Edited version of your written advice

Authorisation Number: 1051396045761

Date of advice: 30 July 2018

Ruling

Subject: Fringe Benefits Tax: rebatable employer

Question

Will the Association be considered to be a rebatable employer in accordance with subsection 65J(1) of the Fringe benefits Tax Assessment Act 1986 (FBTAA), and therefore entitled to a rebate of the amount of Fringe Benefits Tax (FBT) payable pursuant to subsection 65J(2A) of the FBTAA?

Answer

Yes

This ruling applies for the following periods:

1 July 2017 to 30 June 2018

1 July 2018 to 30 June 2019

The scheme commences on:

1 July 2017

Relevant facts and circumstances

The Association is a non-profit and non-political organization.

The Association is an incorporated association.

Constitution

The Constitution of the Association contains a list of its objectives.

The Association’s Constitution also contains substantive requirements that define the rights and duties of the Association.

Non-profit

The Constitution contains non-profit clauses.

The Association is not registered as an income tax exempt charity with the Australian Charities and Not-for-profits Commission (ACNC).

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 section 65J

Fringe Benefits Tax Assessment Act 1986 subsection 65J(1)

Fringe Benefits Tax Assessment Act 1986 subsection 65J(2A)

Fringe Benefits Tax Assessment Act 1986 subsection 65J(3)

Fringe Benefits Tax Assessment Act 1986 subsection 65J(5)

Income Tax Assessment Act 1997 section 50-1

Income Tax Assessment Act 1997 section 50-10

Income Tax Assessment Act 1997 section 50-70

Income Tax Assessment Act 1997 subsection 50-70(1)

Income Tax Assessment Act 1997 subsection 50-70(2)

Income Tax Assessment Act 1936 former subparagraph 23(g)(v)

Associations Incorporation Act 1984

Reasons for decision

Summary

The Association is a rebatable employer under section 65J of the FBTAA on the basis that it is a non-profit association established for community service purposes as per item 5 of the table in subsection 65J(1) and is therefore entitled to a rebate of fringe benefits tax under subsection 65J(2A).

Detailed reasoning

In determining whether the Association may claim a rebate pursuant to subsection 65J(2A) of the FBTAA, we must first determine if the Association is an eligible rebatable employer pursuant to subsection 65(J)(1), which states in part:

An employer is a rebatable employer for a year of tax if the employer:

(a) is exempt from income tax at any time during the year of tax under any of the provisions set out in the table; and

(b) satisfies the special conditions (if any) set out in the table.

The type of employer referred to under Item 5 of the rebatable employer table is exempt from income tax as:

a society, association or club:

(a) established for community service purposes (except political or lobbying purposes); and

(b) covered by item 2.1 of the table in section 50-10 of the Income Tax Assessment Act 1997

Further, a rebatable employer under item 5, must also satisfies the special condition set out in subsection 65J(5) of the FBTAA. Essentially, it excludes any society or association from being a rebatable employer where it is an incorporated company that is beneficially owned by:

(a) the Commonwealth, State or Territory; or

(b) an authority or institution of the Commonwealth, State or Territory.

Therefore, to qualify as a rebatable employer under subsection 65J(1) of the FBTAA, an entity must:

● be a non-profit society or association;

● be established for community service purposes (except political or lobbying purposes); and

● Must not be a company that is owned, controlled or established by the Commonwealth, State or Territory.

An entity covered by item 2.1 of the table in section 50-10 of the Income Tax Assessment Act 1997 (ITAA 1997) is a society, association or club established for community service purposes (except political or lobbying purposes) that satisfies the special conditions of section 50-70.

Non-profit

The Association is considered to be non-profit as its Constitution contains appropriate non-profit and dissolution clauses. The Association qualifies as an exempt entity for income tax purposes as it is established for the purpose of community service. The Constitution contains clauses relating to the source and management of funds. These clauses suggest the Association was established not for individual profit or gain as all funds will be used in the pursuance of the objects of the association and prohibit the distributions of profit or gain to its members in the life of the operations and in the event of winding up.

A society, association or club

The terms society, association or club are not defined in the ITAA 1997. The terms 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; 36 ATR 532; 97 ATC 4722. The definitions for each of these terms was accepted as referring to a voluntary organisation having members associated together for a common or shared purpose.

As an organisation incorporated under the Associations Incorporation Act 1987, the Association is considered to be an association.

Established

The meaning of the term established in the context of section 50-10 of the ITAA 1997 was determined in the case of Wentworth District Capital Ltd v FC of T [2010] FCA 862; (2010) 2010 ATC 20-202; (2010) 80 ATR 50 (Wentworth). Perram J found that the issue of whether the body in question was established was to be addressed in each income year by looking at its activities in that year while at the same time it was relevant to look at the objects or purposes for which the body was incorporated. An entity might be established for the requisite purpose in one year, but not another.

Therefore, the determination whether the Association is established for community service purposes must be determined on a year by year basis, considering its activities during the year as well as its objects in its governing documents.

Community service purposes

The phrase ‘community service purposes’ is not defined in the tax law. It is given its ordinary meaning.

Paragraphs 2 to 4 of Taxation Determination TD 93/190¹, state the following in relation to former subparagraph 23(g)(v) of the Income Tax Assessment Act 1936, which is the same as item 2.1 of the table in section 50-10 of the ITAA 1997:

…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.

… 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.

…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’.

In Navy Health Ltd v Federal Commissioner of Taxation (2007) 163 FCR 1; [2007] FCA 931; (2007) 2007 ATC 4568, Jessup J said that:

‘I consider that the essence of 'community service' is that a service is provided to the community, or a section of the community. Here the word “service" is used in the sense of 'help, benefit or advantage', particularly 'the action of serving, helping or benefiting, conduct tending to the welfare or advantage or another'.

In this regard, His Honour went onto say that the benefit provided must not be vague. Specifically, His Honour said that community service:

‘...deals with 'service' in a much more concrete setting, and requires, in my view, the community, or a section of the community, to benefit by way of the receipt of some identifiable help, benefit or advantage...’

The principles to be used in the characterisation of community service purposes were outlined by Perram J in Wentworth and the decision made was upheld by the full federal court on appeal in FC of T v Wentworth District Capital Ltd (2011) 191 FCR 151; [2011] FCAFC 42; (2011) 2011 ATC 20-253. These principles are:

1. the kind of community service referred to in section 50-10 of the ITAA 1997 is a practical or tangible help, benefit or advantage conferred on the community or an identifiable section thereof;

2. a service provided for reward is not a community service, at least when there is no element of subsidisation;

3. community service purposes is to be interpreted broadly and are not only restricted to the act of provision of such services but also include activities such as the facilitation and promotion of such services;

4. The entity claiming the exemption must be established for those purposes and requires an analysis of what the entity is doing in the relevant year of income, both as a matter of its constitutive documents and also by reference to its actual activities, and

5. the main or dominant purpose of the entity must be connected to the delivery of a community service.

In seeking to achieve its object the Association is involved in a number of activities that confer a practical or tangible benefit to the community.

As a result, the Association undertakes and collaborates in activities which provide a service to the community. These activities are consistent with the Association’s purpose.

The Association is therefore considered to be established for community service purposes.

Political or lobbying purposes

The Association’s purposes are not considered to be political or lobbying purposes.

Special conditions in section 50-70 of the ITAA 1997

Subsection 50-70(1) of the ITAA 1997 provides that an entity covered by item 2.1 of the table in section 50-10 is not exempt from tax unless it is a society, association or club that is not carried on for the purpose of profit or gain of its individual members and:

(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).

Under subsection 50-70(2) of the ITAA 1997 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.

The governing rules of an entity are those rules that authorise the policy, actions and affairs of an entity. The governing rules condition is applied on a continuous basis throughout an income year.

The Association’s current activities are consistent with the substantive requirements of its Constitution in the pursuit of its objects.

The requirement that the Association must apply its income and assets means that the Association must make use of all of its income and assets solely for the purpose for which it is established.

The Association’s income may still be applied for the purpose for which it is established if some of its income is accumulated provided the accumulation is consistent with the rules for which it is established.

The Constitution states that the Association is carried on without purpose of gain for its members and any income, profits or other accretions to the Association to be used in promoting the purposes of the Association.

Consequently, the Association meets the special conditions specified in section 50-70 of the ITAA 1997.

Special condition in subsection 65J(5) of the FBTAA:

In order for the association to satisfy the requirements under subsection 65J(1), the special conditions in subsection 65J(5) must also be met.

Subsection 65J(5) of the FBTAA refines the meaning of society, association or club.

It provides that a society, association or club must not be an incorporated company where it is beneficially owned by:

i. the Commonwealth, a State or Territory, or

ii. an authority or institution of the Commonwealth, a State or a Territory.

Although Taxation Determination TD 95/56², refers to former subsection 65J(1) FBTAA, it provides at paragraph 1 that a body cannot be an ‘association’ where it is formed by government, is controlled by government, and performs functions on behalf of government.

A review of the Constitution with respect to membership, the committee and non-profit clauses, indicates that the Association has not been formed or controlled by government to carry out functions on behalf of government, and is therefore not a body formed by the federal, state or territory governments, for the purpose of subsection 65J(5) of the FBTAA.

The Association satisfies subsection 65J(5) of the FBTAA as it is not beneficially owned by the government.

Conclusion

The Association was established for community service purposes, is covered by item 2.1 of the table in section 50-10 of the ITAA 1997 and meets the special conditions in subsection 65J(5) of the FBTAA.

Accordingly, the Association satisfies all the necessary conditions to be considered a rebatable employer under subsection 65J(1) of the FBTAA and is therefore entitled to a rebate of fringe benefits tax under subsection 65J(2A) of the FBTAA.