Edited version of private advice

Authorisation Number: 1051730946598

Date of advice: 30 July 2020

Ruling

Subject: Tax exemption for a not-for-profit community organisation

Question

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

Answer

Yes

This ruling applies for the following periods:

01 July 20XX to 30 June 20XX

01 July 20XX to 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Entity was established in 20XX in a state or Territory of Australia and attracted individuals and community associations from within Australia and other countries.

The Entity was incorporated in the state or Territory of Australia under the Associations Incorporation Act 1981.

The Entity is not registered as a charity under the Australian Charities and Not-for-profits Commission Act 2012.

The Entity does not provide financial benefits to its members.

The Entity is not a political party and does not support a specific political party or lobby on behalf of a political party or political group.

The Entity's preliminary rules when they applied for incorporation (and registered by the Office of Fair Trading) listed 'to lobby at the national and international levels to promote the above' as one of the Entity's objects for which the association is established.

The Entity had not written their final rules at the time they lodged the application for incorporation.

The Entity subsequently wrote its final rules (Entity's Rules) and in doing so revised its preliminary rules to exclude the object that included the words 'to lobby'. These are now the rules and contain the objects of the Entity.

Including the objects, the Entity's Rules contain the Entity's substantive requirements.

The Entity plans to achieve its objectives through efforts directed at community education, and through organising stakeholder public conferences, seminars, workshops and face-to-face meetings; through their website and social media information; and submissions to relevant agencies and other bodies.

The Entity provided details of the activities it has carried out throughout the year ended 30 June 20XX and the activities it intends to carry out in the following income year to further promote and implement its strategies.

From 1 July 20XX to 30 June 20XX, The Entity incurred 80% of its expenditure in Australia and incurred 20% of its expenditure outside Australia and pursued its objects 80% in Australia and 20% outside Australia.

The Entity had a physical presence in Australia for the whole period from the date it was established to 30 June 20XX. The Entity is based in Australia and will remain in Australia and conduct its activities from Australia at all times during subsequent income years.

From 1 July 20XX to 30 June 20XX, the Entity applied its income solely for the purpose for which it is established. The Entity did not have any assets it could apply for the purpose for which it is established during that period.

At all times during subsequent income years, the Entity will apply its income and any assets solely for the purpose for which is established.

From the date it was established to 30 June 20XX the Entity complied with all substantive requirements in the Entity's Rules and will continue to comply with all substantive requirements in those governing rules, at all times, during subsequent income years.

Relevant legislative provisions

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 Subsection 50-70(1)

Income Tax Assessment Act 1997 Subsection 50-70(2)

Reasons for decision

Section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) exempts from income tax the total ordinary and statutory income of an entity covered by item 2.1 of the table in section 50-10 of the ITAA 1997.

An entity is covered by item 2.1 of the table in section 50-10 of the ITAA 1997 where:

1.    it is a society, association or club

2.    it is established for community service purposes (except for political or lobbying purposes); and

3.    it meets the special conditions of section 50-70 of the ITAA 1997.

Association

The term 'association' is not defined in the ITAA 1997 therefore should be interpreted according to its ordinary meaning.

The Shorter Oxford English Dictionary defines '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'.

The Entity is a not-for-profit organisation incorporated under the Associations Incorporation Act 1981 and was brought into existence by its members to pursue its formation objects as stated in its Rules. It is accepted that the Entity is an association.

Established

The meaning of the word 'established' in former subsection 23(g) of the Income Tax Assessment Act 1936 (ITAA 1936) was considered in Cronulla Sutherland Leagues Club Limited v. FC of T 90 ATC 4215, where it was held that it referred not only to the circumstances existing when the entity was initially formed but also to its subsequent activities and to the circumstances of the particular year under consideration.

This is noted in paragraph 24 of the Taxation Ruling 2015/1 Income tax: special conditions for various entities whose ordinary and statutory income is exempt (TR 2015/1) where it is stated that, the purpose for which an entity is established is determined by a consideration of all the features of the entity. The main factors to be considered are the objects in the entity's constituent documents and the activities of the entity after its formation.

Community service purposes

'Community service' is not defined in the ITAA 1997 or ITAA 1936. Paragraph 3 of Taxation Determination 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 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) of the ITAA 1936 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.

To determine exemption from income tax for organisations that are established within the community, paragraph 4 of TD 93/190 requires altruistic purposes to be an essential element of even the widest interpretation of 'community service purposes'.

Paragraph 7 of TD 93/190 points out that 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: Royal Australasian College of Surgeons v. Federal Commissioner of Taxation (1943) 68 CLR 436.

lobbying purposes

The exemption available for an association established for community service purposes specifically excludes one established for lobbying purposes.

In this case, the Entity's preliminary rules when they applied for incorporation listed 'to lobby at the national and international levels to promote the above' as one of the objects for which the association is established.

However, the Entity had not yet written their final rules at the time they applied for incorporation. When the Entity wrote their final rules (Entity's Rules) they had revised their preliminary rules. The Entity's Rules do not include the object regarding 'lobbying'. We accept that the Entity was not established for lobbying purposes.

The association's objects are stated in the Entity's Rules.

The activities the Entity has conducted since it was established and its intended activities correspond with the Entity's stated objects which are considered to be of an altruistic nature.

It is therefore accepted that the Entity is an association established for community service purposes.

Special conditions

An association established for community service purposes is not exempt from tax unless it satisfies at least one of the conditions in subsection 50-70(1) of the ITAA 1997 and satisfies both conditions in subsection 50-70(2) of the ITAA 1997.

The relevant condition in subsection 50-70(1) of the ITAA 1997 is that the entity has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia.

The conditions insubsection 50-70(2) of the ITAA 1997 are that the entity must at all times during an income year:

                    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.

Applying the Entity's circumstances

Subsection 50-70(1) of the ITAA 1997

The Entity was physically present in Australia from the date it was established through to 30 June 20XX and at all times during subsequent income years will have a physical presence in Australia.

From 1 July 20XX through to 30 June 20XX, the Entity incurred 80% of its expenditure in Australia and incurred 20% of its expenditure outside Australia and pursued its objects 80% in Australia and 20% outside Australia. At all times during subsequent income years, the Entity will conduct its activities from Australia.

Accordingly, the Entity satisfies this special condition as it has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia.

Subsection 50-70(2) of the ITAA 1997

'governing rules condition'

Entity's Rules are its governing rules and contain it substantive requirements.

From 1 July 20XX to 30 June 20XX the Entity complied with all of the substantive requirements in the Entity's Rules and will continue to comply with all the substantive requirements in those governing rules at all times during subsequent income years.

'income and assets condition'

From 1 July 20XX to 30 June 20XX the Entity, applied its income solely for the purpose for which it is established. The Entity did not have any assets it could apply for the purpose for which it is established throughout that period. At all times during subsequent income years, the Entity will apply its income and any assets solely for the purpose for which is established.

We accept that the purpose for which the Entity operated throughout the year ended 30 June 20XX, and intends to operate throughout the following income year, is consistent with the purpose for which it was established.

Accordingly, for the year ended 30 June 20XX and the year ended 30 June 20XX, the Entity satisfies the special conditions in subsections 50-70(1) and 50-70(2) of the ITAA 1997 that must be met by a community service association.

Conclusion

On analysis of its objects and current and intended activities it is accepted that the Entity is an association established for community service purposes covered by section 50-10 of the ITAA 1997 and meets the special conditions in section 50-70 of the ITAA 1997.

The Entity's total ordinary and statutory income is therefore exempt from income tax pursuant to section 50-1 of the ITAA 1997 for the income year ending 30 June 20XX and the income year ending 30 June 20XX.