Private ruling: Mutuality Principle and Income Tax Exempted Entities
Published: November 2014
Ruling period: Income year ended 30 June 20XX
Date scheme commenced: 1 July 20VV

Ruling: Q1: Is Company A an exempt entity for the purposes of Item 2.1 of section 50-10 of the Income Tax Assessment Act 1997 (ITAA 1997) under the current structure? | A1: No Issue 2 | Q2: i) Is Entity B considered a member of Company A for the purposes of income tax and mutuality under the current structure? | A5: No | Q3: i) Is Entity B considered a member of Company A for the purposes of income tax and mutuality under the proposed structure? | A9: Yes Issue 3 | Q4: Is Company A an exempt entity for the purposes of Item 2.1 of section 50-10 of the Income Tax Assessment Act 1997 (ITAA 1997) under Company A's proposed structure? | A10: No

Relevant facts and circumstances: Company A was incorporated on 1 July 20VV as an Australian public company, limited by guarantee. It is governed by the Corporations Act 2001 (CA), its constitution and its regulations and by laws. Company A is a representative body for Entity B and Entity C. Company A's Current Structure Entity B has to apply and pay member fees to become a member of Company A and enjoy its benefits. Entity C does not need to apply and pay member fees to Company A but are allowed to attend conferences and conventions operated by Company A by buying entry tickets and purchasing goods and services at these conferences and conventions operated by Company A. Company A's Proposed Structure Entity B and C both have to apply and pay member fees to become a member of Company A and enjoy its benefits. Entity C are allowed to attend conferences and conventions operated by Company A by buying entry tickets and purchasing goods and services at these conferences and conventions operated by Company A. Assumptions N/A

Relevant legislative provisions: Income Tax Assessment Act 1997 section 50-10 | Income Tax Assessment Act 1997 section 50-70 | Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 8-1

Reasons for decision: Detailed Reasoning - Detailed reasoning: According to the ATO Publication The Income Tax Guide for Non-profit Organisations , an entity will be an exempt entity under item 2.1 in section 50-10 of the ITAA 1997 where the following requirements are satisfied: a) the entity must be a society, association or club. b) the entity must be established for community service purposes and c) the entity must satisfy the special conditions in section 50-70 of the ITAA 1997. Company A is an association for the purposes of section 50-10 of the ITAA 1997.The main purpose of Company A must be for community service purposes. To work out Company A's main purpose, the organisations' constituent documents, activities, use of funds and history needs to be considered. Any other purpose of the organisation must be incidental, ancillary or secondary to the community service purpose. Community service purposes are altruistic - that is, community service organisations are established and operated with regard to the well-being and benefit of others. Community service organisations promote, provide or carry out activities, facilities or projects for the benefit or welfare of the community or any members who have a particular need by reason of youth, age, infirmity or disablement, poverty or social or economic circumstances In Victorian Healthcare Association Ltd v FC of T 2010 ATC 10-141, BH Pascoe SM quoted at paragraph 22 when denying the Victorian Healthcare Association Ltd their income tax exemption status due it being unable to satisfy requirements under the income tax legislation. "22. Notwithstanding the wording of the object of VHA in its constitution and in some of its publications which are likely to have had their origin in its attempt to satisfy the requirements of the statutes, I am satisfied that, being the peak body for its members and controlled by a board of directors made up of board members and executive of its members, its principal or dominant purpose is to provide services as directed and needed by its members. As with Navy health its operations may result in an improvement in community health as provided by its members but that is a by-product of its principal or dominant purpose, not any altruistic purpose for which it is established." Notwithstanding the wording of the object of the Company A in its constitution and in some of its publications, the Commissioner is satisfied being the representative body for its members its principal or dominant purpose is to provide services as directed and needed by its members. Its operations may result in improving the quality of the Australian community but that is a by-product of its principal or dominant purpose, not any altruistic purpose for which it is established. Therefore, Company A is not an income tax exempt entity for the purposes of Item 2.1 of section 50-10 of the ITAA 1997 under AMSA's current organisational structure | Detailed Reasoning - Question 1: Entity B is considered a member of Company A for income tax and mutuality under the current structure. Entity C is not considered a member of Company A for income tax and mutuality under the current structure. The member fees paid by Entity B are mutual fees. The sponsorship activities, investing activities, publication advertising activities are not mutual activities and in the nature of trade. The convention and conference activities are not mutual activities as they are transactions with non-members. | Detailed Reasoning - Question 2: Entity B is considered a member of Company A for income tax and mutuality under the proposed structure. Entity C is considered a member of Company A for income tax and mutuality under the proposed structure. The member fees paid by Entity B and Entity C are mutual fees. The sponsorship activities, investing activities, publication advertising activities are not mutual activities and in the nature of trade. The convention and conference activities are mutual activities as they are transactions with members under the proposed structure. | Detailed Reasoning - Question 1: Company A is not an income tax exempt entity for the purposes of Item 2.1 of section 50-10 of the ITAA 1997 under AMSA's proposed organisational structure Company A does not qualify as a community service organisation. Although Company A's members are a section of the community, other clubs servicing other section of the communities are not income tax exempt e.g. social clubs retired businessmen or expatriates. These organisations seek to advance the common interests of their members and are not altruistic and so cannot be community service organisations. In addition, Entity B and Entity C are not necessarily members of the community with a particular need by reason of youth, age, infirmity or disablement, poverty or social or economic circumstances.

ii) Is Entity C considered a member of Company A for the purposes of income tax and mutuality under the current structure? | iii) Are the member fees paid by Entity B to Company A under its current structure mutual receipts? | iv) Are the convention receipts paid by Entity C to Company A under its current structure mutual receipts? | ii) Is Entity C considered a member of Company A for the purposes of income tax and mutuality under the proposed structure? | iii) Are the member fees paid by Entity B and Entity C to Company A under its proposed structure mutual receipts? | iv) Are the convention receipts paid by Entity C to Company A under its proposed structure mutual receipts?