Private ruling: Income Tax ~~ Exempt entities ~~ community service
Published: July 2014
Ruling period: Year ended 30 June 2014 | Year ending 30 June 2015 | Year ending 30 June 2016
Date scheme commenced: 1 July 2013

Ruling: Q1: Are you exempt from income tax from 1 July 2013 on the basis that you are established for community service purposes in accordance with section 50-10 of the Income Tax Assessment Act 1997 (ITAA 1997), particularly in reference to the opening of a second bank in the town? | A1: Yes

Relevant facts and circumstances: You are a Company limited by guarantee and are situated in a township of Australia. The closest township which has full banking services to this town is approximately a X hours away by road. You facilitate the operation of a community bank in the township providing face to face banking services. All profits made by the Company are distributed to worthwhile projects in the community, or retained by you as a reserve to meet future contingencies and such reserves are subject at all times to the conditions in the Company constitution (the Constitution) dated the dd/mm/yyyy. There are several directors of the Company who act on a voluntary basis. The Company does not limit the number of members. No dividends are paid to members of the Company. The objects of association are outlined in the governing documents and are to facilitate the provision of face to face banking services and to distribute profits for the benefit of the community. Any person shall be entitled to apply for membership of the Company. The winding up clause in the governing document ensures that assets are not distributed to member of the Company. A second full-service bank opened in the township which is beyond your control. The second bank aims to capture the significant proportion of banking that still leaves the town. It is submitted by you that you are still "established" for a community service purpose, being to facilitate the provision of face-to-face banking. The Company is not a registered Charity with the Australian Charity and Not-For-Profit Commission (ACNC).

Relevant legislative provisions: Subsection 6-20(1) of the Income Tax Assessment Act 1997 | Section 50-1 of the Income Tax Assessment Act 1997 | Section 50-10 of the Income Tax Assessment Act 1997 | Section 50-70 of the Income Tax Assessment Act 1997

Reasons for decision: Summary: Yes, you are exempt from income tax on the basis that you are established for community service purposes in accordance with section 50-10 of the Income Tax Assessment Act 1997 (ITAA 1997), particularly in reference to the opening of a second bank in the town. | Detailed Reasoning - Detailed reasoning: Section 50-1 of the ITAA 1997 provides that the total ordinary and statutory income of the entities covered in the following tables is exempt from income tax. Item 2.1 in the table listed in Section 50-10 of the ITAA 1997 exempts an entity from liability to income tax, subject to the entity meeting the special conditions outlined in section 50-70 of the ITAA 1997. Section 50-10 exempts an entity if it is a: "society, association or club established for community service purposes (except political or lobbying purposes)." Therefore it is necessary to determine that the Company meets all elements of section 50-10 and the special conditions in section 50-70. | Detailed Reasoning - A society, association or club: The term 'association' takes on its ordinary meaning. The Shorter Oxford English Dictionary defines the term as follows: Association 2 . A body of persons associated for a common purpose; the organisation formed to effect their purpose; a society; e.g. the British Association for the Advancement of Science, etc. The Shorter Oxford English Dictionary further defines the meaning of 'body' to be: Body IV. 2 . A society, association, league, fraternity. 4 . (loosely) a collective mass of persons Similarly, the Macquarie Dictionary has the following definitions: Association 1 . an organisation of people with a common purpose and having a formal structure. Body 18 . a number of things or people taken together: the student body These concepts have arisen from United Kingdom law dating back to the early eighteenth century. Broadly, an association or body of persons may be seen as consisting of a group of persons who associate to achieve a common aim or purpose and who are bound by mutual obligations and rights. Furthermore, Olsson J, in Quinton v South Australian Psychological Board (1985) 38 SASR 523 stated that the term 'association' has come to be regarded as attaching to a body of persons associated for a common purpose. In your case, more than one director manages the Company for the common purpose specified in the objects of association. The Company can have unlimited members. Therefore, the Company can be considered to be an association. | Detailed Reasoning - Established: The meaning of the word "established" in the context of section 50-10 of the ITAA 1997 was determined in the case of Wentworth District Capital Ltd v FC of T [2010] FCA 862. The trial judge found that the issue of whether the body in question was established was to be addressed in each income year by looking at its activities in that year while at the same time it was relevant to look at the objects or purposes for which the body was incorporated. An entity might be established for the requisite purpose in one year, but not another. On appeal to the decision handed down in the Wentworth case, Gilmour and Gordon JJ stated that practical difficulties such as whether an entity would lose its tax exempt status if another competitor bank opened a bank in the future was to be put to one side with the judgement stating: "that an entity's tax status is to be addressed in each income year by looking at the activities in that year while at the same time it is relevant to look at the objects or purposes for which the body was incorporated, including the clauses in its memorandum of association or constitution". The view of the Commissioner on this decision in the Wentworth case is stated in the Decision Impact Statement DIS NSD 1144 of 2010: "The court did not go so far as to hold that every community bank will qualify as providing a community service within Item 2.1 of section 50-10 of the ITAA 1997. It will be necessary to examine the purpose for which the relevant entity is established and a consideration of the circumstances of the relevant community to determine if the facilitation on the provision of face to face banking activities provides sufficient real and tangible benefit to the community to qualify as a community service. This is to be determined in a year to year basis and will turn on the facts of the case." Therefore, when determining whether the Company is established for community service purposes, this must be determined on a year by year basis, considering both the Company's activities during the year, the circumstances of the community as well as the Company's objects in its governing documents. Your current activities of facilitating face-to-face full-service banking have not changed in their nature since the Company was established. These activities are consistent with your objects of association. The Commissioner has previously found at Objection that you were established for community service purposes. The fact the circumstances of the community have changed, specifically that another bank has come to the town and is providing full-service banking does not change your purpose and does not prevent you from being currently established for the same purpose. | Detailed Reasoning - Community service purposes: The phrase 'community service purposes' is not defined in the tax law. It is given its plain ordinary meaning. In Navy Health Ltd v Federal Commissioner of Taxation (2007) 163 FCR 1, Jessup J said that "I consider that the essence of 'community service' is that a service is provided to the community, or a section of the community. Here the word "service" is used in the sense of 'help, benefit or advantage', particularly 'the action of serving, helping or benefiting, conduct tending to the welfare or advantage or another." In this regard, His Honour went onto say that the benefit provided must not be vague. Specifically, His Honour said 'community service' "...deals with 'service' in a much more concrete setting, and requires, in my view, the community, or a section of the community, to benefit by way of the receipt of some identifiable help, benefit or advantage..." The principles to be used in the characterisation of community service purposes were outlined by the trial judge, Perram J, in Wentworth District Capital Ltd v FC of T [2010] FCA 862 and the decision made was upheld by the full federal court on appeal in FC of T v Wentworth District Capital Ltd [2011] FCAFC 42. These principles are: • The kind of community service referred to in section 50-10 of the ITAA 1997 is a practical or tangible help, benefit or advantage conferred on the community or an identifiable section thereof; • A service provided for reward is not a community service, at least when there is no element of subsidisation; • 'Community service purposes' is to be interpreted broadly and are not only restricted to the act of provision of such services but also include activities such as the facilitation and promotion of such services; • The entity claiming the exemption must be established for those purposes and requires an analysis of what the entity is doing in the relevant year of income, both as a matter of its constitutive documents and also by reference to its actual activities; • The main or dominant purpose of the entity must be connected to the delivery of a community service. These principles can be applied to your circumstances. Firstly, the service provided to the regional community in which the Company operates is to facilitate the provision of face-to-face, full-service banking. This is encapsulated by your governing documents. The purpose and activities of the Company have not changed since the Company was established. The arrival of another full-service bank into the township does not remove the practical or tangible help, benefit or advantage conferred on the community provided by the Company. An independent study stated that the new bank is hoping to capture a proportion of the banking that is still leaving the town. Therefore, the tangible benefit provided by the Company to the community still exists in the presence of a second bank. Secondly, a service provided for reward is not a community service. The service provided to the community is the facilitation of face-to face-banking. The Company did not provide ordinary commercial banking services for reward to customers, but facilitated the provision of those services. It was found by Honourable Justice Perram in the Wentworth case that under analogous circumstances, facilitation of banking services was not for reward and the accumulation of profits was a collateral benefit of the principal purpose and was distributed in accordance with the objects of association for the benefit of the community. Similarly, in your circumstances, the Company does not provide a service for reward. Thirdly, 'community service purposes' is to be interpreted broadly and are not only restricted to the act of provision of such services but also include activities such as the facilitation and promotion of such services. The Company facilitates the provision of full-service banking and whilst not directly providing the community service, this lies within the broad interpretation of a community service purpose as decided upon in the Wentworth case. Fourthly, the entity claiming the exemption must be established for those purposes and requires an analysis of what the entity is doing in the relevant year of income, both as a matter of its constitutive documents and also by reference to its actual activities. It has already been reasoned above that the Company has been and is currently established for community service purposes. Lastly, the main or dominant purpose of the entity must be connected to the delivery of a community service. In your situation, your main or dominant purpose is to facilitate the provision of face-to-face, full-service banking. This provides a real and tangible benefit to the community due to the lack of other full-service banks in the township. Full-service banking is considered to be a service that is necessary for a community to flourish and to increase the amenity of the town. Therefore, the Company facilitating the delivery of such services is seen to be a community service within the meaning of section 50-10 of the ITAA 1997. Furthermore, 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 states that "community service purposes extend to a range of altruistic purposes that are not otherwise charitable based on the community or a section of the community's need by reason of youth, age, infirmity or disablement, poverty, or social or economic circumstances". TD 93/190 also states that - "(t)he 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] The Company is not a registered charity. The Company facilitates the provision of full-service banking that will benefit the regional township socially and economically. TD 93/190 states that the motive must be altruistic to be a community service purpose. The Company formed voluntarily, does not return profits to members of the Company and has been established to help the community rather than the self-interests of the members of the Company. A question that further needs to be considered in regard to the altruistic motive is whether it is a section of the community or a closed and restricted class of persons that receive benefits from the Company and this is a question of degree ( Dingle v. Turner [1972] AC 601; per Lord Cross of Chelsea at 624). Any individual in the community can utilise the banking services, therefore the purpose of the Company in facilitating such services can be considered to be altruistic and to be a community service purpose. | Detailed Reasoning - Political or lobbying purposes: The purpose of the Company is to facilitate full-service banking in the township. This is not considered to be political or lobbying purpose. | Detailed Reasoning - Special conditions in section 50-70 of ITAA 1997: The income tax exemption provided under section 50-10 of the ITAA 1997 is subject to the special conditions listed in section 50-70 which have been amended for income years starting on or after 30 June 2013 and further necessitate that an entity complies with all the substantive requirements in its governing rules and applies its income and assets solely for the purpose for which the entity is established. The special conditions in section 50-70 are: | 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. Section 50-70(1) relevantly states that the Company is only exempt if it is not carried on for the purpose of profit or gain of its individual members and has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia. The governing documents state that profits will be distributed in a manner which will benefit the community. Similarly, the governing documents state that upon winding up or dissolution or liquidation of the company, any remaining assets will not be distributed to the members of the company. Therefore, the Company is not carried on for the purpose of profit or gain of its individual members. The Company is an Australian public company limited by guarantee and is registered with the Australian Securities and Investment Commission (ASIC). The office of the Company is situated in Australia and it has facilitated the establishment and operation of a bank providing face to face services. Therefore, the Company has a physical presence in Australia and incurs its expenditure and pursues its objectives principally in Australia. Section 50-70(2) requires that the Company complies with all the substantive requirements in its governing rules and applies its income and assets solely for the purpose for which the entity is established. After reviewing the current activities of the Company as stated in information provided, it is evident that the Company complies with the substantive requirements in its governing documents in the pursuit of its objects of association. Similarly, the Company applies its income and assets solely for the purpose for which it is established. Consequently, you satisfy section 50-70(2) of the ITAA 1997. You therefore meet the special conditions specified in section 50-70 of the ITAA 1997. In summary, you are an entity established for community service purposes under section 50-10 of the ITAA 1997. | Detailed Reasoning - Exemption from income tax: Not all assessable income is liable to income tax. 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 demonstrated in the reasoning above, you are an entity established for community services purposes under section 50-10. Therefore, your total ordinary and statutory income is exempt from income tax.