Edited version of your written advice

Authorisation Number: 1051462295764

Date of advice: 10 December 2018

Ruling

Subject: Exempt entities - Sport, culture and recreation

Question 1

Is the Entity a rebatable employer pursuant to item 11 of the table in subsection 65J(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

No

Question 2

In the event that the Entity is a rebatable employer, is its FBT assessment for the FBT year ended 31 March 2018 overstated because a rebate of tax was not claimed pursuant to section 65J of the FBTAA?

Answer

This question is not applicable given the Entity is not a rebatable employer, as confirmed in response to Question 1.

This ruling applies for the following periods:

Year ended 31 March 2018

Year ending 31 March 2019

Year ending 31 March 2020

Year ending 31 March 2021

Year ending 31 March 2022

Relevant facts and circumstances

1. The Entity is a statutory corporation established pursuant to a State Act.

2. The Entity consists of at least five but not more than seven members, each appointed by the Governor in Council on the recommendation of the Minister. Of those members, one is appointed by the Governor in Council on the recommendation of the Minister to be the chairperson, and another may be appointed by the Minister to be deputy chairperson.

3. The State Act authorises the Governor in Council to determine and terminate the appointment of any member of the Entity.

4. The State Act authorises:

● the Entity, with the approval of the Minister, to appoint, and revoke the appointment of, a Chief Executive Officer; and

● the Entity to appoint (as required), and revoke the appointment of, other officers.

5. Pursuant to the State Act, the Chief Executive Officer shall:

● have control of the day to day administration of the affairs of the Entity and administer those affairs in accordance with the policies of, and directions given by, the Entity; and

● exercise such other powers and perform such other duties as are conferred and imposed on the Chief Executive Officer by or under the State Act or by the Entity.

6. Pursuant to the State Act, the other officers of the Entity shall exercise such powers and perform such duties as are conferred and imposed on them by the Entity or the Chief Executive Officer.

7. The function of the Entity is set out in the State Act.

8. The State Act authorises the Entity to make rules for or with respect to its function.

9. The Entity may, pursuant to the Sate Act, enforce the rules made by it pursuant to the State Act.

10. For the purposes of carrying out its powers and functions under the State Act, the Entity is authorised with the prior approval in writing of the Minister and the Treasurer to borrow moneys on such terms and conditions as the Treasurer approves.

11. Pursuant to the State Act, the Entity is required to establish a fund (‘the fund’). All moneys received by the Entity other than money required to be paid into a specified development fund established in accordance with the State Act, shall be paid into the fund.

12. The fund is required by the State Act to be applied by the Entity to meet any expenses incurred by the Entity in performing any functions under the State Act, or any other Act (including payments to members and officers of the Entity) and as the Entity thinks fit, for the benefit and development of X.

13. The State Act provides that any surplus of the fund may be applied at the discretion of the Entity for the benefit of X clubs.

14. A large majority of the Entity’s revenue is not funded by the government.

15. The Entity’s expenditure is concentrated highly around giving back and supporting the X industry.

16. Members of the X industry include A and B. They are provided funding that is required to financially support them for administration support services and other specific purposes.

17. The Entity takes a lead role in bringing the industry members together to deliver a number of initiatives to grow, support and deliver cost savings and efficiencies for the industry.

18. The Entity also takes the lead on behalf of the industry on a number of strategic issues and industry events to ensure the industry can be sustained long into the future and that participants in the industry are appropriately acknowledged.

19. The Entity is exempt from income tax pursuant to section 50-25 of the Income Tax Assessment Act 1997 (ITAA 1997) and/or section 24AM of the Income Tax Assessment Act 1936 (ITAA 1936).

20. Extensive information regarding the Entity, its activities and its members is available in the Entity’s 2018 Annual Report. Amongst other things, that report provides that:

● The Entity’s goals and key objectives are to create a vibrant and sustainable X industry

● the Minister issued a new Statement of Expectations outlining the Minister’s expectations for the Entity and the measures of the Entity’s success, as set by the Minister.

● The Entity’s Financial Reports are audited by the State Auditor-General's Office in their role as an auditor of public sector agencies.

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(5)

Income Tax Assessment Act 1997 section 50-25

Income Tax Assessment Act 1997 section 50-45

Income Tax Assessment Act 1997 section 50-70

Income Tax Assessment Act 1936 section 24AM

Income Tax Assessment Act 1936 section 24AQ

Income Tax Assessment Act 1936 paragraph 24AQ(c)

Income Tax Assessment Act 1936 section 24 AT

Income Tax Assessment Act 1936 section 24 AU

Reasons for decision

Question

Summary

The Entity is not a rebatable employer pursuant to item 11 of the table in subsection 65J(1) of the FBTAA as it is not an association, society or club.

Detailed reasoning

Pursuant to item 11 of the table in subsection 65J(1) of the FBTAA, an employer will be a rebatable employer for a year of tax if the employer:

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

● satisfies the special conditions (if any) set out in the following table:

With respect to item 11(b) of the table in subsection 65J(1) of the FBTAA, an employer is covered by item 9.1 of the table in section 50-45 of the ITAA 1997 if:

● it is a society, association or club established for the encouragement of animal racing, art, a game or sport, literature or music; and

● It satisfies the special conditions in section 50-70 of the ITAA 1997.

Section 50-70 of the ITAA 1997 provides as follows:

50-70(1)

An entity covered by item 1.7, 2.1, 9.1 or 9.2 is not exempt from 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

…

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.

The special conditions in subsection 65J(5) of the FBTAA, as they relate to item 11 of the table in subsection 65J(1) of the FBTAA, read as follows:

A society, association or club is not covered by table item 4, 5, 8, 9, 10, 11 or 12 in subsection (1) for a year of tax if it is:

(a) an incorporated company where all the stock or shares in the capital of the company is or are beneficially owned by:

(i) the Commonwealth, a State or a Territory; or

(ii) an authority or institution of the Commonwealth, a State or a Territory; or

(b) an incorporated company where the company is limited by guarantee and the interests and rights of the members in or in relation to the company are beneficially owned by:

(i) the Commonwealth, a State or a Territory; or

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

Therefore, whether the Entity is a rebatable employer pursuant to item 11 of the table in subsection 65J(1) of the FBTAA is to be determined on the basis of its satisfaction of the following requirements:

1. It is exempt from income tax by virtue of being a society, association or club established for the encouragement of animal racing, art, a game or sport, literature or music.

2. It meets the special conditions in section 50-70.

3. It meets the special conditions in subsection 65J(5) of the FBTAA.

1. Is the Entity exempt from income tax by virtue of being a society, association or club established for the encouragement of animal racing, art, a game or sport, literature or music?

The income of a State/Territory Body (an STB), other than an excluded STB pursuant to section 24AT of the ITAA 1936, is exempt from income tax pursuant to section 24AM of the ITAA 1936. A body is an STB pursuant to section 24AQ of the ITAA 1936 where:

(a) it is established by State or Territory legislation;

(b) it is not a company limited by shares; and

(c) the legislation gives the power to appoint or dismiss its governing person or body only to one or more government entities.

In relation to paragraph 24AQ(c) of the ITAA 1936, section 24AU of the ITAA 1936 provides that if the power to appoint, dismiss or direct the governing body is given to, or is held by a Governor of a State or a Minister of the Crown of a State, the power is taken to be given to, or held by, a government entity.

As:

● the Entity was established by the State Act, being State legislation;

● the Entity is not a company limited by shares;

● pursuant to the State Act, the power to appoint the members of the Entity is given to the Governor in Council, on the recommendation of the Minister; and

● the Entity does not satisfy the definition of an excluded STB under section 24AT of the ITAA 1936,

the Entity qualifies as an STB exempt from income tax pursuant to section 24AM of the ITAA 1936.

The income of a public authority constituted under an Australian law (i.e. a Commonwealth law, a State law, or a Territory law) is exempt from income tax pursuant to item 5.2 of the table in section 50-25 of the ITAA 1997.

The term 'public authority' is not defined in the ITAA (or the FBTAA). Broadly, a public authority is recognised as a body carrying on some undertaking of a public nature for the benefit of the community or of some section or geographical division of the community, and should have some governmental authority to do so. A body which is an authority of a State or of the Commonwealth must be an agency or instrument of government set up to exercise control or execute a function in the public interest; and exist to achieve a government purpose.

The Entity is a public authority. As a public authority constituted under a State law, it may also be exempt from income tax pursuant to item 5.2 of the table in section 50-25 of the ITAA 1997.

Whilst the Entity is exempt from income tax pursuant to both/either section 50-25 of the ITAA 1997 and/or section 24AQ of the ITAA 1936, neither of these provisions are set out in the table in subsection 65J(1) of the FBTAA, hence the relevance in establishing whether the Entity, for the purposes of item 11 of the table in subsection 65J(1) of the FBTAA, is otherwise exempt from income tax by virtue of being a society, association or club established for the encouragement of animal racing, art, a game or sport, literature or music.

Is the Entity an association?

The term 'association' is not defined in the FBTAA (or the ITAA). Guidance on this term can be found in the Federal Court judgement in Douglas and Others v. FCT (1977) 77 FCR 112; 97 ATC 4722; 36 ATR 532. In that case, Olney J made reference to the definition contained in the Concise Oxford Dictionary for this term as follows:

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:

…

Association: Organised body of persons for a joint purpose;

…

'Olsson J, in Quinton v. South Australian Psychological Board (1985) 38 SASR 523, similarly stated that the term association has come to be regarded as attaching to a body of persons associated for a common purpose.

The Shorter Oxford English Dictionary defines the term association to be 'a body of persons associated for a common purpose; the organisation formed to effect their purpose'. The Macquarie Dictionary defines it as 'an organisation of people with a common purpose and having a formal structure'.

However, for the purposes of section 65J of the FBTAA, a body cannot be an association where it is formed by government, is controlled by government and performs functions on behalf of government. Paragraphs 3 and 4 of Taxation Determination TD 95/56 provide:

3. A body which is formed by government, is controlled by government and performs functions on behalf of government is clearly not formed to effect the purposes of the members of that body but is formed to effect the purposes of government. Combined with the fact that the members do not create the body (or have the power to dissolve it) and that the members do not have ultimate control over the functions of the body, such a body cannot be said to be an association.

4. Bodies which are formed by government, are controlled by government and perform functions on behalf of government would include:

● most bodies formed by the Federal, State or Territory Governments;

● most statutory authorities (including those set up to market, regulate or promote agricultural or other products);

● local government councils.

The Entity is not a body created by its members, nor do its members have the power to dissolve it. It is a body established by an Act of State Parliament, pursuant to the provisions of the State Act, and is therefore a body formed by government.

Ultimate control over the functions of the Entity does not rest with its members or any Chief Executive Officer or other officers appointed to perform duties imposed on them by or under the State Act or by the Entity. Whilst the Chief Executive Officer of the Entity controls the day to day administration of the affairs of the Entity, the Entity takes direction from the State Government and, despite it not being significantly funded by that government, is considered to be controlled by, and perform functions on behalf of, that government.

The ultimate control of the Entity by the government, and the fact that it exists to effect the purposes of government, is evident from the following, non-exhaustive list of factors:

● Members of the Entity are appointed by the Governor in Council on the recommendation of the Minister.

● The office of a member of the Entity can be terminated by the Governor in Council.

● The Entity appoints a Chief Executive Officer with the approval of the Minister.

● The Chief Executive Officer’s entitlement to be paid travelling and other allowances (if any) is determined by the Entity with the approval of the Minister.

● The entity’s function is conferred on it by or under the State Act.

● The Entity is authorised, with the approval of the Minister and the Treasurer, to borrow money on such terms and conditions as the Treasurer approves, for the purposes of carrying out the Entity’s powers and functions under the State Act.

● The State Government, represented by the Minister, sets expectations and performance benchmarks for the Entity.

● The Entity’s Strategic Plan advises that the Entity has made a strong commitment to achieving the government’s goal and delivering the government’s mission.

● The Entity’s Financial Reports are audited by the State Auditor-General's Office.

Given the above, the Entity is not considered to have been formed as a result of a group of people coming together to establish an association with a formal structure. Rather, it is a public authority established by an Act of Parliament to carry on functions on behalf of government.

As such, and in accordance with TD 95/56, the Entity is (in addition to not being a society or club) not considered to be an association for the purposes of item 11 of the table in subsection 5J(1) of the FBTAA, and therefore is not a rebatable employer to which section 65J of the FBTAA applies.

This outcome is considered to be consistent with the policy intent behind the introduction of section 65J of the FBTAA. The Supplementary Explanatory Memorandum to Taxation Laws Amendment (Fringe Benefits Tax Measures) Bill 1992 which amended the FBTAA to insert section 65J provided:

When this Bill was introduced into Parliament on 16 September 1992, the Treasurer announced that special arrangements would be provided for non-government organisations that are non-tax paying bodies which are currently subject to fringe benefits tax. These amendments will provide those special arrangements.

…

Also, the Bill will ensure that the meaning of a society, association or club does not include for the purposes of section 65J, an incorporated company which is beneficially owned by the Commonwealth, a State or a Territory or an authority or institution of the Commonwealth, a State or a Territory.

From this extract it can be seen that there was a clear intention to restrict the rebate to certain income tax exempt employers. It was never intended that every employer that is exempt from income tax would be a rebatable employer. In particular, the intention was to exclude government organisations from being a rebatable employer.

Section 6.4 of Fringe benefits tax: a guide for employers (NAT 1054-12.2000) published by the ATO reinforces this point in stating:

Organisations that qualify for the FBT rebate are referred to as 'rebatable employers'. Rebatable employers are certain non-government, non-profit organisations.

Note: as the Entity does not satisfy this particular requirement, the other requirements of subsection 65J(1) have not been addressed.