Edited version of private advice

Authorisation Number: 1051605617199

Date of advice: 06 November 2019

Ruling

Subject: Exempt income

Questions and answers

Issue 1:

Is Entity A exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997(Cth) (ITAA 1997) as an entity described in item 2.1 of section 50-10 of the ITAA 1997?

Answer:

Yes

Issue 2:

Is Entity A a rebatable employer under subsection 65J(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer:

Yes

This ruling applies for the following periods:

Year ended 30 June 2015

Year ended 30 June 2016

Year ended 30 June 2017

Year ended 30 June 2018

Year ended 30 June 2019

Year ended 30 June 2020

Year ended 30 June 2021

Year ended 30 June 2022

Year ended 30 June 2023

Year ended 30 June 2024

The scheme commences on:

1 July 2014

Relevant facts and circumstances

Entity A is an incorporated company limited by guarantee with its head office in Australia.

Its Constitution (provided) includes non-profit and winding up clauses.

It has a number of members.

The objects of the Entity are broadly to promote community safety.

Its activities are directed to this purpose.

Relevant legislative provisions

Income Tax Assessment Act 1997 (ITAA 1997) Section 50-1

Income Tax Assessment Act 1997 (ITAA 1997) Section 50-10 item 2.1

Income Tax Assessment Act 1997 (ITAA 1997) Section 50-47

Income Tax Assessment Act 1997 (ITAA 1997) Section 50-70

Charities Act 2013 Section 5

Fringe Benefits Tax Assessment Act 1986 (FBTAA) Subsection 65J(1)

Reasons for decision

Summary

Entity A is a 'community services organisation' described in item 2.1 because it is a society, association or club established for community service purposes, and it satisfies the special condition. Entity A is exempt from income tax pursuant to section 50-1 of the ITAA 1997.

Detailed reasoning

Item 2.1 of the table in section 50-10 of the Income Tax Assessment Act 1997 (ITAA 1997) in conjunction with section 50-1 of the ITAA 1997, 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 of the ITAA 1997.

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 of the ITAA 1997.

Each of these requirements is examined below in relation to Entity A.

Society, association or club

The term society, club or association is not defined in the ITAA 1997. The term should therefore be construed according to the ordinary meaning of the words.

This approach was taken in Douglas v. Federal Commissioner of Taxation 36 ATR 532; (1997) 77 FCR 112; 97 ATC 4722. Reference was made by the court to the definitions contained in the Concise Oxford Dictionary for each of these terms. Society, association or club was accepted by the court as referring to a voluntary organisation having members associated together for a common or shared purpose.

Entity A has been formed to promote community safety. The members of Entity A have a common interest, and therefore Entity A is a society, club or association.

Established for community service purposes

Item 2.1 requires the society, club or association to be established for community service purposes. The required community service purposes must be the entity's main or predominant purposes (Royal Australasian College of Surgeons v FCT (1943) 68 CLR 436; Cronulla Sutherland Leagues Club Limited v FCT 90 ATC 4215).

Item 2.1 is the equivalent of subparagraph 23(g) (v) of the Income Tax Assessment Act 1936 (ITAA 1936). Guidelines on the scope of the exemption provided by subparagraph 23(g)(v) are provided by 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 states that the purpose of enacting the provision was to create a category of exemption for community bodies whose activities are not accepted as being charitable because they do not fall within one of the four heads of charitable purpose.

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'.

It is also relevant to refer to the Explanatory Memorandum for the Taxation Laws Amendment Bill (No 2) 1990 which introduced subparagraph 23(g) (v) of the ITAA 1936. The Explanatory Memorandum states that the words '"for community service purposes" are to be given a wide interpretation':

They extend to a range of altruistic purposes' including 'promoting, providing or carrying out activities, facilities or projects for the benefit or welfare of the community, or of any members of the community who have particular need of those activities, facilities or projects by reason of their youth, age, infirmity or disablement, poverty or social or economic circumstances. An exclusion from the exemption will apply to bodies established for political or lobbying purposes.

The Explanatory Memorandum and TD 93/190 indicate that to determine whether an association is established for community service purposes it is necessary to consider its constitution, its current operations and activities, and also the circumstances and needs of those who benefit from the operations. If it can be established that an entity is established mainly to provide benefits to the community, it will not be a disqualifying attribute if there is an incidental benefit derived by members.

Political or Lobbying Purposes

A clause in Entity A's current Constitution could be interpreted as engaging in lobbying through the initiation, support and influence over laws. Organisations that are established for these reasons are excluded from the exemption. These activities are broader than political party activities, and extend to activities directed to influence changes to the law or its administration.

Dominant and main purpose

Where an organisation has mixed purposes, the dominant purpose of the organisation must be for community purpose to satisfy the requirements of the exemption.

The objectives of Entity A are to promote community safety. Entity A is altruistic and community service purposes are the main or predominant purpose. Therefore, Entity A is 'established for community service purposes'.

Charitable purpose

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 that:

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.

Broadly, an entity capable of being a registered charity is an ACNC type of entity. Therefore, if the organisation is capable of being a registered charity it will not be exempt from income tax unless it is registered as such under the Australian Charities and Not-for profits Commission Act 2012 (ACNC Act).

Taxation Ruling TR 2011/4 Income tax and fringe benefits tax: charities (TR 2011/4) sets out the Commissioner's views on the meaning of 'charitable' in the terms 'charitable institution' and 'fund established for public charitable purposes' by reference to principles established by court decisions. Paragraph 26 provides that an institution is charitable if it's main or predominant or dominant' purpose is charitable in the technical legal meaning and it was established and is maintained for that charitable purpose. Any other purpose can only be incidental or ancillary to the charitable purposes.

The definition of 'charity' in section 5 of the Charities Act 2013 provides that 'charity' means an entity:

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

b)    All of the purposes of which are:

                      i.        Charitable purposes that are for the public benefit; or

                     ii.        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; and

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

Whilst Entity A's activities are altruistic and for the benefit of the community, it is considered that due to the level of government involvement, Entity A would not meet the definition of a 'charity' under the Charities Act 2013.

Therefore, Entity A is not an 'ACNC type of entity' and section 50-47 is not applicable.

Special Condition

Section 50-70 of the ITAA 1997 states that an entity covered by item 2.1 is not exempt unless it is not carried on for the purposes of profit or gain of its individual members, and:

·   it has a physical presence in Australia and, to that extent it pursues its objectives and incurs its expenditure principally in Australia; or

·   it is a deductible gift recipient; or

·   it is prescribed by law in the income tax regulations and it is located outside Australia and is exempt from income tax in its country of residence.

·   complies with all the substantive requirements in its governing rules and applies its income and assets solely for the purposes for which it is established.

The constitution of Entity A contains clauses to prevent distributions to members both whilst it is operating and upon its winding up. Therefore, Entity A is not established for the profit or gain of its members. Entity A is incorporated in Australia and must pursue its objectives principally in Australia. Entity A will principally incur all of its expenditure in Australia. Information provided supports the conclusion that Entity A complies with its governing rules and applies it income and assets solely for the purposes for which it is established. Entity A satisfies the special condition in section 50-70 of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1997 (ITAA 1997) Section 50-1

Income Tax Assessment Act 1997 (ITAA 1997) Section 50-10 item 2.1

Income Tax Assessment Act 1997 (ITAA 1997) Section 50-47

Income Tax Assessment Act 1997 (ITAA 1997) Section 50-70

Charities Act 2013 Section 5

Issue 2

Summary

Entity A is a rebatable employer under subsection 65J(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA).

Detailed reasoning

An employer will be a rebatable employer for FBT purposes where it meets the requirements under s 65J of the FBTAA 1986. Relevantly, Item 5 of s 65J(1) includes in the scope of rebatable employers:

... a society, association or club

(a) established for community service purposes (except political or lobbying purposes); and

(b) covered by item 2.1 of the table in section 50-10 of the Income Tax Assessment Act 1997.

This requirement mirrors the requirements under s 50-10 of the ITAA 1997 as discussed above. On the basis that Entity A is entitled to income tax exemption as a community services organisation under section 50-10 of the ITAA 1997, Entity A also qualifies as a rebatable employer under section 65J of the FBTAA 1986

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 (FBTAA) Subsection 65J(1)