The ruling applies to entities that are mentioned in column 2 of
Division 50 of the Income Tax Assessment Act 1997, generally known
as 'Exempt Entities' including registered charities,
scientific institutions, public educational institutions, community
service organisations, employee associations, trade unions, public
hospitals, not-for-profit hospitals, racing, cultural or sporting
Any tax exempt entity must meet certain special conditions.
There are two new special conditions that the Ruling considers:
compliance with all the substantive requirements in its
governing rules; and
application of its income and assets
'solely' for the purposes for which the
entities are established.
Governing Rules Special Condition
At paragraph 12, 'the substantive requirements in an
entity's governing rules are those that define the rights and
duties of the entity', compared with 'the procedural rules
by which those rights and duties are applied and enforced'. The
most obvious substantive requirements are those giving effect to
the object or purpose, the non-profit status of the entity (i.e.
that no distribution of profit is allowed for members), the winding
up provision (that on a winding up, the surplus must be distributed
to another like entity) and financial records obligations.
Income and Assets Condition
This rule requires:
examination of 'purposes for which the entity is
whether the entity has applied its income and assets solely for
The constituent document is studied but also activities after
its formation become relevant. What does
'solely' mean – a one-off
insignificant expenditure outside the sole purpose could be
There are various examples cited in the Ruling, including a case
where profits from commercial activities are used to further an
entity's purpose but is not a breach of the income and assets
condition, even though the objects of the group are 'to do all
things necessary for the purpose of advancing the Soul Worship
Group's religious views'.
The Group establishes an opportunity shop in the inner city
location, with profits to be directed to the religious activities
of the Group – i.e. Sunday school classes, Bible classes,
community gatherings for religious discussions, religious books and
articles. The commercial activity is found to be consistent with
the application of the Group's assets and income solely for the
purpose for which it was established.
And, cases where external regulatory provisions not part of the
governing Rules, so they don't need to be observed, for
example, beach side table tennis club hosts an event but fails to
get a liquor licensing authority although it serves alcohol. There
is no breach of the governing rules because the liquor licensing
law is imposed by an external statutory authority.
Comment on the draft ruling is due by 26 September 2014. Some
members of the not-for-profit sector might consider that the two
special conditions are unnecessary and will submit that they should
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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