Edited version of private advice

Authorisation Number: 1052069846268

Date of advice: 16 December 2022

Ruling

Subject: Not-for-profit - tax-exempt status

Question

Is the total ordinary and statutory income of the Institute of Actuaries of Australia exempt from income tax, in accordance with section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997)as a society or association established for community service purposes pursuant to item 2.1 of section 50-10 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods:

Period ending XX XX 20XX

Period ending XX XX 20XX

Period ending XX XX 20XX

Period ending XX XX 20XX

Period ending XX XX 20XX

The scheme commences on:

YY YY 20YY

Relevant facts and circumstances

1.    The entity is a public company limited by guarantee and was incorporated on ZZ ZZ 19ZZ.

2.    The entity is a resident of Australia for income tax purposes.

3.    The entity is not registered as a charity.

4.    The entity is applying for income tax exemption on the basis of being a non-profit association established for community service purposes.

5.    The entity's members are Australian trained and most practice in Australia with some moving abroad to practice in other countries utilising their Australian qualifications.

6.    The Constitution document of the entity has the appropriate non-profit and winding up clauses.

7.    Expenses of the entity are mainly incurred in respect of education, events, research, public policy, and support services, most of which were carried out in Australia.

8.    The entity principally incurs its expenditure and pursues its objectives in Australia for the benefit of its Australia-based and Australia-trained members.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 30-15

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 section 995-1

Reasons for decision

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

Summary

The Institute is exempt from income tax under section 50-1 as a society, association or club established for community service purposes pursuant to item 2.1 of the table in section 50-10.

Detailed reasoning

Section 50-1 exempts the ordinary income and statutory income of a non-profit society or association established for community service purposes (except political or lobbying purposes) as described at Item 2.1 of the Table in section 50-10. Section 50-1 outlines that in all cases, the exemption of a non-profit society's ordinary and statutory income is subject to the special condition in section 50-47 as follows:

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.

The Table in section 50-10 also specifies a special conditions requirement at section 50-70.

The special condition in subsection 50-70(1) specifies the requirement that the entity is 'not carried on for the purpose of profit or gain of its individual members' and that it:

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 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.

Society or Association

One of the requirements of subsection 50-10 is that the entity be a society or association. The terms "society" or "association" are not defined in the ITAA 1997.

The Macquarie dictionary (online version of 13 December 2022 on https://www.macquariedictionary.com.au) defines association as:

an organisation of people with a common purpose and having a formal structure ......

(Macquarie Dictionary Publishers, 2017)

The meaning of "association" was considered by Olney J in Douglas & Ors v FCT 97 ATC 4722 in relation to former paragraph 23(g)(v) of the Income Tax Assessment Act 1936 (ITAA 1936) and the following was found:

As the section contains no definition of either 'society, association or club' or "community services purposes' it should be construed according to the ordinary meaning of the words used and, if necessary, after resort to the relevant explanatory memorandum and second reading speech.

Unassisted by authority I would construe the collation "society, association or club" to refer to a voluntary organisation having members associated together for a common or shared purpose. Such a description is consistent with various dictionary definitions of the several words used. The following examples can be found in the Concise Oxford Dictionary:

•                Society: Association of persons united by a common aim or interest or principle;

•                Association: Organised body of persons for a joint purpose;

•                Club: Association of persons united for some common interest, usually meeting periodically for shared activity.

Application to your circumstances

The entity is an Australian Public Company limited by guarantee. The Constitution of the entity states that the number of members is unlimited, and they work towards a common goal as expressed in their Constitution.

In applying the definition, the entity is considered to be an 'association' or 'society' for the purpose of section 50-10.

Be established for dominant purpose of community service

A non-profit society, association or club established for community service purposes, excluding political or lobbying purposes, described in item 2.1 of the table in section 50-10 of the ITAA 1997 is exempt from income tax.

This legislation draws upon the predecessor section 23(g)(v) of the Income Tax Assessment Act 1936 (ITAA 1936). Taxation Determination TD 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 at paragraphs 2:

the purpose of enacting subparagraph 23(g)(v) 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.

TD 93/190 further states at paragraphs 3 to 5:

3. ... 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) 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.

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 organisation 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.

In Navy Health Limited v Deputy Commissioner of Taxation [2007] FCA 931, Jessup J said that:

I consider that the essence of 'community service' is that a service is provided to the community, or a section of the community. Here the word "service" is used in the sense of 'help, benefit or advantage', particularly 'the action of serving, helping or benefiting, conduct tending to the welfare or advantage or another.

In this regard, His Honour went onto say that the benefit provided must not be vague. Specifically, His Honour said that community service:

...deals with 'service' in a much more concrete setting, and requires, in my view, the community, or a section of the community, to benefit by way of the receipt of some identifiable help, benefit or advantage...

To determine whether an association is established for community service purposes it is necessary to consider its constitution, its current operations and activities, and also the circumstances and needs of those who benefit from the operations. If it can be established that an entity is established mainly to provide benefits to the community, it will not be a disqualifying attribute if there is an incidental benefit derived by members.

The required 'community service purpose' must be the entity's main or predominant purpose '(Royal Australian College of Surgeons v. FCT [1943] ALR 377; [1943] HCA 34; (1943) 68 CLR 436; (1943) 7 ATD 289, Cronulla Sutherland Leagues Club Limited v. FCT [1990] FCA 90; (1990) 23 FCR 82; 90 ATC 4215; (1990) 21 ATR 300). It is a question of fact in each case as to whether any benefits derived by members are merely incidental to a main community service purpose of the entity.

A question that needs to be answered in your circumstances is whether it is a section of the community or a closed and restricted class of persons that receives benefits from the industry entity. This is a question of degree and depends on the purpose of the entity or trust (Dingle v. Turner [1972] AC 601; per Lord Cross of Chelsea at 624).

Application to your circumstances

The entity provides a variety services and support to its members. The entity's educational programs are available to any member of the public and there are no pre-requirements or restrictions on who can undertake the educational programs. Further, all events organised by the entity are open to be attended by the general public as well as the members of the entity. The entity continues to contribute to a wide range of public policy debates.

Overall, it is considered that the entity's educational programs, activities and objectives provide the community with help, benefit and advantage, and that benefits provided to members are incidental. Therefore, it is considered that the predominant purposes of the entity are community purposes under item 2.1 of the table in section 50-10.

Not carried on for the profit or gain of its individual members

A not-for-profit organisation does not operate for the profit or gain of its individual members. This applies both while the organisation is operating and when it winds up. Its constituent or governing documents must prevent it from distributing profits or assets for the benefit of particular people - both while it is operating and when it winds up. A NFP organisation can still make a profit, but this profit must be used to carry out its purposes and must not be distributed to owners, members or other private people.

The not-for-profit requirement is also explained in Taxation Ruling TR 97/22 Income tax: exempt sporting clubs and is also applicable to other types of organisations. It notes that in addition to the above-mentioned requirements:

•           an organisation's actions must be consistent with the not-for-profit restrictions in its constitution,

•           that benefits received by members communally as members and incidental to pursuit of entity's objects do not prevent the entity from passing the non-profit test,

•           nor does the payment of reasonable remuneration to members for services they provide to the entity.

In Cooperative Bulk Handling Ltd v FC of T 2010 ATC 20-183, the Court considered the contention that bodies can be carried on for profit or gain of their individual members other than by way of distribution from the body - where the Court made the following observations:

116. In my opinion, for the following reasons, the activities of CBH are not carried on for the profit or gain of its individual members. The special condition is accordingly satisfied.

117. The qualification in s 50-40 of the ITAA 1997 does not one preclude any benefit to members. Rather, it is that the activities of CBH should be "not carried on for the profit or gain of its individual members." As Barwick CJ said (McTiernan, Windeyer and Owen JJ agreeing) of an earlier and essentially identical statutory provision in Commissioner of Taxation v Cappid Pty Ltd (1971) 127 CLR 140 at p 153:

"Section 23(g) exempts from tax the income of certain bodies which are not carried on for the purposes of profit or gain to their individual members. The concept in this provision is of bodies, either corporate or unincorporated which are carried on for the benefit of their members but not for the profit or gain of their members severally or individually."

118. I do not regard anything said in Mersey Docks and Harbour Board v Lucas as to the meaning of "profits" and "gains" under the Income Tax Act 1842 (U.K) and upon which the respondent relies as detracting from the persuasive force of Cappid.

119. I accept the submission of CBH that an association is not carried on for the profit or gain of its individual members if it cannot distribute its assets among or apply its assets to the individual benefit of its members but must apply them to the furtherance of its objects. In Theosophical Foundation Pty Ltd v Commissioner of Land Tax (1996) 67 SR (NSW) 70 at 85 Sugarman JA considering a requirement that a society be "not carried on for pecuniary profit," meaning not for the pecuniary profit of individuals, said that its "object is to accord exemption to those societies, clubs and associations, and institutions and bodies of various kinds, whose profits, if any, are applied solely to the advancement of their objects and cannot find their way into the pockets of individuals." This approach was followed in Crows Nest Club Ltd v Commissioner of Land Tax [1978] 1 NSWLR 523 at 526 per Hutley JA with Moffit P and Glass JA agreeing.

Application to your circumstances

Notwithstanding, members of the entity may benefit from these events (by way of professional/career development etc.), it remains that the entity is not being carried on for the profit or gain of its individual members. Relevantly, the entity is prevented from distributing its profits or assets among members while it is operating and on its wind-up. Therefore, the entity satisfies the non-profit test.

Australian Charities and Not-for-profits Commission (ACNC) type of entity

Section 50-47 provides a further condition that if an entity that is covered by one of the items in Subdivision 50-A is an ACNC type of entity, they will not be exempt from income tax unless they are registered under the Australia Charities and Not-for-profits Commission Act 2012 (ACNC Act).

The meaning of 'ACNC type of entity' is provided in section 995-1 which refers to column 1 of the table in subsection 25-5(5) of the ACNC Act. The entity types at Column 1 of the table in subsection 25-5(5) is 'charity'.

The meaning of 'charity' is provided, for the purposes of all Commonwealth law, at section 5 of the Charities Act 2013:

"charity" means an entity:

(a) that is a not-for-profit entity; and

(b) all of the purposes of which are:

(i) charitable purposes (see Part 3) that are for the public benefit (see Division 2 of this Part); 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 (see Division 3); and

(d) that is not an individual, a political party or a government entity.

Application to your circumstances

Section 50-47 does not apply to the entity as it is not a charity.

Entity to have a physical presence in, incurs its expenditure and pursue its objectives in Australia

The special conditions as contained in section 50-70 were inserted into legislation by Taxation Laws Amendment Bill (No. 3) 1998 (the Bill). The Explanatory Memorandum to the Bill (EM) provided the following commentary regarding the special condition in paragraph 50-70(1)(a):

3.12 In the case of 'physical presence' a broad interpretation has been adopted - all that is required is for an organisation to operate through a division, sub-division or the like in Australia. The structure of the organisation is immaterial as is whether it has its central management and control or principal place of residence in Australia. On the other hand, the term does not apply where an organisation merely operates through an agent based in Australia.

...

3.14 To be exempt from income tax, a charitable trust established on or after 1 July 1997 must pursue its charitable purposes ' solely' in Australia. This does not mean, however, that an incidental activity or pursuit outside Australia will prejudice the exempt status of a charitable trust. An institution, however, generally only has to pursue its objectives 'principally' in Australia. This term is also not defined in the legislation. The dictionary meaning of the word 'principally' is mainly or chiefly. Accordingly, it is not possible to specify a particular percentage but less than 50% would not be considered to meet the 'principally' requirement. Where there is some doubt whether this requirement is satisfied it will be necessary to examine each institution's individual circumstances.

Application to your circumstances

The entity is an Australian Public Company limited by guarantee. The Institute also has its registered office and principal place of business in XXX, Australia. Therefore, it is considered that the entity has a physical presence in Australia for the purposes of paragraph 50-70(1)(a).

The Constitution of the entity includes the appropriate non-profit and winding up clauses.

Expenses of the entity are mainly incurred in respect of education, events, research, public policy, and support services, most of which were carried out in Australia.

The entity principally incurs its expenditure and pursues its objectives in Australia for the benefit of its Australia-based and Australia-trained members.

In conclusion, it is considered that the conditions in paragraph 50-70(1)(a) are satisfied, and as a result subsection 50-70(1) is satisfied.

Governing rules condition

Paragraph 50-70(2)(a) requires the Institute to comply with all the substantive requirements in its governing rules. Taxation Ruling TR 2015/1 Income tax: special conditions for various entities whose ordinary and statutory income is exempt (TR 2015/1) provides guidance on the interpretation and application of special conditions in subsection 50-70(2). Paragraph 8 of TR 2015/1 explains that:

Three questions must be considered to determine whether an entity satisfies the governing rules condition:

•                What are the 'governing rules' of the entity?

•                What are the 'substantive' requirements in the entity's governing rules?

•                At what time must the entity comply with all of the substantive requirements in its governing rules?

Paragraph 18 of TR 2015/1 provides that the "substantive" requirements in an entity's governing rules are those rules that define the rights and duties of the entity.

Application to your circumstances

The entity's Constitution provides the governing rules of the entity and outlines the substantive requirements of the entity's governing rules. It is considered that the entity has continued to comply with its governing rules and substantive requirements of its governing rules. Therefore, the requirement in paragraph 50-70(2)(a) is satisfied.

Income and assets

Paragraph 50-70(2)(b) further requires an entity to apply its income and assets solely for the purpose for which the entity is established. Regarding this condition, paragraph 23 of TR 2015/1 explains:

There are two questions that must be considered to determine whether an entity satisfies the income and assets condition:

•                what is the 'purpose for which the entity is established', and

•                has the entity applied its income and assets solely for the purpose for which the entity is established?

Paragraph 24 of TR 2015/1 outlines that in determining the purpose for which the entity is established, the main factors to be considered are 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.

On the meaning of 'apply' paragraphs 30 and 31 of TR 2015/1 outlines that in the context of this condition, 'apply' means that an entity must make use of all its income and assets solely for its purpose or purposes. An entity can accumulate income provided the accumulation is consistent with the purpose or purposes for which the entity is established.

On the meaning of 'solely' paragraphs 33-35 of TR 2015/1 outline that an entity must apply its income and assets exclusively or only for the purpose for which the entity is established. None of the income and assets of the entity is to be applied for purposes that are not in accordance with or incidental or ancillary to, the purpose of which the entity is established. An entity will not comply with the income and assets condition if it applies any of its income or assets for a private purpose.

Application to your circumstances

The entity's objectives as set out in the entity's Constitution provide the purposes for which the entity is established.

The entity's Constitution also provides that the entity's income and property will only be used for the promotion of the objects of the entity as set out in the entity's Constitution.

Majority of the entity's income was consistently derived from its membership and education activities, in line with its Constitution.

In conclusion, it is considered that the entity has continued to apply its income and assets solely for the purposes for which it is established. As a result, the special condition in paragraph 50-70(2)(b) is satisfied.

Conclusion

As discussed above, the entity is considered to be a society, club or association which has been established for altruistic purposes which fall within the definition of 'community service purposes' as described in item 2.1 of the table in section 50-10.

As such, the entity's ordinary and statutory income is exempt from income tax pursuant to section 50-1.