Private ruling: Income tax exemption
Date of advice: 19 February 2018
Published: June 2018
Ruling period: 17 February 20XX to 30 June 20XX
Date scheme commenced: 17 February 20XX

Ruling: Q1: Is the taxpayer an entity covered by item 2.1 of the table in section 50-10 of the Income Tax Assessment Act 1997 (ITAA 1997), so that its ordinary and statutory income is exempt from income tax under section 50-1 of the ITAA 1997? | A1: Yes.

Relevant facts and circumstances: The taxpayer is an entity established in Australia that has at all relevant times undertaken its activities in Australia. The object of the taxpayer is stated to be established as a specialist facility with the purpose of expanding learning opportunities in certain subjects in one state. The governing documents of the taxpayer prevent it from distributing assets and income directly or indirectly for the benefit of its members both while it is operating and when it winds up. The taxpayer is officially approved and registered as an education provider in certain subjects by a state statutory authority. The taxpayer provides certain officially accredited courses. It plans to offer more courses subject to a number of factors and is exploring opportunities to develop additional courses, where there is an evident need in the region. It conducts management of a website to support learning needs in certain subjects for public access and for access by the taxpayer’s students at no charge. It also delivers workshop sessions for colleagues at workplace to meet specific learning needs.

Relevant legislative provisions: Income Tax Assessment Act 1997

Reasons for decision: Summary: Pursuant to section 50-1 and item 2.1 of the table in section 50-10, the ordinary income and statutory income of a society, association or club established for community service purposes (excluding political or lobbying purposes) is exempt from income tax provided the special conditions in section 50-70 are satisfied. Subsection 50-70(1) requires that, to be exempt from income tax, an entity covered by item 2.1 of the table in section 50-10 must be a society, association or club that is not carried on for the purpose of profit or gain of its individual members (the non-profit requirement) and it either has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia; or meets the description and requirements in item 1 of the table in section 30-15; or 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. Subsection 50-70(2) provides that the entity must comply with all the substantive requirements in its governing rules (governing rules condition) and apply its income and assets solely for the purpose for which the entity is established (income and assets condition). The threshold question in order to quality for exemption under section 50-1 as an entity covered by item 2.1 of the table in section 50-10 is whether the entity is a society, association or club established for community service purposes. Established The meaning of the word ‘established’ in former subsection 23(g) of the Income Tax Assessment Act 1936 (ITAA 1936) was considered in Cronulla Sutherland Leagues Club Limited v. FC of T 90 ATC 4215 , where it was held that it referred not only to the circumstances existing when the entity was initially formed but also to its subsequent activities and to the circumstances of the particular year under consideration. This is noted in paragraph 24 of the Taxation Ruling 2015/1 Income tax: special conditions for various entities whose ordinary and statutory income is exempt (TR 2015/1) where it is stated that, the purpose for which an entity is established is determined by a consideration of all the features of the entity. The main factors to be considered are the objects in the entity’s constituent documents and the activities of the entity after its formation. Community service purposes ‘Community service’ is not defined in the Income Tax Assessment Act 1997 or Income Tax Assessment Act 1936. Paragraph 3 of the Taxation Determination 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) provides explanations on the term 'community service purposes' that, it 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. To determine exemption from income tax for organisations that are established within the community, paragraph 4 of the TD 93/190 requires altruistic purposes to be an essential element of even the widest interpretation of ‘community service purposes’. Paragraph 7 of the TD 93/190 states that, 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. In this case, objects of the taxpayer are stated as to be established as a specialist facility with the purpose of expanding learning opportunities in certain subjects in one state. The taxpayer provides certain officially accredited courses; it plans to offer more courses and is exploring opportunities to develop additional courses; it conducts management of a website to support learning needs in certain subjects at no charge; it also delivers workshop sessions for colleagues at workplace to meet specific learning needs. These activities provide and expand learning opportunities in the subjects that the taxpayer provides in the state, they give effective to the taxpayer’s stated purpose. Accordingly, it is considered that the taxpayer is established for community service purposes. Special Conditions The taxpayer was established in Australia and has at all relevant times operated in Australia. Accordingly, the special conditions in section 50-70 will be satisfied if the non-profit requirement, governing rules condition and income and assets condition are satisfied. Generally it is accepted that an association operates on a non-profit basis where, by operation of law or by its constituent document, the association is prevented from distributing its profits or assets among members while the association is operating and on its winding-up. The association's actions must, of course, be consistent with the prohibition. In this case, taxpayer’s non-profit status was originally required upon its formation by operation of the legislation, under which it was established. It is required by its governing documents to use and apply its funds solely in furtherance of its objects and alteration of its objects and rules is strictly prohibited under its governing documents. This ensures that the funds and assets of the taxpayer are applied only to carry out its purposes and are not applied for the benefit of its members. Accordingly, the non-profit requirement is satisfied. The governing rules condition is considered in paragraph 8 of the TR 2015/1, which lists down the following three questions to be asked: ● What are the governing rules of the entity? (further explanations in paragraphs 9 to 16 of the TR 2015/1) ● What are the substantive requirements in the governing rules? (further explanations in paragraphs 17 to 20 of the TR 2015/1) ● At what time must the Association comply with all of the substantive requirements in its governing rules? (further explanations in paragraph 21). In this case, governing documents of the taxpayer constitute its governing rules. The substantive requirements in taxpayer’s governing rules are those set out in its governing documents, including rules such as those that: ● give effect to the purpose and rationale of the taxpayer; ● set out qualifications and other requirements on membership; ● set out powers of the taxpayer’s committee, constitution and membership of the committee, election of committee members, committee meetings and quorum, and voting and decisions; ● set out rules on general meetings; ● set out source and management of funds; ● set out prohibition on alternation of the taxpayer’s objects and rules; ● set out requirements and rules for common seal and records, they are: ● common seal ● custody of books ● inspection of books ● service of notice; ● set out rules of the taxpayer’s learning programs; ● relate to the dissolution or winding up of the taxpayer. On the basis that, there is no fact that could otherwise indicate or suggest that the taxpayer does not comply with any of the substantive requirements in its governing rules, it is considered that the taxpayer meets the governing rule condition in subsection 50-70(2). The income and assets condition is considered in paragraph 23 of the TR 2015/1, which requires the following two questions to be asked: ● what is the ‘purpose for which the entity is established’? (further explanations in paragraphs 24 to 29 of the TR 2015/1) ● has the entity applied its income and assets solely for the purpose for which the entity is established? (further explanations in paragraphs 30 to 36 of the TR 2015/1). Paragraph 24 of the TR 2015/1 explains that, the ‘purpose for which the entity is established’ is determined by a consideration of all of the features of the entity. The main factors to be considered are the objects in the entity’s constituent documents, and the activities of the entity after its formation, up to the time at which the income and assets condition is applied. Other factors to consider include policies and plans, administration, finances, history and control, and any legislation governing the operation of the entity. In this case, the taxpayer was established as a specialist facility with the purpose of expanding learning opportunities in certain subjects in one state. Its governing documents are consistent with its establishment purposes, and since its establishment, it has conducted activities that are directly related to its stated objects. The taxpayer is an officially recognised education provider; it provides certain accredited courses to meet specific learning needs in that state; it manages a website to support learning needs in the subjects at no charge; it delivers workshop sessions for colleagues at workplace on need basis; it also plans to deliver more courses in future and to develop courses where there is an evident need in the region. This indicates that, the taxpayer works and plans to provide and expand learning opportunities in those subjects in the state. Meaning of ‘solely’ is provided in paragraphs 33 to 35 of the TR 2015/1 that, the entity must exclusively or only apply its income and assets for that purpose. In this case, on the basis that, there is no fact that could otherwise indicate or suggest that the taxpayer does not apply its income and assets solely for its establishment purpose, the income and asset condition in subsection 50-70(2) is satisfied. Therefore, the taxpayer is a non-profit entity and is established and operated for the purpose of promoting employer involvement in certain employer sponsored scheme and to safeguard members’ benefits; it meets the conditions as set out in section 50-70, and accordingly it qualifies as an exempt entity under item 2.1 of the table in section 50-10.