Private ruling: Income tax exemption and consideration for taxable supply
Date of advice: 18 February 2019
Published: May 2019
Ruling period: Income year ended 30 June 20XX
Date scheme commenced: XX XXXX 20XX

Ruling: Q1: Is the taxpayer an entity covered by item 2.1 of the table in section 50-10 of the Income Tax Assessment Act 1997 (ITAA 1997), so that its ordinary and statutory income is exempt from income tax under section 50-1 of the ITAA 1997? | A1: Yes. Issue 2 | Q2: In relation to the service fees received from certain stakeholders who are on subscriptions, are they consideration for taxable supplies? | A2: Yes.

Relevant facts and circumstances: The taxpayer is an entity established in Australia that has at all relevant times undertaken its activities in Australia. The objects of the taxpayer are stated to promote certain matter in a certain sector, to raise awareness, and to improve certain standards in relevance to the matter. The governing documents of the taxpayer strictly prevent it from distributing assets and income directly or indirectly for the benefit of its members both while it is operating and when it winds up. The taxpayer develops comprehensive marketing strategies to raise awareness and to deliver information to identified targeted audiences and parties, works with different parties on program(s) to fill identified gaps and to increase pathways, investigates existing issues and develops strategies etc.

Relevant legislative provisions: Income Tax Assessment Act 1997 | A New Tax System (Goods and Services Tax) Act 1999 Issue 1 | Question 1 | Unless otherwise stated, all legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997).

Reasons for decision: Summary: Pursuant to section 50-1 and item 2.1 of the table in section 50-10, the ordinary income and statutory income of an association established for community service purposes (excluding political or lobbying purposes) is exempt from income tax provided the special conditions in section 50-70 are satisfied. 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 it either has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia; or meets the description and requirements in item 1 of the table in section 30-15; or 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. Subsection 50-70(2) provides 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). The threshold question in order to quality for exemption under section 50-1 as an entity covered by item 2.1 of the table in section 50-10 is whether the taxpayer is an association established for community service purposes. Association The term ‘association’ is not defined and it has its ordinary meaning. The Shorter Oxford English Dictionary defines 'association' to be 'a body of persons associated for a common purpose; the organisation formed to effect their purpose'. The Macquarie Dictionary defines it as 'an organisation of people with a common purpose and having a formal structure'. On the facts, it is accepted that the taxpayer is an association. Established The meaning of the word ‘established’ in former subsection 23(g) of the Income Tax Assessment Act 1936 (ITAA 1936) was considered in Cronulla Sutherland Leagues Club Limited v. FC of T 90 ATC 4215 , where it was held that it referred not only to the circumstances existing when the entity was initially formed but also to its subsequent activities and to the circumstances of the particular year under consideration. This is noted in paragraph 24 of the Taxation Ruling 2015/1 Income tax: special conditions for various entities whose ordinary and statutory income is exempt (TR 2015/1) where it is stated that, the purpose for which an entity is established is determined by a consideration of all the features of the entity. The main factors to be considered are the objects in the entity’s constituent documents and the activities of the entity after its formation. Community service purposes ‘Community service’ is not defined in the Income Tax Assessment Act 1997 or Income Tax Assessment Act 1936. Paragraph 3 of the 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? (TD 93/190) provides explanations on the term 'community service purposes' that, it has a broader meaning than other purposes beneficial to the community which are also charitable. The Explanatory Memorandum to subparagraph 23(g)(v) of the Income Tax Assessment Act 1936 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. To determine exemption from income tax for organisations that are established within the community, paragraph 4 of the TD 93/190 requires altruistic purposes to be an essential element of even the widest interpretation of ‘community service purposes’. Paragraph 7 of the TD 93/190 points out that, 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 cursory reading of its constitution: cf Royal Australasian College of Surgeons v. Federal Commissioner of Taxation (1943) 68 CLR 436. On the facts, since its establishment, the taxpayer has undertaken substantial activities that give effect to its stated formation purpose. Accordingly, it is considered that the taxpayer is established for community service purposes. Special Conditions The taxpayer was established in Australia and has at all relevant times operated in Australia. Accordingly, the special conditions in section 50-70 will be satisfied if the non-profit requirement, governing rules condition and income and assets condition are satisfied. Generally it is accepted that an association operates on a non-profit basis 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 winding-up. The association's actions must, of course, be consistent with the prohibition. In this case, those relevant clauses in the taxpayer’s constituent document together ensure that the funds and assets of the taxpayer are applied only to carry out its purposes and are not applied for the benefit of its members. Therefore, the non-profit requirement is satisfied. The governing rules condition is considered in paragraph 8 of the TR 2015/1, which lists down the following three questions to be asked: ● what are the governing rules of the entity? (further explanations in paragraphs 9 to 16 of the TR 2015/1) ● what are the substantive requirements in the governing rules? (further explanations in paragraphs 17 to 20 of the TR 2015/1) ● at what time must the entity comply with all of the substantive requirements in its governing rules? (further explanations in paragraph 21). In this case, the taxpayer’s constituent document constitutes its governing rules. The substantive requirements in the taxpayer’s governing rules are those set out in its constituent document. On the facts, there is nothing that could otherwise indicate or suggest that the taxpayer does not comply with any of the substantive requirements in its governing rules, it is considered that the taxpayer meets the governing rule condition in subsection 50-70(2). The income and assets condition is considered in paragraph 23 of the TR 2015/1, which requires the following two questions to be asked: ● what is the ‘purpose for which the entity is established’? (further explanations in paragraphs 24 to 29 of the TR 2015/1) ● has the entity applied its income and assets solely for the purpose for which the entity is established? (further explanations in paragraphs 30 to 36 of the TR 2015/1). Paragraph 24 of the TR 2015/1 explains 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 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. Other factors to consider include policies and plans, administration, finances, history and control, and any legislation governing the operation of the entity. In this case, the taxpayer is an association established for its objects stated in its constituent document. The activities that it has conducted are directly related to its stated objects. Meaning of ‘solely’ is provided in paragraphs 33 to 35 of the TR 2015/1 that, the entity must exclusively or only apply its income and assets for that purpose. On the facts, there is nothing that could otherwise indicate or suggest the taxpayer does not apply its income and assets solely for its establishment purpose or objects, the income and asset condition in subsection 50-70(2) is satisfied. Therefore, the taxpayer is a non-profit entity and is established and operated for its objects as stated in its constituent document; it meets the conditions as set out in section 50-70, and accordingly it qualifies as an exempt entity under item 2.1 of the table in section 50-10. | Detailed Reasoning - Question 1: Unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act). | Detailed Reasoning - Reasons for decision: GST is charged or levied on the making of every taxable supply: subsection 7-1(1). Under section 9-5, you make a taxable supply and therefore must charge GST if: (1) you make a supply for consideration; (2) the supply is made in the course or furtherance of an enterprise that you carry on; (3) the supply is connected with Australia; (4) you are either registered or required to be registered, and (5) the supply is not GST-free or input taxed. A supply is any form of supply whatsoever: subsection 9-10(1) and is clearly intended to be all-encompassing, extending well beyond supplies of goods and services to include many transactions that result in an entity receiving money or property. Subsection 9-10(2) provides, without limiting the general definition in subsection 9-10(1), that supply includes any of the following: a) a supply of goods b) a supply of services c) a provision of advice or information d) a grant, assignment or surrender of real property e) a creation, grant, transfer, assignment or surrender of any right f) a financial supply g) an entry into, or release from, an obligation: (i) to do anything (ii) to refrain from an act, or (iii) to tolerate an act or situation h) any combination of any two or more of the matters referred to in items (a) to (g). Consideration is defined broadly and means, in effect, just about anything of value: section 9-15. In the current case, the taxpayer receives service fees from certain stakeholders who are on subscriptions. In making these payments of service fees, the stakeholders can actively support and participate into taxpayer’s activities and operations that may consequently overcome existing identified problems. The service fees that the taxpayer receives are the monetary consideration for its supply of subscriptions to the stakeholders for their participation and to overcome existing identified problems. The taxpayer is registered for GST, it makes the supply in the course or furtherance of an enterprise that it carries on, the supply is connected with Australia and is not GST-free or input taxed. Therefore, the service fees contributed by the stakeholders to the taxpayer are consideration for taxable supplies, accordingly, GST should be charged on making the supply.