Edited version of private advice

Authorisation Number: 1051899285543

Date of advice: 16 September 2021

Ruling

Subject: Exempt entities - community service

Question 1

Is Company A exempt from income tax pursuant to section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for the 20XX to 20XX income years on the basis that it is covered by item 2.1 of the table in section 50-10 of the ITAA 1997?

Answer

No.

Question 2

Upon execution of the proposed amendments to Company A's Constitution, will Company A be exempt from income tax pursuant to section 50-1 of the ITAA 1997 on the basis that it is covered by item 2.1 of the table in section 50-10 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods:

Income year ended 30 June 20XX

Income year ended 30 June 20XX

Income year ended 30 June 20XX

Income year ending 30 June 20XX

Income year ending 30 June 20XX

Relevant facts and circumstances

Company A is an unlisted public not-for-profit company, limited by guarantee and incorporated in Australia.

Company A provides the premises, staff and equipment for two Company B bank branches in Town A and Town B.

Company A's governing rules are outlined in a constitution (the Constitution).

Membership of the Company is restricted to any person who, on application, can demonstrate to the satisfaction of the Board that they have the ability and capacity to make a meaningful and constructive contribution to Company A, and who has deposited funds of at least $X into a Company B bank account.

Clause A of the Constitution provides that the objects of Company A are:

1.    To enter into a partnership and/or joint venture with Company B for the purpose of providing an efficient financial services group in the shire offering a traditional range of banking and financial services;

2.    To distribute profits as far as practicable in a manner which will benefit the shire community or member thereof; and

3.    Such other objectives as may be permitted by the Corporations Law and as the Directors shall determine necessary from time to time.

The shire community is defined in the Constitution to mean the area defined by the boundaries of the Town A Shire.

The Constitution outlines the remuneration of the Directors of Company A, entitling them to be paid a fee that the Board determines by resolution from time to time. The directors of Company A act as directors on a voluntary basis and receive a nominal amount to cover expenses each year.

Clause Z of the Constitution states that:

The directors may set aside out of the profits of Company A such sums as they think are proper as a reserve to meet depreciation or contingencies or for equalising dividends or for paying a special dividend or for repairing or improving and maintaining any of the property of Company A or for such other purposes as the Directors in their absolute discretion think conducive to the interests of Company A, but subject at all times to this Constitution.

All profits made by Company A are distributed to worthwhile projects in the community or retained by Company A to provide sufficient reserves to do so. No dividends have been paid by Company A to members.

Clause B of the Constitution provides that:

If upon winding up or dissolution of Company A there remains after satisfaction of its debts and liabilities any property whatsoever, the members shall have priority to the extent their Company B deposit has not been repaid. Any remainder after distribution to the members shall be paid to Trust C or if Trust C has ceased to exist then to a like body having its objectives the benefiting of the Town A community.

Trust C is defined in the Constitution and is a resident not-for-profit trust.

Town A is a rural town located X kilometres from City C and Y kilometres from Town B. Town B is a regional town G kilometres from City C.

Town A and Town B have approximate populations of 2,000 and 8,000 respectively.

The Company B branches have been the only face-to-face banking facilities available in Town A and Town B since 1 July 20XX.

The closest bank to Town A is the Company B branch Y kilometres away in Town B, and the closest bank to Town B is located G kilometres away in City C.

Since the closure of the only other bank in Town A, the Company B branch in Town A has grown in membership and comprises of residents from Town A and surrounding areas in the Town A Shire.

The Company B branch in Town B currently has members comprising of residents from Town B and surrounding areas in and around the Town A Shire.

Company A is located solely in Australia and incurs its expenditure and pursues its objectives solely in Australia.

Company A was not established for political or lobbying purposes and does not engage in any political or lobbying activities.

Company A is not a registered charity with the Australian Charities and Not-for-profits Commission, and is not an 'ACNC type of entity' as defined in subsection 995-1(1) of the ITAA 1997.

Proposed amendments to the Constitution

Company A proposes to amend its Constitution during the 2022 income year. As part of the proposed amendments to the Constitution, clauses A, Z and B will be deleted and replaced with the following:

Objects of the Company

A.1 The objects of Company A are:

A.1.1 To receive donations for the purpose of furthering the other objects of the company;

A.1.2 To apply and distribute donations in an efficient manner and:

(a)  in a manner which will benefit Town A Shire community as a whole; or

(b)  for the relief or assistance of members thereof who can demonstrate a need for benevolent assistance;

A.1.3 To establish, organise and oversee community and volunteer activities and programs and to obtain and manage assets to support or further the other objects of Company A.

A.1.4 For the purpose of achieving these objects, the company shall endeavour to maintain a partnership or joint venture with Company B for the purpose of providing efficient financial services in the Town A Shire including a traditional range of banking and financial services.

A.2 A manner which benefits the community specifically includes, but is not limited to:

(a)   Providing community facilities - for example, museums, libraries, halls, botanical gardens, migrant resource centres, neighbourhood centres and community radio stations (or parts thereof);

(b)   Promoting health through means such as educating the public about a particular disease;

(c)   Promoting art and culture through means such as music and drama;

(d)   Relieving distress due to natural disasters such as floods and bushfires;

(e)   Protecting animals;

(f)    Support of wider education programs within the Town A Shire community; and

(g)   Activities providing benefits of social value to the community or a section of the community.

A.3 The assets and income of Company A shall be applied solely in furtherance of the above-mentioned objects and no portion shall be distributed directly or indirectly to the members of Company A except as genuine compensation for services rendered or expenses incurred on behalf of Company A.

B. Winding up

In the event of Company A being dissolved, all assets that remain after such dissolution and the satisfaction of all debts and liabilities shall be transferred to another company with similar purposes, which is charitable at law and which has rules prohibiting the distribution of its assets and income to its members, with Trust C having priority in respect of the application of any such funds.

Assumptions

1.    Company A has applied (and will apply) its income and assets solely for the purposes for which it is established at all times throughout the period covered by this ruling.

2.    Company A has always complied with all the substantive requirements in its governing rules, and will continue to do so.

Relevant legislative provisions

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

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 paragraph 50-70(1)(a)

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

Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision

Questions 1 and 2

Summary

The ordinary and statutory income of Company A will only be exempt from income tax under section 50-1 of the ITAA 1997[1] once the proposed amendments to the Constitution have been made.

Detailed reasoning

Section 50-1 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. An entity that is not an ACNC type of entity is covered by item 2.1 of the table in section 50-10 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.

Society, association or club

The words 'society', 'association' or 'club' are not defined in the ITAA 1997 and are therefore 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 whereby the court made reference to the definitions contained in the Concise Oxford Dictionary for each of these terms.

In Taxation Determination TD 95/56[2] the Commissioner similarly considers the definition of 'association' by reference to its ordinary meaning and states (at paragraph 2):

... The Shorter Oxford English Dictionary defines the term 'association' to be 'a body of persons associated for a common purpose; the organisation formed to affect their purpose'. The Macquarie Dictionary defines 'association' as being 'an organisation of people with a common purpose and having a formal structure'. Olsson J, in Quinton v. South Australian Psychological Board (1985) 38 SASR 523, also stated that the term 'association' has come to be regarded as attaching to a body of persons associated for a common purpose.

Company A is a company limited by guarantee, whose members are people associated for common purposes and interests, as outlined in the Constitution (before and after the proposed amendments), and therefore meets the definition of an association.

Established for community service purposes

Taxation Determination TD 93/190[3] (TD 93/190) sets out the circumstances under which a society, association or club is regarded as being established for community service purposes and explains (at paragraph 2) that the purpose of enacting subparagraph 23(g)(v) of the Income Tax Assessment Act 1936 (ITAA 1936) (being the predecessor to item 2.1 of the table in

section 50-10) 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.

Paragraph 3 of TD 93/190, like 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, and

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.

However, paragraph 4 of TD 93/190 notes that subparagraph 23(g)(v) of the ITAA 1936

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'.

Only when the purposes of the organisation are altruistic can they be community service purposes. This is in contradistinction to an organisation established for the purposes of advancing the common interests of its members (see paragraph 5 of TD 93/190). Where there is an incidental benefit derived by members of an organisation, it will not be a disqualifying attribute if it can be shown that the organisation is established mainly to provide benefits to the community.

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 reading of its constitution: see Royal Australasian College of Surgeons v Federal Commissioner of Taxation (1943) 68 CLR 436 (paragraph 7 of TD 93/190).

Whether an entity is 'established' for community service purpose is considered each income year as stated in the case of Commissioner of Taxation v Wentworth District Capital Limited [2011] FCAFC 42 (Wentworth). The activities undertaken in the relevant year must be considered, alongside the objects and purposes for which the body was incorporated. Per Gilmour and Gordon JJ in Wentworth at paragraph 30, 'an entity might be established for the requisite purpose in one year, but not another'.

The case of Wentworth considered whether the facilitation of banking services in a small country town could be a 'community service purpose'. The Full Federal Court found that the facilitation of commercial services can be a community service purpose (and was found to be one in the case of Wentworth). However, the court rejected the proposition that the facilitation of the commercial supply of services in a town, that would otherwise not be provided, would always be a community service.

Via its provision of premises, staff and equipment for the Company B bank branches, Company A, as in Wentworth, is facilitating the provision of face-to-face banking services where they would not otherwise exist (i.e. the rural towns of Town A and Town B). In order to determine whether this qualifies as Company A being established for community service purposes, the circumstances of the relevant community must be considered to determine whether the facilitation of the provision of face-to-face banking activities provides sufficient real and tangible benefit to the community.

The service provided by Company A means that residents of Town A, Town B and surrounding areas in and around the Town A Shire do not have to drive a significant distance (to City C) to conduct in-person banking. Having a local bank is a benefit for individuals and businesses who/that need to deposit funds or cannot otherwise bank online. Given the population of Town A, Town B and surrounding rural communities, the ratio of customers at each of the Company B Town A branch and the Company B Town B branch indicates that a substantial portion of the local community is using the face-to-face banking facilities made available by Company A. The communities would be detrimentally impacted should Company A cease to provide that service. As such, Company A is providing a real and tangible benefit to the community.

Additionally, as in Wentworth, Company A has a secondary (broader) objective: to distribute profits/donations in a manner which will benefit the Town A Shire community. This is (and will continue to be) facilitated via the distribution of Company A profits/donations into community projects.

The services, facilities and funding made available by Company A has regard to the benefit and best interests of others in the Town A Shire, and are therefore consistent with that of an altruistic purpose. Neither Company A's stated objectives (before and after the proposed amendments to the Constitution), nor its operations and activities for the period in respect of which the ruling relates, supports a purpose of advancing the common interests of its members. It is therefore accepted that Company A is established for community service purposes (none of which include political or lobbying purposes).

Section 50-70 - Special conditions for item 2.1

Section 50-70 states:

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

(b) is a society, association or club that meets the description and requirements in item 1 of the table in section 30-15; or

(c) is a prescribed society, association or club which is located outside Australia and is exempt from income tax in the country in which it is resident;

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 phrase 'carried on for the purpose of profit or gain of its individual members' is not defined in the tax legislation.

In Commissioner of Taxation v. Co-operative Bulk Handling Ltd [2010] FCAFC 155; 2010 ATC 20-231; (2010) 81 ATR 312, the Full Federal Court considered the operation of section 50-40, a special condition of which is that an entity 'must not be carried on for the profit or gain of its individual members'. Mansfield and McKerracher JJ stated the following on the expression 'not carried on for the profit or gain of individual members':

...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... (at paragraph 94).

This was also the approach of the South Australian Supreme Court in Repromed Pty Ltd v. Lucas and Anor [2000] SASC 203; (2000) 76 SASR 575; 2000 ATC 4542; (2000) 44 ATR 452 where the court considered whether Repromed Pty Ltd was exempt from pay-roll tax on the basis that it was an employer who provided health services 'otherwise than for the purpose of profit or gain'. Debelle J held that Repromed Pty Ltd was carried on for the purpose of profit or gain as its constitution did not provide barriers to individual profit, and profits could find their way into pockets of individuals (at paragraph 35).

The above authorities indicate that the phrase 'not carried on for the purpose of profit or gain to its individual members' requires an absolute prohibition against profits or gains arising to individual members.

The Constitution, in its current form, does not contain an absolute prohibition against profits or gains arising to individual members. For the purposes of the special condition in subsection 50-70(1), Company A therefore cannot be considered an association that is not carried on for the purpose of profit or gain of its individual members.

Following the execution of the proposed amendments to the Constitution, Company A will satisfy the special condition in subsection 50-70(1) as:

• the amended Constitution, at clause A.3, will provide an absolute prohibition against Company A's profits or gains arising to individual members (except as genuine compensation for services rendered or expenses incurred on behalf of Company A); and
• for the purposes of paragraph 50-70(1)(a), Company A is located solely (and therefore has a physical presence) in Australia and incurs its expenditure and pursues its objectives solely in the Town A Shire (and therefore Australia).

Company A satisfies the special condition in subsection 50-70(2) as Company A has, as assumed for the purposes of this ruling:

• always complied with all the substantive requirements in its governing rules, and will continue to do so; and
• applied (and will apply) its income and assets throughout the period covered by this ruling solely for the purpose for which Company A is established.

[1] All legislative references are to the ITAA 1997 unless otherwise stated.

[2] 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 (FBTAA)?

[3] 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?