Edited version of your private ruling

Authorisation Number: 1012555570600

Ruling

Subject: Income Tax Exemption

Question 1

Is the total ordinary income and statutory income of the Association exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

Year ended 30 June 2017

The scheme commences on:

1 July 2009

Relevant facts and circumstances

The Association is an incorporated association established in1996.

In the Association adopted a new Constitution.

The Association has industry based objects in its Constitution.

The Association has an appropriate non profit and winding up clause in its Constitution.

The Association undertook various activities as per the particular year Annual Report that were industry based.

Relevant legislative provisions

Section 50-1 of the Income Tax Assessment Act 1997

Section 50-40 of the Income Tax Assessment Act 1997

Paragraph 23(h) of the Income Tax Assessment Act 1936

Reasons for decision

Assessable income of a taxpayer is exempt under section 50-1 of the ITAA 1997 where the taxpayer falls within the description contained in item 8.2 of section 50-40 of the 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.

The matters to be satisfied before exemption under section 50-40 of the ITAA 1997 applies are:

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

· the dominant or principal purpose for which the organisation 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.

· If the association fails to satisfy these requirements, if will not be exempt from income tax under section 50-40 of the ITAA 1997.

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 Association is formed as an incorporated association. It is made up of a group of members who have a common purpose. Therefore, it is accepted that The Association is an association.

Non-profit

The association must not be carried on for the purposes of profit or gain to its individual members. However, 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.

In our publication Income tax guide for non-profit organisations, the Commissioner has accepted an association as being non-profit where, by operation of law or by its constituent document, the association is prevented from distributing its profits or assets among members while the association is operating and on its winding-up. The association's actions must, of course, be consistent with the prohibition. Examples of suitable clauses in constituent documents are:

Non-profit clause

The assets and income of the organisation shall be applied solely in furtherance of its above mentioned objects and no portion shall be distributed directly or indirectly to the members of the organisation except as bona fide compensation for services rendered or expenses incurred on behalf of the organisation.

Dissolution clause

In the event of the organisation being dissolved, the amount that remains after such dissolution and the satisfaction of all debts and liabilities shall be transferred to another organisation with similar purposes which is not carried on for the profit or gain of its individual members.

Alternative words may be used provided the result is achieved that funds and assets of the association cannot find their way to members (or their associates or nominees).

In this case, it is accepted that the Association's constitution contains a suitable non-profit clause and a suitable dissolution clause. Therefore the non-profit requirement is satisfied.

Resources

The Association is seeking income tax exemption on the basis that it is established for the purpose of promoting the development of industrial resources.

Taxation Ruling IT 2415 is the basis for the explanation as to what is an industrial resource in Australia. The Ruling was based on a judgement by Sheppard J in October 1979 in the Supreme Court of New South Wales in an appeal by the Australian Insurance Association against a decision of the Commissioner of Taxation to disallow the Association exemption from income tax under paragraph 23(h) of the Income Tax Assessment Act 1936 (ITAA 1936) as a non-profit association established for the purpose of promoting an industrial resource of Australia (Australian Insurance Association v. Federal Commissioner of Taxation, 79 ATC 4569; 10 ATR 333). Paragraph 23(h) of the ITAA 1936 is the predecessor to section 50-40 of the ITAA 1997.

In the Australian Insurance Association case, Sheppard J. made the following comments (at 4574 and 4575):

There is a degree of specificity in the words used in the section [Paragraph 23(h)]). It refers to industrial resources. The use of these various expressions does not suggest that the draftsman intended to give the word "industrial" any wide meaning intended to embrace business or commercial resources. If it had been intended to do so, it would have been quite unnecessary to use the word "manufacturing" or to be as specific in relation to the primary industry resources which are mentioned.

Even if the word "industrial" had been used alone (that is, without the word "manufacturing") I think there would have been a question as to whether commercial or business resources were included.

IT 2415 states at paragraph 6:

The court concluded that the expression "industrial resources" in paragraph 23(h) refers to resources such as those of the building, mining, quarrying, shipping and transport industries - it does not extend to business or commercial resources.

IT 2415 states at paragraph 9:

There can be little doubt that the identification of, and programmes to overcome, manpower needs and the establishment of systematic training schemes in a particular industry are necessary for the efficient operation of the industry - they are part and parcel of the development of the resources specified in paragraph 23(h). Although the connection may not be as readily apparent the development of marketing techniques may also be relevant to the development of resources - it could be said that there is little point in developing resources if the products of the resources cannot be sold. Another area where the connection with development of resources may not be direct is the development of tourism - but it does play a part in the development of the resources specified in paragraph 23(h).

The Ruling provides that industry training committees that are established to provide training in the resource areas covered by paragraph 23(h) of the ITAA 1936 would qualify for income tax exemption. That is, industry training committees that provide training to the agricultural industry are promoting the development of agricultural resources, those that provide training to the horticultural industry are promoting the development of horticultural resources, and those that provide training to the industrial industries are promoting the development of industrial resources and so on.

The Association promotes education and training in various industries. Therefore the Association meets this requirement.

Resources of Australia

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

The Association is based in Australia and undertakes its activities in Australia. The Association meets this requirement.

Promoting development

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. The promotion of development may be direct or indirect.

The Association is promoting the development of various industries by providing education, training, policies, plans and programs in the industries. The Association meets this requirement.

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 resource development. Determining the dominant purpose will be largely a matter of fact and degree. It may involve a weighting of the various elements: objects, activities, history, proposed directions etc.

It is evident from the Association's objects and activities that the dominant purpose is to provide education, training, policies, plans and programs in various industries. The Association meets this requirement.

Conclusion

It is considered that the Association is a non-profit association that meets the requirements of item 8.2(c) 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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