Private ruling: Exempt income - community service purposes
Date of advice: 12 May 2023
Published: 26 June 2023
Ruling period: Income year ending 30 June 20XX

Ruling: Q1: Will the Company be exempt from income tax pursuant to section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) on the basis that it is covered by item 2.1 of the table in section 50-10 of the ITAA 1997? | A1: Yes.

Relevant facts and circumstances: The Company is a company limited by guarantee and was incorporated in 19XX. The Company was formed to cover the activities of an unincorporated association. The Company is a resident of Australia for income tax purposes, located solely in Australia and incurs its expenditure and pursues its objectives solely in Australia. The Company was not established for political or lobbying purposes and does not engage in any political or lobbying activities. The Company has previously sought endorsement as a charity. An objection decision confirming the refusal of endorsement was issued by the Commissioner in 20XX. The Company is not a registered charity with the Australian Charities and Not-for-profits Commission and is not an 'ACNC type of entity' as defined in subsection 995-1(1) of the ITAA 1997. As a company limited by guarantee, the Company does not have shareholders. The members of the Company include some of its customers, some residents of towns A and B, as well as some residents from surrounding areas. Banking services provided by the Company The Company is a Community Bank that manages franchised offices of ABC Bank in Town A and Town B pursuant to the terms of a Franchise Agreement. The Company: • employs the staff, owns the building in Town A, leases the building in Town B and enables the provision of ABC Bank products to customers; • shares with ABC Bank 50% of the margin from normal banking products and earns commission on some other bank products; and • uses this income to pay the staff, site expenses and administrative costs. Town A is a rural town in Australia located X kilometres from Town B, also in Australia. The population of Town A and Town B respectively is approximately XXX and XXX. Originally, and at the time of the objection decision in 20XX, the Town A branch was the only banking service in Town A and was profitable, while the Town B branch competed with three other banks which did not provide a full-service, was much smaller than that in Town A and had never made a profit. The objection decision issued by the Commissioner in 20XX further concluded that: • the Town A branch constituted a significantly larger operation than that in Town B at the time and was the main purpose of the Company; and • on the basis that the Company was the only banking service provider in Town A (among other factors), the Company was established for a community service purpose for the purposes of section 50-10 of the ITAA 1997, and was tax-exempt. As at the date of this ruling: • the Town A branch remains the only banking service in Town A; • the manager of the two franchised offices now spends more time at the Town B branch than the Town A branch; • there is only one other commercial banking operation in Town B and that branch has no manager or lending staff, has limited operating hours and is often closed due to staff shortages; • the Company provides a full banking service in Town B. The Town B branch is open from 9:30am to 4:00pm between Monday and Thursdays and from 9:30am to 5:00pm on Fridays. There is a full-time manager and loans officer and a number of customer relations officers. They have all the facilities and the personnel to provide a full bank service, including loan and finance applications, advice regarding term deposits, the ability for business to bank takings and conduct business at the end of each day, foreign currency exchange and the provision of assistance to its customers, particularly the elderly or those with limited internet or electronic banking access; • the number of customers at the Town A and Town B branches respectively is approximately XXX and XXX; and • it is likely that the Town B branch will recover all of its carried forward losses and become profitable by 30 June 20XX. The closest full banking service to the Town B branch is the Town A branch and the closest full banking service to the Town A branch is the Town B branch. The next-nearest full banking service to the Town B branch is XX kilometres away and the next-nearest full banking service to the Town A branch is XX kilometres away. Constitution The objects for which the Company is established are listed in the Constitution, as amended. They are: 1. To take over the funds and other assets and liabilities of the present unincorporated Association stated at Item 2 in the 1st Schedule. 2. To operate and manage the ongoing action (if any) stated at Item 3 in the 1st Schedule. For the purpose of carrying out these objects, and not otherwise, the Constitution lists a number of powers held by the Company, including: • to purchase, take on, lease or otherwise acquire any lands, building, easement or property, real and personal, and any rights and privileges which may be requisite for the purposes of or capable of being conveniently used in connection with any of the objects of the Company; • to appoint and employ such employees and other persons as may be necessary or convenient for the purpose of the Company; • to make donations for patriotic or charitable purposes; • to pursue charitable purposes only and to apply its income in promoting those purposes; and • to prohibit the company making distributions to its members and paying fees to its directors. Item 3 in Schedule 1 of the Constitution provides that the ongoing actions (if any) that the Company proposes to operate and manage are: 1. To take over the funds and other assets of the Unincorporated Association; 2. To conclude a Management Agreement with ABC Bank and one or more of its subsidiaries to enable the Company to manage a franchised office of ABC Bank; 3. To manage such franchised outlet at Town A and such other places as the Company may decide; 4. If and when possible, to conduct commercial banking within Victoria under franchise from ABC Bank or from such other banking corporation as the Company may from time to time decide; and 5. To distribute such portion of any profit derived by carrying on the management of (or conducting the business of) the banking franchise for such community service purposes within the areas in which such management or franchise is conducted as the Board may from time to time decide. The Constitution also states: The income and property of the Company from wherever derived must be applied solely towards promoting the Company as provided in these rules and no portion thereof shall be paid or transferred directly or indirectly by way of dividend, bonus or otherwise to the Members of the Company. and: The Company must not distribute, pay or transfer to the Members directly or indirectly by way of dividend, bonus or otherwise any of the property or income of the Company PROVIDED that nothing shall prevent the payment in good faith of remuneration to any officers or servants of the Company or to any Member of the Company in return for any services actually rendered to the Company or for goods supplied in the ordinary and usual way of business nor prevent the payment of interest at reasonable and proper commercial rates on money borrowed from any Members of the Company or reasonable and proper rent for premises demised or let by any Member of the Company... Upon winding up or dissolution of the Company, the Constitution states that if: ... there remains after satisfaction of all its debts and liabilities any property whatsoever it shall not be paid to nor distributed among the Members of the Company but shall be given or transferred to some other institution or Company having objects similar to the objects of the Company and whose Memorandum of Association or constitution shall prohibit the distribution of its or their income and property among its or their Members to an extent at least as great as is imposed on the Company under these rules... Community activities of the Company As soon as it was able to, the Company began to provide funding for community organisations and activities via the provision of grants and sponsorships. Each year the Company conducts a Community Grants Program directed at local not-for-profit community groups, mainly utilising the ABC Bank's Foundation. The Foundation is a registered charity, operating as the charitable arm of the ABC Bank and as a conduit for many community banks to run grants programs for their local community. The role of the Foundation is to administer donations and grants on behalf of the Trustee within an agreed framework primarily to support organisations and individuals to improve the prospects of the communities in which they operate. As part of the Foundation's strict guidelines, eligibility for a community grant is restricted to a charitable purpose that demonstrates a clear benefit to the community as a whole. The Foundation also runs Scholarship Programs which support rural and regional students, Indigenous students, students aspiring to make an impact in the agribusiness sector, and students from disadvantaged backgrounds. The Company also makes some grants direct to community groups, including different community clubs, events, schools and facilities such as pools and museums. As at the date of this ruling, the Company has provided a cumulative total of $XXX in grants and sponsorships. Of that amount, $XXX has been made through the Foundation's Community Grants Program and $XXX has been made through its Scholarship Program. In the 20XX, 20XX and 20XX income years, a total of $XXX, $XXX and $XXX has been provided by the Company in grants and sponsorships. Further grants are projected prior to 30 June 20XX. Assumptions The Company has applied (and will apply) its income and assets solely for the purposes for which it is established at all times throughout the period covered by this ruling. The Company has always complied with all the substantive requirements in its governing rules, and will continue to do so.

Relevant legislative provisions: Income Tax Assessment Act 1936 former subparagraph 23(g)(v) | Income Tax Assessment Act 1997 section 50-1 | Income Tax Assessment Act 1997 section 50-10 | Income Tax Assessment Act 1997 section 50-40 | Income Tax Assessment Act 1997 section 50-70 | Income Tax Assessment Act 1997 subsection 50-70(1) | Income Tax Assessment Act 1997 paragraph 50-70(1)(a) | Income Tax Assessment Act 1997 subsection 50-70(2) | Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision: Summary: All subsequent legislative references are to the ITAA 1997, unless otherwise stated. The ordinary and statutory income of the Company will be exempt from income tax pursuant to section 50-1 on the basis that it is covered by item 2.1 of the table in section 50-10. | Detailed Reasoning - Detailed reasoning: Section 50-1 exempts from income tax the total ordinary and statutory income of an entity covered by item 2.1 of the table in section 50-10. An entity that is not an 'ACNC type of entity' is covered by item 2.1 of the table in section 50-10 where: | Detailed Reasoning - Society, association or club: The terms 'society', 'association' or 'club' are not defined in the ITAA 1997 and are therefore construed according to the ordinary meaning of the words. This approach was taken in Douglas v Federal Commissioner of Taxation 36 ATR 532; (1997) 77 FCR 112; 97 ATC 4722 whereby the court made reference to the definitions contained in the Concise Oxford Dictionary for each of these terms. In Taxation Determination TD 95/56 the Commissioner similarly considers the definition of 'association' by reference to its ordinary meaning and states (at paragraph 2): ... The Shorter Oxford English Dictionary defines the term 'association' to be 'a body of persons associated for a common purpose; the organisation formed to affect their purpose'. The Macquarie Dictionary defines 'association' as being 'an organisation of people with a common purpose and having a formal structure'. Olsson J, in Quinton v. South Australian Psychological Board (1985) 38 SASR 523, also stated that the term 'association' has come to be regarded as attaching to a body of persons associated for a common purpose. The Company is a company limited by guarantee, whose members are people associated for common purposes and interests, as specified in the Constitution, and therefore meets the definition of an 'association' for the purpose of section 50-10. | Detailed Reasoning - Established for community service purposes: Taxation Determination TD 93/190(TD 93/190) sets out the circumstances under which a society, association or club is regarded as being established for community service purposes and explains at paragraph 2 that the purpose of enacting subparagraph 23(g)(v) of the Income Tax Assessment Act 1936 (ITAA 1936) (being the predecessor to item 2.1 of the table in section 50-10) 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. Paragraph 3 of TD 93/190, like the Explanatory Memorandum to subparagraph 23(g)(v) of the ITAA 1936, confirms that the words 'community service purposes' are to be given a wide interpretation, and 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. However, paragraph 4 of TD 93/190 notes that subparagraph 23(g)(v) of the ITAA 1936 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'. Only when the purposes of the organisation are altruistic can they be community service purposes. This is in contradistinction to an organisation established for the purposes of advancing the common interests of its members (see paragraph 5 of TD 93/190). Where there is an incidental benefit derived by members of an organisation, it will not be a disqualifying attribute if it can be shown that the organisation is established mainly to provide benefits to the community. The purposes for which an organisation is established are demonstrated by its current operations and activities, which may show different purposes to those suggested by a reading of its constitution: see Royal Australasian College of Surgeons v Federal Commissioner of Taxation (1943) 68 CLR 436 (paragraph 7 of TD 93/190). Whether an entity is 'established' for community service purpose is considered each income year as stated in the case of Federal Commissioner of Taxation v Wentworth District Capital Ltd 2011 ATC 20-253 ( Wentworth ). The activities undertaken in the relevant year must be considered, alongside the objects and purposes for which the body was incorporated. Per Gilmour and Gordon JJ in Wentworth at paragraph 30, 'an entity might be established for the requisite purpose in one year, but not another'. The case of Wentworth considered whether the facilitation of banking services in a small country town could be a 'community service purpose'. The Full Federal Court found that the facilitation of commercial services can be a community service purpose (and was found to be one in the case of Wentworth ). However, the court rejected the proposition that the facilitation of the commercial supply of services in a town, that would otherwise not be provided, would always be a community service. Via its provision of franchised offices of ABC Bank, the Company, as in Wentworth , is facilitating the provision of face-to-face and full banking services where they would not otherwise exist (i.e. the rural towns of Town A and Town B). In order to determine whether this qualifies as the Company being established for community service purposes, the circumstances of the relevant community must be considered to determine whether the facilitation of the provision of full-service and face-to-face banking activities provides sufficient real and tangible benefit to the community. The service provided by the Company means that residents of Town A, Town B and surrounding areas in and around those rural towns do not have to drive a significant distance to conduct in-person banking. Having a local bank is a benefit for individuals and businesses who/that need in-person banking services, whether it be to apply for a loan, receive advice regarding banking products, deposit funds or bank otherwise than online. Given the population of Town A and Town B, the ratio of customers at each of the Community Banks in those towns indicates that a substantial portion of the local community is using the face-to-face banking facilities made available by the Company. The communities would be detrimentally impacted should the Company cease to provide that service. As such, the Company is providing a real and tangible benefit to the community. Additionally, as in Wentworth , the Company has a secondary (broader) objective: to distribute profits in a manner which will benefit the community in and around the towns within which a franchised office is carried on. This is (and will continue to be) facilitated via the distribution of Company profits into community organisations and activities. The services, facilities and funding made available by the Company has regard to the benefit and best interests of others in those communities, and are therefore consistent with that of an altruistic purpose. Neither the Company's stated objectives (per its Constitution), nor its operations and activities for the period in respect of which the ruling relates, supports a purpose of advancing the common interests of its members. It is therefore accepted that the Company is established for community service purposes (none of which include political or lobbying purposes). | Detailed Reasoning - Section 50-70 - Special conditions for item 2.1: Section 50-70 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). (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. The phrase 'carried on for the purpose of profit or gain of its individual members' is not defined in the tax legislation. In Commissioner of Taxation v. Co-operative Bulk Handling Ltd [2010] FCAFC 155; 2010 ATC 20-231; (2010) 81 ATR 312, the Full Federal Court considered the operation of section 50-40, a special condition of which is that an entity 'must not be carried on for the profit or gain of its individual members'. Mansfield and McKerracher JJ stated the following on the expression 'not carried on for the profit or gain of individual members': ...if as a consequence of pursuing the purpose, the members derive a benefit or gain..., that gain or benefit will not preclude exemption unless it is a gain produced only by reason of individual membership... In all cases of exemption, it must be the position that it is not open to the body to disburse any profits or dividends to members... (at paragraph 94). This was also the approach of the South Australian Supreme Court in Repromed Pty Ltd v. Lucas and Anor [2000] SASC 203; (2000) 76 SASR 575; 2000 ATC 4542; (2000) 44 ATR 452 where the court considered whether Repromed Pty Ltd was exempt from pay-roll tax on the basis that it was an employer who provided health services 'otherwise than for the purpose of profit or gain'. Debelle J held that Repromed Pty Ltd was carried on for the purpose of profit or gain as its constitution did not provide barriers to individual profit, and profits could find their way into pockets of individuals (at paragraph 35). The above authorities indicate that the phrase 'not carried on for the purpose of profit or gain to its individual members' requires an absolute prohibition against profits or gains arising to individual members. The Company will satisfy the special condition in subsection 50-70(1) as: The Company satisfies the special condition in subsection 50-70(2) as the Company has, as assumed for the purposes of this ruling:

it is a society, association, or club; | it is established for community service purposes (except for political or lobbying purposes); and | it meets the special conditions of section 50-70. | the Constitution contains an absolute prohibition against the Company's profits or gains arising to individual members (except as genuine compensation for services rendered or expenses incurred on behalf of the Company) such that the Company constitutes an association that is not carried on for the purpose of profit or gain of its individual members; and | for the purposes of paragraph 50-70(1)(a), the Company is located solely (and therefore has a physical presence) in Australia and incurs its expenditure and pursues its objectives solely in the towns and surrounding areas of Town A and Town B (and therefore Australia). | always complied with all the substantive requirements in its governing rules, and will continue to do so; and | applied (and will apply) its income and assets throughout the period covered by this ruling solely for the purpose for which the Company is established.