Edited version of private advice

Authorisation Number: 1051926100259

Date of advice: 9 December 2021

Ruling

Subject: Not-for-profit community service organisation

Question

Is the entity considered to be established for community service purposes under section 50-10 of the Income Tax Assessment Act 1997 and therefore exempt from income tax?

Answer

Yes.

This ruling applies for the following periods:

1 July 20XX to 30 June 20XX

1 July 20XX to 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The entity was established and incorporated in Australia and has at all times operated in Australia, is physically present in Australia and incurs its expenditure and pursues its objectives only in Australia.

The objects of the entity in its governing document are to enable, promote and support a particular sector and its members.

The entity conducts activities to help it achieve its objects.

The entity's governing document prevents it from distributing income and assets directly or indirectly to its members while the entity is functional and on winding up.

From establishment, the entity has complied with all the substantive requirements of its governing document and has applied its income and assets solely for the purpose for which it is established.

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

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)

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

Charities Act 2013 section 5

Reasons for decision

Unless otherwise stated, all legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997).

Section 50-1 exempts from income tax the ordinary and statutory income of entities specified in Subdivision 50-A.

ACNC type of entity

Section 50-47 provides a special condition for all entities covered by section 50-1. 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.

'ACNC type of entity' is defined in subsection 995-1(1) 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. The entity in column 1 is a charity.

Section 5 of the Charities Act 2013 provides a definition of 'charity' that applies to all Commonwealth laws which says 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.

Accordingly, if the entity 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.

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 states 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. It further states that a charitable institution cannot have an independent non-charitable purpose.

Paragraphs 27 to 29 provide the meaning of the terms referred to in paragraph 26:

'Main or predominant or dominant' purpose

27. A purpose is the 'main or predominant or dominant' purpose of an institution if any other purpose the institution has is no more than incidental or ancillary to that purpose.

'Incidental or ancillary' purpose

28. A purpose is incidental or ancillary to a charitable purpose if it tends to assist, or naturally goes with, the achievement of the charitable purpose. It does not mean a purpose that is minor in quantitative terms.

Independent purpose

29. A purpose is independent rather than incidental or ancillary if it is an end in itself, or of substance in its own right or is not intended to further a charitable purpose.

Application to the entity's circumstances

Some of the entity's objects are not charitable objects.

The entity undertakes particular activities that provide benefits to others and not solely to a section of the community.

After considering the entity's objects and activities and applying the meanings of the terms in paragraphs 27 to 29 of TR 2011/4, it is decided that the entity has a number of independent non-charitable purposes. It is considered that each purpose is an end in itself, or of substance in its own right.

Accordingly, as the entity has independent non-charitable purposes it is not an ACNC type entity and section 50-47 will not apply.

Community service purpose

To be exempt from income tax under item 2.1 of the table in section 50-10, an entity must be a society, association or club established for community service purposes (except political or lobbying purposes) and satisfy the special conditions in section 50-70.

Society, Association or Club

The words 'society' and 'association' are not defined in the ITAA 1997. An association is a voluntary organisation having members associated together for a common or shared purpose (Douglas & Ors v FCT 97 ATC 4722). Society has an equivalent meaning (Pro-Campo v Commissioner of Land Tax (NSW) 81 ATC 4270). An association may be incorporated or unincorporated.

The entity is an incorporated entity and is an organised body of members instituted for the purpose as per its governing document. As such, it is accepted that the entity is an association.

Political or lobbying purposes

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

The Explanatory Memorandum to Taxation Laws Amendment Bill (No.2) 1990 states what is considered to be 'political or lobbying purposes':

Political or lobbying purposes include standing candidates for election, campaigning for changes to the law or to government policy, and the like. Community service organisations may engage in political or lobbying activities, provided these are no more than merely incidental to other purposes beneficial to the community. But a body will be unable to claim exemption from income tax under this subparagraph if its only undertakings for the benefit of the community are political or lobbying ones.

Paragraph 6 of TD 93/190 states that political or lobbying activities are not limited to party political activities; they include activities directed to influence changes to the law or its administration.

After considering the entity's specific circumstances, its objects and activities, it is accepted that the entity is not established for political or lobbying purposes.

Established for Community Service Purposes

For an organisation to exist for community service purposes its purposes must be altruistic as per 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? (TR 93/190) which at paragraphs 3 to 5 states:

3. ...The Explanatory Memorandum to section 23(g)(v) of the Act confirms that the words 'community service purposes' are to be given a wide interpretation. Those words extend to a range of altruistic purposes which 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.

4. However, 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.'

5. It is not accepted that common association as such is altruistic. Neither the purposes of members, nor the purposes of their organisation, are altruistic merely because the members form a non-profit association to advance their common interests. Members who seek to advance their common interests are not therefore motivated by an unselfish regard for others, and neither is their organisation. It follows that an organisation established for the purposes of its members is not therefore established for community service purposes. Only when the purposes of the organisation are altruistic can they be community service purposes.

Therefore, to be considered an organisation established for community service purposes, the organisation's activities must be directed to altruistic purposes. A community services organisation is expected to serve at least a particular group in need such as those expressed in paragraph 3 of TD 93/190.

The entity's main purpose is to enable, promote and support a particular activity for the benefit of members of the community who have a particular need.

The entity conducts various activities to achieve this purpose.

In this case, it is accepted that the entity has an altruistic purpose that is beyond that of a common association of people as it has been established to improve the provision and standard of a particular community service.

On balance, after analysing the entity's objects and activities, it is considered thatthe entity has a main purpose of providing community services and that the independent non-charitable purposes are secondary.

Special Conditions in section 50-70

Subsection 50-70(1) requires that, to be exempt from income tax, an entity covered by item 2.1 of the table in section 50-10 must be a society, association or club that is not carried on for the purpose of profit or gain of its individual members (the non-profit requirement), and relevantly in the entity's case, has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia.

Subsection 50-70(2) requires that the entity must comply with all the substantive requirements in its governing rules (governing rules condition) and apply its income and assets solely for the purpose for which the entity is established (income and assets condition).

Non-profit requirement

Organisations satisfy the non-profit requirement if their constituent documents prevent them from distributing profits or assets among members while the organisation is functional and on winding up. The organisation's actions must be consistent with this requirement.

The entity's governing document contains clauses that prevent distribution of income and property to members while the entity is functional and prevents distribution of surplus assets to members if the entity is wound up.

The entity is incorporated and located in Australia. It carries out its activities in pursuit of its objectives in Australia and incurs its expenditure in Australia.

Accordingly, the special condition in subsection 50-70(1) is satisfied.

Governing rules condition

The governing rules condition requires an entity to 'comply with all the substantive requirements in its governing rules'.

Paragraph 9 of TR 2015/1 explains that the 'governing rules' of an entity are those rules that authorise the policy, actions and affairs of the entity. That is, rules that direct what the entity is required and permitted to do, and what those, who control the entity, are required and permitted to do in respect of the entity. Paragraph 21 stipulates that the governing rules condition is applied on a continuous basis throughout an income year.

The substantive rules that define the entity's rights and duties are contained in its governing document. The entity complies at all times with all the substantive requirements in its governing document.

The governing rule condition in subsection 50-70(2) is therefore satisfied.

Income and assets condition

The income and assets condition requires that an entity apply its income and assets solely for the purpose for which it was established.

Paragraph 24 of TR 2015/1 states that the purpose for which the entity is established is determined by a consideration of all of the features of the entity. The main factors being the objects in the entity's constituent documents and the activities of the entity after its formation, up to the time at which the income and assets condition is applied.

Paragraph 33 explains that 'solely' means that an entity must exclusively or only apply its income and assets for the purpose for which the entity is established. Paragraph 36 stipulates that the income and assets condition is applied continuously throughout the income year.

The entity continuously applies its income and assets solely to for the purpose it is established.

The income and asset condition in subsection 50-70(2) is therefore satisfied.

Conclusion

The entity is considered to be an association established for community service purposes covered by section 50-10.

In addition, the entity satisfies the relevant special conditions and is therefore exempt from income tax.