Exemption for community service institutions

In recent times, there have been a number of taxation cases that have considered the application of the tax rules relating to organisations established for "community purposes".

One example, saw the Full Federal Court posed with the question of whether a community bank was income tax exempt pursuant to section 50-10 ITAA 1997 (see FCT v Wentworth District Capital Limited [2011] FCAFC 42). In particular, the question was whether the entity, which was established to facilitate face-to-face banking services in rural towns without such services, was established primarily for “community service purposes”.

Section 50-10 item 2.1 provides that a "society, association or club established for community service purposes (except political or lobbying purposes)" is income tax exempt. The term "community services" is not defined by the legislation and as such it has been left to the Courts to provide appropriate parameters. What can be stated is that the Courts acknowledge the term evolves and must reflect contemporary community requirements and, unlike many other interpretations concerning charitable activities, the term is fluid.

In the case of Wentworth District Capital Limited, the Full Court agreed certain principles applied to s 50-10.  As a result, these principles would be relevant to other institutions seeking to establish an exempt status.  Click to see the principles identified by the Full Court.

"1. The kind of community service referred to in s 50-10 is a practical or tangible help, benefit or advantage conferred on the community or an identifiable section thereof:  Navy Health Ltd v Federal Commissioner of Taxation (2007) 163 FCR 1 at [83] and [84]; Victorian Women Lawyers’ Association Inc v Federal Commissioner of Taxation (2008) 170 FCR 318 at [163] and [164].  

…

3. Community service purposes include the purpose of providing a community service, although the purposes contemplated are not limited solely to the act of provision. The expression is broad and may extend to encompass any activity whose purpose has a reasonable connection to the delivery of a community service.  Facilitation and promotion, therefore, are purposes that are squarely within s 50-10:  see the Explanatory Memorandum to the Taxation Laws Amendment Act (No 2) 1990 (Cth), cl 6.  

4. The entity claiming the exemption must be established for those purposes.  That 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.

5. The purpose must be the entity’s main or dominant purpose.  The existence of other purposes will not lead to a different conclusion so long as a matter of true characterisation, the main or dominant purpose is still reasonably connected to the delivery of a community service. "

The factual analysis of what is an organisation's primary purpose is an essential element in determining whether that organisation satisfies the threshold test. In Wentworth District Capital the charactisation of the purpose was one of the contestable elements. The Australian Taxation Office (ATO) argued that the primary purpose was to conduct banking activities, whereas the entity maintained that its purpose concerned the provision of face–to-face banking services.

While the supply of commercial services such as banking would not represent a community service, the Judge did conclude that:

"…eschewed the proposition that the facilitation of the commercial supply of services in a town that would otherwise not be provided would always be a community service".

Institutions that are seeking exempt status pursuant to section 50-10 need to be contrasted with the “charitable” institution provision in section 50-5. An institution will be a charity where the institution satisfies the relevant requirements including the entity’s characterisation as a charity.

Charitable purposes are commonly grouped as:

1. Trusts for the relief of poverty
2. Trusts for the advancement of education
3. Trusts for the advancement of religion
4. Trusts for other purposes beneficial to the community and not falling under any of the preceding headings (Commrs for Special Purposes of Income Tax v Pemsel (1891) 3 TC 53).

In relation to grouping 4, Draft Taxation Ruling TR 2011/D2, the Commissioner states that for an institution or a fund to be considered charitable, it must be:

• Beneficial to the community, or deemed to be for the public benefit by legislation applying for that purpose, and
• Within the spirit and intendment of the preamble to the Statute of Elizabeth, or deemed to be charitable by legislation applying for that purpose.

Recent examples where the Courts have considered and endorsed the application of the charitable purpose rule are:

• An association incorporated for the advancement of women in the legal profession, being an organisation whose purposes were beneficial to the community (Victorian Women Lawyers' Association Inc v FC of T [2008] FCA 983
• An institution that monitored, researched and campaigned for the delivery of overseas aid (albeit did not actually provide any aid itself), on the basis that the generation by lawful means of public debate concerning the efficacy of foreign aid directed to the relief of poverty was itself a purpose beneficial to the community (Aid/Watch Incorporated v FC of T [2010] HCA 42).

BDO Comment

There are many organisations and institutions established to undertake some activity that is purpose driven to assist some element of our community.  Recent cases demonstrate that the parameters that apply to determine the tax exempt status of “community” based organisations is evolving to take on the changes in our community needs and expectations. The rigor the ATO would like to impose has been tested by the Courts and, to date, the Courts have successfully expanded the scope for community based organisations to obtain tax exempt status. The Federal Government’s current commitment to reforming Not For Profit sector regulation is also likely to create further changes in this area.