Edited version of your written advice

Authorisation Number: 1012993534437

Date of advice: 13 April 2016

Ruling

Subject: Income Tax Exemption for Promoting the Development of Pastoral Resources

Question 1

Is the Entity exempt from taxation under section 50-1of the Income Tax Assessment Act 1997 (ITAA 1997) on the basis that it is an exempt entity under Item 8.2(e) of the table in section 50-40 of the ITAA 1997?

Answer

Yes

This ruling applies for the following period

1 July 2015 - 30 June 2019

The scheme commences on

1 July 2015

Relevant facts and circumstances

The Entity is a company limited by guarantee and governed by its Constitution (the Constitution).

The Entity is a holding company and does not actively trade itself. Its current activity is to be a member of both Associate Company A ("Company A") and Associate Company B ("Company B"). These associate companies promoting the development of a category of Australian livestock breeding industry and the advancement of the interests of those breeders.

Clause X of the Constitution describes the objects of the Entity as the promotion and encouragement of the development of a category of Australian livestock breeding and the promotion of the sale of Australian livestock in Australia and international markets.

The Constitution prevents the distribution of income or property to members of the Entity under clause Z. Clause Y of the Constitution states that the income and property of the Entity must be applied solely towards the objects set out in clause X.

Clause A of the Constitution provides that, on winding up of the Entity, amounts remaining after the satisfaction of all debts and liabilities will be transferred to another organisation with similar objects and purposes which is not carried on for the profit or gain of its members as determined by the members of the Entity

Relevant legislative provisions

Income Tax Assessment Act 1997 section 50-1

Income Tax Assessment Act 1997 section 50-40

Reasons for decision

The statutory provisions that must be satisfied in order to be entitled to exemption for the total ordinary income and statutory income of entities are set out in sections 50-1 and 50-40 of the ITAA 1997.

Section 50-1 of the ITAA 1997 states the total ordinary income and statutory income of the entities specified in the tables in Division 50 is exempt from income tax. In certain instances, exemption is subject to special conditions.

Item 8.2(e) of the table in section 50-40 of the ITAA 1997 provides that a society, association or club established for the purpose of promoting the development of Australian pastoral resources shall be exempt from income tax subject to the special conditions contained in the table in section 50-40.

In order for the Entity 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. be 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. Not carried on for the profit or gain of its individual members.

The above criteria will be considered in turn.

Society, Association or Club

The terms "society" and "association" are not defined in Australian taxation legislation.

The meaning of "association" was considered by Olney J in Douglas v FCT 97 ATC 4722 in relation to section 23(g)(v) of the Income Tax Assessment Act 1936 (ITAA 1936) and the following was found:

As this section contains no definition of either 'society, association or club' it should be construed according to the ordinary meaning of the words used and, if necessary, after resort to the relevant explanatory memorandum and second reading speech. Unassisted by authority I would construe the collation society, association or club to refer to a voluntary organization having members associated together for a common or shared purpose. Such a description is consistent with various dictionary definitions of the several words used. The following examples can be found in the Concise Oxford Dictionary:

• Society: Association of persons united by a common aim or interest or principal;

• Association: Organised body of persons for a joint purpose:

• Club: Association of persons united for some common interest, usually meeting periodically for shared activity.

In Pro-Campo Limited v Commissioner of Land Tax (NSW) 81 ATC 4270 the meaning of "association" and "society" was considered within the context of section 23(g) of the ITAA 1936. It was held that a taxpayer which was a company incorporated under the Companies Act for the purpose of carrying on holiday activities could be a "society" notwithstanding that was a company.

The Entity is a company limited by guarantee without share capital and was incorporated for the purposes of its Constitution.

In applying the principles established in statute and case law, the Entity is considered to be a "society, association or club" for the purpose 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 purposes of profit or gain to its individual members. This is known as the non-profit requirement.

Evidence that an association operates on a non-profit basis can be found in its constituent documents which should contain a prohibition against distribution of profit and assets among members while the association is functioning and on winding up. The association's actions must also be consistent with this prohibition.

The Entity's Constitution contains the following clauses governing the distribution of income and assets:

• Clause Y of the Constitution states that the income and property of the company must be applied solely towards the objects of the company

• Clause Z prevents the distribution of income or property to members of the company

• Clause A provides that, on winding up of the Company, amounts remaining after the satisfaction of all debts and liabilities will be transferred to another organisation with similar objects and purposes which is not carried on for the profit or gain of its members as determined by the members of the Company.

Accordingly, the Entity satisfies the requirements of being constituted a non-profit entity.

Established for the Dominant Purpose of Promoting the Development of Resources

It is a requirement under section 50-40 of the ITAA 1997 that the primary or predominate purpose of the entity must be directed at promoting the development of a specific resource. It will not be sufficiently satisfied if the promotion or development is incidental to the entity's operations.

In Cooperative Bulk Handling v FCT [2010] FCA 506 (the CBH case) Gilmour J provided the following definitions of "promoting" and "development":

• Promoting - to further the growth, development, progress, etc.

• Development - the act, process or result of developing, evolution, growth, expansion.

However, as per Lockhart J in Cronulla Sutherland Leagues Club Limited v Commissioner of Taxation (1990) 23 FCR 82 at 89:

Section 23(g)(iii) is concerned with the periodic or recurrent, not the static, with the purposes of the relevant body in the year of income. It is relevant, however, to look at the objects or purposes for which the body was incorporated including the objects clauses in the memorandum of association, also any subsequent activities of the body which may throw light on its activities in the relevant year of income. A society, association or club is not a stationary entity. It may change its activities and perhaps its purposes during its life which together make up the body itself and enable the questions posed by the subparagraph to be answered in the year of income, namely, the identification of the objects or purposes for which the body is established.

And then at 95-96:

It is not sufficient to look to the formation of the body and to ascertain what was at the time, the purpose of its formation. The statute gives a periodic operation to the words and directs the enquiry to a particular time, namely, the year of income so that consideration must be given not only to the purpose for which the society was established but also the purpose for which it is currently conducted.

Subsequently, while the Constitution is relevant, it is not conclusive of the Company's principal or dominant purpose. The absence of a purpose expressed in the language of section 50-40 of the ITAA 1997 is not necessarily an indication that the requisite statutory purpose is absent.

In all cases the society must be established for "the purposes of promoting development" of the particular activity or resource. This is not only a matter of having such promotion as its main object in its constitutional documents, but also it must be its main activity for the particular income year in question.

The ATO publication Income tax exemption checklist - Resource development organisations (the Checklist) provides that the various resources referred to in item 8.2 of section 50-40 of the ITAA 1997 have their ordinary meaning. According to the Checklist, pastoral resources include infrastructure, facilities, plant and equipment, personnel, knowledge, expertise and skills and promoting development can be by various means, including research, providing facilities, training, improving marketing methods, facilitating cooperation, and the like. 

The Checklist states that, to be an association established for the purposes referred to in item 8.2 of section 50-40 of the ITAA 1997, the main purpose of the society, association or club 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 main purpose is determined by looking at your constitution and activities.

It is considered that the objects of the Entity, being the promotion of a category of Australian horse breeding are promoting the development of a pastoral resource specified in item 8.2(e) of section 50-40 of the ITAA 1997.

The Entity's Constitution stipulates that its objects are to promote and encourage the development of a category of Australian livestock breeding. In addition, the financial statements for the Entity for the year ending 30 June 2015 reinforce the principle activity as the promotion of the development of that industry. This is also reflected by the activities discussed on the Entity's website.

Australian Resources

Resources or their elements include infrastructure, plant and equipment, livestock, personnel, knowledge, expertise and skills.

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.

Associations promoting trade between Australia and another country may be exempt where it is clear that they are predominantly promoting Australia's resources. 

The Entity defines its activities as the promotion of the sale of a category of Australian horse breeding in Australia and international markets.

It is evident through analysis of the Constitution and the Entity's current activities that the resource promoted meets the definition of an Australian Resource.

The activities and Constitution indicate that the Entity has been established for the purpose of promoting the development of Australian resources, being a category of Australian livestock breeding, as required in item 8.2 of section 50-40 of the ITAA 1997.

Pastoral Resources

Item 8.2(e) of the table in section 50-40 of the ITAA 1997 provides that a society, association or club established for the purpose of promoting the development of Australian pastoral resources shall be exempt from income tax subject to the special conditions contained in the table in section 50-40.

In Tribunal Case 56 [1987] 18 ATR 3360 it was determined that horse breeding and grazing fell within the term "pastoral" when discussing exempt income. Horse breeding may be considered a pastoral resource where horses are grazed on land rather than being mainly kept in stalls.

As per CJ Bannon QC

"It appears to me that horse breeding and grazing fall within the term 'pastoral pursuit'. True, horses can be stall fed and breeding may take place in stalls but this is not the normal method of breeding horses in Australia. The normal method is keeping them at a stud where they graze and breed on the pastures."

Further, the Tribunal held that the taxpayer in this case undertook other activities related to horse breeding, for instance the maintenance of a stud book, which is accepted as promoting the development of pastoral resources of Australia.

Therefore it is accepted that the promotion and the development of horse breeding in Australia falls within the definition of pastoral resources for the purposes of item 8.2(e) of the table in section 50-40 of the ITAA 1997.

Conclusion

It is considered that the Entity meets the requirements for tax exempt status under item 8.2(e) of the table in section 50-40 of the ITAA 1997 as a society, club or association promoting the development of an Australian pastoral resource.

ATO view documents

Taxation Ruling IT 2415 Income Tax: Associations promoting development of Australian resources

Tax office publication Income tax exemption checklist - Resource development organisations

Other references (non ATO view)

Cooperative Bulk Handling v FCT [2010] FCA 508

Case U70 [1987] 87 ATC 440

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