Private ruling: Exempt entities
Published: April 2015
Ruling period: Income year ended 31 March 2007 | Income year ended 31 March 2008 | Income year ended 31 March 2009 | Income year ended 31 March 2010 | Income year ended 31 March 2011 | Income year ended 31 March 2012 | Income year ended 31 March 2013 | Income year ended 31 March 2014
Date scheme commenced: The scheme has commenced.

Ruling: Q1: Is the organisation (X) an exempt entity under item number 2.1 of the table in section 50-10 of the Income Tax Assessment Act 1997 (ITAA 1997) for the years ended 31 March 200X to 31 March 20XX? | A1: No | Q2: Is the interest income of X exempt income under section 6-20 of the ITAA 1997 for the years ended 31 March 200X to 31 March 20XX? | A2: No | Q3: Is the interest income of X assessable income under section 6-5 of the ITAA 1997 for the years ended 31 March 200X to 31 March 20XX? | A3: Yes

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. Background X is an unincorporated entity. They recently changed their name. X was formed by officers whose criterion for membership was that they had certain military training. Around the time of incorporation, X received sponsorship. Lately, however, X has gained financial support from attendance at social functions, payment of membership subscriptions and the recruitment of new members. X's Constitution X's Constitution has remained relatively unchanged since its incorporation. The most significant change has been the change of name mentioned above. The objects in X's Constitution are directed towards fostering the spirit of patriotism to the military amongst members and directing any income towards the promotion of these objects. X's day to day operations and activities The copies of annual financial statements and minutes of meetings provided that X's day to day operations include: • Reunions; • Cocktail parties; • Luncheons; • Dinners; • Maintenance of a website; and • Publishing a member's newsletter. Membership of X A clause in X's Constitution deals with membership. It states that membership of X is open to all persons approved by the Committee that hold certain qualifications and whom the Committee deems desirable. X's Committee retains the right to refuse or defer any membership application at its discretion. X's Committee can admit certain persons as lifetime members. X's Committee can also declare a person to longer be a member if they fail to pay their dues (including subscriptions), tender a resignation or disregard the Constitution. A clause in X's Constitution provides that all office bearers will be indemnified by X from all losses and expenses incurred by them while carrying out their duties. However, they will not be indemnified if the losses and expenses arise through their own wrongful act, excess of authority or wilful default. Dissolution of X X will be wound up if any of the following occurs: (a) A resolution to that effect is passed at any Annual or Extraordinary General meeting; or (b) If at any time there shall be less than a certain number of financial members. Pursuant to a cause in X's Constitution, on winding up, the Committee shall have full power to close the affairs of X and to dispose of its assets as it deems expedient. However, the surplus funds of X cannot be distributed to members.

Relevant legislative provisions: Income Tax Assessment Act 1936 Subparagraph 23(g)(v) | Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 6-20 | Income Tax Assessment Act 1997 Division 6 | Income Tax Assessment Act 1997 Section 10-5 | Income Tax Assessment Act 1997 Division 50 | Income Tax Assessment Act 1997 Section 50-10 | Income Tax Assessment Act 1997 Section 50-70

Reasons for decision: Summary: X is not an exempt entity as it is not a society, association or club established for community service purposes pursuant to item 2.1 of the table in section 50-10 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Section 50-1 of the ITAA 1997 exempts from income tax the total ordinary and statutory income of an entity covered by section 50-10 of ITAA 1997. Item 2.1 of the table in section 50-10 of the ITAA 1997 states that a society, association or club established for community service purposes (except political or lobbying purposes) shall be exempt from income tax, subject to the special conditions in section 50-70 of the ITAA 1997. Accordingly, to be exempt from income tax under item 2.1 of the table in section 50-10 of the ITAA 1997, an entity must: • be a society, association or club; • be established for community service purposes (except political or lobbying purposes); and • meet the special conditions specified in section 50-70 of the ITAA 1997. | Detailed Reasoning - Society, Association or Club: The words 'society', 'association' or 'club' are not defined in the ITAA 1997 and have their ordinary meaning. The Macquarie Online Dictionary defines an association as 'an organisation of people with a common purpose and having a formal structure'. 'Society' has an equivalent meaning as discussed at length in Pro-campo Ltd v. Commr of Land Tax (NSW) 81 ATC 4270 at 4279; (1981) 12 ATR 90 at 35. X is an unincorporated entity. As X is an unincorporated entity brought into existence by its members to pursue a common purpose, the entity is accepted as an association. | Detailed Reasoning - Established for community service purposes: Item 2.1 in section 50-10 of the ITAA 1997, replaces subparagraph 23(g)(v) of the Income Tax Assessment Act 1936 (ITAA 1936). Guidelines for the exemption provided by that subparagraph are located 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 ? (TD 93/190). The Explanatory Memorandum to the Taxation Laws Amendment Bill (No. 2) 1990 which introduced subparagraph 23(g)(v) of the ITAA 1936, explains that while the phrase "community service purposes" is not defined, it: • is not limited to those purposes beneficial to the community which are also charitable; • extends to a range of altruistic purposes; and • extends 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. The Explanatory Memorandum also explains that: • to establish the purpose of an entity, an examination of its present conduct and activities is required, even if its constitution or its formation and history suggest a different purpose in the past. This is confirmed by the courts in Royal Australasian College of Surgeons v. Federal Commissioner of Taxation ( 1943) 68 CLR 436; and • the concept of community is not a reference to a narrow geographic limit, and does not need to be confined to the population of a particular region. Paragraph 4 of 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? (TD 93/190) explains the Commissioner's view that altruistic purpose is an essential element in the phrase "community service purposes". Paragraph 5 of TD 93/190 contains the ATO's view that the mere fact that an entity is a non-profit organisation to advance the members' common interest is not sufficient for it to satisfy the phrase "community service purposes", as members who seek to advance their common interest are not motivated by an unselfish regard for others, and neither is the entity. Only when the purposes of the organisation are altruistic can an organisation be established for community service purposes. The court in Royal Australasian College of Surgeons v. Federal Commissioner of Taxation (1943) 68 CLR 436 established that the purpose for which an organisation is established is demonstrated by its current operations and activities, which may show a different purpose to those suggested by its constitution. In Cronulla Sutherland Leagues Club Ltd v Commissioner of Taxation (1990) 23 FCR 82 at 89-90 it was discussed whether the wording in the legislation in relation to 'established' meant when an entity is initially established or whether it refers to its current activities. In this case the court established that the purposes of an entity must be examined in each income year to determine if it is 'established' for community service purposes. In the case of X, the purpose of its establishment can be found in its Constitution, minutes from the Annual General Meetings and financial statements, along with other sources. As mentioned previously, an article of X's Constitution states that its objects are to foster the spirit of patriotism towards the military amongst members. An examination of documents provided indicates that X conducts the following activities: • Provide social events that are attended by membership; • Communicate to members using a website and a newsletter; and • Refine and grow membership. It is considered that X's activities are restricted to a certain class of persons, being members of this organisation and therefore do not fall within the kind of community services referred to in section 50-10 of the ITAA 1997. As already stated, social functions are put on each year by X. These are clearly of a private nature, providing personal benefit to the members. This is not consistent with a community service purpose. X has some liquid investments. None of these appear to be used for any purpose outside of the organisation. The objects and activities need to be considered together in order to determine X's real purpose. The social functions support its objects. These objects and activities are of benefit to members. From these factors, it is determined that X, in essence, provides a social network for its members. In all relevant years of income, X has primarily existed for the benefit of members. As such, during these income years X does not fall within the definition of being established for community service purposes. | Detailed Reasoning - Special Conditions: Section 50-70 of the ITAA 1997 states that there are special conditions for which must be satisfied for entities considered for income tax exemption under section 50-10 (Item 2.1) of the ITAA 1997. The condition states that an entity covered by item 2.1 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. To meet the first condition of section 50-70(a), X must have a 'physical presence' in Australia and, to that extent, incur its expenditure and pursue its objectives principally in Australia. This requirement is met as X has a physical presence in Australia and pursues its objectives wholly in Australia. Non-profit requirement In relation to this requirement, an entity must also not be carried on for the purposes of profit or gain of its individual members, either directly or indirectly. Where members, in their individual capacity are to receive benefits from an entity, then the entity will fail the non-profit test. However, reasonable remuneration paid to members for services they provide to the entity will not prevent the entity from passing the non-profit test. Therefore, the provision of benefits communally to members of an entity does not preclude it from satisfying the non-profit requirement. The Commissioner will accept an entity as being non-profit where, by operation of law or by its constituent documents, it is prevented from distributing its profits or assets among members while the club is functional and on its winding up. An entity's actions must be consistent with this requirement. Example of suitable clauses in constituent documents are: Non-profit clause 'The assets and income of the organisation shall be applied solely in furtherance of its above mentioned objects and no portion shall be distributed directly or indirectly to the members of the organisation except as bona fide compensation for services rendered or expenses incurred on behalf of the organisation.' Dissolution clause 'In the event of the organisation being dissolved, the amount that remains after such dissolution and the satisfaction of all debts and liabilities shall be transferred to another organisation with similar purposes which is not carried on for the profit or gain or its individual members. ' Alternative words may be used provided the result is achieved that funds and assets of the club cannot find their way to members (or their associates or nominees). In respect of the income years which are subject to this ruling, we accept that X has met this requirement as no distributions were made for the individual benefit of any member. Furthermore, its Constitution prohibits the making of such distributions to members. Accordingly, X satisfies the 'Special Conditions' specified in section 50-70 of the ITAA 1997. | Detailed Reasoning - Conclusion: Based on the above, X is a not a society, association or club established for community service purposes pursuant to item 2.1 of the table under section 50-10 of the ITAA 1997 for the duration of this ruling. | Summary: The interest income of the X is not exempt income under section 6-20 of the ITAA 1997 for the years ended 31 March 200X to 31 March 20XX. | Detailed Reasoning - Detailed reasoning: Section 6-20(1) of the ITAA 1997 states that ordinary income or statutory income is exempt if it is made exempt by a provision of the ITAA 1997 or another Commonwealth law. Section 50-1 of the ITAA 1997 states: 'The total ordinary income and statutory income of the entities covered by the following tables is exempt from income tax. In some cases, the exemption is subject to special conditions.' Section 50-10 of the ITAA 1997 contains one of the tables referred to in section 50-1 and relates to an entity established for community services purposes. As previously concluded in Question 1, the X is not an association established for community services purposes under section 50-10. Therefore, the total ordinary and statutory income of X is not exempt from income tax under section 50-1. Accordingly, the interest income of X is not exempt under section 6-20. | Summary: The interest income of X is assessable income under section 6-5 of the ITAA 1997 for the years ended 31 March 200X to 31 March 20XX. | Detailed Reasoning - Detailed reasoning: Division 6 of the ITAA 1997 sets out what income is included in the assessable income of an entity. Under section 6-5 of the ITAA 1997, the assessable income of a taxpayer consists of amounts of ordinary income derived, directly or indirectly, from all sources during the income year. Subsection 6-10(1) of the ITAA 1997 includes in the assessable income any statutory income that is not ordinary income but specifically made assessable by other provisions (section 10-5 of the ITAA 1997 provides a list of provisions about assessable income). Ordinary income means income according to ordinary concepts under section 6-5(1). It is included in a taxpayer's assessable income unless it is exempt, or is made non-assessable. There is no specific guidance on what is meant by "ordinary concepts". However, income according to ordinary concepts has generally been held to include 3 categories, namely income from rendering personal services including employment income, income from carrying on a business and income from property such as rent, interest and dividends. The interest accrued by X is income from property. Therefore, as the interest income is not exempt income under section 6-20 of the ITAA 1997, it is assessable under section 6-5 of the ITAA 1997.