Court Confirms Tax Exempt Community Bank

A Full Federal Court decision confirming that a community bank was exempt from paying income tax as a community service has wide implications for the Not for Profit sector, according to an Australian tax expert.

The Australian Tax Office recently challenged a 2010 Federal Court decision to allow a rural community bank tax exemption status but the Full Federal Court dismissed the appeal.

The bank, Wentworth District Capital Ltd (WDCL) was set up as a Not for Profit corporation to provide face-to-face banking services to the small town of Wentworth on the northern side of the border between Victoria and New South Wales that had no other bank and applied for tax exemption under the Income Tax Assessment Act 1997 .

WDCL told the original hearing that under the legislation the community bank was established for "community service purposes".

The court was told that for many years the only bank in the town was a single branch of Westpac Banking Corporation. In September 1996 Westpac closed the branch leaving the town without a bank. In 1998 members of the Wentworth community incorporated “WDCL” which entered into arrangements with Bendigo Bank Ltd under which the bank provided banking services in Wentworth through premises, staff and equipment provided by WDCL.

In the decision delivered in the Federal Court on August 13, 2010, the Judge Perram said the facilitation of face-to-face banking in Wentworth had improved the plight of older customers who are more reliant upon cash and passbook account arrangements and on a weekly basis the branch sent a staff member out to an aged care facility to address the issues of those with mobility problems. It also conducted a school banking programme.

The Judge ruled that in a town with no face-to-face banking, its services provided a substantial benefit to the community describing the benefits as both real and tangible providing a concrete amenity of the town.

As such the judge ruled that WDCL was established for community services purposes. The income of WDCL was, therefore, exempt under s 50-1 of the 1997 Act.

During the Appeal to the Full Federal Court, the ATO contended that the trial judge had erred when he held that the facilitation by Wentworth District Capital Limited of face-to-face banking for reward in a small country came within the definition of a community service¹ under section 50-10 of the Income Tax Assessment Act
1997.

On March 28th, 2011, the Full Federal Court dismissed the appeal by the Commissioner of Taxation and ruled in favour of WDCL.

And according to tax experts 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.

Accountancy firm, Moore Stephens Melbourne says such an organisation would also be able to access fringe benefits tax concessions allowing it to offer attractive salary packages to staff.

Moore Stephens Tax Director, Stephen O’Flynn says 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.

O’Flynn says it is important to note that in the judgement 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.

He says 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.

He says 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.

He says qualifying organisations are able to offer very attractive salary packages to staff in a manner that is tax effective for both parties.

O’Flynn says it is also important to note that the ATO can still appeal this decision to the High Court.

The Full Federal Court decision can be see at http://www.austlii.edu.au/au/cases/cth/FCAFC/2011/42.html