Edited version of private ruling

Authorisation Number: 1011571468531

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Ruling

Subject: income tax exemption

Is the entity a non profit society or association established for the purpose of promoting the development of Australian agricultural resources pursuant to item 8.2 (a) of the table in section 50-40 of the Income Tax Assessment Act 1997 (ITAA 1997) and therefore exempt from income tax?

No.

This ruling applies for the following periods:

Income year ended 30 June 2009

Income year ended 30 June 2010

The scheme commenced on:

1 July 2008

Relevant Facts

The Association is an incorporated entity.

The Association was established to operate a market each month.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 50-1

Income Tax Assessment Act 1997 Section 50-40

Reasons for decision

Item 8.2 of section 50-40 of the ITAA 1997 provides that a society or association established for the purpose of promoting the development of any of the following Australian resources shall be exempt from income tax, subject to the special condition that it is not carried on for the profit or gain of its individual members.

Australian resources listed in the table under item 8.2 of section 50-40 of the ITAA 1997 are as follows:

· agricultural resources

· horticultural resources

· industrial resources

· manufacturing resources

· pastoral resources

· viticultural resources

· aquacultural resources

· fishing resources.

Prior to determining whether the entity meets the definition of item 8.2 of section 50-40 of the ITAA 1997, it is necessary to determine whether the entity could be considered under one of the resources listed in the table.

Australian Resources

The word 'Australian' applied to the term 'resources' in the table in section 50-40 of the ITAA 1997 limits the exemption to associations whose activities are directed to Australian resources, thereby excluding associations whose activities are directed to the resources of places beyond Australia. Exemption is not limited to associations whose activities extend, or are intended to extend, throughout the whole of Australia. An association promoting the development of a particular region's resources may be exempt. It is not required that the activities which promote development of the Australian resources be performed exclusively in Australia.

The facts indicate the entity's activities are directed to Australian farm products.

Based on the information provided by the entity, it is considered that the entity's activities does not involve the following resources in the table in section 50-40 of the ITAA 1997, that is, horticultural resources, industrial resources, manufacturing resources, pastoral resources, viticultural resources, aquacultural resources and fishing resources.

To the extent that the entity is involved in farm products it is considered that the most appropriate listing in the table that the entity could come under is item 8.2(a), being agricultural resources.

The Income tax guide for non-profit organisations - (NAT 7967) (ITGNPO) provides that the various resources referred to in item 8.2 of the table in section 50-40 of the ITAA 1997 have their ordinary meaning. The Macquarie Dictionary 1997, 3^rd edn, The Macquarie Library Pty Ltd, Macquarie University defines 'agricultural' as 'of or relating to agriculture' and 'agriculture' as 'the cultivation of land, including crop-raising, forestry, stock-raising etc.; farming'. The Australian Oxford Dictionary 1999, Oxford University Press, Melbourne, defines 'agriculture' as 'the science or practice of cultivating the soil and rearing animals'.

The ITGNPO, at page 22, states what is meant by resources:

… resources include infrastructure, facilities, plant and equipment, personnel, knowledge, expertise and skills.

An industry's businesses and their assets may be resources (Australian Insurance Association v. FC of T 79 ATC 4569; (1979) 10 ATR 333 (Australian Insurance Association)).

It is considered that the term 'agricultural resources' is not applicable to the entity as it does not meet the definition of the term as taken from its ordinary meaning as stated above. It is considered that the entity is not engaged in the 'cultivation of land, including crop-raising, forestry, stock-raising, etc., or farming' or in the 'the science or practice of cultivating the soil and rearing animals'. Rather it considered to be involved in the 'trade' of farm produce and other products via the common venue of a 'market'.

The definitions of 'trade' according to the Macquarie Dictionary include:

the buying and selling, or exchanging, of commodities, either by wholesale or by retail, within a country or between countries: domestic trade; foreign trade;

· a purchase, sale, or exchange

· a form of occupation pursued as a business or calling, as for a livelihood or profit

· people engaged in a particular line of business

· market

· to give in return; exchange; barter

· to exchange.

In line with the definitions of 'trade' it is evident that the purpose of the Association is more commercial in nature benefiting a producer via the sale of their particular produce, as a stallholder at the market, rather than being engaged in the 'cultivation of land, including crop-raising, forestry, stock-raising and so on, farming' or in the 'the science or practice of cultivating the soil and rearing animals'.

In this case, the purpose of the entity is to facilitate a producers market where the community can buy, sell or exchange local produce. These activities arise from a purpose of 'trade' rather than agricultural activities.

Thus it is considered that the entity's primary purpose of providing a 'market' for producers to trade produce does not meet the requirement of agricultural resources per the definitions as it is considered to be involved in 'trade'.

Society or Association

The word 'society' and 'association' are not defined in the ITAA 1997 and have their ordinary meaning.

An association is a voluntary organisation having members associated together for a common or shared purpose (Douglas & Ors v. Federal Commissioner of Taxation (1997) 77 FCR 112; 97 ATC 4722; (1997) 36 ATR 532). Society has an equivalent meaning (Pro-Campo v Commissioner of Land Tax (NSW) 81 ATC 4270). An association may be incorporated or unincorporated.

The entity is an incorporated entity.

The entity is an organised body of members instituted for the purpose of developing a market for fresh produce.

It is accepted that the entity is an association.

Established for the Purpose of Promoting the Development

Section 50-40 of the ITAA 1997 is directed to 'promoting the development' of the specified resources and requires that the association be established principally or predominantly for the purpose of resource development (Australian Insurance Association).

It is not sufficient that promoting the development of the resource(s) may be a consequence of or incidental to, involved with, or a consequence of an association's purposes.

Determining the dominant purpose of the association will be a question of fact and degree and will involve a weighing of the various elements which include its objects, activities, history, proposed directions, and so on, (Boating Industries Association of NSW v. FC of T 85 ATC 4224; (1985) 16 ATR 388 (Boating Industries Association)). 'Established' refers not only to the motives and objectives which lead to the formation of the association but also to its purpose since that time.

In the High Court in A. & S. Ruffy Pty. Ltd. v. F.C of T 98 CLR 637, Fullagar J. at p652 said;

One must look at the memorandum but this cannot be conclusive either way but in addition there is also to be looked at the activities and the history and control.

Taxation Ruling IT 2415 Income Tax: Associations promoting development of Australian resources states at paragraphs 7 and 8 as follows:

The reasoning in the decision in the Australian Insurance Association case highlights the matters that need to be satisfied in any case before exemption under paragraph 23(h) applies:-

a. Promotion of the specified resources must be the predominant purpose for which a particular body is established.

b. The resources, the development of which is being promoted, must come within the umbrella of the specified resources.

It is important to note that paragraph 23(h) does not refer to the promotion of specified resources - it is directed to the promotion of the development of the specified resources. In the context of paragraph 23(h) the term "development" must be taken to be used in a commercial or business sense, i.e. it comprehends all the elements which must be taken into account to ensure that the specified resources are used in the best interest of Australia. Reference might usefully be made to the observations of the High Court in F.C. of T. v. Broken Hill Pty. Co. Ltd., 69 ATC 4029; 1 ATR 40 on the meaning of the term "development" in relation to the development of a mining property.

Methods of promoting resources include marketing, training, research, education, introduction of new and improved classes of product and facilitation of cooperation between businesses.

In Cronulla Sutherland Leagues Club Limited v. Federal Commissioner of Taxation (1990) 23 FCR 82; 90 ATC 4215; (1990) 21 ATR 300, Lockhart J at 4220 said:

Section 23(g) (iii) is concerned with the periodic or recurrent, not the static, purposes of the relevant body in the year of income. It is relevant, however, to look at the objects or purposes for which the body was incorporated including the objects clauses in the Memorandum of Association, and also any subsequent activities of the body which may throw light on its activities in the relevant year of income.

Section 23(g)(iii) of the Income Tax Assessment Act 1936 (ITAA 1936) provides exemption to a society, association or club 'established for' the encouragement of a game or sport and is similar to the wording in item 8.2 in section 50-40 of the ITAA 1997 which provides exemption to a society or association 'established for the purpose' of promoting the development of specified resources.

Purpose, must be primary and dominant, to satisfy section 50-40 of the ITAA 1997.

In Boating Industries Association:

In Inland Revenue Commissioners v. Aberdeen Medico-Surgical Society (1931) 16 Tax Case 237 at p. 249 it was said by the Lord President that the question must always be what is the true nature and objects and activities and if they are of a mixed character the question must be decided according to the prevalent or main character. This was accepted by Latham C.J in Royal Australasian College of Surgeons v. F.C. of T. ((1943) 68 CLR 436) at p.444. Starke J. at p. 448 referred to main and dominant. See also Williams J. at p.452. This was in relation to a similar subparagraph, 23(e).

Other examples such as Australian Chemical Industry Association (Case W4 89 ATC 133; AAT Case 4841 (1988) 20 ATR 3135), Australian Insurance Association, Surveyors' association (AAT Case 46/94 94 ATC 412; Case 9723 (1994) 29 ATR 1102) all had express promotional purposes and little or no other activity at all.

Case U118 87 ATC 710 (Cane Growers case) at 714 states:

The construction of the water storage seems easily to fit within the meaning of the words "promoting the development of … agricultural ….resources of Australia" in sec. 23(h) of the Act. There can be little doubt that the construction of a water storage designed to provide additional water supplies for sugar-cane growers is the development of an agricultural resource. The ordinary meaning of the words must lead to that conclusion.

And again at 714:

…… However, para 23(h) does not require that there be a development of an agricultural resource, but rather a purpose of promoting the development of an agricultural resource. …

In Boating Industries Association:

It does not follow that a body whose activities or involvement have the effect or result of promoting the development of manufacturing resources of Australia, who otherwise are within the section as to the disposition of income, is necessarily established for that purpose.

The term 'development' is used in item 8.2 of the table in section 50-40 of the ITAA 1997 in a commercial or business sense. The promotion of development may be direct or indirect. It comprehends all the elements which must be taken into account to ensure that the specified resources are best used. A similar approach to 'development' is used in Federal Commissioner of Taxation v. Broken Hill Pty. Co. Ltd. (1969) 120 CLR 240; 69 ATC 4028; (1969) 1 ATR 40 (Broken Hill Pty. Co. Ltd). In considering the phrase 'development of the mining property' the majority of the High Court accepted the interpretation of Kitto J:

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

Development entails increase in operations, unlocking of potentialities, advancement of activity; not just conduct of ongoing activity (Broken Hill Pty Co Ltd per Kitto J at page 248).

It is considered that the activities of the entity does not entail an increase in operations, unlocking of potentialities or advancement of activity but providing a common venue to undertake the ongoing activity of selling produce. It is considered that the activities of the Association are not a purpose of promoting development where a perceived gap or barrier to that development exists. The facts available does not support the entity as having identified a particular gap or barrier blocking development of specified resources, and that the establishment of the market will fill a gap or remove barriers.

The facts of the situation are similar to those in the case FC of T v. Australian Music Traders Association 90 ATC 4536; (1990) 21 ATR 471. There an unincorporated non-profit association ran market days, with stallholder members. The point emerging clearly from the Music Traders case is that a market of this kind is essentially a business operation. If stallholders benefit, they do so only as they would from any other market. If those who supply the stallholders benefit, they do so only as they would from sale to any other retailer.

Based on the evidence provided, the entity's predominant purpose is not considered to be promoting the development of specified Australian resources but rather to provide a venue via 'the market' for the stallholders to sell their produce. It is considered to be no different to any other retail operation where space is leased to prospective tenants and to use for their own commercial benefits.

Thus, it is considered that the entity in carrying out its purposes and activities does not have a predominant purpose of promoting the development of specified Australian resources. The entity's constituent documents disclose no express purpose of promoting the development of agricultural resources rather the promotion of the market. While the results of some of the entity's activities could have the effect of promoting the development of specified Australian resources, this is considered to be incidental to its primary purpose of providing a venue for any stallholder to sell their produce, agricultural or otherwise.

Special Conditions - 'Not carried on for the Profit or Gain of its individual Members'

If an association operates principally to confer benefits to its members jointly or as a group, it is unlikely to be predominantly for promoting resource development and thus not exempt under item 8.2 of the table in section 50-40 of the ITAA 1997. If an association is carried on for the profit or gain of its individual members, it will fail the non-profit requirement. Such a purpose is unlikely to be consistent with the purpose of promoting resource development.

However, it is necessary to distinguish a dominant purpose of providing benefits to members as a group from the incidental benefits which will often flow to members from activities promoting the development of resources with which they are involved. Organisations will not be exempt where their main objects and activities are to protect or promote the interests of members.

As stated at page 22 of the ITGNPO:

If the organisation's main purpose is merely to provide services to its members, it will not be exempt. This is the case even if the services result in better use of resources by those members.

Furthermore, at page 6 of the ITGNPO:

The Tax Office accepts an organisation as non-profit where its 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.

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

It is accepted that the Association is a non profit organisation.

This requirement is met.

Conclusion

We consider that the primary purpose of the entity by way of consideration of its objects is for the purpose of establishing and developing a market from where producers can sell fresh local produce.

The market is also to be used as a vehicle to promote sustainable food production and provide a means by which the community can be educated about the impact of the environment on the food chain and the production and use of fresh food.

The entity therefore presents an opportunity for stallholders, for a fee, with a display space to sell their goods for profit.

Thus based on the above facts and case law, the total ordinary income and statutory income of the entity is therefore not exempt from income tax pursuant to section 50-1 of ITAA 1997 as it is not an association established for promoting the development of agricultural resources, pursuant to item 8.2(a) of the table in section 50-40 of the ITAA 1997.

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