Private ruling: Income tax exemption
Date of advice: 1 November 2017
Published: March 2018

Ruling: Q1: Does the entity remain a tax exempt entity pursuant to section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) in light of the new agreement? | A1: Yes Issue 1 Before entering into the agreement, is the entity still an income tax exempt entity pursuant to section 50-1 of the ITAA 1997? Summary The entity is still an income tax exempt entity pursuant to section 50-1 of the ITAA 1997 before entering into the agreement. Detailed Reasoning Section 50-1 of the ITAA 1997 provides that the total ordinary income and statutory income of certain entities is exempt from income tax. Item 2.1 of the table in section 50-10 of the ITAA 1997 provides that a society or association established for community service purposes (except political or lobbying purposes), is an exempt entity. ‘Society or association’ In a previous private ruling issued to the entity, it was determined that the entity was an ‘association’ on the basis that it was registered as a company limited by guarantee and was an organised body of members instituted for the objects as per its constitution. On the same basis, the entity is still an ‘association’ for the purposes of section 50-10 of the ITAA 1997. Is the purpose for which the entity was established a ‘community service purpose’? In a previous private ruling issued to the entity, it was determined that the entity was established for a ‘community service purpose’ on the basis that the entity’s principal purpose was to facilitate the reintroduction of a service in an area by making it commercially viable for another entity to operate. This was an application of the decision in FC of T v Wentworth District Capital Ltd 2011 ATC 20-253; 2010 ATC 20-202 ( Wentworth ) where it was held that the facilitation of the provision of banking services in Wentworth by making it commercially viable for a bank to return to Wentworth was a ‘community service purpose’. However, as the decision in Wentworth also makes clear, the purposes of the entity must be examined each income year to determine if it is ‘established for community service purposes’. Because there are no other entities offering the service in the area, and the entity continues to operate as a franchise of the other entity, the entity’s purpose for the purposes of item 2.1 in section 50-10 of the ITAA 1997 remains the same, and is a ‘community service purpose’. ‘Political or lobbying purposes’ Item 2.1 in section 50-10 of the ITAA 1997 provides an exception for community service purposes, excluding political or lobbying purposes. The Explanatory Memorandum to Taxation Laws Amendment Bill (No. 2) 1990 explains ‘political or lobbying purposes’: Political or lobbying purposes include standing candidates for election, campaigning for changes to the law or to government policy, and the like. Community service organisation 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, the entity does not appear to conduct any of the activities above. The entity has not been established for political or lobbying purposes. Special condition – section 50-70 Section 50-70 provides special conditions for entities covered by item 2.1 in section 50-10 of the ITAA 1997: ● The entity is not carried on for the purpose of profit or gain of its individual members; and ● The entity has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia; or ● The entity is a society, association or club that meets the description and requirements in item 1 of the table in section 30-15; or ● The entity 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 Because the entity’s Constitution contains the necessary non-profit and dissolution clauses, we accept that the entity is not carried on for the purpose of profit or gain of its individual members. The entity’s activities outlined in its annual report also support this conclusion. The first special condition is met. The entity is an entity that has its physical presence in Australia, pursues its objectives in Australia, and incurs its expenditure in Australia. The entity will meet the special conditions in section 50-70 of the ITAA 1997. Special condition – section 50-47 Section 50-47 of the ITAA 1997 provides a special condition that if an entity that is covered by one of the items in subdivision 50-A is an ‘ACNC type of entity’, they will not be exempt from income tax unless they are registered under the Australia Charities and Not-for-profits Commission Act 2012 . ‘ACNC type of entity’ is defined in subsection 995-1(1) of the ITAA 1997 as an entity that 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 . Column 1 of the table in subsection 25-5(5) of the Australian Charities and Not-for-profits Commission Act 2012 describes a charity. The Charities Act 2013 provides a definition of ‘charity’ that applies to all Commonwealth laws. The definition of ‘charity’ in section 5 of the Charities Act 2013 provides that ‘charity’ means an entity: a) That is a not-for-profit entity; and b) All of the purposes of which are: i. Charitable purposes that are for the public benefit; or ii. Purposes that are incidental or ancillary to, and in furtherance or in aid of, purposes of the entity covered by subparagraph (i); and c) None of the purposes of which are disqualifying purposes; and d) That is not an individual, a political party or a government entity It has been concluded that the entity is a not-for-profit entity. Charitable purposes are listed in section 12 of the Charities Act 2013 . It has also been concluded that the entity’s purpose is to facilitate the reintroduction of a service by making it commercially viable for another entity to operate in the area. This will not qualify as one of the charitable purposes listed and the entity will not be an ‘ACNC type of entity’. Accordingly, section 50-47 of the ITAA 1997 will not apply. Issue 2 Does entering into the new agreement change the entity’s income tax exempt status? Summary The entity remains an income tax exempt entity pursuant to section 50-1 of the ITAA 1997 in light of entering into the new agreement. Detailed Reasoning In order to change the conclusion that the entity is an income tax exempt entity pursuant to section 50-1 of the ITAA 1997, entering into the new agreement needs to have either altered the entity’s purpose for which it was established, or the outcomes of any of the special conditions. Purpose It was concluded that the purpose for which the entity was established was to facilitate the reintroduction of a service by making it commercially viable for another entity to operate in the area. This was a community service purpose and was the entity’s main or predominant purpose, as required by Cronulla Sutherland Leagues Club Limited v. FC of T 90 ATC 4215 ( Cronulla ). We have examined the terms of the new agreement as well as the accompanying explanation document. Helpfully, the explanation document outlines the purpose of the new agreement, as well as all of the key differences. Importantly, the purpose stated in the explanation document is to simplify the documents so they are easier to understand and use. The key differences outlined in the explanation document show that many of the changes are merely regulatory, such as changes to timeframes and payments, requirements for the other entity to approve and check staff appointments, and requirements for the other entity to provide assistance. It is apparent from an examination of the terms in the new agreement that the entity facilitates a franchise of the other entity, as they are required to pay a franchise fee, employees must wear uniforms supplied by the other entity, only the other entity’s products can be sold, and the other entity’s interests are to be supported. The entity and the other entity’s relationship is similar to the relationship between Bendigo Bank and Wentworth District Capital Ltd in Wentworth . In that case, Wentworth District Capital Ltd entered into a management agreement which contained a franchise deed with a wholly owned subsidiary of Bendigo Bank. Under this agreement, Wentworth District Capital Ltd was required to sell the products and services of Bendigo Bank, pay fees to Bendigo Bank, ensure that staff wore Bendigo Bank uniforms, and to promote the franchise and interests of Bendigo Bank. Gilmour and Gordon JJ held at [45] that Wentworth District Capital Ltd achieved its purpose of facilitating face-to-face banking in Wentworth by making it commercially viable for Bendigo Bank to operate in Wentworth by entering into the relevant management agreement. This enabled Wentworth District Capital Ltd to manage a franchised office of Bendigo Bank. Similarly, entering into a franchise agreement allows the entity to achieve its purpose of facilitating a service in the area by making it commercially viable for the other entity to operate in the area. The terms of the new agreement, which contains mostly regulatory changes and was written to simplify documents, does not change the entity’s purpose. The new agreement would still allow the entity to achieve its purpose of facilitating the service in the area by making it commercially viable for the other entity to operate in the area. Special Conditions – section 50-70 and 50-47 Entering into the new agreement will not change the outcome of any of the special conditions. The entity remains a not-for-profit entity with a physical presence in Australia, incurs its expenses and pursues its objectives in Australia, and is not an ‘ACNC type of entity’. | Q2: Does the entity remain a tax exempt entity pursuant to section 50-1 of the ITAA 1997 in light of undertaking the new deed? Issue 1 Before entering into the new deed, is the entity still an income tax exempt entity pursuant to section 50-1 of the ITAA 1997? Summary The entity is still an income tax exempt entity pursuant to section 50-1 of the ITAA 1997 before entering into the new deed for the same reasons as outlined in the detailed reasoning to issue 1 of question 1. Issue 2 Does undertaking the new deed change the entity’s income tax exempt status? Summary The entity remains an income tax exempt entity pursuant to section 50-1 of the ITAA 1997 in light of undertaking the new deed. Detailed Reasoning In order to change the conclusion that the entity is an income tax exempt entity pursuant to section 50-1 of the ITAA 1997, entering into the new deed needs to have either altered the entity’s purpose for which it was established, or the outcomes of any of the special conditions. Purpose It was concluded that the purpose for which the entity was established was to facilitate the reintroduction of a service by making it commercially viable for the other entity to operate in the area. This was a community service purpose and was the entity’s main or predominant purpose, as required by Cronulla Sutherland Leagues Club Limited v. FC of T 90 ATC 4215 ( Cronulla ). The new deed is an agreement that the entity enters into with third party host businesses. The terms of the new deed largely impose conditions on the host business relating to health and safety, staffing conditions, and opening hours. Relevantly, several clauses of the new deed still show that the entity operates as a franchise. Much like the new agreement, entering into the new deed allows the entity to achieve its purpose of facilitating a service in the area by making it commercially viable for the other entity to operate in the area. The new deed outlines the arrangement between the entity and a host business so that the entity can operate as a franchise of the other entity within that host business . Several of the entity’s sites are already operating under this model, and the new deed merely formalises the model. The new deed does not change how the entity operates or the nature of the entity’s relationship with the other entity. As a result, entering into the new deed will not change the entity’s purpose of facilitating the service in the area by making it commercially viable for the other entity to operate in the area. Special Conditions – section 50-70 and 50-47 Entering into the new deed will not change the outcome of any of the special conditions. The entity remains a not-for-profit entity with a physical presence in Australia, incurs its expenses and pursues its objectives in Australia, and is not an ‘ACNC type of entity’. Conclusion The entity is exempt from income tax under section 50-1 of the ITAA 1997 as an entity that falls within item 2.1 of the table in section 50-10 of the ITAA 1997. The entity remains an income tax exempt entity in light of entering into the new agreement and deed.