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Community banks are tax exempt.

02/04/2011

Bendigo Bank has a franchise model. It allows independent managers to sell retail banking products and services using the bank’s trademarks and systems.  The manager is obliged to actively and diligently manage the franchise, promote the interests of Bendigo Bank, employ staff and lease premises.

Wentworth is a small town at the confluence of the Murray and Darling Rivers with an aging population of about 1,400 people.  It had been serviced by a retail bank from 1872. Westpac closed its branch in 1996. Residents had to conduct their banking from an agency in the local post office or in Mildura about 30 kilometres away.  Deposits took time to clear. People were inconvenienced and concerned about their personal privacy.  Business had to keep cash on their premises or make the 60 minute round trip to Mildura.  There was a significant downturn in customer traffic in the main street and in retail trade.

In 1998, residents organised to consider the feasibility of re-opening a bank in Wentworth. Contact was made with Bendigo Bank Ltd.   About $200,000 was pledged as deposits to provide security for a loan facility.   A company, limited by guarantee, was incorporated by ten local subscribers for the objects of opening a franchise of the Bendigo Bank Limited and distributing profits for community service purposes.

The company signed a management agreement  with a bank subsidiary on 17 February 1999 and opened banking premises in Wentworth the following month.  It started generating profit in September the same year.  The profits were used to repay all the money pledged (with interest) and then distributed to local community groups.

Its constitution relevantly provided that “For the avoidance of doubt, the Company’s main and or dominant purpose and or object is the promoting, providing, or carrying out activities, facilities or projects including but not limited to community banking services, for the benefit or welfare of the community or any members of the community who have a particular need by reason of youth, age, infirmity or disablement, poverty or social or economic circumstances. Any other ongoing action or object otherwise stated or inferred is secondary and subservient to the extent of any inconsistency to the Company’s main or dominant purpose and or objective as expressed in this item

The Commissioner of Taxation assessed income tax on the profits.

The Courts found that the Bendigo Bank provided banking services in Wentworth.  The taxpayer, on the other hand, facilitated the provision of face-to-face banking services in the town by making banking operations commercially viable for the Bank.  Face-to-face banking services were a real and tangible benefit to the community of Wentworth. That economic and general benefit should not be confused with the profit motives of the Bank.  The management of the branch was just the means by which the taxpayer was able to provide the community service which was its main or dominant purpose.

The full Federal Court said the tax assessment was rightly set aside.  The franchisee was established for community service purposes for the purposes of section 50 of the Income Tax Assessment Act 1997 and was exempt from paying income tax.

Read the judgement in FCT v Wentworth District Capital Ltd.

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