Private ruling: Income tax exemption

Ruling: Q1: Is the Company entitled to be endorsed as a exempt entity from income tax pursuant to section 50-110 of the Income Tax Assessment Act 1997 (ITAA 1997), being a charitable institution under item 1.1 in the table of section 50-5 of the ITAA 1997? | A1: Yes Facts The Company is an Australian limited liability proprietary company with a certain number of members (shareholders). The objects in the Company's constitution indicate that it is established for the purpose of advancing education. The information provided also show that its activities fall within the ambit of advancement of education. The members of the Company are tax-exempt charitable institutions established for the purpose of advancing education. The Company's constitution has a clause which prevents it from distributing income or property to its members whilst in operation. The income and property of the Company must be applied for its objects. The constitution has a dissolution clause which allows it to distribute money and property to the members on winding up. No dividends have been paid by the Company to any of its members since the Company has been in existence.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 50-5 | Income Tax Assessment Act 1997 Section 50-105 | Income Tax Assessment Act 1997 Section 50-110 Summary | The Company is entitled to be exempt for income tax exemption on the basis that it is a charitable institution for the purpose of item 1.1 of the table in section 50-5 of the Income Tax Assessment Act 1997 (ITAA 1997). Detailed reasoning | Sections 50-1 and 50-5 of the ITAA 1997 provide an exemption for the ordinary and statutory income of a charitable institution subject to satisfaction of the conditions in sections 50-50 and 50-52. | It is considered that the Company satisfies the conditions in sections 50-50 and 50-52. | It is also accepted that the Company is an institution and has a charitable purpose, being the advancement of education. | Beneficial to the community and non-profit requirements | A charitable purpose must be for the benefit of the community or a section of the community. If an institution is carried on for the private profit of its owners or members, it is carried on for their benefit and not for the benefit of the community. | However, distributions of profits, or the potential for an entity to distribute profits, from a commercial activity to the entity's owners or members will not always result in a private benefit to the owner or member. | In the case of Commissioner of Taxation v. Word Investments Limited [2008] HCA 55 ( Word Investments Case ) the High Court held that an institution could be charitable even where it did not engage in charitable activities itself, but instead made profits that were directed to charitable institutions which did engage in charitable activities. | Based on the decision in Word Investments Case , the fact that the recipient of the profits could be an owner or member of the institution does not alter the characterisation of the institution as charitable as long as: | · the sole purpose of the institution making the distribution is charitable; | · its constituent documents allow it to distribute its surplus or profit to another entity or entities in order to effect that sole charitable purpose; and | · its constituent documents restrict potential recipients of the surplus or profit to charitable entities that have the same charitable purpose as the institution itself. | In these circumstances, the Commissioner will accept that the distribution of profit is not for the private benefit of the members or owners but for the benefit of the public generally. | It is considered that the Company has a sole charitable purpose; it may distribute its profits or surplus to members, but only to effect a charitable purpose of advancing education. Whilst its ownership is not limited to educational charities, clauses in its constitution require that payments be made to endorsed charities (that is, payments by way of dividends and as surplus on winding up), and the constitution requires that the whole of the income and property of the Company must be applied to its objects. It is not considered that the ability to make payments to members indicates that the Company has a purpose of providing private benefits to its shareholders. | In conclusion, it is accepted the Company meets the requirements of a charitable institution for the purpose of section 50-5 (item 1.1) of the ITAA 1997.


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