Edited version of private advice

Authorisation Number: 1051582101909

Date of advice: 3 October 2019

Ruling

Subject: Income tax exemption - private health insurance fund

Question

Will the total ordinary income and statutory income of the Entity continue to be exempt from income tax pursuant to section 50-1 and item 6.3 of the table in section 50-30 of the of the Income Tax Assessment Act 1997 (ITAA 1997)following the adoption of the Entity's amended constitution?

Answer

Yes.

This ruling applies for the following periods:

For income years ended 30 June 20xx to 20zz

Relevant facts and circumstances

The Entity is a registered health insurer that provides private health insurance to its members. The Entity is proposing to amend its existing constitution. The membership of the Entity includes those persons who are insured with the Entity under a complying health insurance policy.

Relevant legislative provisions

Australian Charities and Not-for-profits Commission Act 2012 subsection 25-5(5)

Charities Act 2013 section 5

Charities Act 2013 section 12

Income Tax Assessment Act 1936 subparagraph 23)(g)(i)

Income Tax Assessment Act 1997 section 50-1

Income Tax Assessment Act 1997 item 6.3 of section 50-30

Income Tax Assessment Act 1997 section 50-47

Private Health Insurer (Prudential Supervision Act) 2015 section 12

Private Health Insurer (Prudential Supervision Act) 2015 subsection 12(1)

Reasons for decision

Section 50-1 of the ITAA 1997 exempts from income tax the total ordinary and statutory income of an entity covered by section 50-30 of the ITAA 1997.

Item 6.3 of the table in section 50-30 of the ITAA 1997 provides that an entity that is a private health insurer within the meaning of the Private Health Insurer (Prudential Supervision Act) 2015 (PHIPS Act) is an exempt entity. Item 6.3 also contains a special condition that the entity is not carried on for the profit or gain of its individual members.

Additionally, an entity which qualifies as an ACNC type of entity (i.e essentially a charity) is not entitled to exemption unless registered with the Australian Charities and Not-for-Profit Commission - see section 50-47 of the ITAA 1997.

Therefore, to be exempt from income tax the Entity must satisfy all of the following requirements:

·        be a private health insurer under the PHIPS Act;

·        cannot be carried on for the gain or benefit of its individual members; and

·        not be an ACNC type of entity.

Each of these requirements is considered below:

Private Health Insurer

Under section 4 of the PHIPS Act, a 'private health insurer' is defined to mean a body that is registered under Division 3 of Part 2 of the PHIPS Act. Section 12 of the PHIPS Act outlines the process of applying for registration as a private health insurer. A body that is a company within the meaning of the Corporations Act 2001 and a constitutional corporation may apply to the Australian Prudential Regulation Authority (APRA) for registration as a private health insurer (see subsection 12(1) of the PHIPS Act).

After the amendments to the constitution are adopted the Entity will still be registered as a private health insurer with APRA. Consequently, as the Entity continues to be a registered private health insurer, it will meet the requirement in item 6.3 that it is a 'private health insurer' within the meaning of that term under the PHIPS Act.

Not-for-Profit Requirement

The phrase 'not carried on for the profit or gain of its individual members' is not defined in the income tax provisions. The meaning of this phrase was considered in court cases and in Taxation Ruling TR 93/39 Income tax: friendly society education funds (TR 93/39).

In TR 93/39, the Commissioner discusses this phrase in the context of the income tax exemption provision that applies to friendly societies, former subparagraph 23(g)(i) of the Income Tax Assessment Act 1936 (see paragraphs 18 to 25 of TR 93/39). At paragraphs 18 to 19 of TR 93/39, it is explained that the words 'profit or gain' are fairly wide and include any benefit, direct, or indirect, pecuniary or non-pecuniary, capital or revenue that any person may obtain (see paragraph 18 of TR93/39).

However, not all profit or gain is profit or gain to individual members. In Cappid Pty Ltd v. F C of T 71 ATC 4121; 2 ATR 319, the High Court distinguished bodies carried on for the benefit of their members generally from those carried on for the profit or gain of their individual members. In that case, Barwick CJ at p 4,124 stated that:

Section 23(g) exempts from tax the income of certain bodies which are not carried on for the purposes of profit or gain to their individual members. The concept in this provision is of bodies, either corporate or unincorporate which are carried on for the benefit of their members but not for the profit or gain of their members severally or individually. .... The exemption which sec. 23(g) offers is not co-extensive with all bodies which are not carried on for the benefit of their members severally or individually. Instances of corporate bodies which direct their profits or gains to the benefit of their members as a whole but not to their members individually readily come to mind.''

In Commissioner of Taxation v Co-operative Bulk Handling [2010] FCAFC 155; 81 ATR 312 the Full Federal Court considered whether benefits received by members of an entity as a consequence of the entity pursuing its exempting purpose would affect the entities entitlement to income tax exemption under section 50-40. Section 50-40 provides that to be exempt, an entity 'must not be carried on for the profit or gain of its individual members. On this point, Mansfield and McKerracher JJ commented at paragraphs 94 and 95:

...if as a consequence of pursuing the purpose, the members derive a benefit or gain..., that gain or benefit will not preclude exemption unless it is a gain produced only by reason of individual membership...In all cases of exemption, it must be the position that it is not open to the body to disburse any profits or dividends to members...

In the present circumstances, the Entity provides private health insurance products to its members. Members who hold a complying health insurance policy may receive benefits upon making a claim on a policy in accordance with the rules of the health benefit fund. The making of payment or benefits to members in their capacity as a policy holder is a function of the Entity's business providing private health insurance to its members. These payments are made to members in their capacity as policy holders (in consideration for premiums paid) and not because of their individual membership of the Entity. Consequently, in paying out benefits to members the Entity cannot be said to be carried on for the profit or gain of its individual members.

This view is supported by TR 93/39, which discussed the difference between personal gain to members of a friendly society individually and profit or gain to members. At paragraph 23, it was stated that personal benefits to members will not have the character of gain or profit to the members individually where the benefits are provided on the basis of criteria other than mere equity participation through contributions.

In determining whether an entity is carried on for the profit or gain of individual members, regard must also be had as to whether the entity's constitution contains a prohibition on the distribution of the entity's income and assets to its members. In Theosophical Foundation Pty Ltd v Commr of Land Tax (NSW) [1966] 67 SR (NSW), Sugerman JA held that, in order to satisfy the requirement that the relevant body is 'not carried on for pecuniary profit', its constitution had to provide barriers to individual profit.

In Repromed Pty Ltd v Lucas and Anor (2000) 76 SASR 575, the court concluded that an employer could not satisfy the requirement that it provide health services 'other than for the purpose of profit or gain' if its constituent documents did not provide that profits could not find their way into pockets of individuals.

The ATO accept an entity as non-profit where its constituent or governing documents prevent it from distributing profits or assets for the benefit of particular people - both operating and on winding up - (see ATO website document 'What type of NFP is your organisation?' [QC 52485]).

The Entity's constitution prevents the distribution of income or property to its members while the Entity is operating or upon winding up.

The Entity is not carried on for the profit or gain to its individual members. Consequently, the Entity meets the special condition in item 6.3 of section 50-30.

ACNC type of entity

Section 50-47 of the ITAA 1997 provides a special condition for all entities covered by section 50-1 of the ITAA 1997, it states:

An entity that:

(a) is covered by any item; and

(b) is an ACNC type of entity;

is not exempt from income tax unless the entity is registered under the Australian Charities and Not-for profits Commission Act 2012.

An ACNC type of entity is defined in subsection 995-1(1) of the ITAA 1997 as an entity that meets the description of a type of entity in column 1 of the table in subsection 25-5(5) of the Australian Charities and Not-for-profits Commission Act 2012 (ACNC Act). Column 1 of the table in subsection 25-5(5) of the ACNC Act describes a charity.

The Charities Act 2013 (Charities Act)provides a definition of 'charity' that applies to all Commonwealth laws (see Preamble to the Charities Act).

The term 'charity' is defined in section 5 of the Charities Act to meanan entity:

a)           that is a not-for-profit entity; and

b)           all of the purposes of which are:

1. charitable purposes that are for the public benefit; or
2. purposes that are incidental or ancillary to, and in furtherance or in aid of, purposes of the entity covered by subparagraph (i); and

c)       none of the purposes of which are disqualifying purposes (see Division 3); and

d)       that is not an individual, a political party or a government entity.

The term 'charitable purpose' is defined in section 12 of the Charities Act. It includes purposes such as advancing health, advancing social or public welfare or any other purpose beneficial to the general public that is reasonably analogous to, or within the spirit of, any of the purposes mentioned in section 12.

A charity's purpose will be for 'public benefit' if achieving it would be of benefit to the public generally, or a sufficient section of the public (see section 6 of the Charities Act). This is with the exception of certain purposes for example advancing education or relieving sickness where in the absence of evidence to the contrary is presumed to be for the public benefit - see section 7 of the Charities Act.

In the present circumstances, the Entity's main purpose is to conduct a business of providing private health insurance for the benefit of its members. This purpose does not qualify as one of the charitable purposes listed in section 5. The entity will not be an 'ACNC type of entity'.

Accordingly, section 50-47 of the ITAA 1997 will not apply.

As the Entity meets all of the requirements in item 6.3 of section 50-30 and is not an ACNC type of entity, its ordinary and statutory income will be exempt from income tax under section 50-1 of the ITAA 1997, after it adopts its amended constitution.