Edited version of your written advice

Authorisation Number: 1012746016193

Ruling

Subject: Obligation to submit a tax return

Question 1

Is the Association (the "Association") a non-profit company?

Answer

Yes.

Question 2

If the taxable income of the Association is under $416 in any given tax year, does the Association need to lodge a tax return?

Answer

No.

Relevant facts and circumstances

1. The Association Incorporated (the "Association") has been in existence since X, when a group of heritage infill buildings were returned to their original purpose as residential buildings, after a period of use as X;

2. The development company sold the houses and townhouses as stand-alone Torrens Title properties;

3. The Torrens Title for each property includes an encumbrance on the title, which requires all owners to maintain their individual properties, to use prescribed paint colours, and to seek approval from the Association before making any changes to the exterior, or any property that is part of the group;

4. At the time of establishment, it was necessary to create two "common areas", each of which is a private access road to the resident's garages;

5. The Association's constitution requires them to maintain the common areas, and to keep them "clean and tidy''. Funds are raised annually for this purpose, which are held by an independent property management company, known as the X Property Group ("X");

6. X pays independent contractors, who perform work in accordance with instructions from the owner's management committee;

7. As the common areas provide vehicle access to the individual properties, these areas cannot be built upon, or sold, and are strictly for the residents' use only;

Property Management

8. For the past X years, the Association has used Y Management as their property manager. This company was involved from the outset in X, and the need to prepare and submit a tax return was never mentioned;

9. In X, X started acting as the property manager for the Association;

10. X wish to charge the Association $X per annum to prepare and submit a tax return, as they believe that the Association is required to submit one;

Funds

11. Money is collected from the owners of the residential properties, deposited with X, and paid out by X for work done, as required. The following is paid to X:

(a) $X which covers maintenance of the common areas and includes a management fee for Y.

(b) Approx. $X for insurance to cover all the buildings (this amount is shown in the accounts as money coming in (collection) and going out (payment to the insurance company).

12. Surplus funds in any given financial year are not returned to property owners and are rolled over to the next financial year to cover ongoing maintenance requirements;

13. Once paid no individual, or group, is able to access or use the funds for any personal benefit.

The Association's Governance

14. The Association's constitution was formally registered in X, and has had minor amendments to reflect changes in the terminology since then;

15. The Association is incorporated under the Associations Incorporation Act 1985 (SA) ("Associations Incorporation Act").

16. Clause 55 of the Associations Incorporation Act contains a Prohibition against securing profits for members, and states:

(1) Unless the Commission otherwise approves, an incorporated association must not conduct its affairs in a manner calculated to secure a pecuniary profit for the members of the association or any of them, or for associates of the members or any of them.

(2) Unless the Commission otherwise approves, an incorporated association must not make a payment from its income or capital, or dispose of any of its assets in specie to the members of the association or any of them, or to associates of the members or any of them.

(3) Subsection (2) does not apply-

(c) to reasonable remuneration of a member of the association for work done by the member for or on behalf of the association; or

(b) to any payments or dispositions that are incidental to activities carried on by the association in accordance or consistently with its objects.

17. Clause 43 deals with the distribution of assets upon winding up, prevents assets from being distributed to members upon winding up, stating:

(4) Subject to subsection (1a), it is not lawful to distribute among members, former members or associates of members or former members of an incorporated association any surplus assets available for distribution at the completion of the winding up of the association under this Part.

(1a) the surplus assets of an incorporated association may, with the consent of the Commission, be distributed among the members of the association if each of the members of the association is also an incorporated association that has identical or similar aims and objects.

(5) Subject to this section and any order of the Supreme Court, the surplus assets of an incorporated association are, on a winding up of the association, to be distributed in accordance with-

(a) the rules of the association; or

(b) where there are no valid rules of the association governing distribution of the surplus assets-a special resolution of the association

18. In accordance with the requirements of the constitution, the Association holds and annual general meeting, to elect a management committee, report on expenditure, and set the levies required for maintenance for the coming year.

Relevant legislative provisions

Section 6-5 of the Income Tax Assessment Act 1997

Division 50 of the Income Tax Assessment Act 1997

Reasons for decision

Question 1

Is the X Association (the "Association") a non-profit company?

Summary

The Association exists for the purpose of managing the shared property of the residents. It does not trade, nor does it undertake any profit making activity for the benefit of its members.

Read in conjunction with the Associations Incorporation Act 1985, the Association's constitution prohibits it from making any distribution, whether in money, property, or otherwise, to its members, either while it is operating, or when it is wound up.

Therefore, because the Association is not carried on for the profit or gain of its individual members, and is prevented from making distributions to members while it is operating and upon windup, the Association is considered to be a non-profit company.

Detailed reasoning

In accordance with ATO publication Tax Basics for Non-Profit Organisations (NAT 7966-08.2014) Organisations are 'non-profit' if:

(a) they are not carried on for the purposes of profit or gain to their individual members; and

(b) their constituent or governing documents prevent them from distributing profits or assets for the benefit of particular persons - both while they are operating, and upon winding up. The organisation's documents should contain acceptable clauses to indicate a non-profit character, and the organisation's actions must be consistent with these clauses.

A non-profit organisation can still make a profit or generate a surplus, but the profit or surplus must be used to carry out its purposes, and must not be distributed for the benefit of owners, members, or other private people.

Taxable non-profit organisations

A non-profit entity is not automatically tax exempt. To be tax exempt, it must satisfy the requirements for tax exemption found in Division 50 of the Income Tax Assessment Act 1997 (the "ITAA 1997"). In this instance, the Association does not satisfy any of these categories, and therefore, it will be considered a 'taxable non-profit organisation'.

Taxable non-profit organisations are generally treated as companies for income tax purposes, whether they are incorporated or not. For your organisation to be a non-profit company, it must meet the 'non-profit requirement'. This means:

• it must be a company that is not carried on for the purposes of profit or gain to its individual members; and

• Its constituent documents must prohibit it from making any distribution, whether in money, property or otherwise, to its members.

Your organisation can be a non-profit company and still make a profit. However, any profits it makes must be used to carry out its purposes. The profits must not be distributed to members.

If an organisation is prohibited by the terms of its constituent documents from making any distributions - whether in money, property or otherwise - to its members, it is treated as a non-profit company. It will have the benefit of special rules for calculating taxable income, lodging income tax returns, and special rates of income tax.

For non-profit companies, the income tax that is payable depends on the level of taxable income. If the taxable income is $416 or less for the year, then no tax is payable.

Strata title body corporates and non-profit status

As discussed in your ruling application, you do not believe that the Association is governed by strata title legislation in the Australian state, particularly because the houses were sold as stand-alone Torrens Title properties.

Taxation Determination TD 93/73 Income Tax: will a strata title body corporate be taxed as a non-profit company if it includes non-profit clauses in its by-laws? ("TD 93/73") discusses strata title body corporates.

As explained at paragraph 5, we accept, as a general proposition, that a strata title body corporate is not carried on for the purposes of profit or gain to its individual members. However, a non-profit company must also be prohibited from making any distribution to its members.

Paragraph 6 elaborates by stating that a strata title body corporate fails this second requirement because, under the various State and Territory strata title legislation governing its operation, a strata title body corporate can make distributions to its members in certain circumstances, e.g. on winding up.

The by-laws of a strata title body corporate are made under, and are subject to, the operation of its governing State or Territory legislation. Consequently, a by-law to prohibit any distribution to members cannot be created to over-ride, or limit, the ability of a body corporate to distribute to members in the circumstances permitted by the legislation.

You have stated that the houses were sold as stand-alone Torrens Title properties. Therefore, TD 93/73 does not apply to your circumstances, because the Association is incorporated under the Incorporated Associations Act 1985, and therefore, strata title legislation does not govern its operation. As such, the Association is not considered to be a strata title body corporate, and can be taxed as a non-profit company, as explained above.

Application to your circumstances

The Association is incorporated under the Associations Incorporation Act 1985 (SA), and its constituent documents prevent it from distributing profits or assets for the benefit of particular persons - both while it is in operation, and upon winding up.

Further, as discussed in the ruling application, the houses have been sold as 'stand-alone Torrens Title Properties', and based on what you have told us, you are not governed by a strata title scheme. Therefore, you can be considered a non-profit company.

Question 2

If the taxable income of the X Association is under $416 in any given tax year, does the Association need to lodge a tax return?

Summary

As established at question one, the Association is a non-profit company. Money is paid to X for management fees and insurance is from members, and therefore, it is considered to be a member contribution.

The member contributions are in the nature of mutual receipts, and are non-assessable, non-exempt ("NANE") income in accordance with section 59-35 if the ITAA 1997. Therefore, they do not need to be included in your assessable income under section 6-5 of the ITAA 1997, and will not be subject to income tax.

A non-profit company does not need to lodge a tax return unless it receives income that exceeds the tax free threshold for non-profit companies, being $416 a year. Income from external sources, such as bank interest or dividends, is not mutual in nature, and as such would not be NANE by virtue of section 59-35 of the ITAA 1997, and will have to be included in your assessable income.

Because the Association is a non-profit company, and provided your taxable income, which will not include amounts in the nature of a mutual receipt, is less than the tax free threshold for non-profit companies of $416, you will not be required to lodge a tax return.

Detailed reasoning

ATO publication Mutuality and Taxable Income (NAT 73436-07.2010) explains the principle of mutuality, and helps non-profit clubs, societies and associations to calculate their taxable income.

As explained at page 3 of NAT 73436, many non-profit organisations are taxable, and may need to lodge income tax returns and pay income tax. If your non-profit organisation is not exempt from income tax, it is taxable.

Further, at page 4 of the publication, it is explained that organisations carried on for the joint or common benefit of their members can qualify as non-profit companies. An example would be a professional association established to advance the professional interests of its members. However, the association must not be carried on for the profit or gain of its individual members.

Lodgement rules for non-profit companies

As established at question one, the Association is considered to be a non-profit company. Non-profit companies that are Australian residents have a taxable threshold, and if the taxable income of a non-profit company in an income year is below the threshold ($416 per year) it is not required to lodge a tax return for that year.

Assessable income and the principle of mutuality

As discussed at chapter three of NAT 73436, assessable income is, broadly speaking, the income derived by your organisation. It can also include some capital gains made on the disposal of assets. Many amounts received by a non-profit organisation are assessable income. Examples are bank interest, and the proceeds from fundraising drives to the public.

Page 7 of NAT 73436 states that the mutuality principle is a legal principle established by case law. It is based on the proposition that an organisation cannot derive income from itself. The principle provides that, where a number of persons contribute to a common fund created and controlled by them for a common purpose, any surplus arising from the use of that fund for the common purpose is not considered income.

The characteristics of organisations that can access mutuality typically include those where:

• The organisation is carried on for the benefit of its members collectively, not individually;

• The members of the organisation share a common purpose, in which they all participate or are entitled to do so;

• The main purpose for which the organisation was established, and is operated, is the common purpose of the members;

• There is a common fund that gives effect to the common purpose and all the members contribute to it;

• All the contributions to the common fund are applied for the collective benefit of all the members, in line with the common purpose;

• Different classes of memberships may exist with varying subscription rates, rights and entitlements to facilities;

• The members have ownership and control of the common fund; and

• The contributors to the common fund must be entitled to participate in any surplus of the common fund.

However, it is important to note that the principle of mutuality does not extend to include income that is derived from sources outside the group, for example, bank interest or dividends received.

Mutuality requires the identity between contributions that are made by members to be maintained at all times. In Coleambally Irrigation Mutual Co-Operative Ltd v. Federal Commissioner of Taxation [2004] FCAFC 250 (Coleambally), it was found that identity is not maintained where the entity is prevented from distributing to members, due to non-profit clauses.

However, section 59-35 was inserted into the ITAA1997 to allow a non-profit entity to apply the mutuality principle to their receipts from members in circumstances where Coleambally applies. Section 59-35 of the ITAA 1997 operates to deem receipts from members in the nature of mutual receipts as NANE income.

Conclusion

Because the Association is a non-profit company, and section 59-35 of the ITAA 1997 applies to make receipts from members that are in the nature of mutual receipts NANE income, only income from external sources- such as interest or dividends- would be subject to taxation. Therefore, provided these amounts do not exceed the tax free threshold for non-profit companies ($416) the Association will not be required to lodge a tax return.

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