A recent Full Federal Court decision has confirmed that a
community bank was exempt from paying income tax as a community
service organisation. The decision is important as it confirms that
a properly structured venture between a not for profit organisation
and for profit business can be exempt from tax. Such an
organisation would also be able to access fringe benefits tax
concessions allowing it to offer attractive salary packages to
The ATO contended that the trial judge had erred when he held
that the facilitation by Wentworth District Capital Limited (WDCL)
of face-to-face banking for reward in a small country came within
the definition of a 'community service' under section 50-10
of the Income Tax Assessment Act 1997. The Full Federal Court
dismissed the appeal by the Commissioner of Taxation and ruled in
favour of WDCL.
WDCL was setup in order to provide the residents of Wentworth
with banking services in their own town. To do this it entered into
a franchise agreement with Bendigo Bank Limited to operate a
franchise on WDCL's premises operated by its staff. In 2006
WDCL amended its constitution to include the provision and
promotion of face-to-face banking services for the Wentworth
community one of its main objects. The Commissioner sought to
assess WDCL's profits for the 2006 and 2007 income years.
The Decision of the Full Federal Court
Emmett, Gilmour & Gordon JJ agreed with the trial judge, and
emphasised the following points:
WDCL's main or dominant purpose was to facilitate the
provision of face-to-face banking services in Wentworth by making
it commercially viable for Bendigo Bank to operate in
This main purpose was a community service purpose, thus WDCL
was covered by the exemption in section 50-10 of the ITAA97 for the
2006 and 2007 income years.
The ability of WDCL to rely on this exemption lay in the fact
that its purpose was not to actually provide face-to-face banking
services, but rather to facilitate the provision of these services.
Their Honours found this facilitation brought a benefit to
Wentworth that was "both real and tangible."
It is important to note that in all the judgements Their Honours
stressed that the provision of banking services was not a community
service purpose of itself. They drew the distinction between
providing these services and facilitating the provision of these
services to a town that had no bank and benefited greatly from
What does this mean for taxpayers?
The decision confirms that business ventures between not for
profit community organisations and for profit business can be
exempt for income tax. However, crucial to their exemption status
will be an ability to show that there is some sort of actual
benefit to a particular community from their activities, similar to
those provided to the Wentworth community by WDCL. Consequently it
is important that such venture be structured correctly.
If an organisation does qualify as an income tax exempt
community purpose organisation it will also be able to access the
fringe benefits tax (FBT) rebate. This rebate equates to 48% of the
gross FBT payable by the organisation, and this significantly
reduces its FBT liability. Qualifying organisations are able to
offer very attractive salary packages to staff in a manner that is
tax effective for both parties.
Finally it is important to note that the ATO can still appeal
this decision to the High Court.
For further discussion on the issues raised by this Full Federal
Court decision please contact one of the authors or your Moore
Stephens Relationship Partner.
The income tax treatment of any property lease incentive will vary, depending on the nature of the inducement provided.
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