Private ruling: Income tax exemption and rebatable employer status.
Published: August 2013
Ruling period: Year ended 30 June 2012 | Year ended 30 June 2013 | Year ended 30 June 2014 | Year ended 30 June 2015
Date scheme commenced: Income year beginning 1 July 2011

Ruling: Q1: Is the rulee exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) on the basis that it is a community service organisation as described in Item 2.1 in the table in section 50-10 of the ITAA 1997?? | A2: No

Relevant facts and circumstances: The rulee was established as a Company limited by guarantee to assist its members to meet their statutory obligations under certain specified Australian legislation. The rulee's principal place of business is Australia. The rulee's operations are funded by its members through membership fees. The fees enable the rulee to provide collection services to the community. The services form part of the statutory arrangements and obligations of the specified Act and are intended to fulfil its members' legal obligations under that Act. The rulee claims to be an Association whose members have come together, for the purpose of taking combined action to meet their legal obligations. The regulations set annual targets and the rulee is responsible for providing services and assistance to its members to enable them to achieve the required targets. The objects of the rulee are listed at clause x of its constitution. The rulee's objectives include to fully meet member's obligations under the legislation, reduce waste contribution to landfill, reduce collection and recycling costs, promote maximum recycling of resources, provide free drop off services and connect with stakeholders to educate and collaborate to sustain behavioural change. The Act The object of the Act is to encourage the recycling & recovery of resources from specified types of waste. The Act also sets out certain requirements and obligations which affect the operations of the members of the rulee. The Act and regulations also dictate who is liable and specify key outcomes to be achieved. . Arguments and references by applicant The relevant matter for consideration is whether the entity's main purpose and activities, conform with the term" community service purposes". In support of its claim that it was established for "community service purposes", the applicant made reference to the following: - Taxation Determination TD 93/190, where it was stated the words "community service purposes" extend to a range of altruistic purpose that are not otherwise charitable, such as promoting, providing or carrying out activities, facilities or projects for the benefit or welfare of the community. - the facts and decision in FCT v. Wentworth District Capital Ltd (2011) FCAFC 42, where the members of the Wentworth community incorporated the taxpayer company in response to Westpac Bank closing its branch in the town. The applicant claims the activities carried on by the rulee meet criteria distilled from this case. - ATO Interpretative Decision ATO ID 2003/721, where the Commissioner took the view that an industry ombudsman was exempt from income tax under section 50-10 of the ITAA 1997 where the entity was established by its members, pursuant to a State/Territory statute, to provide a free ombudsman service to domestic and small business consumers of that industry. The applicant also claims that; - the rulee's services to the public provide a practical and tangible benefit to the community by improving the efficiency with which resources are used, reducing the impact on the environment of waste disposal and improving the management of waste. These services minimise the harmful consequences to human health and to the community. - the rulee will benefit the community by educating and raising the awareness of business and households around the legislative requirements through community awareness and education campaigns on the benefits of its services. - the requirement for the members of the rulee to pay annual fees is to enable it to provide its services to the community free of charge. - although one of the rulee's aims is to assist its members in meeting their obligations under the legislation, its main and dominant purpose is to deliver better services and environmental outcomes to the community. - the Australian Charities and not for Profits commission (ACNC) has confirmed the rulee is not a charity. - the rulee has a physical presence in Australia and incurs its expenditure and pursues its objectives in Australia. -in relation to the question of whether it qualifies as a rebatable employer for the purposes of section 65J(1)(j) of the FBTAA 1986, the rulee relies on the outcome of being accepted as an entity established for community service purposes. - the rulee claims to operate as a not for profit entity and although it assists its members to meet their legal obligations, it is a means to ultimately benefit the environment and the community. - the rulee's activities are directed at ensuring the objectives of the relevant legislation are met. - the rulee's constitution contains suitable non-profit clauses which prohibit distribution, payment or transfer of income or property, to a member.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 50-1 | Income Tax Assessment Act 1997 section 50-10 | Income Tax Assessment Act 1997 section 50-70 | Fringe Benefits Tax Assessment Act 1986 subsection 65J(1)

Reasons for decision: Summary: The rulee is not established for community service purposes. As such, it is not exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as a society, association or club described in item 2.1 of the table in section 50-10 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Income Tax Exemption: Section 50-1 of the ITAA 1997 provides that the total ordinary income and statutory income of the entities covered by the tables in section 50-5 of the ITAA 1997 to section 50-45 of the ITAA 1997 are exempt from income tax. The exempt entity described in Item 2.1 of the table in section 50-10 of the ITAA 1997 is a: "society association or a club established for community service purposes (except political or lobbying purposes)". In order to be eligible for income tax exemption under section 50-10 of the ITAA 1997, an entity described in item 2.1 of the table in that section must satisfy the special conditions set out in section 50-70 of the ITAA 1997. For income years starting before 1 July 2013, former section 50-70 of the ITAA 1997 provides: An entity covered by item 1.7, 2.1, 9.1 or 9.2 is not exempt from income taxunless is a society, association or a 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. Note: Certain distributions may be disregarded: see section 50-75. For income years starting on or after 1 July 2013, section 50-70 of the ITAA 1997 provides: (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). Note: Certain distributions may be disregarded: see section 50-75. (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. These requirements are summarised in the Income tax guide for non-profit organisations (NAT 7967), which is available on the Australian Taxation Office Website at www.ato.gov.au. The guide provides the following in regards to community service organisations: | Detailed Reasoning - Requirements checklist: Your organisation will be exempt from income tax, and can self-assess its exemption, if it meets all of the following requirements: · it is a non-profit society, association or club · it is established for community service purposes (except political or lobbying purposes) · it is not a registered charity · it meets one of the three tests. | Detailed Reasoning - Three tests: For a community service organisation that is not a registered charity to be exempt from income tax, it must pass one of the following tests: · physical presence in Australia test · Deductible Gift Recipient (DGR) test · prescribed by law test. | Detailed Reasoning - Non-profit requirement: The rulee is a company limited by Guarantee. Its members all fall within the definition of the specified legislation. The members are associated together for a common shared purpose and to meet the legal obligation imposed on them by the specified legislation. It is accepted the rulee is a society or association for the purposes of section 50-10 of ITAA 1997. The entity must not be carried on for the purposes of profit or gain of its individual members. Its constituent document must contain clauses that prevent it from distributing its profits or assets among members on a daily operational basis and on its winding up. This provision must also be reflected in its activities. On the basis of the information provided and by the adoption of its constitution which prohibits distribution, payment or transfer of income or property to a member, it is accepted the company is aware of its non-profit responsibilities and operates as a not for profit entity. | Detailed Reasoning - Established for community service purposes, except for political or lobbying purposes.: Item 2.1 of the table in section 50-10 of the ITAA 1997, in conjunction with section 50-1 of the ITAA 1997, specify that the total ordinary income and statutory income of a 'society, association or club established for community service purposes (except political or lobbying purposes)' is exempt from income tax. In addition, for income years commencing on or after 1 July 2013, the special conditions in section 50-70 (1) and (2) as amended relevantly require that the entity is 'not carried on for the purpose of profit or gain of its individual members' and that the entity satisfies the conditions in subsection (2) which are: (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. ATO Interpretive Decision ATO ID 2003/721 supports the following; The required 'community service purposes' must be the entity's 'main or predominant purposes' ( Royal Australian College of Surgeons v. FCT (1943) 68 CLR 436; (1943) 7 ATD 289, Cronulla Sutherland Leagues Club Limited v. FCT (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 industry ombudsman entity. Taxation Determination TD 93/190 states at paragraph 2 in relation to former subparagraph 23(g)(v) of the Income Tax Assessment Act 1936 (ITAA 1936), which preceded item 2.1 of the table in section 50-10 of the ITAA 1997, that; 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. [emphasis added] TD 93/190 further states at paragraphs 3 to 5: 3. There are four heads of charitable purpose, one of which is other purposes beneficial to the community; but this is limited by the common law to those purposes which are also charitable within the meaning of the Statute, 43 Elizabeth, Ch. 4. 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. It is noted that 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 for providing it. There is a distinction to be drawn between an association that is advancing its members' interests and an association advancing some community interests. The Income tax guide for non-profit organisations (NAT 7967), which is available on the Australian Taxation Office Website at www.ato.gov.au states the following in regards to community service organisations: Purposes The main purpose of the organisation must be community service purposes. To work out your organisation's main purpose, you should look at your organisation's constituent documents, activities, use of funds and history. Any other purpose of the organisation must be incidental, ancillary or secondary to the community service purpose. Community service purposes are altruistic - that is, community service organisations are established and operated with regard to the wellbeing and benefit of others. Community service organisations promote, provide or carry out activities, facilities or projects for the benefit or welfare of the community or any members who have a particular need by reason of youth, age, infirmity or disablement, poverty or social or economic circumstances. Organisations that seek to advance the common interests of their members are not altruistic and so cannot be community service organisations. If an organisation's main purpose is lobbying or political, its income will not be exempt. The rulee was established as a result of its members' legal obligations under the legislation and not as a result of a voluntary arrangement by its members for altruistic purposes. The legislation requires the members who decide to enter into an arrangement, to establish a body corporate, to be the responsible administrator of the approved arrangement. The rulee is also committed to returning value to its members through high quality service. The arrangement approach involves a combination of government regulation and industry action. Government makes regulations that set the outcomes to be met, while industry funds and implements the scheme and has flexibility in determining how those outcomes are achieved. We do not accept the entity's claim that its main purpose and activities conform with the term community service purposes, based on the argument that its establishment and operation is identical or similar to the facts and purposes in FCT v. Wentworth District Capital Ltd [2011] FCAFC 42. We consider that its main purpose and objectives under its constitution and the legal requirement for its establishment is to assist its members to discharge their legal obligations. The rulee claims that its main purpose and activities conform with the term "community service purposes", based on the argument and facts in the decision in ATO Interpretative Decision ATO ID 2003/721, relating to the establishment of the ombudsman scheme pursuant to a requirement of a State / Territory statute to provide a free ombudsman service to consumers of an industry. We do not accept this claim. We consider the rulee was established due to a legal requirement and operates to assist its members to discharge their legal obligations. One of the entity's activities which relate to the provision of the described services to the public, provide a practical and tangible way to deal with the prescribed products. This is due to the legal requirement, relating to the improvement and management of certain identified products which are dealt with by the entity's members, who have a legal obligation under the relevant legislation. It is not as a result of a voluntary and or altruistic initiative by the members of the rulee. Any benefit to the community from the minimisation of harmful effects on human health and the environment are as a result of the legal obligation imposed by legislation. | Detailed Reasoning - It is not a charity: The rulee confirmed in its application that it has applied to the Australian Charities and Not-for Profits Commission (ACNC) to be registered as a charity. It was confirmed by the ACNC that the rulee is not a charity. | Detailed Reasoning - Whether applicant passes one of the three tests: As stated above, for a community service organisation that is not a registered charity to be exempt from income tax, it must pass one of the following tests: · physical presence in Australia test · DGR test · prescribed by law test. The rulee satisfies the physical presence in Australia test. | Detailed Reasoning - Conclusion:: The rulee was established as a result of legislative requirement as a body corporate. Its main and predominant purpose is to operate to benefit and assist its members fulfil their legal obligations under the legislation and not for altruistic purposes. It only accepts membership and provides its services to anyone who meets the definition under the legislation and who has a legal obligation to become a member under the scheme. In view of the basis and reason for its establishment, its main purpose and objectives and the manner in which the services are provided, the rulee is an organisation that seeks to advance the common interests and fulfil the legal obligations of its members. Such purposes are not altruistic and so the rulee is not a community service organisation. Although it is accepted that the Rulee is: - established as a non-profit society or association, - is not a registered charity, and - meets the physical presence in Australia test, it does not meet the requirement that it is established for community service purposes. As such, the rulee is not exempt from income tax under section 50-1 of the ITAA 1997 as a society, association or club established for community service purposes (except political or lobbying purposes) pursuant to item 2.1 of the table in section 50-10 of the ITAA 1997. | Summary: The rulee does not qualify as a "rebatable employer" within the application of subsection 65J(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986) | Detailed Reasoning - Detailed reasoning: The rulee is not entitled to income tax exemption pursuant to item 2.1 in the table in section 50-10 of the ITAA 1997 because it was not established for community service purposes. As such the rulee is not a "rebatable employer" pursuant to subsection 65J(1) of the FBTAA 1986 on the basis that it is not exempt from income tax and not an entity as described in item 5 in the table in paragraph 65J(1)(b) of the FBTAA 1986 .

Issue 2 Question 1: Is the rulee a "rebatable employer" pursuant to subsection 65J(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986)?