Edited version of private advice

Authorisation Number: 1051579331464

Date of advice: 10 September 2019

Ruling

Subject: Income tax - exempt income

Question 1

Is the Trust a necessitous circumstances fund?

Answer

No

Question 2

Is the ordinary and statutory income of the Trust exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) pursuant to item 2.1 of the table in section 50-10 of the ITAA 1997?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20 XX

Year ended 30 June 20 XX

Year ended 30 June 20 XX

Year ended 30 June 20 XX

Year ended 30 June 20 XX

Year ended 30 June 20 XX

The scheme commences on:

20 XX

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 trustee of the Trust is required to distribute funds in accordance with the purposes and objects outlined in the Trust Deed, which has been provided.

The Trust has been doing so for a number of years. Details of this have been provided.

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

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

Question 1

Summary

The Trust is not a necessitous circumstances fund.

Detailed reasoning

There are certain requirements that must be satisfied for a necessitous circumstances fund to be endorsed.

The Commissioner's views on the meaning of the term necessitous circumstances are set out in Taxation Ruling TR 2000/9 Income tax: necessitous circumstances funds.

Paragraph 29 of TR 2000/9 lists some of the principles that have emerged from case law on the meaning of necessitous circumstances. These include:

• necessitous circumstance concern financial necessity
• it involves some degree of poverty, though it may be less than abject poverty or destitution
• it is relative to a modest standard of living'
• it is a relative term, which has no fixed quantitative measure and it may be relative to particular circumstances; and
• it is distinguished from the inability to afford merely desirable advantages

The Commissioner considers that necessitous circumstances refers to financial necessity and does not extend to more general needs.

The fund must exclusively, or at least chiefly, relieve persons who are in necessitous circumstances. If the fund also provides benefits to persons who are not in necessitous circumstances, it is not a necessitous circumstances fund.

The Trust has provided some funds described as hardship grants, as provided for in the Trust Deed however this is not the exclusive or chief purpose of the Trust. Therefore it is not a necessitous circumstances fund.

Question 2

Summary

The ordinary and statutory income of the Trust is not exempt from income tax under section 50-1 pursuant to item 2.1 of the table in section 50-10 as it is not a society, association or club and has not been established for community service purposes.

Detailed reasoning

Section 50-1 exempts from income tax the total ordinary and statutory income of an entity covered by section 50-10.

To be exempt from income tax under Item 2.1 of the table in section 50-10 an entity must:

• be a society, association or club established for community service purposes (except political or lobbying purposes); and
• meet the special conditions specified in section 50-70.

The terms 'society, association or club' in item 2.1 of section 50-10 are not defined in the income taxation legislation and therefore take on their ordinary meaning.

Paragraph 2 of Taxation Determination TD 95/56 Fringe benefits tax: can a body which is formed by government, is controlled by government and performs functions on behalf of government be an association for the purposes of section 65J of the Fringe Benefits Tax Assessment Act 1986?, considers the definition of association as follows:

'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 "association" as being "an organisation of people with a common purpose and having a formal structure'.

Macmillan Publishers Australia, The Macquarie Dictionary [online] www.macquariedictionary.com.au, viewed 6 September 2019, defines the term society and the term club as follows:

Society: an organisation of persons associated together for religious, benevolent, literary, scientific, political, patriotic, or other purposes.

Club: a group of persons organised for a social, literary, sporting, political, or other purpose, regulated by rules agreed by its members.

In Pro Campo Ltd v. Commissioner of Land Tax (NSW) 81 ATC 4270; (1981) 12 ATR 26, which concerned exemption from New South Wales land tax, Lee J said at 4278 to 4279 the following on the meaning of society, association and club:

The three words 'society, club or association' are words in frequent use in our community and societies, clubs and associations are well-known entities...

In Theosophical Foundation Pty Ltd v. Commr. of Land Tax (1966-1967) 67 SR 70 ... Sugerman JA stated at p.82

'A society, in the relevant sense, is 'a number of persons associated together by some common interest or purpose, united by a common vow, holding the same belief or opinion, following the same trade or profession, etc: an association.' (Oxford English Dictionary,...) A society as thus described, in which the common element pertains to areas concerned with religion, may aptly be described as a religious society.'

The meaning of "society" as the Oxford English Dictionary definition shows can be the equivalent of "association" and I do not think that any relevant distinction in nature exists between the two.

Although clubs can in some respects and in some instances be seen to be distinguishable by reason of their purposes from societies or associations, they nevertheless fall squarely within the dictionary definition of ''society'' set out above. In short the three words are describing bodies made up of groups of persons who have come together to implement common purposes and objects...

All these references indicate that a society, association or club is a number of persons who come together for common purposes. There is formality and structure.

Mere Trust

In contrast, a trust is defined in Underhill (Law of Trusts and Trustees, 12th ed., p 3) as follows as an:

'equitable obligation, binding a person (who is called a trustee) to deal with property over which he has control (which is called trust property), for the benefit of persons (who are called the beneficiaries or cestuis que trust ) of whom he may himself be one, and any of whom may enforce the obligation'.

In Harmer, R.W & Ors v. Federal Commissioner of Taxation [1989] FCA 651French J stated that a trust 'is notably a definition of a relationship by reference to obligations'.

The issue of whether trustees of a trust were a society association or club was considered in Douglas, Douglas Hector v Commissioner of Taxation of the Commonwealth of Australia [1997] FCA 724. In that case, a trust was established to manage a hall which was let to community groups and such other bodies approved of by the trustees. After referring to the ordinary definition of the words 'society, association or club', the court held that the trustees whose only functions were to hold property and administer it in accordance with the terms of the trust deed did not qualify as a society, association or club. It was not a voluntary organisation having members associated together for a common purpose.

In Commissioner of Land Tax (NSW) v Joyce [1974] HCA 39, the owners of land were four trustees who were to hold the land for charitable purposes, preferably as a meeting place for Christians. The trustees were themselves, members of the Christian sect known as the Brethren and the land and halls on it were used for religious purposes of the Brethren.

All members of the High Court held that the trustees were not an 'institution'. Stephen J, with whom Gibbs and Mason JJ agreed, said at 436:

'The trustees' only function is the management of the trust property consistently with the trust deed and with the wish it expresses that the trust property should primarily be devoted to providing a meeting place for Christians. The performance of this function cannot, in my view, confer upon these four trustees the quality of an 'institution', however widely that term may be construed.'

That function involved ordinary administrative operations only:

'They do meet from time to time, make decisions and keep minutes of their proceedings but these proceedings relate exclusively to the management of the trust property and not to the general affairs of the Brethren. They have no standing in relation to the religious practices of any congregation and control neither the general funds of the Brethren in New South Wales or in Sydney nor even those of the Ashfield congregation...'

The above court cases show that there is a clear distinction between the obligations and functions of mere trustees to that of being an association or an 'institution'. Where trustees are connected in their common undertaking solely by their trust obligation to administer property, they will not constitute an association.

In contrast, in Manor Foundation Ltd v Commissioner of Land Tax (NSW) (1983) 14 ATR 676 (Manor Case) the court accepted that trustees which were more than mere trustees could in certain circumstances be accepted as a society.

In the Manor Case, house and land (the Manor) were transferred to the Secretary of the Esoteric School of Theosophy, as trustee. Under the deed of settlement establishing the trust the trustee was to 'establish, carry on and conduct' a spiritual centre and community based on Theosophical ideals. Later, the trustee company was formed and ownership of the property was accordingly transferred to the trustee company. The property was used as a residence by Esoteric School of Theosophy which was a distinct entity of the Theosophical Society. The trustee company's membership was made up of members of the Esoteric School of Theosophy.

In finding that the trustee company was not mere trustee, but was a religious society itself, Yeldham J said that:

'In my view the plaintiff was and is at the present time a religious society (using that word in the charitable sense of being concerned with the advancement and promotion of theosophy) because it is not merely a trustee for the Community or its members but has active duties under the deed and in fact manages and conducts the centre and the educational community at the Manor. ...

The plaintiff is not merely a trustee for the Community or its members but has active duties to perform under the deed in connection with the conduct of the Centre and the educational Community. The plaintiff's membership is entirely composed of members of the Esoteric School, some of whom reside in the Community. ' [emphasis added]

Therefore, it is considered that trustees that are more than merely performing actions of trustees i.e. administering of property in terms of the trust, can be an association if actively involved in the operation of an entity and are bound not merely by their duty as trustees under the trust deed.

The purpose of the Trust as set in its objects is confined to providing and administering funds.

The trustees of the Trust may take all such steps and do all things they think fit in order to further the purposes of the Trust. Details of this have been provided.

As such, it is considered the trustees of the Trust do no more than merely administer the property of the Trust for the benefit of the beneficiaries. They are not required by the terms of the Trust Deed to do more than that.

Accordingly, the trustees of the Trust do not fall within the description of a 'society, association or club' for the purposes of section 50-10. Therefore, the Trust is not exempt from income tax under section 50-1.

Although it is not necessary to address any of the other requirements for the exemption, we have considered whether the Trust was established for community service purposes.

The term community service purposes is discussed in 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? (TD 93/190)

TD 93/190 states at paragraph 2 that in relation to former subparagraph 23(g)(v) of the Income Tax Assessment Act 1936 (ITAA 1936), which preceded item 2.1 of the table in section 50-10, that

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. [emphasis added]

TD 93/190 further states at paragraphs 3 to 5:

3. There are four heads of charitable purpose, one of which is other purposes beneficial to the community; but this is limited by the common law to those purposes which are also charitable within the meaning of the Statute, 43 Elizabeth, Ch. 4. The term 'community service purposes' has a broader meaning than other purposes beneficial to the community which are also charitable. 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.

4. 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'.

5. 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.

Paragraph 7 states:

The purposes for which an organisation is established are demonstrated by its current operations and activities, which may show different purposes to those suggested by a cursory reading of its constitution: cf Royal Australasian College of Surgeons v. Federal Commissioner of Taxation (1943) 68 CLR 436.

TD 93/190 stresses the need for a community service organisation to have purposes that are of an altruistic nature. Organisations that seek to advance the common interests of their members are not altruistic, and so cannot be community service organisations.

Where an organisation has mixed purposes, the approach in TD 93/190 is that it is the main or dominant purpose of the organisation that must be community service. The determination of the character of an organisation is made by examining its main or dominant purpose.

Taking into account the information provided including the Trust Deed and the use of its funds, the Trust is not considered to have the main purpose of community service.