Edited version of private advice

Authorisation Number: 1052321698900

Date of advice: 26 November 2024

Ruling

Subject: Exempt entities - association established for community service purposes

Question 1

Is the Entity exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as a society, association or club established for community service purposes under item 2.1 in section 50-10 of the ITAA 1997?

Answer

Yes.

Question 2

Is the Entity a rebatable employer under paragraph 65J(1)(j) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

Yes.

This ruling applies for the following periods:

1 July 20XX to 30 June 20XX

The scheme commenced on:

1 July 2024

Relevant facts and circumstances

The Entity is an incorporated company limited by guarantee with its head office in Australia.

Its Constitution (provided) includes non-profit and winding up clauses.

It has a number of members.

The objects of the Entity are broadly to promote community safety. Its activities are directed to this purpose.

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 section50-10

Income Tax Assessment Act 1997 section 50-47

Income Tax Assessment Act 1997 section 50-70

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

Charities Act 2013 section 12

Fringe Benefits Tax Assessment Act 1986 subsection 65J(1)

Summary

The Entityis considered to be a society, association or club established for community service purposes under item 2.1 of section 50-10 of the ITAA 1997. As such, the income of the Entity is exempt from income tax under section 50-1 of the ITAA 1997. The Entity is not for the profit or gain of its individual members.

Detailed reasoning

Section 50-1 of the ITAA 1997 states:

The total *ordinary income and *statutory income of the entities covered by the following tables is exempt from income tax. In some cases, the exemption is subject to special conditions.

(* as defined in subsection 995-1(1) of the ITAA 1997)

The tables referred to in section 50-1 of the ITAA 1997 are contained in sections 50-5 to 50-45 of the ITAA 1997. A society, association or club established for community service purposes is listed at item 2.1 in the table in section 50-10 of the ITAA 1997. The society, association or club must meet the special conditions in section 50-70 of the ITAA 1997.

Section 50-1 of the ITAA 1997, together with sections 50-10, 50-47 and 50-70, exempts the ordinary and statutory income of an entity that:

•         is a society, association or club established for community service purposes (except political or lobbying purposes) (item 2.1 of the table in section 50-10 of the ITAA 1997)

•         is not carried out for the profit or gain of its individual members

•         is not an ACNC type of entity.

An entity is exempt from income tax as a society, association or club established for community service purposes if it:

•         is a society, association or club

•         is established for community service purposes, and

•         satisfies the special conditions.

Society, association or club

The term society, association or club is not defined in the ITAA 1997. The term is construed according to the ordinary meaning of the words.

In Douglas v Federal Commissioner of Taxation 97 ATC 4722 reference was made by the court to the definitions contained in the Concise Oxford Dictionary for each of these terms. Society, association or club was accepted by the court as referring to a voluntary organisation having members associated together for a common or shared purpose (at 4726).

In Pro-campo Ltd. v Commr of Land Tax (NSW) 81 ATC 4270 the court considered the meaning of 'society, club or association'. The court stated at 4279:

In Theosophical Foundation Pty Ltd v Commr of Land Tax (NSW) [1966] 67 SR (NSW)...Sugerman JA stated at 82:

A society, in the relevant sense, is a number of persons associated together by some common interest or purpose, united by a common vow, holding the same belief or opinion, following the same trade or profession, etc; an association'...

The meaning of "society" as the Oxford English Dictionary definition shows can be the equivalent of "association" and I do not think that any relevant distinction in nature exists between the two. It merely seems to have happened that some organisations are called "associations", others are called "societies" but no meaningful difference can be detected between the two...Although clubs can in some respects and in some instances be seen to be distinguishable by reason of their purposes from societies or associations, they nevertheless fall squarely within the dictionary definition of "society" set out above. In short the three words are describing bodies made up of groups of persons who have come together to implement common purposes and objects...

The meaning of society, association or club as described above, emphasises a 'body of persons' and 'an organisation of people' with a 'common purpose'.

Application to your circumstance

The Entity is a public company limited by guarantee. It was formed to promote community safety. The Entity is managed by its board. Its members pursue a common purpose and are governed by the rules outlined in its Constitution.

The Entity is a society, association or club for the purposes of section 50-10 of the ITAA 1997.

Established for community service purposes

Item 2.1 requires the society, club or association to be established for community service purposes. The required community service purposes must be the entity's main or predominant purposes (Royal Australasian College of Surgeons v FCT (1943) 68 CLR 436; Cronulla Sutherland Leagues Club Limited v FCT 90 ATC 4215).

Item 2.1 is the equivalent of subparagraph 23(g)(v) of the Income Tax Assessment Act 1936 (ITAA 1936). Guidelines on the scope of the exemption provided by subparagraph 23(g)(v) are provided by 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? Paragraph 2 of TD 93/190 states that the purpose of enacting the provision 'was to create a category of exemption for community bodies whose activities are not accepted as being charitable' because they do not fall within one of the four heads of charitable purpose.

Paragraph 3 states that the term has a broader meaning than other purposes beneficial to the community which are also charitable. Paragraph 4 of TD 93/190 says:

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'.

It is also relevant to refer to the Explanatory Memorandum for the Taxation Laws Amendment Bill (No 2) 1990 which introduced subparagraph 23(g)(v) of the ITAA 1936. The Explanatory Memorandum states that the words '"for community service purposes" are to be given a wide interpretation':

They extend to a range of altruistic purposes' including 'promoting, providing or carrying out activities, facilities or projects for the benefit or welfare of the community, or of any members of the community who have particular need of those activities, facilities or projects by reason of their youth, age, infirmity or disablement, poverty or social or economic circumstances. An exclusion from the exemption will apply to bodies established for political or lobbying purposes.

The Explanatory Memorandum and TD 93/190 indicate that 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 concluded 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.

Political or Lobbying Purposes

A clause of the Constitution says to consider, initiate and support improvements to laws in any Australian jurisdiction to improve the particular systems, and otherwise to education and influence decision makers to advocate for improvements for this safety.

This clause could be interpreted as the Entity engaging in lobbying through the initiation, support, and influence over laws. Organisations that are established for these reasons are excluded from the exemption. These activities are broader than political party activities and extend to activities directed to influence changes to the law or its administration for the benefit or welfare of the community.

Dominant and main purpose

Where an organisation has mixed purposes, the dominant purpose of the organisation must be for community purpose to satisfy the requirements of the exemption.

Application to your circumstances

The Entity informs the community at large about safety performance of new products and advocates for improved safety design. This is the Entity's main purpose, and the introduction of the clause in the Constitution has not altered this, it is merely incidental to the dominant community service purpose.

The objectives of the Entity are to promote community safety. The Entity is altruistic and community service purposes are the main or predominant purpose.

Therefore, on balance, after analysing the Entity's objects and activities, we consider the Entity is 'established for community service purposes' and its main purpose is providing community services and the lobbying purpose is secondary.

Special conditions

Section 50-47 of the ITAA 1997

Section 50-47 of the ITAA 1997 provides a special condition for all entities covered by section 50-1 of the ITAA 1997, it states:

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.

Broadly, an entity that can be registered as a charity with the Australian Charities and Not-for profits Commission (ACNC) is an 'ACNC type of entity'. The Charities Act 2013 (CA) sets out the requirements to be a charity. Section 12 of the CA provides purposes that are a 'charitable purpose', and includes purposes such as advancing education and advancing health.

Application to these circumstances

As the Entity's objects indicate that it does not have charitable purposes, it is not an ACNC type of entity. It does not need to be registered under the ACNC Act.

Section 50-47 of the ITAA 1997 does not apply to the Entity. The Entity satisfies the special condition in section 50-47 of the ITAA 1997.

Section 50-70 of the ITAA 1997

Section 50-10 of the ITAA 1997 requires that the special conditions in section 50-70 be met.

Subsection 50-70(1) of the ITAA 1997 states that an entity covered by item 2.1 is not exempt from income tax unless the entity is not carried on for the profit or gain of its members (not-for-profit requirement) and:

• it has a physical presence in Australia and, to that extent it pursues its objectives and incurs its expenditure principally in Australia; or
• it is a deductible gift recipient; or
• it is prescribed by law in the income tax regulations and it is located outside Australia and is exempt from income tax in its country of residence.

Non-profit requirement

TR 2022/2 states the following about the non-profit requirement for the games and sports exemption but applies to other entities:

11. To qualify for the games and sport exemption, a club must be not-for-profit... The club must not be carried on for the purposes of individual members' profit or gain, either while the club is operating or on its winding up.

12. Club members may receive communal membership benefits, such as the use of the facilities, that are incidental to the club's objects. This will not prevent the club meeting the not-for-profit requirement. The club may also pay members reasonable remuneration for services they perform for the club.

13. Clubs can use various mechanisms to ensure they meet the not-for-profit requirement. 'Not-for-profit' clauses in governing documents are the most common way. These prevent the distribution of profits or assets for the benefit of particular persons while the club is operating and on winding up.

Generally we will accept an association as being non-profit where, by operation of law or by its constituent document; the association is prevented from distributing its profits or assets among members while the association is operating and on its wind-up. The association's actions must, of course, be consistent with the prohibition.

Application to your circumstances

The Entity's Constitution contains appropriate prohibitions from making distributions to its members during operation and upon wind-up. There is nothing to indicate that the actions of the Entity are not consistent with the prohibition. It is accepted that the Entity is not carried on for the purpose of profit or gain to its individual members.

The Entity satisfies the not-for-profit requirement.

Has a physical presence in Australia and, to that extent it pursues its objectives and incurs its expenditure principally in Australia

Taxation Ruling TR 2019/6 Income tax: the 'in Australia' requirement for certain deductible gift recipients and income tax exempt entities gives the Commissioner's view for certain conditions. Paragraph 53 of TR 2019/6 says that 'an entity has a physical presence in a place where it employs assets or people to conduct its range of physical operations'.

The Entity is a resident of, and is located in, Australia. The Entity carries on its activities in Australia. It pursues its objectives and incurs its expenditure in Australia and satisfied this requirement.

Subsection 50-70(2) of the ITAA 1997 provides that the Entity must:

•         comply with all the substantive requirements in its governing rules; and

•         apply its income and assets solely for the purpose for which the entity is established.

Comply with 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 provides guidance in respect of the conditions in subsection 50-70(2) of the ITAA 1997. Paragraph 9 of TR 2015/1 provides that an entity's 'governing rules' are those rules that authorise the policy, actions and affairs of the entity. Paragraphs 18 and 19 of TR 2015/1 explain that the substantive requirements in an entity's governing rules are those rules that define the rights and duties of the entity and include rules such as those that:

•         give effect to the object or purpose of the entity

•         relate to the non-profit status of the entity

•         set out the powers and duties of directors and officers of the entity

•         require financial statements to be prepared and retained

•         set out the criteria for admission as a member of an entity

•         require an entity to maintain a register of members, and

•         relate to the winding-up of the entity.

Application to your circumstances

The Entity's governing documents include its Constitution. The Constitution sets out both substantive and procedural requirements about how the entity is to be operated. The objects and non-profits clauses about the use of assets, clauses governing the admission of members, and the board's composition are 'substantive' requirements.

Based on the supporting evidence and the above analysis, the Entity complies with the substantive requirements set out in its Constitution.

Applies its income and assets for its purpose

Paragraph 33 of TR 2015/1 states that:

The income and assets condition requires an entity to apply its income and assets 'solely' for the purpose for which the entity is established. This means that the entity must exclusively or only apply its income and assets for that purpose.

Application to your circumstances

Based on the supporting evidence and the above analysis, the Entity applies its income and assets solely for the purpose for which it was established.

The Entity satisfies the special conditions in section 50-47 and section 50-70 of the ITAA 1997.

Conclusion

The Entity is considered to be a society, association or club established for community service purposes as required under item 2.1 of section 50-10 of the ITAA 1997. As such, the income of the Entity is exempt from income tax under section 50-1 of the ITAA 1997.

Question 2

Is the Entity a rebatable employer under paragraph 65J(1)(j) of the FBTAA?

Summary

The Entity is a rebatable employer under subsection 65J(1) of the FBTAA.

Detailed reasoning

An employer will be a rebatable employer for FBT purposes where it meets the requirements under s 65J of the FBTAA 1986. Relevantly, item 5 of s 65J(1) includes in the scope of rebatable employers:

... a society, association or club

(a)  established for community service purposes (except political or lobbying purposes); and

(b)  covered by item 2.1 of the table in section 50-10 of the Income Tax Assessment Act 1997.

This requirement mirrors the requirements under section 50-10 of the ITAA 1997 as discussed above. On the basis that the Entity is entitled to an income tax exemption as a community services organisation under section 50-10 of the ITAA 1997, the Entity also qualifies as a rebatable employer under section 65J of the FBTAA.