Private ruling: Income tax exemption - public educational institution
Published: July 2013
Ruling period: 1 April 20XX to 31 March 20YY
Date scheme commenced: 1 April 20XX

Ruling: Q1: Is the ordinary income and statutory income of Association A exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) on the basis that it is a public educational institution as described in item 1.4 of the table in section 50-5 of the ITAA 1997? | A1: Yes

Relevant facts and circumstances: Constitution · Association A is an incorporated association that is wholly owned by Association B. · The constitution of Association A contains a non-profit clause: · The constitution of Association A was amended to change its winding up clause. The clause prohibits distribution of any 'surplus assets' to members. · The objects as stated in the constitution of Association A are to establish and operate training schemes. Activities · Association A is a nationally accredited training provider that operates a group training scheme. It employs qualified lecturers. · Association A offers a number of programs including apprenticeships, traineeships and various post-grad courses. · Association A employs apprentices and trainees in the industry under Contracts of Training (apprenticeships) through "host employers". The majority of host employers are not members of the Association B. · The responsibility of Association A in regards to its group training scheme are to: (a) arrange all theory training; (b) pay apprentices wages; and (c) handle all administration and "on costs" such as wages, annual leave, sick leave, superannuation, safety equipment, tool allowance etc. · Association A has apprentices employed in a number of trades. Apprentices are sourced from the public, not from members of Association B. · Association A employs staff to provide the following services: (b) training apprentices; (c) supervision of the apprentices and for employment placement; (d) payroll; (e) administration services; (f) mentoring and advisory information to apprentices; (g) cleaning and maintenance to the premises of Association A. (h) Association A has approval, as a registered training organisation, to deliver and assess a number of trade Certificates. Loan to Association B · In 20ZZ Association A made a loan to Association B. · In 20VV a loan agreement was executed for the purpose of recording the terms on which the loan was provided. · The loan agreement outlines that the loan is still 'at call' but it is interest bearing from the date the loan was made. The interest rate is comparable to commercial terms. · Association A has no intention of making any further loans to Association B. However, if the need arises for any further loans to be made, they will be made on commercial terms. Charity Status · Association A is not a registered charity with the Australian Charities and Not-for-profits Commission. Physical presence Association A is physically located in Australia and incurs its expenditure and pursues its objectives principally in Australia.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 50-1, | Income Tax Assessment Act 1997 section 50-5, | Income Tax Assessment Act 1997 section 50-52 | Income Tax Assessment Act 1997 section 50-55.

Reasons for decision: Summary: The ordinary and statutory income of Association A will be exempt if it is an institution that is open or available to the public and whose sole purpose is providing education. In addition it must meet the special condition of having a physical presence in Australia and pursuing its objectives and incurring its expenditure in Australia It has been determined that Association A meets these criteria. | Detailed Reasoning - Detailed reasoning: Section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) exempts the ordinary and statutory income of entities that are covered by Division 50 of the ITAA 1997. A public educational institution will be exempt from income tax pursuant to item 1.4 of the table in section 50-5 of the ITAA 1997 provided that it satisfies the special conditions in section 50-55 of the ITAA 1997. The term 'public educational institution' is not defined in the ITAA 1997. The Australian Taxation Office (ATO) publication Income tax guide for non profit organisations (NAT 7967) which is available on the ATO's website www.ato.gov.au provides guidance on the meaning of the term. Under the heading 'Requirements for self-assessing income tax exempt entities' , it states that: A public educational institution is an institution that is available or open to the public or a section of the public and whose sole purpose is providing education. Any other purpose of the organisation must be incidental or ancillary to providing public education. Examples of public educational institutions are: · universities or colleges managed by public bodies · grammar schools · primary and secondary schools run by churches or religious bodies · non-profit business colleges Organisations that are not public educational institutions include: · colleges run for the profit of the private owners · associations operated for their members' professional benefit · promotional and lobbying bodies The three elements that must be present in a public educational institution are: · It is an institution · It is available or open to the public or a section of it · Its sole purpose is to provide education | Detailed Reasoning - Institution: An institution is defined in the Macquarie Dictionary as: an organisation or establishment for the promotion of a particular object, usually one for some public, educational, charitable, or similar purpose. Whether a particular entity is an institution is indicated by a range of factors including activities, size, permanence and recognition. Association A is established for the promotion of an educational purpose (as will be discussed below). It receives funding from government in order to operate a group training scheme. Association A was established by Association B but operates separately to it, having its own accounts and financial statements as well as being a separate legal entity. It is accepted that Association A displays the characteristics of an institution. | Detailed Reasoning - Available or open to the public: A public educational institution is required to be available to, or open to the public. In Lloyd v. Federal Commissioner of Taxation (1955) 93 CLR 645 it was determined that educational purposes for the benefit of the public or a section of the public are public educational purposes. It was stated by Kitto J that the words "public" and "benefit" point to two essentials. Firstly, that the education must be provided for persons selected as members of the public or a section of the public and not selected for reasons of private concern or as members of some private class. Secondly, that the provision of education must not be a means of obtaining private profit for those who provide it. Whilst these features must exist, there is no requirement for the institution to be under some form of public control. Regarding the first element, Association A does not provide its services only to members of Association B. The apprentices and host employers are from the public generally and not selected by any restrictive qualification. Regarding the second element, an educational institution can only be considered to be providing a benefit to the public if it is not providing private benefits. Essentially the entity must be a non-profit organisation. The Income tax guide for non profit organisations (NAT 7967), when examining the characteristics of a non-profit organisation, outlines that a non-profit organisation is one that is not carried on for the profit or gain of its individual members and it applies while the organisation is operating and on winding up. An organisation is accepted as non-profit where its constituent document contains acceptable clauses that show the organisation's non-profit character. The constitution of Association A has appropriate non-profit clauses that limit its board members and the individual members of Association B from benefiting from the organisation. Therefore it is accepted that Association A displays the characteristics of a non-profit organisation. As both elements of the public benefit test are satisfied it is accepted that Association A is open and available to the public. | Detailed Reasoning - Sole Purpose is providing education: The sole purpose of a public educational institution must be to provide education. Any other purpose of an organisation must be incidental or ancillary to providing public education. Finding an organisation's purpose involves consideration of a number of features. These can include its constituent or governing documents, its activities, policies and plans, administration, finances, history and control, and any legislation governing its operation. This is outlined in paragraph 186 of Taxation Ruling TR 2011/4 Income tax: charities . The phrase "public educational purposes" has been held to imply either mental or bodily teaching or training. The word "educational" connotes the sense of imparting knowledge or assisting and guiding the development of body or mind. It has a wide scope extending from elementary instruction in primary schools to the highest level of tertiary teaching ( Chesterman v. FC of T (1923) 32 CLR 362), as well as to instruction and training beyond the domain of schools and universities. The conception of education is much wider than mere book learning and wider than any category of subjects which might be thought to comprise general education as distinguished from education in specialised subjects concerned primarily with particular occupations. For example, the purposes of the Navy League Sea Cadets have been found to be educational. Kitto J said that the training given was such as to teach a person, whose ambition lies towards a sea-going career, some of the rudiments of the intended craft and provide intellectual equipment and stimulus towards further preparation. Those purposes pursued by a responsible body, acting in an organised and disciplined manner were essentially and predominantly educational ( Lloyd v . FC of T (1955) 93 CLR 645). The purpose of Association A is to operate a group training scheme so that people can be educated and trained for employment opportunities. Through their group training scheme Association A delivers two services. One is the training of the apprentices and the other is the administration of their employment. Association A is a registered training organisation which delivers a number of trade courses. The courses it delivers form part of the requirements of an apprenticeship. It also delivers some stand alone post graduate qualifications. Qualified lecturers are employed to deliver the courses. The instruction delivered by Association A is similar to instruction delivered by an Institute of Technical and Further Education (TAFE). In this regard, Association A is clearly providing education. TR 2011/4 outlines a general principle about incidental or ancillary purposes. Whilst on their own they may not be acceptable purposes, if they are for the sake of or in furtherance of an acceptable purpose then it is acceptable. In the decision of the Federal Court in Navy Health Limited v. Federal Commissioner of Taxation (2007) 163 FCR 1; [2007] FCA 931, Jessup J said at paragraph 65: When the courts have described objects of an institution as ancillary, incidental or concomitant to a main object, they have not meant that the lesser object was merely a minor one in quantitative terms. Rather, they have required that object not be of substance in its own right, but only to be something which tends to assist, or which naturally goes with, the achievement of the main object. The employment services provided by Association A are an essential part of a student's apprenticeship. Without employment the student cannot complete their apprenticeship. For this reason the employment service provided by Association A is considered ancillary to its purpose of providing education. Consideration has been given to the current objects and activities of Association A in determining that its sole purpose is providing education | Detailed Reasoning - Charity status: Section 50-52 of the ITAA 1997 states that if an entity is covered by item 1.1 in the table in section 50-5 of the ITAA 1997 then it must be endorsed to be exempt from income tax and that the section has effect despite other provisions in subdivision 50-B of the ITAA 1997. Item 1.1 in the table in section 50-5 of the ITAA 1997 refers to a registered charity. As Association A is not a registered charity, it can be considered for exemption under other provisions in Division 50 of the ITAA 1997. | Detailed Reasoning - Special conditions: Special conditions apply to public educational institutions before they can be exempt from income tax. The special conditions are contained in section 50-55 of the ITAA 1997. A public educational institution that is not a deductible gift recipient or a prescribed institution will be exempt if it has a physical presence in Australia and, to that extent, pursues its objectives principally in Australia. Association A meets this test as it has a physical presence in Australia and pursues its objectives and incurs its expenditure in Australia.