Edited version of your written advice

Authorisation Number: 1012965055892

Date of advice: 12 February 2016

Ruling

Subject: IT - Exempt entities - Primary and secondary resources

Is the Association 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 resources under section 50-40?

Answer

Yes

This ruling applies for the following periods:

• Year ended 30 June 2017

• Year ended 30 June 2018

• Year ended 30 June 2019

The scheme commenced on:

17 January 1994

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The Association is a public company limited by guarantee. The Association was originally established under a different name.

Over the years, the Association has changed its constituent documents.

Purpose of the Association

Clause 4 of the current Constitution provides that the Association is incorporated for the following purposes:

(a) Promoting the development of manufacturing resources and technology in Australia and other parts of the Relevant Regions, specifically the manufacturing resources and technology of the X industry, including the export of manufactured product and technology;

(b) promoting vibrant, profitable, sustainable and responsible X manufacturing and technologies industries as a welcome and integral part of the broader Y industry in the Relevant Regions;

(c) such other purposes which are consistent with the purposes set out in sub paragraph (a) and (b) above and which the Board or Members determine from time to time.

Clause 1 of the current Constitution provides that:

'Relevant Regions' means Australasia, the Pacific and any other geographic region or regions approved by the Board

'Manufacture' includes the assembly of X.

Over the years, the purpose of the Association has changed. As at May 2005, previous constituent documents provided the Purpose as follows:

a) To promote the manufacture of Australian made X and related devices;

b) To represent Australian X manufacturers in the various Australian jurisdictions;

c) To act as a lobbying body in jurisdictions which have introduced, or are considering introducing X;

d) To assist in establishing specifications for products to achieve a high standard of quality product;

e) To assist in establishing a framework in which the A industry can operate;

f) To establish working parties responsible for making legislative proposals to government;

g) To assist A control authorities to implement streamlined and standardised testing and approval procedures; and

h) To disseminate information relevant to participants in the A industry.

and, as at June 2002, as:

a)   representing the X industry

b)   promoting X and

c)   encouraging tourism in Australia

The Association's financial statements for the year ended 30 June 20XX state that the Association's long term objectives are:

'to enhance the sustainable success of its members and the national A industry through policy leadership and industry advocacy.'

The Association's membership

Clause 10 of the current Constitution provides the following rules regarding admission to membership:

10. CATEGORIES OF MEMBERS

10.1 A person is eligible for admission as a Full Member if the person:

(a) Carries on business in the X, X manufacturing or technology industries as an Original Equipment Manufacturer in any part of the Relevant Regions; and

(b) Holds Z Licences issued in various Australian states or territories.

10.2 A person is eligible for admission as an Associate Member if the person:

(a) Carries on businesses in the X or X manufacturing or technology industries as an Original Equipment Manufacturer in any part of the Relevant Regions; and

(b) Holds Z Licences issued either in various states or territories; or holds the equivalent of a Z Licence in a foreign jurisdiction which has been approved for this purpose by the Board.

10.3 A person is eligible for admission as an Affiliate Member if the person carries on business in or is affiliated with the X industry in any part of the Relevant Regions in any capacity, including as a service provider, supplier, financier, customer or other participant.

Clause 1 of the current Constitution provides that:

Original Equipment Manufacturer means a manufacturer of products or components that are either sold under the manufacturer's brand name or are purchased by a company or other entity and onsold under the purchasers brand name.

The current Constitution provides that only Full Members are entitled to vote, with each Full Member entitled to only one vote.

Over the years, the rules in the Association's constituent documents regarding entitlement to membership have changed. As at May 2005, a person was entitled to membership if the person:

a) Is the holder of a current Z Licence issued by the Government of New South Wales; and

b) Has had Approved X installed and operating in New South Wales for a period of not less than two years; and

c) Sells at least xxx X of its Manufacture in an Australian state each year continuously commencing one year prior to its application for membership; and

d) Has a plant for the Manufacture of X situated within the Commonwealth of Australia.

and, as at June 2002, if:

(i) person's principal business activity is the manufacture and sale of X;

(ii) person sells at least xxx X of its manufacture each year continuously commencing one year prior to its application for membership; and

(iii) person has a plant for the manufacture of X situated within the Commonwealth of Australia.

Clauses 37, 38 and 38A of the current Constitution provide the Directors of the Association are determined by the Association's Full members. Clause 40 of the current Constitution provides:

40.1 Subject to the Corporations Act and this Constitution, the business of the Company is managed by the Directors, who may exercise all powers of the Company which are not, by the Corporations Act or this Constitution, required to be exercised by the Company in general meeting.

Clauses 54 and 55 of the current Constitution provide the Directors power to appoint one or more Managing Directors, and the power to confer any of the powers exercisable by the Directors on the Managing Director.

The Association currently has less than ten primary members, which are public companies listed on the Australian and foreign exchanges.

Each of the primary members of the Association has substantial manufacturing and/or information technology (IT) development facilities and resources located in Australia.

By the Association's estimations the primary members sell X in over xxx jurisdictions globally, with the majority of X located throughout the Asia-Pacific region.

Distribution of income

Clauses 6 and 61 of the current Constitution provide for distribution of income and property to members, and are as follows:

6 INCOME AND PROPERTY

6.1 The income and property of the Company shall be applied solely towards the promotion of the purposes of the Company (as described in Clause 4) and no portion of the Company's profits (if any) shall be paid or transferred, directly or indirectly, by way of dividend, bonus or otherwise, to the Members of the Company.

6.2 Clause 6.1 does not prevent the payment in good faith:

(a) of remuneration to any officers or servants of the Company or to any Members of the Company in return for any services actually rendered to the Company; or

(b) of expenses properly incurred on the Company's behalf; or

(c) for goods supplied in the ordinary and usual way of business; or

(d) of interest at a rate not exceeding the rate for the time being fixed for the purpose of this Clause by the board on money borrowed from any Member of the Company; or

(e) of reasonable and proper rent for premises demised or let by any Member to the Company.

…

61 WINDING UP

If upon winding up or dissolution of the Company there remains after the satisfaction of all its debts and liabilities any property the same shall not be paid or distributed among the Members of the company but shall be given or transferred to some other association, company, institution or body having objects similar to the objects of the Company and which shall prohibit the distribution of its income and property among its members to any extent at least as great as is imposed on the Company under or by virtue of Clause 8. Such other association, company, institution or body is to be determined by the Board of Directors of the Company at or before the time of dissolution and in default thereof by application to the Supreme Court of New South Wales for determination and if so far as effect cannot be given to this Clause then to some charitable object determined by the Board.

Activities of the Association

A significant event undertaken by the Association each year acts as a primary vehicle used to promote the development of Australian manufacturing and IT resources.

The activity provides members and non-members a showcase event to demonstrate their latest range of products and services to highly targeted trade executives.

The Association members occupied x% of floor space.

The Association markets relevant floor space toward B equipment manufacturers and service providers through various advertising campaigns. The event previously offered an X day conference with a range of keynote speakers from the A industry and business professionals discussing such topics as:

• The future of the A industry;

• Competition and the changing demands of the market;

• Financial issues;

• Effective management decisions and teamwork in the workplace;

• Successful marketing through the Internet;

• The current state of the F industry in Australia;

• Ongoing changes in the A Industry as a pointer to the future.

In 20YY, the event relocated to another venue, which didn't have necessary facilities. However, from 20ZZ the event will be held at a new location that includes the necessary facilities. The Association anticipates that the event will include a conference for the foreseeable future.

Assumption

This ruling relies on the following assumption:

The Association is not an 'ACNC type of entity' as defined in subsection 995-1(1) of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1936 former paragraph 23(h)

Income Tax Assessment Act 1997 section 50-1

Income Tax Assessment Act 1997 section 50-40

Income Tax Assessment Act 1997 section 50-47

Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision

Under section 50-1 of Income Tax Assessment Act 1997 (ITAA 1997) the ordinary and statutory income of entities covered by the tables in sections 50-5 to 50-45 are exempt from income tax. Section 50-40 of the ITAA 1997 addresses promoting the development of Australia's primary and secondary:

• item 8.2 includes a society or association established for the purpose of promoting the development of Australian agricultural resources; horticultural resources; industrial resources; manufacturing resources; pastoral resources; viticultural resources; aquacultural resources; and fishing resources, and

• item 8.3 includes a society or association established for the purpose of promoting the development of Australian information and communication technology resources.

Taxation ruling IT 2415 Income tax: associations promoting development of Australian resources (IT 2415) considers the operation of former section 23(h) of the Income Tax Assessment Act 1936 (ITAA 1936) (subsequently replaced by section 50-40 of the ITAA 1997) in relation to specific industry training committees.

IT 2415 discusses the reasoning in the decision in Australian Insurance Association v. Federal Commissioner of Taxation (1979) 41 FLR 256; 79 ATC 4569; 10 ATR 333 (the AIA case), which highlights the matters that need to be satisfied in any case before exemption under the provision applies:

• Promotion of the specified resources must be the predominant purpose for which a particular body is established.

• The resources, the development of which is being promoted, must come within the umbrella of the specified resources.

Guidance for interpreting and applying section 50-40 of the ITAA 1997 is found in Resource development organisations, provided on the ATO website (at http://www. ato.gov.au/Non-profit/Your-organisation/Do-you-have-to-pay-income-tax-/Types-of-income-tax-exempt-organisations/Resource-development-organisations/).

Resource development organisations, under the heading Purpose, explains that the main purpose of the association must be promoting the development of the relevant resources. Any other purpose of the organisation must be incidental, ancillary or secondary to promoting development of the relevant resources.

The term 'established' in the legislation is not used in a narrow sense, considering only the motives and objectives which led to the initial formation of an association (Case W49 89 ATC 469 at 474; AAT Case 5127 (1989) 20 ATR 3597 at 3602-3). It is necessary to consider an association's constituent documents and also its history, operations and activities to determine its principal or dominant purpose (Boating Industries Association of New South Wales v. FC of T 85 ATC 4224 at 4228-9; (1985) 16 ATR 383 at 388).

What is necessary is that the association was established for the requisite purpose, and continues to pursue that purpose by its present activities. As the Tribunal pointed out in Case W49 (at ATC 474; ATR 3603) when applying former paragraph 23(h) of the ITAA 1936, 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.'

The specified resources

The words 'of Australia' in section 50-40 of the ITAA 1997, limit the exemption to entities whose activities are directed to Australian resources.

However, in Case U70 87 ATC 440; Tribunal Case 56 (1987) 18 ATR 3360 (Case U70), the associations' constituent documents included the words 'in Australia and elsewhere' in its purpose. The Tribunal found that expression 'and elsewhere' did not prevent exemption because in practical terms the principal activities were all concerned with Australia and not with 'elsewhere'.

Case W49 (at 473) said, in relation to importing materials and components from foreign jurisdictions,:

'… what is exported is ordinarily the product of Australian industry; and that what is imported is not a finished product… but rather materials for use in Australian primary and secondary industry.

Resource development organisations, under the heading Purpose, explains that the terms aviation, tourism and the various resources have their ordinary meaning. Sheppard J discussed the specified resources in the AIA case (at 262-4; 4573-4; 338-9) in considering the meaning of 'industrial resources':

"... It is a question of ascertaining what the expression "industrial resources" was intended to mean ... There is a degree of specificity in the words used in the section. It refers to aviation, then to four resources of primary industry, then to manufacturing and finally to industrial resources. The use of these various expressions does not suggest that the draftsman intended to give to 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.

Further, Shepard J identified 'manufacturing resources' included plant and equipment, manpower, skill and know-how in manufacturing.

Promoting development

Paragraphs 8 and 9 of IT 2415, explain that the legislation does not refer to the promoting the specified resources - it is directed to promoting 'the development of' the specified resources. In this context, the term 'development' must be taken to be used in a commercial or business sense:

'ie it comprehends all the elements which must be taken into account to ensure that the specified resources are used in the best interests of Australia.'

In FC of T v. Broken Hill Pty Co. Ltd 120 CLR 240; 69 ATC 4028; (1969) 1 ATR 40, Kitto J discussed the meaning of 'development' in reference to the phrase 'development of the mining property':

'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 the 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.'

Research development organisations, under the heading Purpose, explains that 'promoting development' can be by various means, including research, providing facilities, training, improving marketing methods, facilitating cooperation and similar activities.

National Office Minute 96/3107-1 Non-profit associations for promoting resource development, aviation or tourism (NO 96/3107-1) provides guidance to tax officers in interpreting and applying former paragraph 23(h) of the ITAA 1936, and applies similarly for the purposes of section 50-40 of the ITAA 1997.

At paragraph 49, NO 96/3107-1 discusses 'improvement of marketing techniques', explaining:

'it will not be the marketing as such that gives rise to exemption. The improvement of marketing will ground an exemption only where it is undertaken as a means of promoting development of the particular resources. If the marketing or other purported means is not sufficiently connected or integrated with resource development, it will not be for the purpose of promoting development of those resources. It is not enough that a consequence of the activities may be resource development.

Paragraph 73 of NO 96/3107-1 provides that trade villages are unlikely to be exempt under the section, and explains that while the promotion of the particular businesses of the builders, sponsors, etc might incidentally contribute to promoting resource development, it is unlikely to be the primary purpose of such events.

Purpose

The current Constitution states that the Association is incorporated for two main purposes:

(a) Promoting the development of manufacturing resources and technology in Australia and other parts of Australasia, the Pacific and any other geographic region or regions approved by the Board - specifically the manufacturing resources and technology of the X industry, including the export of manufactured product and technology;

(b) Promoting vibrant, profitable, sustainable and responsible X manufacturing and technologies industries as a welcome and integral part of the broader Y industry in Australasia, the Pacific and any other geographic region or regions approved by the Board;

The purpose of the Association in the current Constitution has been changed to include promoting the development of 'technology'. This is indicative of the current X manufacturing environment in Australia.

Also, the purpose of the Association has been expanded to include 'the Relevant Regions', which is defined in clause 1 of the Constitution to mean Australasia, the Pacific and any other geographic region or regions approved by the Board.

As found in Case U70, the inclusion of 'the Relevant Regions' is not, in itself, determinative of exclusion from exemption. It is necessary to consider whether the membership, control and activities of the Association are sufficiently connected or integrated with the promoting the development of 'Australian' manufacturing and IT resources.

Membership and control

Full membership in the Association is open to original equipment manufacturers in the X, X manufacturing or technology industries, that:

• Carry on business in any part of the Relevant Regions (Australasia, the Pacific and any other geographic region or regions approved by the Board); and

• Hold certain Dealer's licences issued in Australia.

As provided in the facts, the Association's current Full members:

• Are either Australian companies or Australian subsidiaries of foreign parent companies, with manufacturing and/or IT development facilities in Australia,

• Sell A equipment world-wide, and

• Import components and materials used to manufacture their products from foreign jurisdictions.

However, the Full members of the Association hold a significant share of the Australian X manufacturing market, and own and utilise significant Australian resources in creating the finished product for export.

Activities

As discussed above, it is necessary to consider the Association's constituent documents, history, operations and activities to determine its principal or dominant purpose, and also whether the Association continues to pursue that purpose by its present activities.

As stated in letter dated late 20VV, the event is an annual event for the Association members and other exhibitors to demonstrate their latest range of products and services to highly targeted trade executives, and is the primary vehicle that the Association uses to promote the development of Australian manufacturing and IT resources.

The Association markets floor space toward B equipment manufacturers and service providers through various advertising campaigns. At the 20VV event, the Association members' exhibits occupied x% of exhibition space.

Historically, the event has included an A conference. The conference is open to visitors and exhibitors and involves presentations and discussions by industry and business professionals, on topics relevant to the current and future development of the A industry and business management issues.

Although the event has not included a A conference since 20YY, the Association intends to re-establish the conference from 20ZZ, when the event will be held at a location that has suitable facilities.

It is evident from the information provided that although the conference has not been provided in recent years, there has been little material change in the event in recent years.

For the period of this ruling, consistent with previous private rulings issued to the Association, it is accepted that the event promotes the development of Australian manufacturing and IT resources.

Non profit

Both item 8.2 and item 8.3 in section 50-40 of the ITAA 1997 include special provisions requiring that the society or association is not carried on for the profit or gain of its individual members.

Taxation ruling TR 97/22 Income tax: exempt sporting clubs discusses the non-profit requirement, and explains that an association satisfies this requirement where the association's constituent documents contain a prohibition against distribution of profits and assets among members while the association is operating and on its winding-up (paragraph 10).

The Association's Constitution contains prohibitions from making distributions to its members:

• during operation (clauses 6.1 and 6.2), and

• upon wind-up (clause 61).

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

'ACNC type of entity'

Section 50-47 of the ITAA 1997 provides that an entity that is covered by any item in Subdivision 50-A, that is an ACNC type of entity (as defined in subsection 995-1(1)), is not exempt from income tax unless the entity is registered under the Australian Charities and Not-for-profits Commissioner Act 2012.

As provided in the assumptions to this ruling, the decision in this private ruling is assumes that the Association is not an 'ACNC type of entity'.

Conclusion

For the period of this ruling, consistent with previous rulings issued to the Association, it is accepted that the Association satisfies the requirements of section 50-40 of the ITAA 1997 and is exempt from income tax under section 50-1.

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