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Ruling

Subject: Exemption from Income Tax

Question 1:

Is the ordinary and statutory income of the entity exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) pursuant to item 8.2 of the table in section 50-40 of the ITAA 1997?

Answer:

Yes

This ruling applies for the following periods:

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

The scheme commences on:

1 July 2011

Relevant facts and circumstances

Facts:

The entity is incorporated as a company limited by guarantee.

The entity's Constitution contains an appropriate non profit clause.

The entity has an appropriate winding up clause in its Constitution.

Relevant legislative provisions

Income Tax Assessment Act 1997 50-1 and

Income Tax Assessment Act 1997 50-40.

Reasons for decision

Section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) exempts the ordinary and statutory income of an entity that:

· Is a society or association established for the purpose of promoting the development of specified Australian resources (item 8.2 of the table in section 50-40 of the ITAA 1997); and

· Is not carried out for the profit or gain of its individual members.

Entity:

The term 'entity' is defined in section 960-100 of the ITAA 1997 to include a body corporate. The entity is a company limited by guarantee and satisfies this definition.

Society or Association:

The terms association or society are not defined in the ITAA 1997 and, therefore, have their ordinary meaning.

In Taxation Determination TD 95/56 the ATO considers the meaning of association as follows at paragraph 2:

The Shorter Oxford Dictionary defines the term 'association' to be a 'body of persons associated for a common purpose, the organisation formed to effect that 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) 38SASR 523, also stated that the term 'association' has come to be regarded as attaching to a body of persons associated for a common purpose.

In Pro-campo Ltd v. Commr of Land Tax (NSW) (1981) 12 ATR 26 at 35 Lee J said:

The meaning of 'society' as the Oxford English Dictionary definition shows can be the equivalent of 'association' and I do not think that any relevant distinction in nature exists between the two. It merely seems to have happened that some organisations are called 'associations', others are called 'societies' but no meaningful difference can be detected between the two.

The entity is a company limited by guarantee.

The entity consists of a body of members organised for a common purpose as set out in its objects. The entity can be classified as a society or association for the purposes of item 8.2 of section 50-40 of the ITAA 1997.

Non profit:

Section 50-40 of the ITAA 1997 requires that the association not be carried on for the purpose of profit or gain to its individual members.

The entity's Constitution contains an appropriate non profit clause in its Constitution and therefore meets this condition.

Promoting the Development of Australian Resources:

To qualify for exemption from income tax under item 8.2 of section 50-40 of the ITAA 1997, a society or association's principal or dominant purpose must be to promote the development of one or more of the resources specified in that section.

With reference to the entity, the specified resources are predominantly:

· Item 8.2(a) agricultural resources;

· Item 8.2 (d) manufacturing resources; and

· Item 8.2(f) viticultural resources.

The entity states its principal business is indirectly promoting the development of Australian manufacturing and agribusiness (including viticulture) resources which are involved in export.

Section 50-40 refers to the promotion of the development of specified resources.

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.

The meaning of 'development' was examined by the High Court in the case of 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 promotion of development may be direct or indirect. Methods of promoting resources include marketing, training, research, education, introduction of new and improved classes of product and facilitation of cooperation between businesses.

The entity's objects and activities are sufficiently integrated with the relevant resources, particularly agriculture (agribusiness, manufacturing resources and viticulture) so that it is promoting the development of Australian resources.

Through its objects and activities it is considered that the entity is promoting the development of Australian resources.

Dominant purpose:

To qualify as exempt from income tax under item 8.2 of section 50-40 of the ITAA 1997 an association must be established principally or predominantly for the purpose of resource development. It is not sufficient that one of the association's purposes falls within the relevant provision. Nor is it sufficient that resource development is incidental to, involved with, or a consequence of an association's purpose.

Determining the dominant purpose is a question of fact and degree and may involve a weighing of the various elements such as objects, activities, history, proposed directions, etc.

As evidenced by the entity's objects and activities, the organisation is established principally for the purpose of promoting resource development.

Benefit to members:

Where an association operates principally to confer benefits on its members jointly or as a group, it is unlikely to be predominantly for promotion of resource development and therefore not exempt from income tax under item 8.2 of section 50-40 of 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. It is necessary to distinguish from the dominant purpose of providing benefits to members as a group from the incidental benefit which will often flow to members from activities promoting the development of resources with which they are involved.

The entity's objects and activities indicate that the organisation is not established as a professional organisation to protect and promote the interests of its members. While benefits may flow to the entity's members as a consequence of membership, these are in the nature of incidental benefits which often flow to members from activities promoting the development of resources in which they are involved. The Australian community in its entirety will benefit from the resource development that results from the organisation's activities. The organisation demonstrates a wider purpose concerned with the broader development of Australian resources. It is considered that the entity does not exist principally to confer benefits on its members.

CONCLUSION:

It is considered that the entity is a non profit association that meets the requirements of item 8.2 of the table in section 50-40 of the ITAA 1997 and its ordinary and statutory income is exempt from income tax under section 50-1 of the ITAA 1997.

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