Edited version of private ruling

Authorisation Number: 1011548397452

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Ruling

Subject: Income Tax Exemption

Question 1

Is the income of the entity exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) because it is an entity established for the purpose of promoting the development of tourism pursuant to item 8.1(b) in the table of section 50-40 of the ITAA 1997?

Advice/Answers

No

This ruling applies for the following period

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

The scheme commenced in

1 March 2010

Relevant facts

The entity is an incorporated association of X industry staff formed with the objective of developing the skills of Australian X industry staff in Australia and relationships with similar associations worldwide.

Constitution

The objectives of the entity are set out in one of the clauses of the constitution. They include promoting goodwill and friendship amongst the X industry staff of Australia and other countries, seeking courses to educate members of the profession, maintaining best possible services for X industry guests, exchanging views, and promoting high professional standards.

The entity's constitution contains suitable non-profit and dissolution clauses which show the entity's non profit character.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 50-1

Income Tax Assessment Act 1997 section 50-40

Reasons for decision

Issue 1

Question 1

Section 50-1 of the ITAA 1997 provides that the ordinary and statutory income of the entities described in the tables which follow that section is exempt from income tax.

Included in those tables is item 8.1(b) of section 50-40 of the ITAA 1997 which refers to a society or association established for the purpose of promoting the development of tourism. The special condition imposed on the society or association for the exemption to apply is that it is not carried on for the profit or gain of its individual members.

Some of the issues that need to be addressed to ascertain an organisation's income tax status under item 8.1(b) of section 50-40 of the ITAA 1997 include:

· determining whether the organisation is an association or society

· determining whether the organisation meets the non profit requirements

· determining how tourism is being developed and how the association promotes the development of tourism

· what other purposes and activities of the association are not for promoting the development of tourism and how extensive and substantial are the association's activities on these other purposes

· what benefits to members does the association provide, and

· whether the dominant purpose of the association is to promote the development of tourism.

Association

The terms 'association' and 'society' are not defined and have their ordinary meaning. An association may be incorporated or unincorporated. However, it does not include a body formed and controlled by government and performing functions on behalf of government (see Taxation Determination TD 95/56).

Paragraph 2 of TD 95/56 states:

…The Shorter Oxford Dictionary defines the term 'association' to be a 'body of persons associated for a common purpose; the organisation formed to effect their purpose'. The Macquarie Dictionary defines 'association' as being 'an organisation of people with a common purpose and having a formal structure'. Olsson J, in Quinton v. South Australian Psychological Board (1985) 38 SASR 523, also stated that the term 'association' has come to be regarded as attaching to a body of persons associated for a common purpose.

The entity is an incorporated entity brought into existence by its members to pursue a common purpose as stated in its constitution. It is not a body controlled or formed by government or performing functions on behalf of government.

It is accepted that the entity is an association.

Non Profit

The Income Tax Guide for Non Profit Organisations (ITGNPO) at page 6 states that:

The Tax Office accepts an organisation as non-profit where it's constituent or governing documents prevent it from distributing profits or assets for the benefit of particular people - both while it is operating and when it winds up. These documents should contain acceptable clauses showing the organisation's non-profit character. The organisation's actions must be consistent with this requirement.

A non-profit organisation can still make a profit but this profit must be used to carry out its purposes…the profits must not be distributed to owners, members or other private people.

There are two requirements in the statement of non-profit character above. First, an entity's constituent documents must display a non profit character. Second, the entity's actions must be consistent with this non profit character.

The constitution of the entity prevents it from distributing its profits or assets among members while it is operating or on it's winding up.

It is accepted that the entity is a non-profit association.

Tourism

Tourism is not defined in the ITAA 1997. Page 22 of ITGNPO provides that tourism has its ordinary meaning.

The Macquarie dictionary defines the term tourism as the practice of touring, especially for pleasure; the occupation of providing local services, as entertainment, lodging, food, etc., for tourists.

The Shorter Oxford English Dictionary defines the term to mean 'The theory and practice of touring; travelling for pleasure', and Butterworths Australian Legal Dictionary defines it to mean 'The practice of travel and associated activities for the primary purpose of recreation.'

Promotion of Development

Item 8.1(b) of the table in section 50-40 does not refer to the promotion of tourism. It is directed to the promotion of the development of tourism (emphasis added).

The ITGNPO states 'Promoting development can be by various means, including research, providing facilities, training, improving marketing methods, facilitating co-operation, and similar activities'.

The term 'development' is used in section 50-40 of the ITAA 1997 in a commercial or business sense. It comprehends all the elements which must be taken into account to ensure that the specified resources are best used.

'Promoting the development' may be direct or indirect. It need not be on a large scale or use commercial means. However, not all activities connected with a resource will necessarily be for its development.

For example, the development of agricultural resources might be directly promoted by research, experimental farms, control of pests, education in farming methods, or the introduction of new and improved classes of products. It might be indirectly promoted by improved marketing methods, cooperative buying and selling, solution of labour disputes, or ameliorative legislation.

Development of resources can be promoted by facilitating the cooperation of business and instrumentalities. Chambers of commerce and regional development bodies may help promote resource development in these ways.

As Taxation Ruling IT 2415 points out, resource development might also be promoted by the identification of, and programs to overcome, labour needs and the establishment of systematic training schemes in particular industries. Although the connection may not be readily apparent, the development of marketing techniques may also be relevant to the development of resources.

As the Tribunal pointed out in Case W49 at 89 ATC 474; 20 ATR 3602: 'The enlargement of the market is one of the objectives of "promoting the development" of any relevant industry.'

The improvement of marketing will ground an exemption only where it is undertaken as a means of promoting development of the particular resources. If the marketing or other purported means is not sufficiently connected or integrated with resource development, it will not be for the purpose of promoting development of those resources. It is not enough that a consequence of the activities may be resource development.

The development of resources which are not covered by section 50-40 of the ITAA 1997 is sometimes represented as the indirect promotion of resources that are within the paragraph. For example an association for promoting the development of insurance might claim to be indirectly promoting the development of manufacturing and industrial resources, and therefore exempt. We do not accept this approach. Where an association's purpose is properly characterised as the promotion of the development of resources that are outside the scope of section 50-40, it will not be exempt under the section regardless of its effects on other resources.

The approach to 'development' found in FC of T v. Broken Hill Pty Co Ltd 69 ATC 4028 at 4031- 4032; (1969) 1 ATR 40 at 45, based on the interpretation of Kitto J is as follows:

It covers I think any preparation, adaptation, or equipment of the property for the exploitation of an inherent potentiality which cannot be exploited, or fully exploited without some such preliminary treatment.

Their Honours also said:

For instance, we do not doubt that expenditure of bringing water to that mining property to enable the taxpayers mining operations by sluicing to take place thereon is both expenditure in connexion with mining operations on a mining property and is expenditure on the development of that property.

Based on the objectives outlined in its constitution, and the information outlined above, it is acknowledged that the entity may be indirectly promoting the development of tourism through one of its objectives. It should be noted however that this objective constitutes only one out of several objectives in the constitution.

Dominant Purpose

The ITGNPO states:

The purpose of the society, association or club must be promoting the development of the relevant resources…Any other purpose of the organisation must be incidental, ancillary or secondary to promoting development of the relevant resources.

This means that to be exempt under item 8.1(b) in the table of section 50-40 of the ITAA 1997, an association must be established principally or predominantly for the purpose of promoting the development of tourism.

It is not sufficient that one of an association's purposes falls within the provision nor is it sufficient that the development of tourism is incidental to, involved with, or a consequence of an association's purposes.

In Boating Industries Association of New South Wales v. FC of T 85 ATC 4224; (1985) 16 ATR 383 at 85 ATC 4228; 16 ATR 387-8, the taxpayer was the Boating Industries Association of N.S.W.

Its objects included the promotion of interests in safe boating and the organisation of and staging of exhibitions and demonstrations intended to arouse public interest in marine activities. The Association contended that it was a non profit organisation established for the purpose of promoting the development of manufacturing resources of Australia.

The Commissioner rejected the Association's contention and assessed it on income tax. The Association objected and the Commissioner disallowed the objection. The Association appealed.

In dismissing the appeal it was held that section 23(h) of the Income Tax Assessment Act 1936 (ITAA 1936) (now repealed and replaced with section 50-40 of the ITAA 1997) requires that the relevant organisation be "established" for the purpose stated, not merely "involved". It is the purpose of the establishment of the body that is crucial. In this case it was clear from the evidence that the taxpayer's principal activity was safe boating and not the promotion of Australian manufactured boats. Accordingly the taxpayer was not established for the purpose of promoting the development of manufacturing resources of Australia.

The case - Australian Insurance Association v. Federal Commissioner of Taxation (1979) 10 ATR 333 (1979) 41 FLR 256 involved an insurance association set up primarily to protect and further the interests of Australian insurance companies. Another object of the association was to promote Australian underwriting skills and knowledge. The company claimed that its income from investments was exempt on the basis that it was income of a non profit association established for the purpose of promoting an industrial resource of Australia. The Commissioner took the view that the association was not entitled to exemption because it was established not for the purpose of promoting any resource of Australia but for the purpose of preserving and increasing the business of its members. The taxpayer appealed.

In dismissing the appeal, it was held that the purpose referred to in section 23(h) of the ITAA 1936 must be the principal or dominant purpose for which the association was established. Here a purpose for which the association was established was to make available to industry generally, underwriting skills and knowledge. Even if this purpose constituted the promotion of an Australian industrial resource, the taxpayer had failed to show that this was the dominant purpose for which it was established.

In the entity's constitution, most objects are not for the purpose of promoting the development of tourism. Rather, the objects deal with (among other things) promoting goodwill and friendship, exchanging views, maintaining high service standards for clients, and promoting high professional standards for all the relevant hospitality industry staff.

Based on the objectives outlined in the constitution, the main purpose of the entity is to provide a professional body for the relevant X industry staff in Australia. Through the professional body, those staff will be able to share knowledge, ideas, friendship, and promote high professional standards. These objectives do not constitute the promotion of the development of tourism.

As previously stated, it is not sufficient that one of an association's purposes falls within item 8.1(b) in the table of section 50-40 of the ITAA 1997. Nor is it enough that promoting the development of tourism is incidental to, involved with or a consequence of an association's purposes.

While it is acknowledged that there may be a link between some of the entity's objectives and the promotion of the development of tourism, the objects of the entity are overwhelmingly not focused on the development of tourism, and it cannot be concluded that the main or dominant purpose of the entity is to promote the development of tourism.

Benefits to members

If an association operates principally to confer benefits on its members jointly or as a group, it is unlikely to be predominantly for promoting resource development and thus not exempt under section 50-40 of the ITAA 1997.

Professional associations are unlikely to be exempt under section 50-40 of the ITAA 1997. They will commonly be for development of resources outside the scope of section 50-40 or primarily for providing benefits to members.

In Case 46/94 at 94 ATC 417; 29 ATR 1108 the tribunal found, as an alternative ground, that the association was not exempt under 23(h) of the ITAA 1936 because it was principally to promote the interests of its members. It operated to look after the needs of consulting surveyors through such activities as public liability insurance, professional development, training of employees, assuring quality client service, publishing business practice and technical material, and lobbying to obtain work for members particularly from government.

The entity is essentially a professional association designed to further the interests, training, and professional development of its members, as well as promote quality client service. On that basis, it is set up for the development of resources outside the scope of section 50-40 of the ITAA 1997 and primarily for providing service to its members.

Conclusion

The entity is not exempt from income tax under section 50-1 of the ITAA 1997 as it was not established for the purpose of promoting the development of tourism pursuant to item 8.1(b) of the ITAA 1997.

That is, the entity's dominant purpose is not to promote the development of tourism, and it is set up principally to promote the interests of its members.

The entity is therefore not exempt from income tax under section 50-1 of the ITAA 1997.

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