Edited version of private ruling

Authorisation Number: 1011777381026

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Ruling

Subject: Scientific Institution

For the ordinary and statutory income of an organisation to be exempt from income tax under Division 50 of the Income Tax Assessment Act 1997 (ITAA 1997), that organisation must be an entity covered by the tables of exempt entities contained in subdivision 50-A of the ITAA 1997.

Under item 1.3 of the table in section 50-5 of the ITAA 1997, an entity will be exempt from income tax if it satisfies these requirements:

1. it is an institution;

2. It is a scientific institution; and

3. It meets the special conditions contained in section 50-55.

Section 50-55 of the ITAA 1997 states:

An entity covered by item 1.3, 1.4, 6.1 or 6.2 is not exempt from income tax unless the entity:

· has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia; or

· is an institution that meets the description and requirements in item 1 of the table in section 30-15; or

· is a prescribed institution which is located outside Australia and is exempt from income tax in the country in which it is resident.

The entity has a physical presence in Australia and therefore satisfies this requirement.

Issue 1

Is the Entity an institution?

Institution

"Institution" is not defined in the ITAA 1997, but paragraph 4 of Taxation Ruling TR 92/17 states:

"A body is an institution for the purposes of both the ITAA and the FBTAA if it is an establishment, organisation or association, instituted for the promotion of some object 9 especially one of public or general utility) that is religious, charitable, educational, etc. That definition was accepted by the High Court in YMCA of Melbourne v FC of T (1926) 37 CLR 351 and later in Stratton v Simpson (1970) 125 CLR 138."

The entity is a company limited by guarantee which was established to conduct scientific research jointly with the participants through the research centre. It is therefore operating as an institution.

Issue 2

Is the Entity a scientific institution?

Scientific Institution

The term "scientific institution" is not defined in the Act and therefore will take on its ordinary meaning. The Macquarie Dictionary defines 'science' as: 

1. a. the systematic study of humans and their environment based on the deductions and inferences which can be made, and the general laws which can be formulated, from reproducible observations and measurements of events and parameters within the universe. b. the knowledge so obtained. 2.systematised knowledge in general. 3. a particular branch of knowledge. 4. skill; proficiency.

and 'scientific' as: 

1. having to do with science or the sciences: scientific studies. 2. occupied or concerned with science: scientific men. 3. regulated by or conforming to the principles of exact science: a scientific method. 4. systematic or accurate.

The meaning of "institution'' was considered in the High Court in Stratton & Ors v Simpson & Ors (1970) 125 CLR 138, where Gibbs J said:

In its ordinary sense 'institution' means 'an establishment, organisation, or association, instituted for the promotion of some object, especially one of public utility, religious, charitable, educational etc' (The Shorter Oxford English Dictionary). It means as was said in Mayor etc of Manchester v McAdam (1896) AC 500 at p 511, 'an undertaking formed to promote some defined purpose ...' or 'the body (so to speak) called into existence to translate the purpose as conceived in the mind of the founders into a living and active principle'. Although its meaning must depend on its context, it would not ordinarily connote a mere trust (cf Minister of National Revenue v Trusts and Guarantee Co Limited).

In Royal Australasian College of Surgeons v. Federal Commissioner of Taxation (1943) 68 CLR 436 the High Court considered the meaning of 'scientific institution' under section 23 (e) of the Income Tax Assessment Act 1936 (ITAA1936). Latham CJ at 442 stated that 

"A scientific institution is one which has for its sole or dominant object the enlargement of scientific knowledge." At 442 Latham CJ stated "If these objects and activities are of mixed character, being partly professional and partly literary or scientific, then the question must be decided according to the prevalent or main character."

The Income tax guide for non-profit organisations, on page 24, states that, 

Scientific institutions are set up and operated for the dominant purpose of advancing science. Common ways of advancing science include research, exploration and teaching. Disseminating information will often be involved. Scientific institutions do not include:

· Organisations run for the profit of their individual owners or members.

Further in Royal Australasian College of Surgeons v. Federal Commissioner of Taxation (1943) 68 CLR 436 Rich J said: 

"The inclusion of an institution in the exemption clause (section 23(e) of the Income Tax Assessment Act 1936) depends upon the intrinsic character of the object which it promotes and not upon the scope of the benefits which may result from its transactions."

It is evident from the information provided that the applicant is significantly involved in research activities, in relation to optimising mineral resource extraction, in partnership with the participants; its sole and dominant purpose is the enlargement of scientific knowledge. This is why it has been approved as a CRC by the Commonwealth Department of Industry, Science and Research. The applicant is therefore a scientific institution.

Non-profit requirement

The ITAA 1997 does not expressly impose a non profit requirement in terms of a scientific institution under item 1.3. Notwithstanding this, in Royal Australian College of Surgeons v Federal Commissioner of Taxation (1943) ) 68 CLR 436, Latham CJ stated that a scientific institution is a charitable institution. Thus, the non-profit requirement applies.

Member benefits

Paragraph 75 of TR 2005/21 states:

If an organisation is carried on for the profit of its owners or members, it is carried on for their benefit and not for the benefit of the community.

The applicant's constitution contains acceptable non-profit and winding up clauses.

Participants in the CRC are not members therefore there are no member benefits.

However the question of private benefit remains. Intellectual property may arise from the joint research. Legal ownership of the IP arising for joint research remains with the applicant to use in accordance with its objects. Participants however do retain the right to use the IP themselves.

The funding for the various projects of approximately $X is split evenly between the participants and the applicant. Given that the participants are significant monetary contributors to these projects, and in addition provide research staff to the various projects, it is accepted that that any benefits accruing to them from the use of the IP is sufficiently related the participants input as to not give rise to a situation were the applicant has a separate purpose of benefiting the participants.

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