A Federal Court decision handed down by Perram J in Wentworth District Capital Ltd v Commissioner of Taxation [2010] FCA 862 ruled that a company supporting a community bank was established for 'community service purposes' and was therefore exempt from income tax.

The decision could be regarded as counter-intuitive however the Court drew a distinction between the actual provision of the community banking services, which would not have been a community service and the facilitation of such services by Wentworth District Capital Limited through an arrangement it entered into with Bendigo Bank Limited.

We note that this position may change, as the Australian Taxation Office have appealed the decision to the Full Federal Court.

Background

The banking services were set up following the closure of the previous Westpac Bank (the only bank in Wentworth) in 1996 leaving the town without any banking services to the Wentworth community (population of 1,400). Wentworth District Capital Limited (WDCL) subsequently entered into franchise arrangements with Bendigo Bank Limited (BBL) that enabled BBL to provide banking services using WDCL's premises, staff and equipment. Under WDCL's constitution it did not distribute any profits to its members and included as one of its formal objects the promotion of community banking services.

What is an exempt entity?

An exempt entity is an entity whose income (irrespective of type) is exempt from income tax. An example of an exempt entity is one that has been "established for community service purposes", and the meaning of this phrase was the key issue of this case.

The meaning of 'community service purposes'

Section 50-10 of the Income Tax Assessment Act 1997 (ITAA97), defines a 'community service' as a "society, association or club established for community service purposes (except political or lobbying purposes)." In applying previous case law, Perram J summarised the following considerations when applying the community service exemption:

  • The kind of community service referred to in section 50-10 is a practical or tangible help, benefit or advantage conferred on the community or an identifiable section of it.
  • A service provided for reward is not a community service at least where there is no element of subsidisation i.e. where the service is provided at normal market value.
  • Community service purposes include the purpose of providing a community service but the purposes contemplated are not limited solely to the act of provision.
  • The entity claiming the exemption must be 'established' for community service purposes.
  • The purpose must be the entity's main or dominant purpose.

The Court ruled that WDCL's main or dominant purpose was to facilitate the face-to-face banking services in Wentworth.

According to Perram J,

In a town with no face-to-face banking services, the facilitation of such services provided a substantial benefit to the community. That benefit was both real and tangible. It consisted of the fact that local banking then became available, increasing in a concrete way the amenity of the town.

Implications for entities seeking tax exempt status

Entities seeking income tax exemption as community service providers must provide an actual, tangible benefit to a particular community.

According to case law, the provision of the benefit does not have to be provided directly by the entity concerned and can be facilitated by way of fundraising or promotion i.e. the facilitation of community banking services rather than the provision of community banking services.

However, as previously noted this position may change, as the Australian Taxation Office have appealed the decision to the Full Federal Court.

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