Edited version of private ruling

Authorisation Number: 1011759970232

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Subject: IT exempt entity and FBT rebate

Ruling

Question 1:

Is the Entity exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as a non-profit association established for the purpose of promoting the development of Australian pastoral, agricultural and manufacturing resources pursuant to item 8.2 in the table in section 50-40 of the ITAA 1997?

Answer: Yes.

Question 2:

Can the Entity claim a rebate pursuant to subsection 65J(2A) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) on the basis that it is a rebatable employer pursuant to paragraph 65(J)(1)(l) of the FBTAA?

Answer: Yes.

This ruling applies for the following periods:

For Question 1: For Question 2:

Year ended 30 June 2009 Year ended 31 March 2009

Year ended 30 June 2010 Year ended 31 March 2010

Year ended 30 June 2011 Year ended 31 March 2011

Year ended 30 June 2012 Year ended 31 March 2012

The scheme commences on:

1 April 2008

Assumptions:

All the information provided in support of the Entity's previous ruling requests in 2004 and 2007 in relation to its income tax exemption status and rebatable employer status is still current and applicable. Specifically, the Entity continues to be a non-profit association with no material changes to its constituent documents and day-to-day operations to impact its tax status. The Entity continues to perform the function of promoting a specific Australian industry.

Relevant facts and circumstances:

Background

The Entity is incorporated under the Corporation Law. The Entity has received favourable rulings in 2004 stating that the Entity:

· is exempt from income tax under section 50-1 of ITAA 1997

· is rebatable employer under paragraph 65(J)(1)(l) of the FBTT.

The Entity has subsequently received favourable rulings in 2007 for the same status in relation to its proposals to acquire all the shares of another entity. However, such transaction will not have material affect to the Entity's purpose or activities

Constitution

The Constitution contains a list objects. Overall, the Entity's objects are to receive Commonwealth funding and seek other funds for research and development, innovation and other activities for the benefit of the Australian industry.

The Constitution contains non-profit and dissolution clauses.

The Constitution limits issuing of shares to only specific applicants who are engaged in the industry business.

Activities

For the benefit of Australian producers, the Entity conducts the following activities:

· Assist producers in producing a higher quality product

· Enable the product to be processed more cost effectively by processors

· Enable the product to be processed into end-use products for a range of new market segments

· Assist growers in making better business decisions through the use of latest intelligence on market demand and fibre performance requirement plus business decision making tools and

· Lift the demand for Australian produce by providing a range of industry services in the areas of market development, after sales support for the product and addressing trade barriers to the product and product apparel.

Website

The Entity's website provides detail information for producers for each stage of the process from the beginning until the finishing of the end-product. It also contains information in relation to the industry, including media release, workshops, forum, expo, shows, publications…etc.

Relevant legislative provisions:

Item 8.2, Section 50-40 Income Tax Assessment Act 1997

Paragraph 65(J)(1)(l) of the Fringe Benefits Tax Assessment Act 1986

Section 50-1 Income Tax Assessment Act 1997

Subsection 65J(1) of the Fringe Benefits Tax Assessment Act 1986

Subsection 65J(1A) of the Fringe Benefits Tax Assessment Act 1986

Subsection 65J(2A) of the Fringe Benefits Tax Assessment Act 1986

Subsection 65J(5) of the Fringe Benefits Tax Assessment Act 1986

Relevant Rules and Determinations:

Taxation Determination TD 95/56

Taxation Ruling IT 2415

Taxation Ruling TR 2003/5

Taxation Ruling TR 2004/8

Taxation Ruling TR 2005/21

Relevant Cases:

Australian Insurance Association v FC of T 79 ATC 4569; 10 ATR 333; (1979) 41 FLR 256

Boating Industries Association of New South Wales v F C of T 85 ATC 4224; (1985) 16 ATR 383

Case 46/94 94 ATC 412; (1994) 29 ATR 1102; ATR 1108

Case W49 89 ATC 474; 20 ATR 3602-3

FC of T v. Broken Hill Pty Co. Ltd 69 ATC 4028; 1 ATR 40

Perpetual Trustee Co Ltd v. FC of T (1931) 45 CLR 224

Pro-campo Ltd v. Commr of Land Tax (NSW) 81 ATC 4270; (1981) 12 ATR 26

Reasons for decision:

1) Income Tax Exemption

Summary of decision:

The Entity will be exempt from income tax if it is a non-profit association whose dominant purpose is the promotion and development of pastoral, agricultural and manufacturing resources of Australia. Having regarded to its objects and activities it is considered that the dominant purpose of the Entity is the promotion or development of Australian pastoral, agricultural and manufacturing resources.

Detailed reasoning:

Assessable income of an entity is exempt under section 50-1 of the ITAA 1997 where the entity falls within the following description contained in item 8.2 of section 50-40 of the ITAA 1997 (ITAA 1997):

A society or association established for the purpose of promoting the development of any of the following Australian resources:

(a) agricultural resources

(b) horticultural resources

(c) industrial resources

(d) manufacturing resources

(e) pastoral resources

(f) viticultural resources

(g) aquacultural resources

(h) fishing resources

The exemption is subject to a special condition that the society or association is not carried on for the profit or gain of individual members.

For an association to be exempt from taxation under s50-40 of the ITAA 1997, it must be established predominantly for the purpose of promoting resource development. An essential element of the table in Item 8.2 above is that the section, in its application to production industries, applies only to Australian resources.

Therefore, the matters to be satisfied before this exemption applies are:

· the entity is a non-profit association or society; and

· the dominant or principal purpose for which the entity is established is promoting resource development; and

· the resources whose development is being promoted are within the umbrella of resources specified in the relevant section; and

· the resources, are resources of Australia (see Taxation Ruling IT 2415 Income tax: Associations promoting the development of Australian resources at para 7).

If the association fails to satisfy these requirements, its income will not be exempt under this provision.

Society or association

One of the requirements of section 50-40 of the ITAA 1997 is that the entity be a society or association.

The terms association and society are not defined and have their ordinary meaning. The Macquarie Dictionary defines association as an organisation of people with a common purpose and having a formal structure. Society has an equivalent meaning (Pro-campo Ltd v. Commr of Land Tax (NSW) 81 ATC 4270 at 4279; (1981) 12 ATR 26 at 35).

The Entity is incorporated under the Corporation Law and is governed by its Constitution. The common purpose for which the Entity's shareholders have joined together is expressed in the Constitution to promote the Australian industry through research ad development and innovation activities Therefore, it is accepted that the Entity is an association.

Non-profit

Section 50-40 of the ITAA 1997 requires that the association not be carried on for the purposes of profit or gain to its individual members. This is known as the non-profit requirement. Where members, in their individual capacity, are to receive benefits from an association it will fail the non-profit test.

The Entity's Constitution contains appropriate clauses which prevent benefits or profits being distributed to members both during its operation and on winding up. Therefore it is accepted that the Entity is non-profit.

Resources

To fall within the section 50-40 of the ITAA 1997 criteria, an association's principal or dominant purpose must be to promote the development of one or more of the resources specified in that section.

The Entity is seeking income tax exemption on the basis that it is established for the purpose of promoting the development of pastoral, agricultural and manufacturing resources. These resources are not defined in the ITAA and so take on their ordinary meaning.

The Macquarie Dictionary defines agriculture as:

the cultivation of land, including crop-raising, forestry, stock-raising, etc.; farming.

Pastoral is defined in the Macquarie Dictionary:

1. of or relating to the raising of stock, especially sheep or cattle, on rural properties: pastoral occupations; pastoral leases.

2. used for pasture, as land.

Manufacturing is also explained in Australian Insurance Association v. FC of T 79 ATC 4569 by Sheppard J, at 4574:

If, as I think is the case, plant and equipment, manpower, skill and know-how in manufacturing such article as steel products, clothing and furniture, and such non-tangible commodities as gas, electricity are manufacturing resources…

The Entity is concerned with the benefits of producers and the overall industry. Therefore it is accepted that it is concerned with agricultural, pastoral or manufacturing industries. Furthermore, given that it is concerned with the products of the agriculture/pastoral industries and the manufacturing of these products, it is accepted that it is concerned with agricultural, pastoral and manufacturing resources.

Resources of Australia

The words 'in Australia' limit the exemption to associations whose activities are directed to Australian resources.

The Entity aims to benefit the producers in Australia and so it is accepted that it is concerned with Australian agricultural/pastoral resources.

Promoting Resource Development

It has already been established that the Entity is an association involved with agricultural, pastoral or/and manufacturing resources of Australia.

However, section 50-40 of the ITAA 1997 does not refer to the promotion of the specified resources. It specifies the promotion of the development of those resources. The term 'development' is used in section 50-40 in a commercial or business sense. It takes in all the elements which must be taken into account to ensure that the specified resources are best used. The promotion of development may be direct or indirect. 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.

The meaning of 'development' was examined by the High Court in FC of T v. Broken Hill Pty Co. Ltd 69 ATC 4028; 1 ATR 40 where, in considering the phrase 'development of mining property', the majority of the High Court accepted the interpretation of Kitto J:

In its ordinary English sense the word "development" when used in relation to a property. Refers to the unfolding, the bringing out, of some latent capability of that property…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.

The Entity receives and seeks funds for research and development, innovation to assist producers in producing high quality product. The Entity educates Australian producers so that they could process the product more efficiently to produce end-use products for a range of new market segments. The Entity also educates producers in relation to the use of latest intelligence on market demand and fibre performance requirements so that producers can make better business decisions in relation to production.

Therefore, the object of the Entity is considered to promote the development of the agricultural, pastoral and/or manufacturing resources through research and development, innovation, education, and the introduction of improved methods and processes.

Principal or dominant purpose

To be exempt under section 50-40 of the ITAA 1997, an association must be established principally or predominantly for the purpose of resource development (Australian Insurance Association v FC of T 79 ATC 4569; 10 ATR 333; (1979) 41 FLR 256). It is not sufficient that one of the association's purposes falls within section 50-40, nor is it enough that resource development is incidental to, involved with, or consequences of an association's purposes.

The term 'established' is not used in the narrow sense of considering only the motives and objectives which let to the formation of an association (Case W49 at 89 ATC 474; 20 ATR 3602-3). It is necessary to consider an association's constituent documents, and also its history, operations and activities (Boating Industries Association of New South Wales v F C of T at 85 ATC 4228-9; 16 ATR 388). As the Tribunal pointed out in Case W49 at ATC 474; 20 ATR 3603 it is necessary to consider:

'…whether during the period under review the organisation was in existence and was operated and maintained in an established or stable condition as an organisation having as its principal or dominant purpose, one of the purposes provided for in the subsection.'

Therefore, 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, etc (Boating Industries Association of New South Wales v F C of T 85 ATC 4224; (1985) 16 ATR 383).

Consequently, it will be necessary to consider each association on the merits of its particular circumstances. Also, because those circumstances may change, an association's tax status may change over time.

In order to determine the purpose of the Entity, it is necessary to consider its history, constituent document and activities. The Entity's objects clearly states that it seeks funds for 'research and development, innovation and other activities for the benefit of Australian producers'. Its main activities are to disseminate relevant information through media release, workshops, forum, expos…etc to assist producers in producing a higher quality the product and fibre with improved process that is more cost efficient.

Therefore, by considering its objects and underlying activities, it is considered that the predominant purpose of the Entity is to promote the development of the agricultural, pastoral or/and manufacturing resources.

Special condition - 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 the purpose of promoting resource development and thus not exempt under section 50-40.

As the following cases illustrate, 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.

In Case 46/94 94 ATC 412; (1994) 29 ATR 1102 at ATC 417; ATR 1108 the Tribunal found, as an alternative ground, that the association was not exempt under 23(h) because it was principally to promote the interests of its members. It operated to look after the needs of consulting surveyors through such matters 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 association was accepted as non-profit.)

Case W49 89 ATC 469; at 474 states:

The enlargement of the market is one of the objectives of "promoting the development" of any relevant industry. In my view the relevant test is satisfied provided that members do not benefit "as members". I find that the Association does not have as an object the generation of increased profits to any one or more members to the exclusion of others or have as an object the equal or equitable distribution of any increased market profit between its members to the exclusion of others.

As discussed before, the Entity contains non-profit and dissolution clauses in its Constitution which prevents the Entity from distributing its profits and assets among members while it is operating and on winding up. Therefore, it is accepted that the Entity operates on a non-profit basis and does not make any distributions to its members.

Also, it is evident from the Entity's objects and activities that it operates for the benefit of all producers in Australia and its services are not limited to members only.

Consequently, the Entity is not considered to operate principally to confer benefits on its members jointly or as a group.

2) Rebatable Employer

Summary of decision:

The Entity can claim a rebate pursuant to subsection 65J(2A) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) on the basis that it is a rebatable employer pursuant to paragraph 65(J)(1)(l) of the FBTAA.

Detailed reasoning:

In determining whether the Entity may claim a rebate pursuant to subsection 65J(2A) of the FBTAA, we must first determine if the Entity is an eligible rebatable employer pursuant to paragraph 65(J)(1) of the FBTAA, which states in part:

For the purposes of this section, an employer is a rebatable employer for a year of tax if the employer is not a public benevolent institution, is not a health promotion charity, and is covered by any of the following paragraphs at any time during the year of tax:

Specifically, paragraph 65K(1)(l) covers the following:

a non-profit society, or non-profit association, established for the purpose of promoting the development of the agricultural, pastoral, horticultural, viticultural, aquaculture, fishing, manufacturing or industrial resources of Australia.

Further, subsection 65J(1A) states the following:

Despite subsection (1), if the employer is a charitable institution at any time during the year of tax, the employer is not a rebatable employer for the year of tax unless the employer is endorsed under subsection 123E(1) at that time.

Therefore, to qualify as a rebatable employer under paragraph 65J(1)(l) of the FBTAA, an entity must:

· not be a public benevolent institution (PBI);

· not be a health promotion charity (HPC);

· not be a charitable institution, unless endorsed;

· be a non-profit society or association; and

· be established for the purpose of promoting the development of at least one of the resources of Australia as specified in this paragraph.

Public benevolent institution

The expression 'public benevolent institution' is not defined in the Income Tax Assessment Act 1997 (ITAA 1997) but the definition has been considered by numerous court cases. The essential characteristics of a PBI were described in the High Court in Perpetual Trustee Co Ltd v. FC of T (1931) 45 CLR 224. Starke J, at 45 CLR 232 said that 'public benevolent institution', in ordinary English usage means, an institution organised for the relief of poverty, sickness, destitution or helplessness. Dixon J at 45 CLR 233-234 said it should include the relief of poverty, suffering, distress or misfortune.

The Taxation Ruling TR 2003/5 Income tax and fringe benefit tax: public benevolent institutions provides the Tax Office's view on what constitute a PBI. Paragraph 7 of the TR 2003/5 states:

'A public benevolent institution is a non-profit institution organised for the direct relief of poverty, sickness, suffering, distress, misfortune, disability, destitution or helplessness as arouses compassion in the community.'

The entity must be at least predominantly for the above purposes. Any other purposes must be incidental to the public benevolence or of minor extent and importance

The Commissioner's view of what characterises a PBI is also outlined in the Guide for deductible gift recipient and donors (The GiftPack). In accordance with TR 2003/5 and the GiftPack, the characteristics of a PBI are:

· It is set up for needs that require benevolent relief

· It relieves those needs by directly providing services to people suffering from them

· It is carried on for the public benefit

· It is non-profit

· It is an institution, and

· Its dominant purpose is providing benevolent relief

As discussed above, the Entity is established predominantly for the purpose of promoting the development of Australian resources. The Entity is not set up for needs that require benevolent relief and does not have a dominant purpose in providing direct benevolent relief. Therefore, the Entity is not considered to be a PBI.

Health promotion charity

Paragraph 4 of the Taxation Ruling TR 2004/8 Income tax and fringe benefits tax: health promotion charities lists the characteristics of a health promotion charity (HPC) which are:

· Its principle activity is promoting the prevention or the control of diseases in human beings, and

· It is a charity that is a charitable institution.

Example of HPC includes charitable institution that provides relevant information to sufferers of a disease, health professionals, carers and the public.

The Entity's principal activity is to assist producers in producing a higher quality product with improved cost efficient processes. The Entity does not have any activities which are for the promotion of the prevention or the control of diseases in human beings. Therefore, the Entity is not considered to be a HPC.

Charitable institution

The word charitable is not defined by the ITAA 1997, but it has an established legal meaning through case law. The Commissioner's view of what characterises a charity is outlined in the Income Tax Guide for non-profit organisation (The Guide) and Taxation Ruling TR 2005/21 Income tax and fringe benefits tax: charities.

An entity will be considered a charity if:

· It is an entity that is also an institution,

· It exists for the public benefit or the relief of poverty,

· Its sole purpose is charitable within the legal sense of the term, and

· It is non-profit.

The main issue to consider here is whether the Entity has a sole public charitable purpose.

The purposes of a charity must be charitable and it is only charitable if it is within the 'spirit and intendment' of the Statute of Charitable Uses 1601 (the so-called 'Statue of Elizabeth'. This means that the purpose must be the same as or analogous to:

· purposes set out in the preamble to that Statute; or

· purposes that the courts have found to satisfy the technical legal meaning of charitable.

As stated in paragraph 39 of TR 2005/21, there are five main groupings of benefit or value that the courts have recognised as capable of being charitable. They are purposes for the relief of poverty, the relief of the needs of the aged, the relief of sickness or distress, the advancement of religion and the advancement of education. There are also many other charitable purposes, commonly referred to as 'other purposes beneficial to the community'. Sporting, recreational, social or entertainment purposes are not charitable purposes.

For a purpose to fall within the technical legal meaning of charitable, it must also be beneficial to the community or deemed to be for the public benefit by legislation, except for the relief of poverty. The benefit need not be for the whole community, but it must be at least for an appreciable section of the public. Charities may limit their activities to a particular segment of the community if those limits enable it to better carry out its charitable purposes. Such groups include residents of a particular geographic area, people who practice a particular religion or sufferers of a particular condition. However, it must not be to provide merely private benefits.

As discussed above, the Entity's purpose is to benefit Australian producers by assisting them in producing a higher quality product with improved cost efficient processes. This purpose may be classified as other purposes beneficial to the community, however, the benefits or values intended by this purpose must be of worth, advantage, utility, importance and significance (paragraph 33 of TR 2005/21)

Paragraph 43 to 45 of TR 2005/21 provides the following explanation:

43. While purposes may be more or less beneficial when looked at from different points of view, a charitable purpose must be of benefit overall. The benefit must be real or substantial; it must not be negligible. Nor can it be harmful on balance

44. Relevant factors in deciding whether a purpose is of sufficient value are community consensus, general notions of value and expert evidence. Factors and the weight given to the factors, may vary with the type of purported benefit…

45. If the particular circumstances indicate the purported benefit is in fact insufficient, the purpose is not charitable…

Paragraph 137 to 139 of TR 2005/21 further states:

137. A purpose that has insufficient value to the community is not charitable. For example, where a testator set up a trust for the publication of this own literary works, it was not charitable as the works failed to have any educational value to the community.

138. Benefits that are too indirect for the community also do not qualify. New Zealand Society of Accountants v. Commissioner of Inland Revenue [1986] 1 NZLR 147 concerned statutory funds used to compensate people for money misappropriated by a solicitor or accountant….Richardson J who considered there was not sufficient value to the community to find a charitable purpose. He said, at 153:

The peace of mind seems to me far too nebulous and remote to be regarded as public benefit. Nor is it suggested that the existence of the fund tends to promote honesty and integrity on the part of those engaged in the public practice of law or accountancy, or that the purpose of the trust is the moral improvement of the community. The element of public benefit must arise if at all from the application of the fund for the purposes of the fund and I cannot see any basis for enlarging the community benefited beyond those persons entitled to claim from the fund.

139. Any purpose that is value or ambiguous falls to have sufficient certainty to be characterised as charitable…

As stated in the Constitution, the Entity's objects are to conduct research and development, innovation and other activities for the benefit of Australian producers. The Entity achieves this by assisting producers to produce higher quality product by educating them of improved and cost efficient processes for each stage of the production. Such purposes to benefit Australian producers are considered to provide benefits to the specific industry. However, as stated in the above paragraphs from TR 2005/21, benefit or value to the public community must be real or substantial, rather than indirect benefit.

In this case, it can be argued that the Entity provides benefit to the producers industry which will result in better quality product. However, the benefit which flows through to the public community from better quality product is considered to be too indirect and remote. Therefore, it is insufficient to conclude that the Entity's objects and activities will provide sufficient and substantial value and benefit to the community.

The Entity is not considered to be a charitable institution as it does not have a sole public charitable purpose.

Non-profit society or association

Subsection 65J(5) provides the meanings of "non-profit society", "non-profit association" and "non-profit club". For the purposes of this section, a society, association or club is a non-profit society, non-profit association or non-profit club, as the case may be, if, and only if:

(a) the society, association or club is carried on otherwise than for the purposes of profit or gain to its individual members; and

(b) the society, association or club is neither:

(i) an incorporated company where all the stock or shares in the capital of the company is or are beneficially owned by:

(A) the Commonwealth, a State or a Territory; or

(B) an authority or institution of the Commonwealth, a State or a Territory; nor

(ii) an incorporated company where the company is limited by guarantee and the interests and rights of the members in or in relation to the company are beneficially owned by:

(A) the Commonwealth, a State or a Territory; or

(B) an authority or institution of the Commonwealth, a State or a Territory; nor

Therefore, to qualify as a non-profit association under subsection 65J(5) of the FBTAA, an entity must:

· be non-profit;

· be a society, association or club; and

· not be under beneficial ownership of the Commonwealth, a State or a Territory or an authority or institution of the Commonwealth, a State or a Territory.

Non-profit

As discussed above, the Entity is considered to be non-profit as its Constitution contains appropriate non-profit and dissolution clause.

Society, association or club

As discussed in Question 1 in relation to the Entity's income tax exemption status, the Entity meets the ordinary meaning of an association.

However, Taxation Determination TD 95/56 serves to slightly modify the ordinary meaning of an "association" for the purpose of section 65J of the FBTAA. It states that a body cannot be an association where it is:

· formed by government;

· controlled by government; and

· performs functions on behalf of government.

The reasoning being that such body is clearly not formed to give effect to the purposes of the members of that body, but to give effect to the purpose of government.

The Entity is a public company limited by shares formed pursuant to the Corporations Law and is not created as a result of an act or law passed by the governments. Its Constitution was developed in consultation with its shareholders, being Australian producers and producers. Therefore, the Entity is not considered to be formed by government.

While the Entity is required to report to the government on its use of the government grants, the Entity effectively controls and manages its affairs without any requirement to take direction from the government. Therefore, the Entity is not considered to be controlled by the government or perform functions on behalf of the government.

As such, the Entity is considered to be an association for the purposes of TD 95/56.

Beneficial ownership

The Entity is a public company that is limited by shares. Clause 4 of the Entity's Constitution serves to limit ownership of shares to Australian producers and producers. Therefore, the Entity is not considered to be beneficially owned by the Commonwealth, a State or a Territory or an authority or institution of the Commonwealth, a State or a Territory.

Established for the purpose of promoting the development of Australian resources

In order to determine whether the Entity is eligible for income tax exemption under section 50-1 of the ITAA 1997 as discussed in Question 1, it has already been established that the Entity is established for the purpose of promoting the development of Australian resources.

Therefore, this requirement is satisfied.

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