Edited version of private ruling

Authorisation Number: 1011823953596

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Ruling

Subject: Continuation of income tax exemption

Question

Is the Association exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as a society or association established for the purpose of promoting the development of Australian manufacturing resources under item 8.2(d) of section 50-40 of the ITAA 1997?

Answer

The Association is exempt from income tax under section 50-1 of the ITAA 1997 on the basis that it is established for the purpose of promoting the development of Australian manufacturing resources under item 8.2(d) of section 50-40 of the ITAA 1997.

Section 50-40 of the ITAA 1997 states that a 'society or association established for the purpose of promoting the development of any of the following Australian resources' will be exempt from income tax, subject to the fact that it is not carried on for the profit or gain of its individual members.

The items listed under item 8.2 include the following:

a) Agricultural resources;

b) Horticultural resources;

c) Industrial resources;

d) Manufacturing resources;

e) Pastoral resources;

f) Viticultural resources;

g) Aquacultural resources; and

h) Fishing resources.

Detailed reasoning

In order for the Association to satisfy the requirements in item 8.2 of the table in Section 50-40 ITAA 1997 it must:

1. be a society or association;

2. established for the dominant or principle purpose of promoting the development of an Australian resource as described in item 8.2 of the table in section 50-40 of the ITAA 1997; and

3. it is not carried on for the profit or gain of its individual members.

The above criteria will be considered in turn.

Society or association

The terms 'association' and 'society' are not defined in the ITAA 1997, therefore they should be interpreted according to their ordinary meaning. For the purposes of section 50-40 of the ITAA 1997, the terms 'society' and 'association' generally have the same meaning.

The Macquarie Dictionary defines 'association' as an organisation of people with a common purpose and having a formal structure', with 'society' considered to have an equivalent meaning (Pro-campo Ltd v Commr of Land Tax (NSW) 81 ATC 4270 at 4279; (1981) 12 ATR 26 at 35). An association may be incorporated or unincorporated.

The Association is a company limited by guarantee, it's structure has not changed since its formation in 1962, and it is still considered to be "an organisation of people with a common purpose" with a "formal structure" who have come together to promote the development of Australian manufacturing resources.

The Association satisfies the above requirement.

Australian resources

The use of the word "Australian" applied to resources in section 50-40 of the ITAA 1997 limits the exemption to associations whose activities are directed towards Australian resources.

The Association promotes the development of 'Australian" resources. For example, subclause 1.1(b) is concerned with 'supporting efforts of industry in improving safety, reliability and environmental performances of Products for the benefit of the Australian community'. This is supported by the Association's activities which are all applied to Australian resources, as outlined in the Private Ruling application form.

The Association notes that while a significant proportion of the commercial and domestic resource appliances certified are manufactured overseas, they are manufactured for sale in Australia and certified to Australian standards by the Association.

Therefore, the Association satisfies this requirement as it intends to promote the development of "Australian" resources.

Promoting the development of Australian Resources

The term 'development' is used 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.

Australian Manufacturing resources

The case of Australian Insurance Agency v Federal Commissioner of Taxation 79 ATC 4569 ("the Australian Insurance Agency Case") dealt with the legislative distinction between "industrial" and "manufacturing" resources. The following was observed by Sheppard J:

There is a question as to whether there are two separate and distinct categories, or whether there may be some overlapping between the two. Whether that be so or not, one must reach a conclusion as to what type of resources were intended to be referred to as industrial resources as opposed to those which were embraced by the expression "manufacturing resources"

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

Taxation ruling IT 2415 Income tax: Associations promoting the development of Australian resources states the following on the meaning of 'development':

The term "development" must be taken to be used in a commercial or business sense, i.e. it comprehends all elements which must be taken into account to ensure that the specified resources are used in the best interests of Australia.

Taking into consideration the Association's primary activities, and the objectives contained in their constitution, it is apparent that they would most appropriately be described as 'promoting the development of Australian manufacturing resources', as they are focused on the development of resource product certification and safety standards in the manufacture, supply, testing and assessment of those products.

The promotion of development may be direct or indirect. Activities directly promoting the development of manufacturing resources include research, education and training in manufacturing (such as establishment of systematic training schemes), development and monitoring of standards in manufacturing, and introduction of new and improved classes of product. Activities that indirectly promote development include marketing, and participation in industry committees.

The objectives contained in the constitution, and the certification activities that the Association performs, promotes the safe use of Australian manufacturing resources. Through promoting research and/or projects that develop enhanced ways to use the resource the Association 'endeavours to improve the safety and marketability of the resource so that it is used in a manner that is in the best interests of Australia'.

As the Association is principally concerned with certifying the resource appliances to enable customers to rely on the safety and quality of the resource products, the Association contributes directly to the increase of skill and know how in the manufacture of the resource in Australia.

Therefore, it is accepted that the Association directly promotes the development of manufacturing resources in Australia.

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 promoting the development of one or more of the specified resources in item 8.2 of section 50-40 ITAA 1997: Australian Insurance Association at 79 ATC 4576; 10 ATR 341; Boating Industries Association of New South Wales at 85 ATC 4228-9; 16 ATR 388

Determining the dominant purpose of an association will largely be a matter of fact and degree, and will involve the weighing up of various elements such as its objects, activities, history and proposed directions (Boating Industries Association of New South Wales v F C of T 85 ATC 4224; (1985) 16 ATR 383).

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

Paragraph 7 of Taxation Ruling IT 2415 states:

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 [Section 50-40] 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.

The Association was previously considered exempt from income tax in accordance with section 23(h) of the ITAA 1936, and it is apparent that they are still 'focused on the development of the Australian industry'. There has been no substantial change to that objective, other than ancillary activities being included. This is a relatively new activity, and is a logical progression from the certification of the resource products; however it is not a predominant activity.

Therefore, on an analysis of the current activities and the objectives contained in the constitution, it is apparent that the Association is established with the dominant purpose of promoting the development of Australian manufacturing resources through the development of standards and procedures for Australian resource products.

Special conditions- 'not carried on for the profit or gain of its individual members'

Section 50-40 of the ITAA 1997 requires that an association is not is not carried on for the profit or gain of its individual members (non-profit). An organisation is accepted as being 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. The organisation's actions must also be consistent with this requirement.

A clause of the Association's constitution clearly states that the company must not be carried on for the purpose of profit or gain of any member and prohibits the distribution of profits or assets to any member both while in operation and upon winding-up.

Furthermore, as put forward by the Association, the clause regarding income, payments and property hasn't changed since the previous ATO Private Rulings, in which the Association was considered a non profit entity under section 23(h) of the ITAA 1936.

Benefits which are received by members jointly as members and are incidental to the pursuit of the association's objects will not prevent it from passing the non-profit test (Australian Insurance Association case).

The principle aim of the Association is the provision of certification services for resource fuelled products to be sold to Australian consumers and contributing to the development of new Safety Standards for the benefit of resource customers and the Australian resource industry at large. Despite the fact that members of the Association will inadvertently benefit, the benefits are incidental to the pursuit of the Association's principle objectives.

It is therefore accepted that the Association is not carried on for the profit or gain to its individual members.

Conclusion

The applicant has stated that its circumstances have not changed since the issue of its previous Private Rulings. Therefore on an analysis of its objectives and current activities it is accepted that the Association continues to be established for the purpose of promoting the development of Australian manufacturing resources pursuant to section 50-40 of the ITAA 1997, and is not carried on for the profit or gain of its individual members.

The total ordinary and statutory income of the entity is therefore exempt from income tax pursuant to section 50-1 of the ITAA 1997.

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