Private ruling: Income Tax ~~ Exempt entities ~~ community service
Published: July 2014
Ruling period: Year ended 30 June 2013 | Year ending 30 June 2014 | Year ending 30 June 2015 | Year ending 30 June 2016
Date scheme commenced: 1 July 2012

Ruling: Q1: Are you an entity established for community service purposes under section 50-10 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes | Q2: As an entity who satisfies section 50-10 of the ITAA 1997, is your ordinary and statutory income exempt from income tax? | A2: Yes | Q3: Do you qualify for GST tax concessions provided to non-profit organisations? | A3: Yes | Q4: Do you qualify for the Fringe Benefit Tax (FBT) rebate under Section 65J of the Fringe Benefits Tax Assessment Act 1986 ? | A4: Yes

Relevant facts and circumstances: You are an Australian public company limited by guarantee and is registered with the Australian Securities and Investment Commission (ASIC). Your office is in Australia. You have more than one director who are also the members of the company according to your governing documentation. You are a community based service organisation who operates in regional locations of Australia. Your aim is to assist in the creation, development and growth of small business, in particular, for the benefit of the unemployed. You are not a registered charity with the Australian Charities and Not-For-Profit Commission. Your governing documents provide the objects of association and state you are established to operate and grow a community owned and managed financially self-sustaining, multi-site network to capitalise on the region's strengths and opportunities to develop and grow viable small enterprises and generate employment growth. Your governing documents provide for how the income and property shall be applied and no portion shall be paid or transferred to the members of the company except for reasonable remuneration for services provided to the company or for out-of-pocket expenses. Your governing documents provide for the events resulting on dissolution of the company and ensure that any remaining property after settling debts and liabilities will not be distributed to members of the company and shall be transferred to another company who has similar objects in their governing documents. You provide flexible workspace and business support services to new start-up or expanding small businesses.

Relevant legislative provisions: Subsection 6-20(1) of the Income Tax Assessment Act 1997 | Section 50-1 of the Income Tax Assessment Act 1997 | Section 50-10 of the Income Tax Assessment Act 1997 | Section 50-70 of the Income Tax Assessment Act 1997 | Section 9-17 of the A New Tax System (Goods and Services Tax) Act 1999 | Section 23-15 of the A New Tax System (Goods and Services Tax) Act 1999 | Section 40-130 of the A New Tax System (Goods and Services Tax) Act 1999 | Section 48-15 of the A New Tax System (Goods and Services Tax) Act 1999 | Section 65J of the Fringe Benefits Tax Assessment Act 1986 | Subsection 65J(1) of the Fringe Benefits Tax Assessment Act 1986 | Subsection 65J(5) of the Fringe Benefits Tax Assessment Act 1986 | Subsection 65J(2A) of the Fringe Benefits Tax Assessment Act 1986

Reasons for decision: Summary: You are an entity established for community service purposes under section 50-10 of the ITAA 1997 for the 2013 year and future years provided that your circumstances remain the same. | Detailed Reasoning - Detailed reasoning: Not all assessable income is liable to income tax. Section 6-20(1) of the ITAA 1997 states that ordinary income or statutory income is exempt if it is made exempt by a provision of the ITAA 1997 or another Commonwealth law. Section 50-1 of the ITAA 1997 provides that the total ordinary and statutory income of the entities covered in the following tables is exempt from income tax. Item 2.1 in the table listed in Section 50-10 of the ITAA 1997 exempts an entity from liability to income tax, subject to the entity meeting the special conditions outlined in section 50-70 of the ITAA 1997. Section 50-10 exempts an entity if it is a: society, association or club established for community service purposes (except political or lobbying purposes). Section 50-70 states that the entity is only exempt if it is not carried on for the purpose of profit or gain of its individual members and has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia. Therefore it is necessary to determine if you meet all elements of section 50-10 and the special conditions in section 50-70. | Detailed Reasoning - A society, association or club: The term 'association' takes on its ordinary meaning. Olsson J, in Quinton v South Australian Psychological Board (1985) 38 SASR 523 stated that the term 'association' has come to be regarded as attaching to a body of persons associated for a common purpose. In your case, more than one member has come together to form a company limited by guarantee for the common purpose specified in governing documents. Therefore, you can be considered to be an association. | Detailed Reasoning - Established: The meaning of the word "established" in the context of section 50-10 of the ITAA 1997 was determined in the case of Wentworth District Capital Ltd v FC of T [2010] FCA 862. The trial judge found that the issue of whether the 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. An entity might be established for the requisite purpose in one year, but not another. Therefore, when determining whether you are established for community service purposes, this must be determined on a year by year basis, considering both your activities during the year as well as your objects in your governing documents. | Detailed Reasoning - Community service purposes: The phrase 'community service purposes' is not defined in the tax law. It is given its plain ordinary meaning. In Navy Health Ltd v Federal Commissioner of Taxation (2007) 163 FCR 1, Jessup J said that 'I consider that the essence of 'community service' is that a service is provided to the community, or a section of the community. Here the word "service" is used in the sense of 'help, benefit or advantage', particularly 'the action of serving, helping or benefiting, conduct tending to the welfare or advantage or another'. In this regard, His Honour went onto say that the benefit provided must not be vague. Specifically, His Honour said 'community service' '...deals with 'service' in a much more concrete setting, and requires, in my view, the community, or a section of the community, to benefit by way of the receipt of some identifiable help, benefit or advantage...' The principles to be used in the characterisation of community service purposes were outlined by the trial judge in Wentworth District Capital Ltd v FC of T [2010] FCA 862 and the decision made was upheld by the full federal court on appeal in FC of T v Wentworth District Capital Ltd [2011] FCAFC 42. These principles are: • The kind of community service referred to in section 50-10 of the ITAA 1997 is a practical or tangible help, benefit or advantage conferred on the community or an identifiable section thereof; • A service provided for reward is not a community service, at least when there is no element of subsidisation; • Community service purposes is to be interpreted broadly and are not only restricted to the act of provision of such services but also include activities such as the facilitation and promotion of such services; • The entity claiming the exemption must be established for those purposes and requires an analysis of what the entity is doing in the relevant year of income, both as a matter of its constitutive documents and also by reference to its actual activities; • The main or dominant purpose of the entity must be connected to the delivery of a community service. These principles can be applied to your circumstances. Firstly, the service provided to the regional communities in which you operate is as stated in the governing documents and is to capitalise on the region's strengths and opportunities to develop and grow viable small enterprises and generate employment growth. J Heerey in Tasmanian Electronic Commerce Centre Pty Ltd v F C of T [2005] FCA 439 found that benefits to a regional economy (in that case, Tasmania) resulting in long term economic advantage would benefit the public in that region and also the wider national public. J Heerey further explained that this is due to the nature of Australia's economy where a prosperous private sector generates profits and employment, which in turn raises incomes that can be spent to create demand or be saved to create capital for further investment. This principle can be applied to your circumstances where you are facilitating the growth of small business in regional areas which provides a practical or tangible help, benefit or advantage conferred on the regional communities in which you operate. Secondly, a service provided for reward is not a community service. The payment of a licence fee or other payment for membership does not deny the 'public' element unless by virtue of its quantum, it places an illegitimate barrier to the public becoming members. Although you charge a licence fee for your services, these are used to employ staff and operate premises and you aim to provide economical facilities and advice to facilitate the establishment of small businesses. The quantum of the licence fee is not considered to be prohibitive or to provide a barrier to members of the public utilising their services. Moreover, you will provide your services free of charge in the event that an applicant cannot pay the prescribed licence fees. Furthermore, your governing documents ensure that income and property are not transferred to the members of your organisation and are used solely for your objects of association. Thirdly, community service purposes is to be interpreted broadly and are not only restricted to the act of provision of such services but also include activities such as the facilitation and promotion of such services. You facilitate and promote the establishment of small businesses in regional Australia to capitalise on the regions strengths and opportunities and to generate employment growth and whilst not directly providing the community service, you facilitate and promote such services. Fourthly, the entity claiming the exemption must be established for those purposes and requires an analysis of what the entity is doing in the relevant year of income, both as a matter of its constitutive documents and also by reference to its actual activities. It has already been reasoned above that you are established for community service purposes. Lastly, the main or dominant purpose of the entity must be connected to the delivery of a community service. In your situation, your main or dominant purpose as stated in the governing documents is to establish, operate and grow a community owned and managed financially self-sustaining, multi-site network to capitalise on the region's strengths and opportunities to develop and grow viable small enterprises and generate employment growth. This is consistent with the description of your activities stated on your website and the activities described in the 2013 Annual Report. Therefore, this principle purpose can be said to have not changed since it was outlined in the governing documents and you are currently established for this purpose. Furthermore, 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 states that "community service purposes extend to a range of altruistic purposes that are not otherwise charitable based on the community or a section of the community's need by reason of youth, age, infirmity or disablement, poverty, or social or economic circumstances". TD 93/190 also states that - (t)he 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… but which, nevertheless, conduct activities of benefit to the community. [emphasis added] You are not a registered charity. You facilitate and promote the growth of small enterprises and the generation of employment growth that will benefit regional townships both socially and economically. TD 93/190 states that the motive must be altruistic to be a community service purpose. You formed voluntarily, do not return profits to members of the company and have been established to help the community rather than the self-interests of the members of the company. A question that further needs to be considered in regard to your altruistic motive is whether it is a section of the community or a closed and restricted class of persons that receive benefits from you and this is a question of degree ( Dingle v. Turner [1972] AC 601; per Lord Cross of Chelsea at 624). There are certain criteria which are used by you to select appropriate businesses. However, none of these criteria are exclusive of certain members of the public and exist only to efficiently allocate resources of the organisation. Therefore, it is considered that any business in the community can utilise your services. In addition, the licence fees charged by you are not prohibitive in their quantum to deny some members of the public from utilising your services and it has been stated by you that in the event a business applies for a licence but does not have the money to pay the license fee, then you will work with them free of charge. | Detailed Reasoning - Political or lobbying purposes: Your purpose is to assist in the creation, development and growth of small business, in particular, for the benefit of the unemployed. These are not considered to be political or lobbying purposes. | Detailed Reasoning - Special conditions in section 50-70 of ITAA 1997: The income tax exemption provided under section 50-10 of the ITAA 1997 is subject to the special conditions listed in section 50-70 which have been amended for income years starting on or after 30 June 2013 and further necessitate that an entity complies with all the substantive requirements in its governing rules and applies its income and assets solely for the purpose for which the entity is established. The special conditions in section 50-70 are: | Detailed Reasoning - 50-70(1): An entity covered by item 1.7, 2.1, 9.1 or 9.2 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; and the entity satisfies the conditions in subsection (2). | Detailed Reasoning - 50-70(2): 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. Section 50-70(1) relevantly states that you are only exempt if you do not carry on for the purpose of profit or gain of your individual members and have a physical presence in Australia and, to that extent, incurs your expenditure and pursue your objectives principally in Australia. The governing documents state how your income and property are to be applied and provide that you do not carry on for the purpose or gain of your members. Similarly, the governing documents state that upon winding up or dissolution of the company any remaining property will not be distributed to your members. Therefore, you do not carry on for the purpose of profit or gain of your individual members. You are an Australian public company limited by guarantee who is registered with the Australian Securities and Investment Commission (ASIC). Your office is situated in Australia and you have established yourself in regional areas of Australia. Therefore, you have a physical presence in Australia and incur your expenditure and pursue your objectives principally in Australia. Section 50-70(2) requires that you comply with all the substantive requirements in your governing rules and apply your income and assets solely for the purpose for which you are established. After reviewing your current activities as stated in the 2013 Annual Report and information available on your website, it is evident that you comply with the substantive requirements in your governing documents in the pursuit of your objects of association. Similarly, you apply your income and assets solely for the purpose for which you are established. This is evidenced by the activities stated in the 2013 Annual Report and statements made on your website that you achieve your cash flow to employ staff and operate premises through the collection of licence fees which provide economical rental, low start-up costs, easy entry/exit terms, business advice and support and provide assistance to small businesses when first establishing. Consequently, you satisfy section 50-70(2) of the ITAA 1997. You therefore meet the special conditions specified in section 50-70 of the ITAA 1997. In summary, you are an entity established for community service purposes under section 50-10 of the ITAA 1997 for the 2013 year and future years provided that its circumstances remain the same. | Summary: You are an entity who satisfies section 50-10 of the ITAA 1997. Therefore your ordinary and statutory income is exempt from income tax. | Detailed Reasoning - Detailed reasoning: Not all assessable income is liable to income tax. Section 6-20(1) of the ITAA 1997 states that ordinary income or statutory income is exempt if it is made exempt by a provision of the ITAA 1997 or another Commonwealth law. 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. Section 50-10 of the ITAA 1997 contains one of the tables referred to in section 50-1 and relates to an entity established for community services purposes. As previously demonstrated in the reasoning to Question 1, you are an entity established for community services purposes under section 50-10. Therefore, your total ordinary and statutory income is exempt from income tax. | Summary: You are considered to be a non-profit organisation. Therefore, you qualify for GST tax concessions applicable to non-profit organisations. | Detailed Reasoning - Detailed reasoning: There are a range of goods and services tax (GST) concessions that are available to non-profit organisations. The decision in Repromed Pty Ltd v Lucas and Anor (2000) 76 SASR 575 provided guidance on what is a non-profit organisation and was found to be an entity whose profits, if any, are applied to the advancement of their objects and cannot find their way into the pockets of individuals. To be classified as a non-profit organisation, an organisation's governing documents or rules must prohibit the distribution of profits to its members and provide for the distribution of any assets remaining on a winding up to another non-profit organisation. Your governing documents prohibit the distribution of profits to your members and provide for the distribution of any assets remaining on a winding up to another non-profit organisation. Therefore, you are considered to be a non-profit organisation who is eligible for GST concessions afforded to non-profit organisations. | Summary: You are an entity who qualifies for the Fringe Benefit Tax (FBT) rebate under Section 65J of the Fringe Benefits Tax Assessment Act 1986 . | Detailed Reasoning - Detailed reasoning: Section 65J of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) provides a Fringe Benefit Tax (FBT) rebate for certain not-for-profit employers. Organisations that qualify for a FBT rebate are referred to as 'rebatable employers'. Subsection 65J(1) of FBTAA 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. Item 5 of the following table states the following type of employer is a rebatable employer provided it satisfies the special conditions set out in subsection (5) of section 65J: 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. The special conditions in subsection 65(5) of the FBTAA 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 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 Territory. In your situation, you are an entity established for community service purposes under section 50-10 of the ITAA 1997 as decided in the reasoning to Question 1 above. You also meet the special conditions outlined in subsection 65(5) of the FBTAA. You are not a company whose rights are beneficially owned by the Commonwealth, a State of Territory or an authority or institution of the Commonwealth, a state or territory. Therefore you meet the requirements of subsection 65J(1) and are a rebatable employer. Subsection 65J(2A) of the FBTAA provides instruction on how to calculate the FBT rebate.