Private ruling: Exemption from income tax
Date of advice: 6 December 2017
Published: April 2018
Ruling period: Year ended 30 June 2018 | Year ended 30 June 2019 | Year ended 30 June 2020 | Year ended 30 June 2021 | Year ended 30 June 2022 | Year ended 30 June 2023 | Year ended 30 June 2024 | Year ended 30 June 2025 | Year ended 30 June 2026 | Year ended 30 June 2027
Date scheme commenced: DDMMYY

Ruling: Q1: Does Company B qualify for income tax exemption under section 50-1 of the Income Tax Assessment Act 1997 as a society association or club established for community service purposes in Section 50-10 Item 2.1 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes

Relevant facts and circumstances: 1. Company B was established by Company A 2. Company B owns property which is used by Company A and others 3. Company B also provides funds to Company A 4. The constitution of Company B has appropriate non-profit and winding up clauses.

Relevant legislative provisions: Income Tax Assessment Act 1997 50-1, | Income Tax Assessment Act 1997 50-10 and | Income Tax Assessment Act 1997 50-70.

Reasons for decision: Summary: The total ordinary income and statutory income of Company B is exempt from income tax pursuant to section 50-1 of the ITAA 1997 as it is a society, association or club established for community service purposes pursuant to item 2.1 of the table under section 50-10 of the ITAA 1997. An organisation will be exempt from income tax as a community service organisation if it meets all of the following requirements: ● it is not a charity ● it is established for community service purposes (except political or lobbying purposes) ● it is a non-profit society, association or club ● it satisfies the special conditions. | Detailed Reasoning - Charity: If an organisation is a charity it must be registered as a charity with the Australian Charities and Not-for-profits Commission (ACNC) to be exempt from income tax. Where an organisation has only charitable purposes, it will not be exempt from income, even if it could be exempt from income tax under another category of exempt entity in Division 50 of the ITAA 1997 (such as community service purpose), unless it is registered as a charity with the ACNC (section 50-47 of the ITAA 1997). Company B is not registered with the ACNC and does not have only charitable purposes. Company B has community service purposes. Section 50-47 of the ITAA 1997 does not apply to Company B. | Detailed Reasoning - Society, association or club: The words 'society', 'association' or 'club' are not defined in the ITAA 1997 and have their ordinary meaning. The Macquarie Online Dictionary defines an association as 'an organisation of people with a common purpose and having a formal structure'. 'Society' has an equivalent meaning as discussed at length in Pro-campo Ltd v. Commr of Land Tax (NSW) 81 ATC 4270 at 4279; (1981) 12 ATR 90 at 35. Company B is an incorporated entity brought into existence by its members to pursue a common purpose, as stated in its articles and memorandum of association, Company B is accepted as an association. | Detailed Reasoning - Established for community service purposes: Item 2.1 in section 50-10 of the ITAA 1997, is the equivalent of subparagraph 23(g)(v) of the Income Tax Assessment Act 1936 (ITAA 1936). Guidelines for the exemption provided by that subparagraph are located 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 that the purpose of enacting the provision was to create a category of exemption for community bodies whose activities are not accepted as being charitable because they do not fall within one of the four heads of charitable purpose. The provision does not give exemption from income tax to a broad range of organisations that are established within the community whose purposes are not of an altruistic nature. Altruistic purposes are an essential element of even the widest interpretation of 'community service purposes': In accordance with the Macquarie Online Dictionary 'altruistic' means regardful of others; having regard to the wellbeing or best interests of others. TD 93/190 considers the meaning of a community service purpose and states at paragraphs 3-5: 3. The Explanatory Memorandum to section 23(g)(v) of the Act confirms that the words 'community service purposes' are to be given a wide interpretation. Those words extend to a range of altruistic purposes which 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. The Explanatory Memorandum for the Taxation Laws Amendment Bill (1990) which introduced subparagraph 23(g)(v) of the Income Tax Assessment Act 1936 (ITAA 1936) provides further guidance. The Explanatory Memorandum states that the words 'for community service purposes' are to be given a wide interpretation and that: They extend to a range of altruistic purposes including promoting, providing or carrying out activities, facilities or projects for the benefit or welfare of the community, or of members of the community, or of any members of the community who have particular need of those activities, facilities or projects by reason of their youth, age, infirmity or disablement, poverty or social circumstances. An exclusion from the exemption will apply to bodies established for political or lobbying purposes. The Explanatory Memorandum and TD 93/190 indicate that to determine whether an association is established for community service purposes it is necessary to consider its constitution, its current operations and activities, and also the circumstances and needs of those who benefit from the operations. If it can be shown that an entity is established mainly to provide benefits to the community, it will not be a disqualifying attribute if there is an incidental benefit derived by members. In FC of T v Wentworth District Capital Ltd 2011 ATC 20-253, 2010 ATC 20-202 ( Wentworth) it was discussed whether the wording in the legislation in relation to 'established' meant when an entity is initially established or whether it refers to its current activities. In the Wentworth appeal JJ Emmett and Gilmour explained: It was common ground, however, as the trial judge stated, that the issue of whether a 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, including the clauses in its memorandum of association or constitution: see Cronulla Sutherland Leagues Club Limited v Commissioner of Taxation 90 ATC 4215; (1990) 23 FCR 82 at 89-90 and 116-117 (which considered s 23(g)(iii) of the Income Tax Assessment Act 1936 (Cth), the predecessor to Item 2.1 of s 50-10), s 4-1 of the 1997 Act and the Explanatory Memorandum to the Taxation Laws Amendment Act (No 2) 1990 (Cth), cl 6. Thus, an entity might be established for the requisite purpose in one year, but not another: see Cronulla at 89-90 and 116-117. The word established therefore means existing in the year of income. In other words, the purposes of an entity must be examined in each income year to determine if it is 'established' for community service purposes. In the case of the entity the purpose of its establishment can be found in its Constitution, which indicates that it was established to: The Company is established to pay and apply its income and property to or for charitable purposes and to promote the Objects and doing all such things that are incidental or conducive to the attainment of those Objects. Given the objects and activities of Company B, and the nexus that exists between Company B and Company A, it is accepted that Company B is established for community service purposes. | Detailed Reasoning - Political or lobbying purposes: The Explanatory Memorandum to Taxation Laws Amendment Bill (No. 2) 1990 confirms the words 'political or lobbying purposes' to mean: Political or lobbying purposes include standing candidates for election, campaigning for changes to the law or to government policy, and the like. Community service organisations may engage in political or lobbying activities, provided these are no more than merely incidental to other purposes beneficial to the community. But a body will be unable to claim exemption from income tax under this subparagraph if its only undertakings for the benefit of the community are political or lobbying ones. From the information provided, Company B appears not to have any role in advocating to government. Company B has not been established for political or lobbying purposes. | Detailed Reasoning - Special conditions: Section 50-70 of the ITAA 1997 states that there are special conditions which must be satisfied for entities considered for income tax exemption under section 50-10 (Item 2.1) of the ITAA 1997. Subsection 50-70(1) of the ITRAA 1997 states that an entity covered by item 2.1 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. The entity must also satisfy the conditions in subsection 50-70(2) of the ITAA 1997. It is accepted that Company B is not carried on for the individual profit of its members. For an entity to meet the requirements of paragraph 50-70(1)(a) it must have a 'physical presence' in Australia and, to that extent, incur its expenditure and pursues its objectives principally in Australia. Company B is incorporated in Australia and owns property in Australia; it has a physical presence in Australia. It incurs its expenditure and pursues its purposes principally within the community defined in its Constitution which is located in Australia. Subsection 50-70(2) states that the entity: (a) must comply with all the substantive requirements in its governing rules; and (b) apply its income and assets solely for the purposes for which the entity is established. There is nothing that shows that Company B has not complied with, or will not comply with, the substantive rules in its governing rules, or that it does not, or will not, apply its income and assets solely for the purpose for which it was established. Accordingly, Company B satisfies the 'Special Conditions' specified in section 50-70 of the ITAA 1997. | Detailed Reasoning - Conclusion: Based on the above, the total ordinary income and statutory income of Company B is exempt from income tax pursuant to section 50-1 of the ITAA 1997 as it is a society, association or club established for community service purposes pursuant to item 2.1 of the table under section 50-10 of the ITAA 1997.