Edited version of private advice

Authorisation Number: 1052051283904

Date of advice: 28 October 2022

Ruling

Subject:Income tax exemption

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 the table in section 50-10 of the ITAA 1997?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The entity was incorporated with Australian Securities and Investments Commission (ASIC) in 20XX as an Australian Public Company, Limited by Guarantee.

Following incorporation, the entity applied to the Australian Charities and Not-for-profits Commission (ACNC) for registration as a charity. The ACNC determined that the entity was not eligible for registration because its objects clause in its constitution was too wide to be charitable.

In a letter dated XX XX 20XX the ACNC confirmed its assessment of the entity's ineligibility prior to XX XX 20XX, stating that the entity did 'not meet all of the charity registration requirements from the date of application.

After amendment to the entity's objects clause the ACNC registered the entity as a charity from XX XX 20XX.

The entity's constitution on incorporation sets out the entity's purpose on establishment.

The entity states that on incorporation and at all times since it has had individual members, directors and other supporters organised for a common purpose, being its objects.

The entity assists vulnerable persons, being persons affected by poverty, family violence, illness and disability or cultural isolation.

The entity partners with various organisations to improve their understanding of and ability to assist vulnerable people and conducts programs which address vulnerability, hardship and inclusion around Australia.

The entity provided details of activities it has undertaken since establishment on XX XX 20XX and becoming a registered charity on XX XX 20XX (Relevant Period).

The entity states that it is not established for political lobbying purposes and does not engage in any political or lobbying activities, and not established for, and has not conducted activities for, a purpose of advancing the common interests of its members.

The entity has not made any cash distributions or paid any dividends, or the like, to its members or directors.

The Constitution 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 and incurs its expenditure and carries out its activities in pursuit of its objectives solely in Australia.

The entity states that it complied with the substantive requirements of its constitution and applied its income and assets solely for the purpose for which it was established for the Relevant Period.

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)

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

Reasons for decision

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

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 (ACNC Act). 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 was capable of being a registered charity for the Relevant Period it will not be exempt from income tax unless it was registered as such under the ACNC Act.

Application to your circumstances

The entity applied to the ACNC for registration as a charity following its incorporation as a company on XX XX 20XX however the ACNC determined that the entity was not eligible for registration because its objects clause in its constitution was too wide to be charitable.

The ACNC confirmed its assessment in 20XX stating that the entity did 'not meet all of the charity registration requirements from the date of application until the date it changed the objects in its constitution.

Therefore, as the entity was not eligible for registration as a charity for the Relevant Period it was not an ACNC type of entity and section 50-47 does not preclude it from being exempt from income tax on that basis.

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 a not-for-profit incorporated company having members, directors and other supporters organised for a common purpose set out in its objects.

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.

On the facts provided, we accept that the entity is not established for political or lobbying purposes and did not engage in any political or lobbying activities in the Relevant Period.

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? 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 assists vulnerable persons, being persons affected by poverty, family violence, illness and disability or cultural isolation. Accordingly, the entity is serving a number of groups in need expressed in paragraph 3 of TD 93/190.

The entity provided details of activities it undertook in the Relevant Period.

We consider that the entity's activities are directed to the altruistic purpose of assisting vulnerable people in Australia and therefore that the entity existed for community service purposes throughout the Relevant Period.

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 constitution 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 and incurs its expenditure solely 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 entity's constitution is its governing rules. The substantive rules that define the entity's rights and duties are contained in those governing rules. The entity states that it complied with the substantive requirements in its governing rules for the Relevant Period.

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 states that it applied its income and assets solely to for the purpose it was established for the Relevant Period.

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

Conclusion

For the Relevant Period, the entity is considered to be an association established for community service purposes covered by section 50-10. The entity also satisfies the relevant special conditions and is therefore exempt from income tax.