Private ruling: Income tax - exempt income - community service purposes
Date of advice: 24 October 2019
Published: December 2019
Ruling period: Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is the ordinary and statutory income of the organisation exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) pursuant to item 2.1 of the table in section 50-10 of the ITAA 1997? | A1: No

Relevant facts and circumstances: Details of the organisation's establishment, history, governing documents, activities and financial statements have been provided.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 50-1 | Income Tax Assessment Act 1997 section 50-10

Reasons for decision: Summary: While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision. All references made in these reasons for decision are to the Income Tax Assessment Act 1997 unless otherwise stated. The ordinary and statutory income of the organisation will not be exempt from income tax under section 50-1 pursuant to item 2.1 of the table in section 50-10 as it does not have the main purpose of community service. | Detailed Reasoning - Detailed reasoning: Section 50-1 exempts from income tax the total ordinary and statutory income of an entity covered by section 50-10. Item 2.1 of the table in section 50-10, 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. Section 50-70 states: | Detailed Reasoning - 50-70(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). | Detailed Reasoning - 50-70(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. Non-profit requirement as a society, association or a club Although section 50-70 was amended in 2013, there has always been a requirement that the entity is non-profit. It is accepted that the organisation fits the description of 'society, association' for the purposes of the operation of section 50-10. For an entity to be non-profit it 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. Where constituent documents do not contain such clauses, the entity may still be in fact non-profit. The following explanation is provided in relation to sporting clubs in Taxation Ruling TR 97/22 Income tax: exempt sporting clubs (TR 97/22): 23. Where the law or the constituent documents do not prohibit distributions, it is a question of fact in each case as to whether the club is not carried on for purposes of profit or gain to the individual members. Factors that we consider relevant include whether distributions have been made, whether there is a stated or demonstrated policy to make or not to make such distributions and whether winding-up is contemplated. Where it is clear from the objects, policy statements, history, activities and proposed future directions of the club that there will be no distributions to members, we accept that the non-profit test has been satisfied. It is accepted that the organisation operates as a society, association or a club. Established for community service purposes, except for political or lobbying purposes The term community service purposes is discussed 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) TD 93/190 states at paragraph 2 that 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, 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. Paragraph 7 states: 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. TD 93/190 stresses the need for a community service organisation to have purposes that are of an altruistic nature. Organisations that seek to advance the common interests of their members are not altruistic, and so cannot be community service organisations. Where an organisation has mixed purposes, the approach in TD 93/190 is that it is the main or dominant purpose of the organisation that must be community service. The determination of the character of an organisation is made by examining its main or dominant purpose. The terms 'main purposes' and 'indicator of purposes', are discussed at paragraphs 41 to 46 of TR 97/22 in the context of sporting clubs: | Detailed Reasoning - Main purpose: 41. To be eligible for the exemption, the club's main purpose must be to encourage a game or sport. Difficulties can arise where the club conducts other activities, particularly social or commercial activities. 42. Where the other activities are merely ancillary or incidental, or secondary, to the encouragement of the game or sport we accept that the main purpose may be that encouragement. Lockhart J in Cronulla Sutherland Leagues Club Limited v. FC of T 90 ATC 4215 at 4225; (1990) 21 ATR 300 at 312 said: 'It [the club] may have other objects or purposes which are merely incidental or ancillary thereto or which are secondary and even unrelated to the main object or purpose without disqualifying the body from the exemption.' 43. However, if the main purpose becomes the carrying out of those other activities, the club is not exempt. Nor is it exempt if it continues to be involved in the game or sport to a substantial degree but is equally involved with another purpose or purposes. As Lockhart J said at ATC 4225; ATR 312: 'But if it has two co-ordinate objects, one of which is outside the exemption, the exemption cannot apply because it would be impossible to say that one object is the main or predominant object.' 44. Therefore, the fact that a sporting club also encourages social and other activities does not, of itself, preclude the club from being exempt. The club is still exempt provided the encouragement of a game or sport is the club's main purpose. By contrast, where the club's main purpose is providing social amenities and licensed club facilities to its members, the exemption does not apply. 45. The effect of non-sporting activities is illustrated by the decision of the Full Federal Court in Cronulla Sutherland . The club had some 13,000 members and extensive social facilities. It was incorporated in 1957 and had as one of its objects the promotion and development of rugby league. In 1963, the Cronulla Sutherland District Rugby League Football Club was formed as a separate club to administer football activities. In time, the club supported the entry of a team into the first grade competition organised and administered by the NSW Rugby League (NSWRL). Thereafter, the football club was almost entirely dependent upon the leagues club for financial assistance in the form of grants, the provision of facilities and guarantees of expenditure. 46. The majority of the Full Federal Court in Cronulla Sutherland held that the leagues club's main object was the provision to its members of social amenities and licensed club facilities, not the encouragement of sport. Consequently, it was not entitled to exemption. Foster J, in dissenting, noted that the taxpayer had: ' ... rendered financial assistance to the sporting body to such an extent as to prevent it making expenditures on maintenance of club facilities which would otherwise have been deemed desirable.' (at ATC 4250; ATR 339). | Detailed Reasoning - Indicators of purpose: 47. The determination of a club's main purpose in the relevant year of income is a matter of fact and degree. In Cronulla Sutherland , Lockhart J in the Full Federal Court said, at ATC 4225; ATR 312: 'The material facts and circumstances which should be examined to characterise the main purpose of the relevant body include its constitution, its activities, its history and its control. These may alter from time to time and the purpose of establishment may correspondingly change. It is not sufficient to look to the formation of the body and to ascertain what was at that time the purpose of its formation. The statute gives a periodic operation to the words and directs the inquiry to a particular time, namely, the year of income so that consideration must be given not only to the purpose for which the society was established but also the purpose for which it is currently conducted.' 48. Section 50-45 looks to the year of income to determine whether each of its elements is satisfied. Evidence of the purpose for which the club was originally or later set up is helpful but the club must demonstrate by reference to its activities in the year of income that it has as its main purpose the encouragement of the game or sport. Where purposes are directed to the benefit or welfare of members of the community in particular need, the phrase community service purposes is limited by the circumstances of the recipients, that is, the recipients have to exhibit a particular need resulting from some sort of disadvantage. Mere beneficial consequence for the community is not sufficient to say that the entity is established for community service purposes. The required community service purposes must be the entity's main or predominant purposes. Significantly, in Cronulla-Sutherland Leagues Club Ltd v. Commissioner of Taxation [1990] FCA 108 where the Club only provided financial support to football club the Full Federal Court determined that the leagues club was not entitled to the exemption. The encouragement of sport was limited to financial support. This financial support was found to be significant and the evidence made it clear that in the absence of that support the football club could not have continued to operate. The Court considered that, notwithstanding the financial support to the football club, the main purpose of the leagues club was to provide licensed social facilities for its members and guests. Where the activities of an organisation are limited in the main to the provision of financial assistance and facilities for meetings for the purposes of other organisations, and are not directly involved in co-ordinating and conducting community work, in this sense the activities are not directly related to the provision of community services. Taking into account the organisation's origins, the objects of the association based on its governing documents and the activities that it now undertakes, it is not considered to have the main purpose of community service. As the organisation does not have the main purpose of community service, it does not satisfy the requirement that is a society, association or club established for community service purposes. Therefore its ordinary and statutory income will not be exempt under section 50-1 pursuant to item 2.1 of the table in section 50-10.