Edited version of your written advice

Authorisation Number: 1051420592991

Date of advice: 24 August 2018

Ruling

Subject: Not For Profit – Exemption from Income Tax

Question 1

Is Entity X exempt from income tax pursuant to section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) on the basis that it is an exempt entity under Item 2.1 of the Table in section 50-10 of the ITAA 1997?

Answer

No.

Question 2

Is the ordinary and statutory income of Entity X that is derived from activities and participation of members assessable under section 6-5 of the ITAA 1997?

Answer

No.

Question 3

Is the ordinary and statutory income of Entity X that is derived from activities and participation of non-members assessable under section 6-5 of the ITAA 1997?

Answer

Yes.

Question 4

Are receipts derived by Entity X from mutual dealings with its members non-assessable non-exempt income pursuant to section 59-35 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods:

Income year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Entity X is governed by the rules in its constitution.

Entity X is a not-for-profit entity.

A rule in the Constitution of Entity X specifies their object of promoting growth and sustainability of the specific industry seeking enhanced organisational performance.

A rule in the constitution deals with not-for-profit and states:

1. the property and income of the Entity must be applied solely towards the promotion of the objects or purposes of the Entity and no part of that property or income may be paid or otherwise distributed, directly or indirectly, to any member, except in good faith in the promotion of those objects or purposes.

2. a payment may be made to the member out of the funds of the Entity only if it is authorised under a subrule.

3. A payment to a member out of the funds of the Entity is authorised if it is –

a. the payment in good faith to the member as reasonable remuneration for any services provided to the Entity, or of goods supplied to the Entity, in the ordinary course of business; or

b. the reimbursement of reasonable expenses properly incurred by the member on behalf of the Entity.

Source of funds as listed under one of the rules of the constitution:

The funds of the Entity may be derived from entrance fees, annual subscriptions, donations, fund-raising activities, grants, interest and any other sources approved by the Board.

One of the rules of the constitution deals with the distribution of surplus property on cancellation of incorporation or winding up. It states:

In this rule –

surplus property in relation to the Entity, means property remaining after satisfaction of:

● the debts and liabilities of the Association; and

● the costs, charges and expenses of winding up or cancelling the incorporation of the Association,

On the cancellation of the incorporation or the winding up of the Entity, its surplus property must be distributed as determined by special resolution by reference to the persons mentioned in section 24(1) of the Act (Association Incorporation Act 2015).

Entity X has a physical presence in Australia, incurring its expenditure and pursuing its objectives solely in Australia. Entity X is not carried out for the profit or gain of individual members.

The Entity’s Meeting minutes of 2016, among other items lists the following:

Vision: Entity X is known for being Australia’s member service body by promoting growth and sustainability of the specific industry seeking enhanced organisational performance.

Values: Underpins the vision in promoting growth and sustainability of the specific industry seeking enhanced organisational performance.

Entity X host events to improve the industry.

The events have fees for attendance to cover the expenses incurred for public liability, venue hire and catering.

Some events are only for the members and are not open to the general public as it requires pre-requisite knowledge.

Different fees are charged by Entity X from the attendees depending on their membership status, i.e.:

● a student member;

● a member; or

● a non-member;

Compared to members of Entity X the general members of the community do not have the same access to website resources as an incentive to become a member.

Membership of Entity X has eligibility criteria i.e. they should have industry related or qualification related to the industry.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-15

Income Tax Assessment Act 1997 Subdivision 50A

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 section 59-35

Reasons for decision

Unless otherwise stated, all legislative references are to the Income Tax Assessment Act 1997.

Summary

Entity X does not meet the requirement of Item 2.1 of the Table in section 50-10 and therefore does not qualify for exemption from income tax as a community service organisation.

However, membership subscriptions are non-assessable non-exempt income pursuant to section 59-35 and, as provided by subsection 6-15(3), will not form part of the assessable income of Entity X. Similarly, other amounts derived by Entity X from its members that are mutual receipts will be non-assessable non-exempt income pursuant to section 59-35.

Further, any income that is received from outsiders who are not members are not contributing to a common fund, these amounts, provided they exhibit the characteristics of income are considered ordinary income and taxable under section 6-5.

Detailed reasoning

Non-profit organisation and exemption from income tax

Section 50-1 states that the total ordinary and statutory income of the entities covered by the tables in Subdivision 50-A is exempt income.

Subdivision 50-A includes section 50-10. Item 2.1 of the Table in section 50-10 describes a “society, association or club established for community service purposes (except political or lobbying purposes)”.

Item 2.1 of the Table in section 50-10 in conjunction with section 50-1, provides that the total ordinary income and statutory income of a society, association or club established for community service purposes (except political or lobbying purposes) is exempt from income tax, subject to the special condition detailed in section 50-70.

To be an entity described in item 2.1 the entity must:

● be a society, association or club;

● be established for community service purposes; and

● satisfy the special condition in section 50-70;

If the association fails to satisfy these requirements, it will not be exempt from income tax under section 50-1.

Society or Association

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

The meaning of “association” was considered by Olney J in Douglas & Ors v FCT 97 ATC 4722 in relation to section 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.

Entity X was incorporated as an association. Currently there are a total of several members.

Entity X is therefore considered to be an ‘association’ or ‘society’ for the purpose of section 50-10.

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 or 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.

Organisations that seek to advance the common interests of their members are not altruistic and cannot be community service organisations.

Entity X’s objectives are listed in its’ Constitution. Objectives include but are not limited:

● to promote the growth and sustainability of the its’ profession;

● to enhance the credibility of the discipline and promote public awareness;

● to advocate and represent the particular profession in Australia on matters that may affect the profession;

● to promote continuous professional development of present and future practitioners of the particular profession in Australia;

● to affiliate with associations or groups with mutual interests or aims;

Paragraph 5 of the TD 93/190 states,

It is not accepted that common association as such is altruistic. Neither the purposes of members, nor the purposes of their organisation, are altruistic merely because the members form a non-profit organisation to advance their common interests. Members who seek to advance their common interests are not therefore motivated by an unselfish regard for others, and neither is their organisation. It follows that an organisation established for the purposes of its members is not therefore established for community service purposes. Only when the purposes of the organisation are altruistic can they be community service purposes.

To qualify for the income tax exemption as a community service organisation the main purpose of the organisation must be community service. Entity X has multiple objectives and they all reflect an advancement of common interests or its members who share their interest in a specific industry or a field related to the industry. It cannot be said community service as its main purpose.

Special Conditions

An association will be exempt under section 50-1 from income tax if it satisfies Items 2.1 provided that the association has at all times complied with all the substantive requirements in its governing rules and applied its income and assets solely for the purpose for which it was established. Accordingly, the special condition in section 50-10 will be satisfied if the non-profit requirement is satisfied.

The non-profit requirement is explained in Taxation Ruling 97/22 Income tax: exempt sporting clubs (TR 97/22). In accordance with this explanation an organisation will be accepted as being a non-profit where it is prevented by is constituent or its governing documents from distributing profit and assets for the benefit of its members, both while it is operating and when it winds up; its actions must be consistent with this prohibition.

Entity X has a physical presence in Australia, incurring its expenditure and pursuing its objectives solely in Australia. Entity X is required by one of the rules in their Constitution to apply its assets and income solely for the purposes it was established and is prohibited by the same from distributing any portion of its assets or income to its members during the course of its operations, except as genuine compensation for services rendered, or expenses incurred, on behalf of Entity X. A rule of the Constitution limits the distribution of any amounts remaining after the satisfaction of all debts and liabilities to another organisation carried on predominantly having similar objects as Entity X which is also not carried on for the profit or gain of its members; and which has rules prohibiting the distribution of its assets and income to its members.

Accordingly, Entity X satisfies the non-profit requirements.

Although a not for profit organisation, Entity X does not qualify for income tax exemption as a community service organisation under section 50-10. Its dominant purpose aligns with its objectives to promote growth and sustainability of the specific industry seeking enhanced organisational performance. Therefore Entity X is not entitled to the exemption provided in section 50-1.

Ordinary Income

Section 6-5 provides that the assessable income of a taxpayer includes income according to ordinary concepts (ordinary income).

The legislation does not define ‘income according to ordinary concepts’. However, there exists a considerable body of case law which identifies factors indicating the nature of ordinary income.

Case law on the topic has identified various factors which may be relevant in determining whether an amount is income according to ordinary concepts. These include: whether the amount has the characteristics of periodicity, recurrence or regularity;

● whether it is convertible into money or money's worth;

● whether it is associated with business activities or services rendered, as distinct from the mere sale of property; and

● whether it is solicited, as distinct from a windfall.

Presence of these factors will assist in a conclusion that the amount is more likely to be ordinary income. However, none of these factors are exhaustive or conclusive, and their relative importance varies significantly according to the circumstances and to the presence of any countervailing factors.

Principle of mutuality and assessability of income from members and non-members

The principle of mutuality is based on the proposition that an organisation cannot derive income from itself. The principle provides that where a number of persons contribute to a common fund created and controlled by them for a common purpose, any surplus arising from the use of that fund for the common purpose is not income.

Mutuality is limited in its application. It does not include 'any contributions to the fund derived from sources other than the contributors' payments, such as interest from the investment of part of the fund, or income from a business activity conducted by the members.

Thus with clubs, societies and associations in circumstances where it can be established that the mutuality principle applies, mutual receipts from associated entities sharing a common purpose, contributing to a common fund have been found not to constitute ordinary income. Whereas receipts from outsiders who are not members are not contributing to a common fund, these amounts, provided they exhibit the characteristics of income are considered ordinary income and taxable under section 6-5.

Mutual receipts – non-assessable and non-exempt income

Section 59-35 provides a statutory extension to the common law principle of mutuality, making it non-assessable non-exempt income, in circumstances where:

● the amount would be a mutual receipt, but for the entities constituent document preventing the entity from making any distribution, whether in money, property or otherwise to its members; and

● apart from this section the amount would be assessable income only because of section 6-5.

Because such amounts are specifically made not assessable and not exempt, they fall into the category of non-assessable non-exempt income in section 6-23. Receipts of such amounts have no tax consequences.

Section 59-35 only applies to ordinary income included in assessable income by section 6-5; amounts of statutory income included as assessable income by other tax law provisions are not affected by section 59-35 and as such do not become non-assessable non-exempt income.

Determining if a receipt is non-assessable non-exempt income under section 59-35 requires consideration of whether that receipt would be a mutual receipt if the organisation receiving the amount was not prohibited by its constituent documents from distributing to its members. If a receipt would not be a mutual receipt even if the organisation could distribute surplus funds to its members, the receipt does not fall within section 59-35.

Application of the Mutuality principle to Entity X

Entity X is a non-profit organisation carried on for the benefit of its members coming together to promote growth and sustainability of the specific industry seeking enhanced organisational performance. All objectives of Entity X aim to achieve a common benefit in which all members participate. Entity X derives amounts from its members that are membership subscriptions and fees to attend the events arranged by them. Entity X also derives fees from non-members who may attend the events arranged by Entity X.

Entity X receives its income from both members and non-members.

General principle of mutuality would not apply to income received from non-members and will be assessable as an ordinary income under section 6-5.

The membership subscriptions received by Entity X from its members would be mutual receipts. Entity X’s Constitution prevents them from making any distribution to its members. The membership subscriptions would be assessable income of Entity X only because of section 6-5. The membership subscriptions and any mutual receipts are considered non-assessable non-exempt income pursuant to section 59-35 and, as provided by subsection 6-15(3), therefore will not form a part of the assessable income of Entity X. Similarly, other amounts derived by Entity X from its members that are mutual receipts will be non-assessable non-exempt income pursuant to section 59-35.