Edited version of private advice

Authorisation Number: 1051901975938

Date of advice: 22 September 2021

Ruling

Subject: Income tax exemption

Question

Upon execution of the proposed amendment to its constitution, will the Entity be exempt from income tax pursuant to section 50-1 of the Income Tax Assessment Act 1997 (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 period:

Income year ended 30 June 2021

Relevant facts and circumstances

The Entity was incorporated in New South Wales and is governed by the rules of the model constitution prepared by NSW Fair Trading under the Associations Incorporation Act 2009 (the Constitution).

The Entity was established by residents of the ABC electorate in NSW. It is entirely volunteer run and (consistent with clause 39 of the Constitution[1]) its activities are supported by individual donations from its members and members of the local community.

The Entity conducts small group discussions which provide a forum for issues of interest to, and concerns of, ABC electorate residents to be heard, counted and collated into a Report that is shared with residents and representatives of all levels of government. The aim is to develop ongoing engagement between the representatives of ABC and the residents of the electorate.

Participation in the small group discussions is welcomed and encouraged by all people, irrespective of political allegiance, age or gender and the Entity provides safe supportive processes to ensure a diversity of opinions are listened to, respected and heard.

The objects of the Entity (Entity objects) are to:

1. Promote and expand active community participation in the processes of democracy;
2. Encourage the highest standards of political representation; and
3. Act as a conduit for voters within the ABC federal electorate to:

                      i.        Provide information to federal members of parliament; and

                     ii.        Provide information to voters on relevant policy debates.

As at the date of this ruling, the Entity objects (as well as any other objects) are not set out in the Constitution.

Sub-clause 40(1) of the Constitution provides:

Subject to any resolution passed by the association in general meeting, the

funds of the association are to be used solely in pursuance of the objects of

the association in the manner that the committee determines.

Clause 41 of the Constitution states:

Subject to the Act and the Regulation, the association must apply its funds and assets solely in pursuance of the objects of the association and must not conduct its affairs so as to provide a pecuniary gain for any of its members.

For the purposes of clause 41, 'pecuniary gain' is defined in section 5 of the Associations Incorporation Act 2009 as follows:

(1) An organisation provides pecuniary gain for its members if

(a) it carries on any activity for the purpose of securing pecuniary gain for its members, or

(b) it has capital that is divided into shares or stock held by the organisation's members, or

(c) it holds property in which the organisation's members have a disposable interest (whether directly, or in the form of shares or stock in the capital of the organisation or otherwise), or

(d) it is an organisation that is or is included in a class of organisations that is, prescribed by the regulations for the purposes of this subsection.

Clause 42 of the Constitution states:

(1)  Subject to the Act and the Regulation, in winding up of the association, any surplus property of the association is to be transferred to another organisation with similar objects and which is not carried on for the profit or gain of its individual members.

(2)  In this clause a reference to the surplus property of an association is a reference to that property of the association remaining after satisfaction of the debts and liabilities of the association and the costs, charges and expenses of the winding up of the association.

The Entity does not, and will not, be standing candidates for election, campaigning for changes to the law or to government policy, and the like, or otherwise engage in any political or lobbying activities.

The Entity is located solely in New South Wales and incurs its expenditure and pursues its objectives solely in Australia.

The Entity 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.

The Entity will amend the Constitution to incorporate the Entity objects (the proposed amendment).

Assumptions

1.    The Entity has always complied with all the substantive requirements in its governing rules, and will continue to do so.

2.    The Entity has applied its income and assets solely for the purposes for which it is established at all times.

Relevant legislative provisions

Associations Incorporation Act 2009 section 5

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 50-47

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

Summary

The ordinary and statutory income of the Entity will only be exempt from income tax under section 50-1 of the ITAA 1997[2] once the proposed amendment has been effected.

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 (subject to the special condition in section 50-47[3]). An 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[4] 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.

As the Entity's members are people associated for common purposes and interests, consisting of the Entity objects, the Entity meets the definition of an association.

Established for community service purposes

Taxation Determination TD 93/190[5] (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 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 (see paragraph 24 of Taxation Ruling TR 2015/1[6]).

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'.

Until such time as the Entity objects are incorporated into the Constitution (per the proposed amendment), the Commissioner cannot make a determination as to the purpose for which the Entity was established.

However, once the proposed amendment takes effect, the Commissioner will be satisfied that the activities provided and carried out by the Entity (i.e. the small group discussions and the production of the Report for residents of, and representatives for, the ABC electorate) accord with the objects for which the Entity was established. Both the Entity objects and the Entity's activities have regard to the benefit and interests of others in the ABC electorate, and are therefore consistent with that of an altruistic purpose. Neither the Entity objects, nor its activities, supports a purpose of advancing the common interests of its members.

It is therefore accepted, following the proposed amendment, that the Entity 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 Entity will satisfy the special condition in subsection 50-70(1) as:

• the Constitution, at clause 41, prevents the Entity from disbursing any profits or gains to its members; and
• for the purposes of paragraph 50-70(1)(a), the Entity is located solely (and therefore has a physical presence) in Australia and incurs its expenditure and pursues its objectives solely in the ABC electorate in NSW.

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

• always complied with all the substantive requirements in its governing rules (including the requirements which, following the proposed amendment, will give effect to the Entity objects), and will continue to do so; and
• always applied its income and assets solely for the purposes for which the Entity is established.

[1] Clause 39 of the Constitution provides:

The funds of the association are to be derived from entrance fees and annual

subscriptions of members, donations and, subject to any resolution passed

by the association in general meeting, any other sources that the committee

determines.

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

[3] The special condition at section 50-47 does not apply to the Entity as it is not an ACNC type of entity.

[4] 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)?

[5] 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?

[6] Income tax: special conditions for various entities whose ordinary and statutory income is exempt.