Edited version of your written advice

Authorisation Number: 5010047044497

Date of advice: 8 December 2017

Ruling

Subject: Income tax exemption

Question

Is the ordinary and statutory income of the entity exempt from income tax pursuant to section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) on the basis that it is a society, association or club established for community services purposes under item 2.1 of section 50-10 of the ITAA 1997?

Answer

No

This ruling applies for the following period:

2014

The scheme commences on:

2014

Relevant facts and circumstances

The entity is an Association under the Associations Incorporation Regulation.

The purpose of the association, as outlined in the Constitution is to support member representatives in advancing their respective entities and the sector in general’s interests through increased cooperation and cohesion.

Activities include liaising with other sectors and other organisations in regard to the international operating environment, legislative framework, market trends and other changes affecting the industry, supporting the advocacy of change in policies that negatively impact the industry in Australia and commissioning research which will inform policy and strategy development or gain support from key stakeholder groups.

The activities of the association are focused on the international success of its members and the industry generating substantial benefits to its members.

The group has always been a not-for-profit entity, with funds collected being used in their entirety or rolled through to another member benefiting activity.

The annual membership fee is agreed to by vote during a general meeting late in the year. The fee covers the operational costs of running the association. Any residual funds, which are usually minimal, are rolled through to the following year. They are either spent on an agreed activity or used to reduce the subsequent membership subscription.

Relevant legislative provisions

Income Tax Assessment Act 1997 (Cth) Section 50-1

Income Tax Assessment Act 1997(Cth) Section 50-10

Income Tax Assessment Act 1997(Cth) Section 50-47

Income Tax Assessment Act 1997(Cth) Section 50-70

Income Tax Assessment Act 1997(Cth) Section 995-1

Australian Charities and Not-for-profits Commission Act 2012 Section 25-5

Reasons for decision

Section 50-1 of the ITAA 1997 provides that the ordinary income and statutory income of certain entities is exempt from income tax. Item 2.1 of section 50-10 of the ITAA 1997 provides that a society, association or club established for community services purposes (except political or lobbying purposes) shall be an exempt entity, subject to special conditions in section 50-70 of the ITAA 1997.

Accordingly, to be an exempt entity described in item 2.1 of section 50-10 of the ITAA 1997, an entity must:

(a) be a society, association or club;

(b) be established for community services purposes (except political or lobbying purposes); and

(c) meet the special conditions specified in section 50-70 of the ITAA 1997.

(d)

(a) Society, Association or Club

The words ‘society’, ‘association’ or ‘club’ are not defined in the ITAA 1997 and have their ordinary meaning.

Guidance on the terms 'society’, 'association' and ‘club’ can be found in Douglas and Others v. FCT (1977) 77 FCR 112; 97 ATC 4722; 36 ATR 532 (Douglas case). In that case, Justice Olney made reference to the definitions contained in the Concise Oxford Dictionary for each of these terms as follows:

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.

A society or association can be incorporated or unincorporated. The status of the entity’s incorporation does not have any bearing on whether the entity is considered a society or an association. In Pro-Campo Limited v. Commissioner of Land Tax (NSW) (1981) 81 ATC 4270; 12 ATR 26, Justice Lee stated:

The three words ``society, club or association'' are words in frequent use in our community and societies, clubs and associations are well-known entities. One knows that many organisations which give themselves the title society or association or club are as often incorporated as they are unincorporated.

The interpretations of ‘society’, ‘association’ or ‘club’ as described above, emphasise a ‘body of persons’ and ‘an organisation of people’ with a ‘common purpose’. The entity is an incorporated association and is brought into existence by its members, a body of persons, to pursue a common purpose as stated in the constitution. The entity is a society, association or club.

(b) Established for community services purposes

Item 2.1 of the table in section 50-10 of the ITAA 1997 requires the society, association or club to be established for community service purposes (except political or lobbying purposes). The required 'community service purposes' must be the entity's main or predominant purposes (Cronulla Sutherland Leagues Club Limited v. FCT (1990) 90 ATC 4215 (Cronulla)).

The phrase 'community service purposes' is not defined in the ITAA 1997. The meaning of the phrase was discussed in the Douglas case where Olney J stated at ATR 536 that:

The absence of a statutory definition and the very broad ambit of the words ‘community service’ justify resort to the explanatory memorandum to identify more precisely the legislative intention.

Item 2.1 of the table in section 50-10 of the ITAA 1997 is the equivalent of its predecessor provision, subparagraph 23 (g)(v) of the Income Tax Assessment Act 1936 (ITAA 1936). The Explanatory Memorandum for the Taxation Laws Amendment Bill (No.2) 1990 which introduced subparagraph 23(g)(v) into the ITAA 1936 provides that the words 'for community service purposes' are to be given a wide interpretation and that:

The words are not limited to those purposes beneficial to the community which are also charitable. They extend to a range of altruistic purposes. The words would extend to 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 Commissioner’s view on the scope of the exemption provided by subparagraph 23(g)(v) of the ITAA 1936 is discussed in 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?.

Relevantly, paragraphs 2, 3 and 4 of TD 93/190 states:

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 for the purposes of subparagraph 23(e), but which, nevertheless, conduct activities of benefit to the community. In other words, some organisations that do not qualify for exemption under subparagraph 23(e) may, nevertheless, be exempt under subparagraph 23(g)(v).

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'.

Consequently, it is only when the purposes of the organisation are altruistic that they can be community services purposes. An altruistic purpose involves promoting, providing or carrying out activities, facilities or projects for the benefit or welfare of the community. That is, a community service organisation is expected to serve at least a particular group in need such as those expressed in paragraph 3 of TD 93/190 extracted above. Whether an entity has the requisite “community service purposes” is to be determined not merely by reference to whether a service is provided or available to the community, but also the motive by which it is provided. If it can be shown 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.

Therefore, to be considered an organisation established for community service purposes, the dominant purpose of the organisation's activities must be directed to altruistic purposes and this altruistic purpose must not be a political or lobbying purpose.

Application to facts

We have reviewed the purposes listed in the Constitution. The main purpose of the Association benefits its members as it supports “…member representatives in advancing their and the sector in general’s interest…” For example, it enhances the understanding of issues and developments in international issues among members, provides a forum for the exchange of ideas and information among other stakeholders and other similar or relevant groups, and represents the interests of its members in relevant national and international forums.

The fact that operations undertaken by the entity for the benefit of members may result in a community benefit does not give activities that are undertaken for the benefit of members an altruistic purpose. In Victorian Healthcare Association v FC of T 2010 ATC 10-141 the Court considered whether a healthcare association had been established for community service purposes. In finding that it was not so established the Court stated:

…it’s principal or dominant purpose is to provide services as directed and needed by its members… it’s operations may result in an improvement in community health as provided by its members but that is a by-product of its principal or dominant purpose, not any altruistic purpose for which it was established.

The benefits the entity provides to its members cannot be considered merely incidental to a community services purpose. Rather, the activities and the Constitution itself, indicates the principal purpose for which the entity is established is to benefit members. An organisation established for the purposes of its members is not considered to be established for ‘community service purposes.’ While operations undertaken by the entity for the benefit of members may result in a community benefit, that does not give those activities an altruistic purpose. It cannot be said that the dominant purpose of the organisation's activities are directed to altruistic purposes. Therefore, the entity is not established for community service purposes.

3. Special Conditions

Section 50-70 of the ITAA 1997 sets out the special conditions for item 2.1. Subsection 50-70(1) of the ITAA 1997 states:

(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).

Not carried on for the profit or gain of its members

Subsection 50-70(1) of the ITAA 1997 requires that the association not be carried on for the purpose of profit or gain to its individual members. This is known as the non-profit requirement. Where members, in their individual capacity, are to receive benefits from an association it will fail the non-profit test. An association usually ensures they operate on a non-profit basis by including non-profit clauses in their constituent documents. An association’s actions must also be consistent with the non-profit requirement.

While the entity does not have a non-profit or dissolution clause in its constituent document to prevent individual members from receiving benefits it is incorporated under the Associations Incorporation Act (NSW) 2009 and sections 40 and 65 of that Act satisfy this requirement. It is accepted that the entity is not carried on for the profit or gain of its members.

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

For the entity to meet this condition, it must have a ‘physical presence’ in Australia and, to that extent, incur its expenditure and pursues its objectives principally in Australia.

The entity has a physical presence in Australia and incurs its expenditure and pursues its purposes principally in Australia.

Governing rules and application of income and assets

Subsection 50-70(2) of the ITAA 1997 provides that the Association 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.

Taxation Ruling TR 2015/1 Income tax: special conditions for various entities whose ordinary and statutory income is exempt (TR 2015/1) provides guidance in respect of the conditions in subsection 50-70(2). 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.

Paragraphs 33 to 35 of TR 2015/1 provide that an entity must solely apply its income and assets for the purpose for which the entity is established. However, where the misapplication or misapplications of part of the income or assets are immaterial in amount and are a one-off misapplication or occasional misapplications, the income and assets condition will still be satisfied.

After a review of the entity’s Constitution, and activities, it is accepted that the entity complies with the substantive requirements in its Constitution and applies its income and assets solely for the purpose for which the entity is established. The entity does satisfy all of the ‘Special Conditions’ specified in section 50-70 of the ITAA 1997.

ACNC type entity condition

Summary

The association is not an ACNC type of entity.

Detailed Reasoning

Section 50-47 of the ITAA 1997 provides a special 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 type of entity’ is defined in subsection 995-1(1) of the ITAA 1997 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. Column 1 of the table in subsection 25-5(5) of the Australian Charities and Not-for-profits Commission Act 2012 describes a charity. The Charities Act 2013 provides a definition of ‘charity’ that applies to all Commonwealth laws.

The definition of ‘charity’ in section 5 of the Charities Act 2013 provides 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

Section 12 of the Charities Act 2013 states that ‘charitable purpose’ means any of the following:

● advancing health

● advancing education

● advancing social or public welfare

● advancing religion

● advancing culture

● promoting reconciliation, mutual respect and tolerance between groups of individuals that are in Australia

● promoting or protecting human rights

● advancing the security or safety of Australia or the Australian public

● preventing or relieving the suffering of animals

● advancing the natural environment

● any other purpose beneficial to the general public that is reasonably analogous to, or within the spirit of, any of the above purposes

● promoting or opposing a change to any matter established by law, policy or practice in the Commonwealth, a state, a territory or another country (where that change furthers or opposes one or more of the purposes above)

The entity’s purpose is to support member representatives in advancing their and the sector in general’s interest, through increased cooperation and cohesion. The entity’s purpose is not a ‘charitable purpose’ as described above, and the entity is not a charity for the purposes of the Charities Act 2013.

Accordingly, section 50-47 of the ITAA 1997 will not apply.

Conclusion

The total ordinary and statutory income of the entity is not exempt from income tax under section 50-1 of the ITAA 1997 as it is not a society or association established for community service purposes pursuant to section 50-10 of the ITAA 1997, and it is not an ACNC type of entity pursuant to section 50-47 of the ITAA 1997.