Private ruling: Income tax exemption and rebatable employer status
Date of advice: 15 February 2016
Published: April 2016
Ruling period: 1 July 2015 to 30 June 2016 | 1 July 2016 to 30 June 2017 | 1 July 2017 to 30 June 2018 | 1 July 2018 to 30 June 2019 | 1 July 2019 to 30 June 2020 | 1 July 2020 to 30 June 2021

Ruling: Q1: Is the entity exempt from income tax under section 50-1 of the ITAA 1997 on the basis that it is an association established for community purpose (except political or lobbying purposes) as described in item 2.1 of the table in section 50-10 of the ITAA 1997 | A1: Yes. | Q2: Is the entity a rebatable employer under subsection 65J(1) of the FBTAA 1986 on the basis that it is a community service organisation as described in item 5 of the table in paragraph 65J(1)(b) of the FBTAA 1986? | A2: Yes.

Relevant facts and circumstances: The entity is a company limited by guarantee which is established for the purpose of providing collection services to the community. The entity's principal place of business is in Australia. The entity carries out its activities in Australia in accordance with its objects as set out in its Constitution. The entity is not a registered charity. The Act The object of the Act is to encourage the recycling and recovery of resources from specified types of products. The Act also sets out certain requirements and obligations which affect the operations of the members of the entity. The Act and regulations also dictates who is liable and specify key outcomes to be achieved. Operation of the entity The entity's operations are funded by its members through membership fees. The fees enable the entity to provide collection services of specified types of products to the community, free of charge. The services form part of the statutory arrangements and obligations of members under the Act. The entity's collection program has operated since its inception and is the means which the entity provides collection services to the community. Object of the entity A copy of the entity's Constitution has been provided. The object of the entity are listed at clause x of its Constitution. The entity's objectives include, amongst other things, to: • meet member's obligations under the legislation; • reduce waste contribution to landfill by delivering on collection and recycling targets; • encourage maximum resource recovery from waste to capture its commercial and environmental value; • provide a free drop off service to the community across Australia for specified types of products; • establish and operate collection services across Australia for the collection of specified types of products; and The entity was formed for a particular purpose, on a not-for-profit basis. Its Constitution contains suitable clauses which prevents it from distributing income and property to its members either during its operation or on winding up. The relevant non-profit clause and winding up clause provides: • the income and property of the entity shall be applied to the objects of the entity as specified in its Constitution; • no income or property of the entity is to be paid or transferred, directly or indirectly to any of its members; and • any surplus property after winding-up is not to be distributed to members but will be transferred to another entity with similar purposes which is not carried on for the profit or gain of its individual members. A copy of the entity's financial report for the x income year has been provided.

Relevant legislative provisions: Australian Charities and Not-for profits Commission Act 2012 Subsection 25-5(5) Income Tax Assessment Act 1936 Subparagraph 23(g)(v) | Income Tax Assessment Act 1997 Section 50-1 | Income Tax Assessment Act 1997 Section 50-10 | Income Tax Assessment Act 1997 Section 50-47 | Income Tax Assessment Act 1997 Section 50-70 | Income Tax Assessment Act 1997 Subsection 50-70(1) | Income Tax Assessment Act 1997 Subsection 50-70(2) | Income Tax Assessment Act 1997 Section 995-1 | Income Tax Assessment Act 1997 Subsection 995-1(1) | Fringe Benefits Tax Assessment Act 1986 Section 65J | Fringe Benefits Tax Assessment Act 1986 Subsection 65J(1) | Fringe Benefits Tax Assessment Act 1986 Subsection 65J(5) Taxation Laws Amendment Bill (No.2) 1990 Explanatory Memorandum

Reasons for decision: Detailed Reasoning - Income Tax Exemption: 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. (*as defined in section 995-1 of the ITAA 1997) A society, association or club established for community service purposes (except political or lobbying purposes) is described in item 2.1 of the table in section 50-10 of the ITAA 1997. The society, association or club must satisfy the special conditions detailed in section 50-70 of the ITAA 1997, including that the entity: • is a society, association or club; • established for community service purposes; • not carried on for the purpose of profit or gain of its individual members; • has a physical presence in Australia and to that extent, it must incur its expenditure and pursue its objectives principally in Australia; • complies with all of the substantive requirements in its governing rules; and • applies its income and assets solely for the purpose for which it was established. To determine whether the entity is exempt from income tax as an entity described in item 2.1 of the table in section 50-10 of the ITAA 1997, it is necessary to determine whether it is a society, association or club, established for community services purposes, and whether it satisfies the special condition pursuant to section 50-70 of the ITAA 1997. Additionally, the entity must also satisfy section 50-47 of the ITAA 1997 if the entity is an ACNC type of entity. | Detailed Reasoning - Society, Association or Club: The terms 'society' and 'association' are not defined in the ITAA 1997 and have their ordinary meaning. However, it does not include a body formed and controlled by government and performing functions on behalf of government (see Taxation Determination TD 95/56 Fringe benefit tax: can a body which is formed by government, is controlled by government and performs functions on behalf of government be an 'association' for the purpose of section 65J of the fringe benefit Act Assessment Act 1986 (FBTAA)? ). Guidance on the terms 'society' and 'association' can be found in the Federal Court judgement in Douglas and Others v. FCT (1977) 77 FCR 112; 97 ATC 4722; 36 ATR 532 ( Douglas case). In that case, Justice Olney made reference to the definitions contained in the Concise Oxford Dictionary for each of these terms: Unassisted by authority I would construe the collation 'society, association or club' to refer to a voluntary organisation having members associated together for a common or shared purpose . Such a description is consistent with various dictionary definitions of the several words used. The following examples can be found in the Concise Oxford Dictionary: Society: Association of persons united by a common aim or interest or principle; Association: Organised body of persons for a joint purpose; Club: Association of persons united for some common interest, usually meeting periodically for shared activity. A society or association can be incorporated or unincorporated. The status of the entity's incorporation should not have any bearing on whether the entity is considered a society or an association. In Pro-Campo Limited v. Commissioner of Land Tax (NSW) (1981) 81 ATC 4270; 12 ATR 26, Justice Lee stated: The three words ``society, club or association'' are words in frequent use in our community and societies, clubs and associations are well-known entities. One knows that many organisations which give themselves the title society or association or club are as often incorporated as they are unincorporated. The interpretations of 'society', 'association' or 'club' as described above, places emphasis on a 'body of persons' and 'an organisation of people' with a 'common purpose'. In the present case, the entity is a company limited by guarantee and was formed for a particular purpose, on a not-for-profit basis. That is, as stated in its Constitution, one of the entity's objects is to establish and implement a collection service consistent with community and industry objectives that discharges its members' obligations under the legislation. As such, the common purpose for which members have joined together is expressed in the entity's Constitution. The fact that the entity is incorporated does not preclude it from being an association or society. The company is an incorporated entity brought into existence by its members to pursue a common purpose as stated in its Constitution. It is not a body controlled or formed by government or performing functions on behalf of government. It is accepted that the entity is an association. | Detailed Reasoning - Established for community service purposes: Item 2.1 of the table in section 50-10 of the ITAA 1997 requires the society, association or club to be established for community service purposes (except political or lobbying purposes). The required 'community service purposes' must be the entity's main or predominant purposes ( Royal Australian College of Surgeons v. FCT (1943) 68 CLR 436; 7 ATD 289, Cronulla Sutherland Leagues Club Limited v. FCT (1990) 23 FCR 82; 90 ATC 4215; 21 ATR 300). Community service purposes The phrase 'community service purposes' is not defined in the ITAA 1997. Olney J considered the term in Douglas , stating at ATC 4726; ATR 536 that: The absence of a statutory definition and the very broad ambit of the words 'community service' justify resort to the explanatory memorandum to identify more precisely the legislative intention. Item 2.1 of the table 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), the predecessor provision to section 50-10 of the ITAA 1997. Guidelines on the scope of the exemption provided by subparagraph 23(g)(v) of the ITAA 1936 are discussed in TD 93/190. Relevantly, paragraphs 2, 3 and 4 of TD 93/190 states: 2. 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 for the purposes of subparagraph 23(e), but which, nevertheless, conduct activities of benefit to the community. In other words, some organisations that do not qualify for exemption under subparagraph 23(e) may, nevertheless, be exempt under subparagraph 23(g)(v). 3. 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'. Paragraphs 5 and 6 of TD 93/190 states that a common association such as members advancing their common interests is not altruistic as it is considered that such an entity is formed for the purposes of its members. Further, an organisation established for political or lobbying purposes are excluded from exemption under the provision. Therefore, to be considered an organisation established for community service purposes, the organisation's activities must be directed to altruistic purposes and this altruistic purpose must not be a political or lobbying purpose. The Explanatory Memorandum for the Taxation Laws Amendment Bill (No.2) 1990 which introduced subparagraph 23(g)(v) of the 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: The words are not limited to those purposes beneficial to the community which are also charitable. They extend to a range of altruistic purposes. The words would extend to promoting, providing or carrying out activities, facilities or projects for the benefit or welfare 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 or economic circumstances. An exclusion from the exemption will apply to bodies established for political or lobbying purposes. Altruistic purpose An altruistic purpose involves promoting, providing or carrying out activities, facilities or projects for the benefit or welfare of the community. That is, a community service organisation is expected to serve at least a particular group in need such as those expressed in paragraph 3 of TD 93/190. 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 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. As discussed above, the entity is a company established as a not-for-profit entity to pursue the objects as specified in its Constitution. The entity states in its application for a private ruling that the Australian Charities and Not-for-Profits Commission has confirmed that the entity is not a charity. Therefore, in deciding whether the entity is established for community service purposes, we must consider whether it was formed for the purpose of its members, or for purposes of an altruistic nature that are for the benefit of the community. It is also necessary to consider whether the entity was formed for a political or lobbying purpose. The legislation seeks to address the environmental, health and safety impacts of products and provides a framework for mandatory, co-regulatory and voluntary arrangements. This approach involves a combination of government regulation and industry action, whereby government makes regulations that set the outcomes to be met, while industry funds and implements the scheme and has flexibility in determining how those outcomes are achieved. In determining the main or predominant purpose of an organisation, its actual activities must be taken into account. The entity's principal object, as outlined in its Constitution is to establish and implement a cost-effective national collection service consistent with community and industry objectives that discharges its members' obligations under the legislation. For a purpose to be altruistic, an organisation must be established and operated with regard to the welfare of the community. Consideration, therefore, must be given not only for the purpose for which the body is established but for which it is currently conducted. The entity's collection program contribute to the minimization of specified types of products being sent to landfill, reducing waste in specified products and increasing recycling and resource recovery - these are all outcomes that support the delivery of environmental and social benefits to the community. Under its collection program, the entity accepts specified waste products from the community at its various collection sites adding to the benefits provided to the community. The entity's collection program also directly benefits the environment However, it is noted that the entity's members have obligations under the legislation. In ATO ID 2003/721, the ATO took the view that an industry ombudsman is an exempt entity under section 50-10 of the ITAA 1997 and section 65J of the FBTAA 1986 where the entity is established by its members, pursuant to a State/Territory statute, to provide a free ombudsman service to domestic and small business consumers of that industry. The ATO stated that these types of entities are altruistic, to the extent, that they provide their service for the benefit of the community free of charge: It is considered that where the industry ombudsman entity is established to make its Ombudsman's services available to ordinary industry consumers, without barring some and not others on the basis of their relationship with ombudsman entity members, it can reasonably be said that these entities are 'established for community service purposes' in a wide sense. They are 'altruistic' to the extent that they provide their service for the benefit of the community free of charge. In the current circumstances, it is seen that the entity is established as an approved arrangement, to support a national, industry-led scheme for collection of specified types of products. Whilst the entity's members have obligations under the legislation, this does not detract from the fact that the entity is an approved arrangement which is funded by the industry and provides collection services that benefits the community. The entity, through its collection program provides a free service for collection of specified types of products to all members of the community. The entity's members discharging their obligations under the legislation are considered to be merely incidental to its main purpose. It is accepted that the entity is established for community service purposes and is of an altruistic nature, to the extent, that its collection service are provided for the benefit of the community, free of charge. Altruistic purpose must not be a political or lobbying purpose. The entity has been established under an approved arrangement to reduce the amount of waste product for disposal to landfill and increase recycling and resource recovery. This does not include political or lobbying activities. It is accepted that the entity meets this condition. Special conditions under section 50-47 of the ITAA 1997 Under section 50-47 of the ITAA 1997, an entity which qualifies as an ACNC type of entity is not entitled to income tax exemption unless it is registered under the Australian Charities and Not-for-profits Commission Act 2012 (ACNC Act). Section 50-47 of the ITAA 1997 provides a special condition for all entities covered by section 50-1 of the ITAA 1997: An entity that: (a) is covered by any item; and (b) is an ACNC type of entity; is not exempt from income tax unless the entity is registered under the Australian Charities and Not-for profits Commission Act 2012 . The expression 'ACNC type of entity' is defined in subsection 995-1(1) of the ITAA 1997 to mean an entity which meets the description of a type of entity in column 1 of the table in subsection 25-5(5) of the Australian Charities and Not-for-profits Commission Act 2012 (ACNC Act). Broadly, an entity capable of being a registered charity is an ACNC type of entity. The entity advised in its application for a private ruling that it has applied to the ACNC to be registered as a charity. It was confirmed by the ACNC that the entity is not a charity under the ACNC Act. As such, the entity is not an ACNC type of entity as defined in subsection 995-1(1) of the ITAA 1997 and the conditions in section 50-47 of the ITAA 1997 does not apply. | Detailed Reasoning - Special Conditions under section 50-70 of the ITAA 1997: Relevantly, the special conditions in subsection 50-70(1) of ITAA 1997 requires that the society, organisation or club is not carried on for the purpose of profit or gain of its individual members and that it has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia. a) Not carried on for the purpose of profit or gain of its individual members A community service organisation must be non-profit. That is, it must not be carried on for the purpose of profit or gain of its individual members. The Income Tax Guide for Non-Profit Organisations (NAT 7967), which is available on the ATO website at www.ato.gov.au states the following in regards to non-profit requirements: A non-profit organisation is an organisation that is not operating for the profit or gain of its individual members, whether these gains would have been direct or indirect. This applies both while the organisation is operating and when it winds up. Any profit made by the organisation goes back into the operation of the organisation to carry out its purposes and is not distributed to any of its members. We accept an organisation as non-profit where its constituent or governing documents prevent it from distributing profits or assets for the benefit of particular people - both while it is operating and when it winds up. These documents should contain acceptable clauses showing the organisation's non-profit character. The income tax law does not prescribe the words that a non-profit organisation must have in its constituent documents. The following example clauses would be acceptable, if other clauses do not contradict them. The organisation's actions must be consistent with this requirement. The entity is not established for the profit or gain of its members. The entity's Constitution contains suitable non-profit clauses to prevent distributions to its members whilst it is operating and when it winds up. We have reviewed the financial statement for the x income year and accepted that the entity has operated in a non-profit manner during those income years. Furthermore, should the entity operate in accordance with its non-profit and winding up clauses for the years subject to this ruling, it is accepted that this requirement will be met for those years. b) Has a physical presence in Australia and to that extent, it must incur its expenditure and pursue its objectives principally in Australia • Physical presence in Australia The entity is incorporated in Australia and is located in Australia. Therefore, the entity is considered to have a physical presence in Australia. • Incur expenditure principally in Australia To the extent that an organisation has a physical presence in Australia, the entity must incur its expenditure principally in Australia. Based on the information provided, the entity will principally incur its expenditure in Australia in undertaking the various objectives set out in its Constitution. • Pursue its objectives principally in Australia To the extent that an organisation has a physical presence in Australia, it must pursue its objectives principally in Australia. Based on the information provided, the entity pursues its objectives as set out in its Constitution, principally in Australia. c) Complies with all substantive requirements of governing rules and applies income and assets solely for the purpose for which established Subsection 50-70(2) of the ITAA 1997 provides that 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. Paragraph 9 of TR 2015/1 provides that an entity's 'governing rules' are those rules that authorise the policy, actions and affairs of the entity. The substantive requirements in an entity's governing rules are those rules that define the rights and duties of the entity, including those that give effect to the entity's object or purpose, relate to its non-profit status, require financial statements to be prepared and retained, set out criteria for admission as a member of the entity and relate to the winding-up of the entity (Paragraphs 18 and 19 of TR 2015/1). The requirement that an entity must apply its income and assets solely for the purpose for which the entity is established means that an entity must exclusively or only apply its income and asset for that purpose. However, misapplication of an entity's income and assets of an insignificant nature will not result in a breach of this condition (Paragraphs 33 to 35 of TR 2015/1). From the entity's Constitution, the Financial Report and the activities conducted by the entity, it is accepted that the association complies with the substantive requirements in its Constitution in the pursuit of its objects as set out in its Constitution. We note that the entity's main source of income is derived from membership fees from its members. From the information provided, we accept that a reserve held by the entity does not breach the income and asset condition in subsection 50-70(2) of the ITAA 1997. Consequently, the entity satisfies the conditions specified in section 50-70 of the ITAA 1997. For the reasons outlined above, the entity is exempt from income tax under section 50-1 of the ITAA 1997 on the basis that it is an association established for community purpose (except political or lobbying purposes) as described in item 2.1 of the table in section 50-10 of the ITAA 1997. | Detailed Reasoning - Question 2: Section 65J of the FBTAA 1986 is about the rebate that is available for certain types of not-for-profit employers. Organisations that qualify for a FBT rebate are referred to as 'rebatable employers'. Subsection 65J(1) of the FBTAA 1986 states: An employer is a rebatable employer for a year of tax if the employer: (a) is exempt from income tax at any time during the year of tax under any of the provisions set out in the following table; and (b) satisfies the special conditions (if any) set out in the following table. The type of employer and the special conditions that is required to be satisfied as a community service organisation is provided for under item 5 in the table in paragraph 65J(1)(b) of the FBTAA 1986 which states: Type of Employer : A society, association or club: (a) established for community service purposes (except political or lobbying purposes); and (b) covered by item 2.1 of the table in section 50-10 of the Income Tax Assessment Act 1997. | Detailed Reasoning - Special conditions: See subsection (5) of this section. The special conditions in subsection 65J(5) of the FBTAA 1986 are: A society, association or club is not covered by table item 4, 5, 8, 9, 10, 11 or 12 in subsection (1) for a year of tax if it is: (a) an incorporated company where all the stock or shares in the capital of the company is or are beneficially owned by: (i) the Commonwealth, a State or a Territory; or (ii) an authority or institution of the Commonwealth, a State or a Territory; or (b) an incorporated company where the company is limited by guarantee and the interests and rights of the members in or in relation to the company are beneficially owned by: (i) the Commonwealth, a State or a Territory; or (ii) an authority or institution of the Commonwealth, a State or a Territory. The discussion at question 1 determined that the entity is a community service organisation covered by item 2.1 of the table in section 50-10 of the ITAA 1997. However, the entity is also required to satisfy the special conditions under subsection 65J(5) of the FBTAA 1986. To satisfy this condition, the entity will need to show that it is not owned or beneficially owned by the government. In accordance with TD 95/56, if an organisation is formed, set up by a law of Government or beneficially owned by government, subsection 65J(1) of the FBTAA will not apply. An organisation is regarded as being owned or beneficially owned by government if all of its shares or membership interests are owned by or beneficially held for the Commonwealth, State or Territory governments or one of their authorities. The entity is a company limited by guarantee. None of the membership interests are held by or held on behalf of the Commonwealth, State or Territory government or one of their authorities. It is accepted that the entity satisfy the special condition under subsection 65J(5) of the FBTAA 1986 and qualify as a rebatable employer under subsection 65J(1) of the FBTAA 1986.