Full Federal Court confirms that a community bank can be tax exempt

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 staff.

Background to the decision

Recently, a decision handed down by Perram J in Wentworth District Capital Ltd v Commissioner of Taxation [2010] FCA 862 was appealed by the ATO to the Full Federal Court (refer to previous article: http://moorestephensresources.com.au/articles/399/1/Company-supporting-community-bank-is-now-tax-exempt-decision-now-subject-to-ATO-challenge-/Page1.html).

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:

1. 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 Wentworth.
2. 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 WDCL’s activities.

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.

Authors: Stephen O’Flynn and Gopi Yogeswaran, Moore Stephens Melbourne


Contact

Stephen O’Flynn
T  +61 03 8635 1800
soflynn@moorestephens.com.au

www.moorestephens.com.au