VICTORIAN HEALTHCARE ASSOCIATION LIMITED Applicant And COMMISSIONER OF TAXATION

[2010] AATA 473

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2010] AATA 473

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No 2009/2075

TAXATION         APPEALS        DIVISION		)          No 2009/2077-9
Re		VICTORIAN HEALTHCARE ASSOCIATION LIMITED

Applicant

And	COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal Mr B H Pascoe, Senior Member

Date25 June 2010

PlaceMelbourne

Decision The Tribunal affirms the decisions under review in each application.

(sgd) B H Pascoe

Senior Member

INCOME TAX – association of public health providers – fringe benefits tax – whether rebatable employer  – whether exempt from income tax – whether established for community service purposes.

Fringe Benefits Tax Assessment Act 1986 s 65J(1)(j)
Income Tax Assessment Act 1997 s 50-10, 50-70

Navy Health Ltd v Federal Commissioner of Taxation (2007) 163 FCR 1

Victorian Womens Lawyers Association v Federal Commissioner of Taxation
(2008) FCA 983

Royal Australasian College of Surgeons v Federal Commissioner of Taxation
(1943) 68 CLR 436

National Council of Women of Tasmania v Commissioner of Taxation 98 ATC 2124

Cooperative Bulk Handling Ltd v Commissioner of Taxation [2010] FCA 508

Central Bayside General Practice Association Ltd and Commissioner of State Revenue (Vic) (2006) 228 CLR 168.

REASONS FOR DECISION

25 June 2010 Mr B H Pascoe, Senior Member

1.        There are two applications for review of decision by the Tribunal.  The first is the decision on an objection lodged against an assessment of fringe benefits tax for the year ended 31 March 2008.  The second is the decision on an objection to a private ruling which denied exemption from income tax and fringe benefits tax. 

2.        At the hearing, the applicant, Victorian Healthcare Association Limited (VHA) was represented by Mr M Flynn of counsel and the respondent by Ms D Harding of counsel.  Evidence was given by Mr T Carr, Chief Executive Officer of VHA. 

3.        VHA is a public company limited by guarantee and originally founded in 1938.  Its voting membership consists of organisations that provide health services in the State of Victoria and are publicly funded.  Such memberships comprises four groups:

Metropolitan public hospitals named in Schedule 5 of the Health Services Act 1988 (Vic) (the Health Act)

Regional public hospitals named in Schedule 1 of the Health Act

Rural public hospitals named in Schedule 1 of the Health Act

Community Health Centres registered under Division 6 of Part 3 of the Health Act.

4.        The Board of Directors of VHA consists of a member of a board of each of the four categories of members, a chief or senior executive from each of the four categories and up to three independent directors appointed by the Board.

5.        Under the Constitution of VHA which was adopted in 2007 the objects are stated as:

The Object of the Company is the improvement of the quality of health care in the Victorian public health care system in order to better promote, prevent and control disease in human beings.  The Company will carry out its object by:

proactively working with all stakeholders in the Victorian public health care system to improve the quality of health care in the Victorian public health care system;

developing and promoting policies that will enable the social and physical health needs of the Victorian community to be met;

facilitating the sharing of knowledge and information, and promoting independent discussion, on how the quality of health care in the Victorian public health care system may be improved;

facilitating and disseminating research and training on how the quality of health care in the Victorian public health care system may be improved;

improving stakeholders’ understanding of how the Victorian public health care system operates and is administered;

fostering and developing relationships with similar organisations; and

doing all such things as are incidental or conclusive to the attainment of the Object.

6.        Mr Carr described the main activities of VHA as:

. Administration of scholarships in the health industry from Government
  Funding

. Organising events and seminars for the promotion and education of
  Healthcare

. Advocacy for change in the healthcare industry by submissions to the
  Government

. Research to identify needs and improvements in the health community

. Policy Development in relation to the issues of concern for members health
  Services

. Member Services to keep members abreast of the current needs of the health sector.

He said that an analysis of employee hours during the year ended 31 December 2007 showed the following proportion of time spent on each of these activities and he believed that this was typical of other years:

Scholarship  4.9 per cent

Events  6.3 per cent

Advocacy  14.1 per cent

Research  33.8 per cent

Policy Development              31.0 per cent

Member Services                9.9 per cent

7.        In a document created in 2006 and headed VHA Strategic Direction 2006-2008 it was stated:

During 2005 the VHA Board identified five priority directions for improvement of the health system over the next three years, including:

·Adoption by government of a Whole of Health model

·Improved planning with a population-based health focus

·Development of flexible funding models

·Recruitment and retention of an appropriate workforce

·Priority focus on client-centred care

The Board defined its core business activities over this period as:

·Advocacy and Influence

·Policy and Issues Development

·Communications and Relationships

·Business Development

8.        In 2009 a VHA Board Endorsed Position Statement commenced by describing VHA in the following terms:

The Victorian Healthcare Association (VHA) is the major peak body representing the interests of the public healthcare sector in Victoria.  The VHA promotes the improvement of health outcomes for all Victorians from the perspective of its members that include public hospitals, rural and regional health services, community health services and aged care facilities. 

9.        In the Director’s Report with the financial report of VHA for the year ended 30 June 2008 the principal activity was described as the undertaking of research and development of policy targeted at optimising health outcomes for all Victorians.  The Report noted a review of investment in real estate and its business location and stated [t]he move completed the operational restructuring of the Company which now dynamically responds to members’ needs.

10.      Mr Carr said that, at the time of his appointment in 2006, there was a sense of failure with a high staff turnover, the failure of a trading company formerly operated by VHA to provide materials to members, a limited research and policy output and declining member income.  A new constitution was adopted, voting rights were changed and Board structure changed. 

11. Section 65J(1)(j) of the Fringe Benefits Tax Assessment Act 1986 (the FBT Act) provides that an employer is a rebatable employer if the employer is: a non-profit society, non -profit association or non-profit club, established for community service purposes (not being political purposes or lobbying purposes).  Pursuant to sections 50-10 and 50-70 of the Income Tax Assessment Act 1997 (the 1997 Act) a society, association or club established for community service purposes (expect political or lobbying purposes) is exempt from income tax if it is not carried on for the purpose of profit or gain to its individual members, has a physical presence in Australia and incurs its expenditure and pursues its objectives principally in Australia.  The only issue in dispute between the parties is whether VHA is established for community service purposes (except political or lobbying purposes). 

12. The legislation draws upon the former s 23(g)(v) of the Income Tax Assessment Act 1936 (the 1936 Act). The explanatory memorandum to the Taxation Laws Amendment Bill (No 2) 1990 which introduced s 23(g)(v) stated:

Among the institutions exempted from income tax under paragraph 23(e) are charitable institutions. However, many organisations that undertake a range of activities for the benefit or welfare of the community are not charitable, and so such bodies as the traditional community service clubs – Apex, Rotary, Lions, Zonta, Quota, and the like – have not qualified for exemption.

…

Paragraph (b) of this clause will introduce subparagraph 23(g)(v) which will exempt from income tax the income of not-for-profit bodies established for community service purposes. The words “for community service purposes” are not defined but are to be given a wide interpretation. The words are not limited to those purposes beneficial to the community which are also charitable. They extend to a range of altruistic purposes. The words would extend to promoting, providing or carrying out activities, facilities or projects for the benefit or welfare of the community, or of any members of the community who have particular need of those activities, facilities or projects by reason of their youth, age, infirmity, or disablement, poverty or social or economic circumstances. An exclusion from the exemption will apply to bodies established for political or lobbying purposes.

As with sporting clubs, the bodies exempted include any qualifying society, association or club, whether incorporated or not. Similarly, a body’s present conduct and activities show the purpose for which it is presently established, even if its constitution or its formation and history suggest a different purpose in the past.

…

When purposes are directed to the benefit or welfare of members of the community in particular need, that need must arise by reason of youth, age, infirmity or disablement, poverty or social or economic circumstances. These causes of need are intended to be read broadly. Infirmity or disablement, for example, could be intellectual or physical, and could be congenital or the product of disease or of injury. Similarly, social or economic circumstances could include such varied matters as sex, living in a remote area, or inability to speak English.

…

All the traditional service clubs such as Apex, Rotary, Lions, Zonta, Quota and the like … are considered to be exempt from income tax under the new subparagraph.

13.      In Navy Health Ltd v Federal Commissioner of Taxation (2007) 163 FCR 1 Jessup J said (at para.83):

Although a composite expression, I consider that the essence of “community service” is that a service is provided to the community, or a section of the community. Here the word “service” is used in the sense of “help, benefit or advantage”, particularly “the action of serving, helping or benefiting, conduct tending to the welfare or advantage of another” (Oxford English Dictionary(2^nd ed))…

His Honour said further (at para.84) that service:

…requires, in my view, the community, or a section of the community, to benefit by way of the receipt of some identifiable help, benefit or advantage bestowed or provided directly by the putative benefactor. Such a requirement, I consider, is not satisfied merely because, in this case, the operations of the applicant had a tendency to promote the efficiency of the armed forces, thereby benefiting the community as a whole.

14.     In Victorian Women Lawyers’ Association Inc v Federal Commissioner of Taxation (2008) FCA 983, French J noted that an organisation may be beneficial to the community without delivering a “community service” in the sense contemplated by that term as explained in the Explanatory Memorandum. His Honour thought that the concept of “community service” imported the notion of the delivery of some practical help, benefit or advantage in the sense used by Jessup J in the passage first extracted above and went on to observe that [t]hat criterion is not necessarily met by an organisation whose purpose is to change practices and attitudes in such a way as to facilitate the entry and advancement of women within the profession generally.

15. In Royal Australasian College of Surgeons v Federal Commissioner of Taxation (1943) 68 CLR 436 the High Court found that the College was exempt from tax as a scientific institution and that the benefits to members were merely incidental and that the main and prevailing and characteristic nature of the activities was the promotion and advancement of science in the advancement of surgical knowledge and practice.

16. In the Tribunal decision on Re National Council of Women of Tasmania v Commissioner of Taxation 98 ATC 2124 it was found that the applicant was an association established for community service purposes.

In that case, the applicant (NCWT) was an unincorporated association whose membership consisted primarily of societies and associations, together with a number of individual associate and life members.  Its objects were to establish a bond of union between various affiliated societies, to advance the interests of women and children and of humanity in general; and to confer on questions relating to the family, the State and the Commonwealth. It acted as an umbrella organisation, bringing together representatives of dozens of women’s organisations.

The Tribunal said at paragraphs 23 and 25:

23.  In our view it is very significant that, in the first paragraph that we have quoted from the explanatory memorandum in paragraph 8 above, the then Treasurer explained the intended meaning of the words "community service purposes" by reference not only to the providing or carrying out of activities, facilities or projects for the benefit or welfare of the community, but also to the promoting of such activities, facilities or projects.  The Council is very much a promoter of its constituent organisations' activities, facilities or projects, more than it is a provider thereof.  With few, if any, exceptions, the promoted activities, facilities and projects of the member organisations are very clearly for the benefit or welfare of the community.

…

25.  We do not regard the Council's predominant purpose as being that of a social club or discussion group.  Whilst we accept that there was an element of social interaction at its meetings, we find that the predominant purpose of the meetings involves the co-ordination of community service work, and the provision and exchange of information for the purpose of facilitating community service work.  One only has to consider the substantial support given to activities of the Council's affiliated associations of the sort listed above in order to see that.

17. After the hearing of this matter but prior to the Tribunal handing down a decision, the Federal Court handed down its decision in Cooperative Bulk Handling Ltd v Commissioner of Taxation [2010] FCA 508 (CBH).  The issue there was whether CBH was an organisation established for the purposes of promoting the development of Australian agricultural resources.  Some relevance to this matter may be seen in the views of Gilmour J at paragraph 96:

So far as the activities of CBH benefit growers who are members, those growers are benefited not because they are members.  That the members, as such participants, benefit from the entity's activity does not deny it from having the principal or dominant purpose of promoting the relevant purpose.

In common with other relevant decisions of the Court or Tribunal, the CBH decision reinforces the view that it is necessary to establish the principal or dominant purpose of the organisation.

18. It was submitted for VHA that its sole object is to improve the quality of health care in the Victorian public health system in order to better promote, prevent and control disease.  It was said that the majority of employee time was spent in research and development projects including:

·     Reporting on quality of health care and developing indicators or bench marks for client care;

·     Appropriate models of GP clinics appropriate for community health;

·     Ensuring aspects of the entire health care system are tailored to meet community expectations and needs;

·     Improvements to establish affordable ambulance fees;

·     Marketing of community health;

·     Rural Health week;

·     Supporting development of GP practices.

19. It was said that there is nothing inconsistent with VHA being a peak body for its members in the public health sector and being altruistic.  It was denied that VHA could be seen as merely furthering the purposes of government in that its members were funded by government.  The decision in Central Bayside General Practice Association Ltd and Commissioner of State Revenue (Vic) (2005) 228 CLR 168 was relied on where the High Court found that the company was charitable despite being subject to significant funding and control by government. It was said that VHA is not a creation of statute, is under the control of its own board of directors, is not subject to statutory controls over its spending and makes submissions to State government inconsistent with it being an arm of government.

20. For the respondent it was submitted that the principal or dominant purpose of VHA was to act as a major peak body representing the interests of the public health care sector in Victoria.  It was said that any improvement of the quality of health care for the community is an incident of VHA fulfilling its purposes as a peak body and not as a result of altruistic motivations of VHA.  Ms Harding submitted further, that VHA's members are publicly funded, owe their existence to or are regulated by statutes, are subject to Ministerial control or direction and perform a government function.  As such, it was said that the majority of VHA's members do not provide a community service in the sense contemplated by the Act and the provision of services is delivered as a function of government and not altruistic.  It was argued that provision of public health care is a responsibility of government through government funded health care providers and any improvement in the delivery of health care assists government to meet such responsibility.

21. From the evidence presented at the hearing and from the documents filed with the Tribunal it may well be accepted that the successful operation of VHA is likely to result in improved health services to the Victorian community. However, that is not the question posed by s 65J(1)(j) of the FBT Act and s 50-10 of the 1997 Act. The issue here is whether the principal or dominant purpose for which VHA is established is community service. As said by Jessup J in Navy Health this requires the community, or a section of the community, to benefit by way of the receipt of some identifiable help, benefit or advantage bestowed or provided directly by the putative benefactor".

22. Nothwithstanding the wording of the object of VHA in its constitution and in some of its publications which are likely to have had their origin in its attempt to satisfy the requirement of the statutes, I am satisfied that, being the peak body for its members and controlled by a board of directors made up of board members and executives of its members, its principal or dominant purpose is to provide services as directed and needed by its members.  As with Navy Health its operations may result in an improvement in community health as provided by its members but that is a by-product of its principal or dominant purpose, not any alturistic purpose for which it is established.

23. For completeness it should be said that I do not see VHA as an arm of government and established to assist government in meeting its responsibility.  It is a body representing its members and providing services to and for the benefit of its members each of whom, although primarily funded by government, is carrying on a business or enterprise of providing public health services.

24. Much of the evidence at the hearing, particularly that of Mr Carr, was said to be directly relevant to the first application relating to the objection against the fringe benefit tax assessment.  It was accepted that, in an objection to a private ruling, the Tribunal is limited to whether the ruling was the correct or preferable decision in relation to the arrangement as set out by the respondent in the private ruling.  However, I am satisfied that with or without the additional evidence of Mr Carr, the decision in that ruling was the correct or preferable decision.

25. On the basis of the foregoing I am satisfied that both decisions under review should be affirmed.

I certify that the twenty five [25] preceding paragraphs are a true copy of the reasons for the decision herein of  

Mr B H Pascoe, Senior Member

(sgd): Mya Anumarlapudi

Clerk

Date of Hearing  12 May 2010

Date of Decision  25 June 2010
Counsel for the Applicant            Mr M Flynn
Solicitor for the Applicant             Mr I Golshtein, DLA Phillips Fox
Counsel for the Respondent        Ms D Harding
Solicitor for the Respondent        Ms A Lemish, ATO Legal Services Branch