section 50-10