Subject References:
Rural Bank
Face to face banking facilities
Community Services Purposes
Tax Exempt

Précis

Outlines the ATO response to the decision of the Full Federal Court in respect of a franchise of Bendigo Bank as an association established for community service purposes.

Brief Summary of Facts

Wentworth is a small town, where at the relevant time the only bank was a single Westpac Branch which closed in 1996. Prior to the establishment of the Bendigo Bank branch, there had been no full service banking facilities in the town since the closure of the Westpac Bank branch in 1996. As a result of this, members of the Wentworth community set up an association with a view to have a branch of the Bendigo Bank established in their town.

The community pledged a certain amount of money which would be used for the purposes of setting up the branch. Wentworth District Capital, the taxpayer a corporation limited by guarantee, provided the premises, staff and other facilities while the Bendigo Bank provides the banking facilities.

The bank charges customers normal fees for banking services, with some of the income going to the taxpayer. The charter of the bank provided that the members of the taxpayer were not to profit from the bank, and the bank's charter provided that profits may be distributed to various community groups. The taxpayer's claim hinged on the proposal that the bank is a community service for the purposes of s 50-10 of ITAA 1997. The taxpayer lodged tax returns for the financial years ended 30 June 2006 and 30 June 2007 on the basis that it was an income tax exempt entity.

In both years the Commissioner assessed Wentworth District Capital as having an assessable income. On this basis the taxpayer objected to the assessments for both years on the basis that it had a community service purpose because it promotes, provides or carries out activities, facilities or projects for the benefit or welfare of members of the community who benefit and who need the services provided by reason of their youth, age, infirmity, disablement, poverty or social or economic circumstances (including living in a "remote area").

The Commissioner disallowed the objection in full, and accordingly the taxpayer appealed to the Federal Court. In the first instance Perram J found for the taxpayer, which was subsequently confirmed by the Full Court.

Issues decided by the Court

The issue on appeal was whether Wentworth District Capital was an association established for community service purposes within the meaning of item 2.1 of s. 50-10 of the ITAA97 during the relevant years in question.

Tax Office view of Decision

In the first instance, Perram J (to which the Full Federal Court agreed) found that Wentworth District Capital was an entity that was established for the main or dominant purpose of facilitating face to face banking services in the relevant years in question.

The Full Federal Court, on appeal, agreed with Perram J that on the particular facts of the case and the circumstances of the community of Wentworth, the facilitation of face to face banking services in the relevant years did amount to community service purposes within the meaning of Item 2.1 of section 50-10 of ITAA 1997.

Importantly, however, the court rejected 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 [2011] FCAFC 42 at paragraph 40; [2010] FCA 862 at paragraph 63. It is the ATO's view that whether or not the facilitation of a particular commercial supply of services in a town that would not otherwise be provided will amount to a community service depending on the facts and circumstances of each case.

The court did not go so far as to hold that every community bank will qualify as providing a community service within Item 2.1 of section 50-10 of ITAA 1997. It will be necessary to examine the purpose for which the relevant entity is established and a consideration of the circumstances of the relevant community to determine if the facilitation of the provision of face to face banking activities provides sufficient real and tangible benefit to the community to qualify as a community service. This is to be determined in a year to year basis and will turn on the facts of each case.

The ATO accepts that the facilitation of certain commercial services in certain circumstances is capable of amounting to community service purposes within the meaning of Item 2.1 of section 50-10 of ITAA 1997 as determined by the Full Federal Court. However, whether that will be so in the particular case is a question of fact and circumstances.

Administrative Treatment

Implications for ATO precedential documents (Public Rulings & Determinations etc)

The Commissioner will withdraw ATO ID 2002/931.

Implications on Law Administration Practice Statements

N/A

Your comments

We invite you to advise us if you feel this decision has consequences we have not identified, or if a precedential decision such as a Public Ruling or an ATO ID requires reconsideration or amendment. Please forward your comments to the contact officer by the due date.

After that date any comments on the consequences of this case for any ATO publication should be sent to the following mail box:

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Legislative References:
Income Tax Assessment Act 1936 (Cth)
23(g)(iii)

Income Tax Assessment Act 1997 (Cth)
4-1
4-10(1)
4-10(2)
4-15
50-1
50-10
50-70


Taxation Laws Amendment Act (No. 2) 1990 (Cth)

Case References:
Cronulla Sutherland Leagues Club Limited v. Commissioner of Taxation
(1990) 23 FCR 82
21 ATR 300
90 ATC 4215

Navy Health v. Federal Commissioner of Taxation
(2007) 163 FCR 1
2007 ATC 4568
68 ATR 215

Royal Australasian College of Surgeons v. the Federal Commissioner of Taxation
(1943) 68 CLR 436
[1943] HCA 34

Spencer v. The Commonwealth of Australia
(2010) 241 CLR 118
[2010] HCA 28

Victorian Women's Lawyers Association Inc v. Federal Commissioner of Taxation
(2008) 170 FCR 318
70 ATR 138
2008 ATC 20-035