Private ruling: income tax exemption status
Date of advice: 10 May 2018
Published: July 2018
Ruling period: Income years ended 30 June 20XX – 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is the company a tax exempt entity? | A1: No

Relevant facts and circumstances: The company is an Australian proprietary company with ordinary shares. All of the company’s shares are held by an incorporated association. The company is not registered with the Australian Charities and Not-for-profits Commission (ACNC). The company operates a Fund for the purposes of the members of the Fund. Members pay to join the Fund and make annual payments to remain a member. Membership can be approved or rejected at the discretion of those managing the Fund. Administering this Fund is the only activity of the company. The company and Fund rules were provided to the Commissioner.

Relevant legislative provisions: Division 50 of the Income Tax Assessment Act 1997 (ITAA 1997) | Subdivision 50-A of the ITAA 1997 | Section 50-1 of the ITAA 1997 | Section 50-10 of the ITAA 1997 | Section 50-47 of the ITAA 1997 | Section 995-1 of the ITAA 1997 | Section 25-5 of the Australian Charities and Not-for-profits Commission Act 2012 | Section 5 of the Charities Act 2013 (CA) | Section 12 of the CA

Reasons for decision: Summary: The company is not an exempt entity for income tax purposes as it does not fit within any of the categories in Subdivision 50-A of the Income Tax Assessment Act 1997 (ITAA 1997). | Detailed Reasoning - Detailed reasoning: Section 50-1 of the ITAA 1997 provides that the ordinary and statutory income of the entities covered in the tables in Subdivision 50-A is exempt from income tax. Taxation Ruling 2005/22 Income tax: companies controlled by exempt entities provides that in working out whether a particular company is exempt from income tax, in circumstances where that company has a relationship with another entity that itself is exempt, it is that particular company that must meet the requirement for exemption. It is not sufficient that the entity which controls the company meets those requirements. In this case, this means that although an incorporated association owns the company, the Commissioner can only consider the character and purposes of the company to determine whether it falls within any of the categories in Division 50 of the ITAA 1997, regardless of whether or not the incorporated association may be exempt from income tax itself. Section 50-47 of the ITAA 1997 provides special conditions for all items in Subdivision 50-A: An entity that: (a) is covered by any item; and (b) is an ACNC type of entity; is not exempt from income tax unless the entity is registered under the Australian Charities and Not-for-profits Commission Act 2012. Broadly, this means that where an entity is covered by an exempt entity category but also meets the description of an ‘ACNC type of entity’, it will not be exempt from income tax unless it is registered as a charity with the ACNC. This means the Commissioner must first consider whether the company meets the description of an ‘ACNC type of entity’ before any consideration is given to whether it is exempt under another exempt entity category. | Detailed Reasoning - ‘ACNC type of entity’: The meaning of ‘ACNC type of entity’ is provided in Division 995 of the ITAA 1997. Section 995-1 of the ITAA 1997 refers to Column 1 of the table in subsection 25-5(5) of the Australian Charities and Not-for-profits Commission Act 2012 (ACNC Act) for the meaning of ‘ACNC type of entity’. The entity type at Column 1 of the table in subsection 25-5(5) is ‘charity’. Section 5 of the Charities Act 2013 (CA) provides the following meaning of charity: ‘charity’ means an entity : (a) that is a not-for-profit entity ; and (b) all of the purposes of which are: (i) charitable purposes that are for the public benefit ; or (ii) purposes that are incidental or ancillary to, and in furtherance or in aid of, purposes of the entity covered by subparagraph (i); and (c) none of the purposes of which are disqualifying purposes ; and (d) that is not an individual, a political party or a government entity . Subsection 12(1) of the CA provides the following meaning of ‘charitable purpose’: ‘charitable purpose’ means any of the following: (a) the purpose of advancing health ; (b) the purpose of advancing education; (c) the purpose of advancing social or public welfare ; (d) the purpose of advancing religion; (e) the purpose of advancing culture ; (f) the purpose of promoting reconciliation, mutual respect and tolerance between groups of individuals that are in Australia; (g) the purpose of promoting or protecting human rights ; (h) the purpose of advancing the security or safety of Australia or the Australian public; (i) the purpose of preventing or relieving the suffering of animals; (j) the purpose of advancing the natural environment; (k) any other purpose beneficial to the general public that may reasonably be regarded as analogous to, or within the spirit of, any of the purposes mentioned in paragraphs (a) to (j); (l) the purpose of promoting or opposing a change to any matter established by law, policy or practice in the Commonwealth, a State, a Territory or another country, if: (i) in the case of promoting a change--the change is in furtherance or in aid of one or more of the purposes mentioned in paragraphs (a) to (k); or (ii) in the case of opposing a change--the change is in opposition to, or in hindrance of, one or more of the purposes mentioned in those paragraphs. Taxation Ruling TR 2011/4 Income tax and fringe benefits tax: charities (TR 2011/4) sets out the Commissioner’s views on the meaning of 'charitable' in the terms 'charitable institution' and 'fund established for public charitable purposes' by reference to principles established by court decisions. Paragraph 26 of TR 2011/4 provides that an institution is charitable if it’s ‘main or predominant or dominant' purpose is charitable in the technical legal meaning and it was established and is maintained for that charitable purpose. Any other purpose can only be incidental or ancillary to the charitable purpose. Paragraph 140 of TR 2011/4 states: Placing limits on who can benefit is generally incompatible with an intention of benefiting the public if the limits are by reference to a personal connection that is not available to the public generally, such as: ● being members of a family or a group which is based on personal relationships to particular persons; ● contractual relationships (for example, the employees of a particular employer); and ● membership of bodies that can admit or exclude members of the public. In these situations, benefits are usually intended for people in their capacity as relatives, employees or members rather than as a section of the public. The objectives of the company were provided. The applicant has advised that the company has only ever conducted the one activity, the operation of the Fund to provide assistance to members. In the Rules the company, it is clear that the company operates the Fund entirely for the benefit of the Fund’s members. That is, these members who pay an annual contribution (as well as any relevant entrance fees) will ultimately benefit financially from the Fund in the form of a payout at the appropriate time. The Rules provides that the Fund has the power to approve or reject any membership application, and is not required to provide any reason or explanation for doing so. It is clearly evident from the above that the Fund exists primarily to benefit its members and not to benefit the public generally. Therefore the company is not an ‘ACNC type of entity’ and section 50-47 of the ITAA 1997 does not apply. | Detailed Reasoning - Exempt entities in Subdivision 50-A: The Commissioner can now consider the categories of exempt entities in Subdivision 50-A of the ITAA 1997. Subdivision 50-A provides for the following categories of exempt entities: ● Charity, education and science ● Community service ● Employee and employer associations ● Funds contributing to other funds ● Government ● Health ● Mining ● Primary and secondary resources, and tourism ● Sports, culture and recreation. As the company is not registered as a charity, and its objectives cannot (as discussed above) be considered as being for charitable purposes, it cannot meet the first category. The only other category likely to be applicable to the company would be that of community service. To be an exempt entity under this category, section 50-10 of the ITAA 1997 states that the entity must be a society, association or club established for community service purposes. The term 'society, association or club' is not defined in the tax law and takes the ordinary meaning of the words. The three words describe bodies made up of people who have come together to implement common purposes and objects. An entity that is a fund is generally not considered to be a society, association or club. The issue of whether an entity with one member can be considered an association was considered in Navy Health v DFC of T [2007] FCA 931: 77. On any natural reading of the word, "association" denotes a grouping, or coming together, of two or more persons. Relevantly for present purposes, the dictionary meaning of the word is "a body of persons who have combined to execute a common purpose or advance a common cause..." (OED, 2 nd Ed). Unless required to decide otherwise by authority, I consider that the proposition that a single person, whether or not incorporated, might constitute an "association" is quite at odds with the natural meaning of the word, and with normal, everyday, usage. In this instance, considering the decision in Navy Health v DFC of T [2007] FCA 931, because the company has only one member (shareholder), being the incorporated entity, it is not considered to be an association and therefore cannot fall within this exemption category. For completeness however, the Commissioner has also considered whether or not the activities of the company could be considered to be for ‘community service purposes’. 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? considers whether something may be for community services purposes: 3. …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. As advised by the applicant, the company’s sole activity is to operate the Fund. As already stated, in the Rules of the company, it is clear that the Fund operates almost entirely for the benefit of the Fund’s members. That is, these members who pay an annual contribution will ultimately benefit financially from the Fund in the form of a payout at the appropriate time. | Detailed Reasoning - Conclusion: In conclusion, the company is not a society, association or club as it only has one member (or shareholder), and neither is it established for community service purposes as the benefits are only provided to the members of the Fund. It does not therefore satisfy the requirements for exemption from income tax under Subdivision 50-A of the ITAA 1997.