Private ruling: Income tax status
Date of advice: 15 September 2016
Published: November 2016
Ruling period: 1July 2015 to 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Is the Taxpayer exempt from income tax pursuant to section 50-1 of the ITAA 1997 on the basis it is a community service organisation as described in section 50-10 of the ITAA 1997? | A1: No

Relevant facts and circumstances: The Taxpayer is an incorporated association and is a non-profit organisation. It was formed as a social community service organisation to arrange activities for its members. It main aim is to arrange reunions, sporting events and social functions for its members. XX% of its expenditure was to arrange social functions for its members. The taxpayer had taxable income of less than $416 for the year ended 30 June 2016.

Relevant legislative provisions: Income Tax Assessment Act 1997 50-1, | Income Tax Assessment Act 1997 50-10 and | Income Tax Assessment Act 1997 59-35.

Reasons for decision: Summary: Section 50 of the Income Tax Assessment Act 1997 (ITAA 1997) states the types of organisations that qualify for income tax exemption and come from the following groups: Charities; • Community service organisations; • Cultural organisations; • Educational organisations; • Employment organisations; • Health organisations; • Income tax exempt funds; • Religious organisations; • Resource development organisations; • Scientific organisations; and • Sporting organisations The Taxpayer does not appear to satisfy any of the above groups and the closest it may come to income tax exemption is as a community service organisation. What is a community service organisation? Subsection 50-10 of the ITAA 1997 allows income tax exemption for community service organisations. A community service organisation is a not-for-profit society, association or club established for community service purposes except political or lobbying purposes. The ATO Publication 'Non-Profit/Your Organisation' states that the main purpose of the organisation must be community services. Any other purpose of the organisation must be incidental, ancillary or secondary to the community service purpose. Community service purposes are altruistic meaning that they are established and operated for 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 other 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 cannot be community service organisations. In this case, the aims of the organisation are as follows: • To maintain and to extend the rights and privileges of its members and their dependants; • Advance the welfare of its members and their dependants; • Arrange reunions, sporting events and social functions for its members; and • Support any charitable cause approved by the Committee of the Association. The ATO Publication 'Non-Profit/Your Organisation' outlines that to qualify for the income tax exemption as a community service organisation the main purpose of the organisation must be community services. In this case, the organisation has multiple objectives that are mainly focused on providing support and assistance to its members and their dependants. As a result it cannot be said that community service is the main purpose of the organisation. Therefore, the organisation does not qualify for income tax exemption as a community service organisation under section 50-10 of the ITAA 1997. Mutuality Principle The mutuality principle is a legal principle established by case law. It is based on the proposition that an organisation cannot derive income from itself. The principle provides that where a number of persons contribute to a common fund created and controlled by them for a common purpose, any surplus arising from the use of that fund for the common purpose is not income. Section 59-35 of the ITAA 1997 states: "An amount of *ordinary income of an entity is not assessable income and not *exempt income if: (a) the amount would be a mutual receipt, but for the entity's constituent document preventing the entity from making any *distribution, whether in money, property or otherwise, to its members; and (b) apart from this section, the amount would be assessable income only because of section 6-5." The organisation's constitution contains a non-profit clause (4.1) which prohibits the distribution of its income and other assets amongst its members. Therefore, income from its members such as membership subscriptions (mutual receipts) will not be assessable income. Expenses incurred to derive mutual receipts are not deductible. Income from non-members such as bank interest, dividends and rental income will be assessable and expenses incurred in deriving this income are deductible. . Non-profit companies that are Australian residents have a taxable threshold. If the taxable income of a non-profit company in an income year is below the threshold (which is $416 per year), it is not required to lodge a tax return for that year. If the Taxpayer's taxable income from non-member receipts is greater than $416 it will be required to lodge a tax return. As the organisation has taxable income of less than $416, it will not be required to lodge an income tax return for the year ended 30 June 2016.