Edited version of your written advice

Authorisation Number: 1051418945082

Date of advice: 21 August 2018

Ruling

Subject: Income tax exemption - ordinary and statutory income - not-for-profit organisation established for community service purpose

Question

Is the total ordinary and statutory income of the Institute exempt from income tax, in accordance with section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) because it is a society or association established for community service purposes pursuant to Item 2.1 of the Table in section 50-10 of the ITAA 1997?

Answer

Yes

This ruling applies for the following periods:

Substituted Accounting Period ending 30 September 2013

Substituted Accounting Period ending 30 September 2014

Substituted Accounting Period ending 30 September 2015

Substituted Accounting Period ending 30 September 2016

Substituted Accounting Period ending 30 September 2017

The scheme commences on:

1 October 2012

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The entity is a public company limited by guarantee.

The entity is a resident of Australia for income tax purposes

The entity is applying for income tax exemption on the basis of being a non-profit association established for community service purposes.

The Constitution document of the entity has the appropriate non-profit and winding up clauses

Expenses of the entity are mainly incurred in respect of education, events, research, public policy, and support services, most of which were carried out in Australia.

The entity’s members are Australian trained and most practice in Australia with some moving abroad to practice in other countries utilising their Australian qualifications.

The entity principally incurs its expenditure and pursues its objectives in Australia for the benefit of its Australia-based and Australia-trained members.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 30-15

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

Summary

The entity is considered to be a non-profit association established for community service purposes and their ordinary and statutory income is exempt from tax for the period year ending 30 September 2013 to 2017.

Detailed reasoning

Income Tax Exemption

Section 50-1 exempts the ordinary income and statutory income of a non-profit society or association established for community service purposes (except political or lobbying purposes) as described at Item 2.1 of the Table in section 50-10. The Table also specifies a special condition requirement at section 50-70.

The special condition in subsection 50-70(1) specifies the requirement that the entity is ‘not carried on for the purpose of profit or gain of its individual members’ and that it:

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 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.

Society or Association

One of the requirements of subsection 50-70(1) is that the entity be a society or association.

The terms “society” or “association” are not defined in the ITAA 1997.

The Macquarie dictionary (online version of 26 June 2018 on https://www.macquariedictionary.com.au) defines association as:

an organisation of people with a common purpose and having a formal structure ……

(Macquarie Dictionary Publishers, 2017)

The meaning of “association” was considered by Olney J in Douglas & Ors v FCT 97 ATC 4722 in relation to former paragraph 23(g)(v) of the Income Tax Assessment Act 1936 (ITAA 1936) and the following was found:

As the section contains no definition of either ‘society, association or club’ or “community services purposes’ it should be construed according to the ordinary meaning of the words used and, if necessary, after resort to the relevant explanatory memorandum and second reading speech.

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.

The entity is registered with the Australian Securities and Investments Commission (ASIC) as an Australian Public Company limited by guarantee. The Constitution of the entity states that the number of members are unlimited and work towards a common goal as expressed in their Constitution.

In applying the definition, the entity is considered to be an ‘association’ or ‘society’ for the purpose of section 50-70.

Be established for dominant purpose of community service

Section 50-10 allows income tax exemption for community service organisations.

A community service organisation is a not-for-profit society, association or club established for community service purposes except political or lobbying purposes.

The main purpose of the organisation must be community services. Any other purpose of the organisation must be incidental, ancillary or secondary to the community service purpose.

Paragraph 4 of 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? states:

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'.

Community service purposes are altruistic meaning that they are established and operated for the wellbeing and benefit of others.

Community service organisations promote, provide or carry out activities, facilities or projects for the benefit of welfare of the community or other members who have a particular need by reason of youth, age, infirmity or disablement, poverty or social or economic circumstances

The required ‘community service purpose’ must be the entity’s main or predominant purpose ’(Royal Australian College of Surgeons v. FCT [1943] ALR 377; [1943] HCA 34; (1943) 68 CLR 436; (1943) 7 ATD 289, Cronulla Sutherland Leagues Club Limited v. FCT [1990] FCA 90; (1990) 23 FCR 82; 90 ATC 4215; (1990) 21 ATR 300). 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 entity.

TD 93/190 discusses the exemption from income tax provided by the former subparagraph 23(g)(v) of the Income Tax Assessment Act 1936 (ITAA 1936), which is the same as in Item 2.1 of the Table in section 50-10, that –

(t)he 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.

A question that needs to be answered in this regard is whether it is a section of the community or a closed and restricted class of persons that receives benefits from the industry entity. This is a question of degree (Dingle v. Turner [1972] AC 601; per Lord Cross of Chelsea at 624).

In order for the ordinary and statutory income to be exempt from income tax under Division 50, the entity must satisfy the two special conditions under subsection 50-70(2). These special conditions include the governing rules condition and the income and assets condition.

Taxation Ruling 2015/1 Income tax: special conditions for various entities whose ordinary and statutory income is exempt, provides an explanation of the special conditions for entities that fall in the category of exempt entity in column 2 of the tables in Division 50 of the ITAA 1997.

There are two special conditions that an entity must satisfy:

● the entity must comply with all the substantive requirements in its governing rules (governing rules condition), and

● the entity must apply its income and assets solely for the purpose for which the entity is established (income and assets condition).

The Governing Rules

Paragraph 9 of TR 2015/1 provides that the governing rules of an entity are those rules that authorise the policy and affairs of the entity. That is, governing rules that direct:

● what the entity is required and permitted to do, and

● what those, who control the entity, are required and permitted to do in respect of the entity.

The “substantive” requirements in an entity’s governing rules are those rules that define the rights and duties of the entity: Paragraph 18 of TR 2015/1

Paragraph 19 of TR 2015/1 provides that the substantive requirements in an entity’s governing rules include rules such as those that:

● give effect to the object or purpose of the entity

● relate to the non-profit status of the entity

● set out powers and duties of directors and officers of the entity

● require financial statements to be prepared and retained

● set out criteria for admission as a member of an entity

● require an entity to maintain a register of members, and

● relate to the winding-up of the entity.

The source of the governing rules may form various sources. The governing rules may be contained in the entities’ constitutions, memoranda and articles of association, association rules, co-operative rules, trust deeds.

For the purpose of paragraph 50-70(2)(a), the entity’s current Constitution provides the appropriate governing rules for non-profit and winding up clauses. Therefore, it is accepted that the entity is not carried on for the purposes of profit or gain to its individual members.

Income and Assets condition

Paragraph 50-70(2)(b) further requires an entity to “apply its income and assets solely for the purpose for which the entity is established”.

There are two questions that must be considered to determine whether an entity satisfies the income and assets condition:

● what is the ‘purpose for which the entity is established’, and

● has the entity applied its income and assets solely for the purpose for which the entity is established?

The determination of the ‘purpose for which the entity is established’ requires the consideration of the entity’s circumstances during the income year in which the income and assets condition is applied. The phrase ‘purpose for which the entity is established’ refers to:

● the main purpose of the entity;

● any purposes incidental or ancillary to the main purpose of the entity; and

● other unrelated purposes that are secondary to the main purposes of the entity.

The final step in applying the income and assets condition is to determine whether the entity has ‘applied’ its income and assets ‘solely’ to the purpose for which the entity is established.

In the context of the income and assets condition, ‘apply’ means that an entity must make use of all its income and assets solely for its purpose or purposes. Consequently, income received by an entity must be put to use within a reasonable period of receipt.

An entity can accumulate income provided the accumulation is consistent with the purpose or purposes for which the entity is established. An entity may use some of its income to acquire assets which, in future, will produce income for its purpose and may accumulate some of its income for later distribution.

An entity must apply its income and assets exclusively or only for the purpose for which the entity is established. None of the income and assets of the entity is to be applied for purposes that are not in accordance with or incidental or ancillary to, the purpose of which the entity is established. An entity will not comply with the income and assets condition if it applies any of its income or assets for a private purpose.

Is the organisation entitled to income tax exemption?

In applying the definitions of the required conditions for income tax exemption, the information provided indicates that the Institute is established as a company limited by guarantee and satisfies the institutional requirement and in addition it is operated in a non-profit manner.

The objects in the entity’s Constitution cover a diverse range of aims.

Based on the objects as listed in the Constitution and the major aims undertaken by the entity, their purpose is beneficial to the community, satisfies the governing rule condition of subsection 50-70(2).

According to the Profit & Loss Summary provided with the ruling application, the income of the entity for the period mainly consisted of income derived from its membership and education activities. The expenses of the entity, for the same period, were mainly incurred in respect of education, events, research, public policy and support services, most of which were carried out in Australia.

Based on the profit and loss summary provided with the ruling application, the income and assets condition is satisfied.

Accordingly, the entity satisfies the special conditions set out in in section 50- 70, and thus, meets the requirement of an exempt entity at Item 2.1 of the Table in section 50-10. It is considered to be a non-profit association established for community service purposes and their ordinary and statutory income is exempt from tax.