Is the entity exempt from income tax under section 50-1 on the basis that it falls under item 2.1 of the table in section 50-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Yes. Issue 2 Fringe Benefits Tax (FBT) Question Is the entity a fringe benefits tax rebatable employer pursuant tosection 65J of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)? Answer Yes. This ruling applies for the following periods : Income Tax year ending 30 June 20XX Income Tax year ending 30 June 20XX Income Tax year ending 30 June 20XX Income Tax year ending 30 June 20XX Income Tax year ending 30 June 20XX FBT year ending 31 March 20XX FBT year ending 31 March 20XX FBT year ending 31 March 20XX FBT year ending 31 March 20XX FBT year ending 31 March 20XX The scheme commenced on: 1 April 2020
The entity is established as a company limited by guarantee and is governed by federal legislation. The entity provides an independent external dispute resolution service for complaints lodged by users of the services of that industry. The entity provides its services free of charge to people who use or are affected by the industry providers. The entity's operations are funded by a member levy. The entity's constitution has appropriate non-profit and dissolution clauses.
Income Tax Assessment Act 1997 section 50-1 Income Tax Assessment Act 1997 section 50-10 Income Tax Assessment Act 1997 section 50-70 Income Tax Assessment Act 1936 subparagraph 23(g)(v) Fringe Benefits Tax Assessment Act 1986 section 65J
Issue 1 Income Tax Question Is the entity exempt from income tax under section 50-1 on the basis that it falls under item 2.1 of the table in section 50-10 of the Income Tax Assessment Act 1997 (ITAA 1997)? Summary The Constitution of the entity prevents the entity from distributing income to its members either during its operation or on winding up. The entity has a physical presence in Australia and carries out its activities in Australia. The activities of the entity are carried out in accordance with its objects. The entity is exempt from income tax as it is a community service association. Detailed reasoning Item 2.1 of section 50-10 of the ITAA 1997 states that the income of a society, association or club established for community services purposes will be exempted from income tax provided section 50-70 does not apply.
Item 2.1 of the table in section 50-10 of the ITAA 1997, in conjunction with section 50-1 of the ITAA 1997, specifies that the total ordinary income and statutory income of a 'society, association or club established for community service purposes (except political or lobbying purposes)' is exempt from income tax. The special conditions in section 50-70 of the ITAA 1997 relevantly require that the entity is 'not carried on for the purpose of profit or gain of its individual members'. Accordingly, to be an entity described in item 2.1, the entity must: • be a society, association, or club; • be established for community service purposes; and • satisfy the special condition in section 50-70 of the ITAA 1997. Society or association The term society or association is not defined in the legislation. The term is therefore construed according to the ordinary meaning of the words. This approach was taken in Douglas v. Federal Commissioner of Taxation 36 ATR 532; (1997) 77 FCR 112; 97 ATC 4722. Reference was made by the court to the definitions contained in the Concise Oxford Dictionary
for each of these terms. Society, association, or club was accepted by the court as referring to a voluntary organisation having members associated together for a common or shared purpose. The entity is a public company limited by guarantee. We consider that it is an organisation of people with a common purpose (as per its objects in the constitution) and a formal structure and that it is a society or an association. Established for the purpose of community services Item 2.1 requires the society, association, or club to be established for community service purposes. The required 'community services purposes' must be the entity's main or predominant purpose. Item 2.1 is the equivalent of subparagraph 23(g)(v) of the Income Tax Assessment Act 1936 (ITAA 1936). Guidelines on the scope of the exemption provided by subparagraph 23(g)(v) are provided by 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 ? (TD 93/190).
TD 93/190 states that the purpose of enacting the provision was to create a category of exemption for community bodies whose activities are not accepted as being charitable because they do not fall within one of the four heads of charitable purpose. The provision does not give exemption from income tax to a broad range of organisations that are established within the community whose purposes are not of an altruistic nature. Altruistic purposes are an essential element of even the widest interpretation of 'community service purposes'. TD 93/190 indicates that to determine whether an association is established for community service purposes it is necessary to consider its constitution, its current operations, and activities, and also 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.
Australian Taxation Office (ATO) guidance provided on the website QC 46312 sets out the Commissioner's view of what constitutes "community service" purposes. Broadly, community service purposes are altruistic - i.e. they are established and operated for the wellbeing and benefit of others. The ATO guidance specifically states that community service organisations include industry ombudsman. The entity is considered to have a community service purpose as its establishment was the direct result of a requirement that industry participants be a part of the scheme. The services of the entity are provided free of charge to members of the public and funding is via quarterly contributions by entity members based on the members share of complaints received against them. The objects of the entity have not changed materially since being granted exempt status in 1995. The activities are carried out in accordance with the objects. The Commissioner accepts in this case that the entity, the work it undertakes, and its organisational objectives all demonstrate that it has been established for the purpose of community service in Australia. Section 50-70
Section 50-70 of the ITAA 1997 states that an entity covered by item 2.1 is not exempt unless it is not carried on for the purposes or gain of its individual members, and: • it has a physical presence in Australia, and to that extent it pursues its objectives and incurs its expenditure principally in Australia; • or is a deductible gift recipient; or • it is prescribed by law in the income tax regulations, and it is located outside Australia and is exempt from income tax in its country of residence. The entity is not established for the profit or gain of its members. It is an organisation which is incorporated in Australia, and which pursues its objectives and expenditure solely in Australia. The entity therefore meets the special conditions of section 50-70 of the ITAA 1997. Conclusion
As a non-profit association established for community service purposes (not being political or lobbying purposes) that satisfies section 50-70 of the ITAA 1997, the entity meets the requirements of item 2.1 of section 50-10 of the ITAA 1997. Accordingly, the entity is accepted as a community services organisation and is exempt from income tax pursuant to section 50-1 of the ITAA 1997. Issue 2 FBT Question Is the entity a fringe benefits tax rebatable employer pursuant tosection 65J of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)? Summary The entity is a rebatable employer for the purposes of section 65J as its purpose is consumer protection and is available free of charge to all consumers of its industry. Detailed reasoning Item 2.1 of section 50-10 of the ITAA 1997 states that the income of a society, association or club established for community services purposes will be exempted from income tax provided section 50-70 does not apply. As per question 1 the entity is accepted as an association for community service purposes and is covered by item 2.1 in section 50-10 of the ITAA 1997 and is exempt from income tax. Subsection 65J(1) of the FBTAA states in part:
For the purposes of this section, an employer is a rebatable employer for a year of tax if the employer is not a public benevolent institution, is not a charitable institution described in subsection 57A(5), and is covered by any of the following paragraphs at any time during the year of tax:... (j) ...a non-profit society, non-profit association, or non-profit club established for community service purposes (not being political or lobbying purposes);... Item 5 of the table in subsection 65J(1) of the FBTAA is relevant in this instance: a) a society, association or club established for community service purposes (except political purposes or lobbying purposes); and b) covered by item 2.1 of the table in section 50-10 of the ITAA 1997. ATO guidance provided on the website QC 46312 sets out the Commissioner's view of what constitutes "community service" purposes. Broadly, community service purposes are altruistic - i.e. they are established and operated for the wellbeing and benefit of others. The ATO guidance specifically states that community service organisations include industry ombudsman. We have already determined that the entity is covered by item 2.1 of the ITAA 1997.
The special conditions for item 5 of the table are found in subsection 65J(5) of the FBTAA. Relevantly, paragraph 65J(5)(b) provides that a society, association, or club is not covered by table item 5 for a year of tax if it is: 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 special condition is satisfied as the entity is not an incorporated company limited by guarantee that is beneficially owned by the Commonwealth, a State or Territory or any authority or institutions of the Commonwealth, a State, or Territory. Conclusion As the entity meets the requirements of section 65J of the FBTAA, it is determined to be a rebatable employer.