Edited version of your written advice

Authorisation Number: 1013031094975

Date of advice: 20 June 2016

Ruling

Subject: Exemption from income tax

Question 1

Is the entity a non-profit organisation established for the purpose of promoting the development of Australian industrial resources pursuant to item 8.2(c) of the table in section 50-40 of the Income Tax Assessment Act 1997 (ITAA 1997) and therefore exempt from income tax under section 50-1 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods:

Income year ended 30 June 20ww

Income year ended 30 June 20xx

Income year ended 30 June 20yy

Income year ended 30 June 20zz

The scheme commences on:

20vv

Relevant facts and circumstances

1. The entity is an Australian public company limited by guarantee and registered with the Australian Securities and Investments Commission (ASIC).

2. The entity was established to address a significant challenge facing the Australian resources industry. The entity conducts research with the aim of developing new technologies that will ensure the future of the Australian resources industry.

3. The entity's constitution states its objects and activities.

4. The entity's constitution prevents the distribution of income and profits to members during its operation and also applies this prohibition to surplus assets remaining upon winding up.

5. The entity may as part of carrying out its objects create intellectual property (IP). Agreements exist that specifically deal with the ownership, vesting and use of IP.

6. Under the Participants Agreement legal interest in IP is owned by the entity and beneficial interest is owned by member entities and the entity as tenants in common.

7. The use of IP through commercialisation projects will be subject to an arm's length licence fee arrangement that is commensurate with the market value of the IP.

8. Where commercialisation income is derived by member entities in IP this is held on trust for the member entities as tenants in common in proportion to their respective interests in the research project from which the IP is derived.

9. Any money derived by the entity from the commercialisation of IP is to be reinvested by the entity in the activities of the entity in order to achieve stated outcomes.

Relevant legislative provisions

Section 50-1 of the Income Tax Assessment Act 1997

Section 50-40 of the Income Tax Assessment Act 1997

Reasons for decision

Summary

The entity is a non-profit organisation established for the purpose of promoting the development of Australian industrial resources pursuant to item 8.2(c) of the table in section 50-40 of the Income Tax Assessment Act 1997 (ITAA 1997) and is exempt from income tax under section 50-1 of the ITAA 1997.

Detailed reasoning

Section 50-1 of the ITAA 1997 exempts from income tax the total ordinary and statutory income of an entity covered by section 50-40 of the ITAA 1997.

Item 8.2(c) of the table in section 50-40 of the ITAA 1997 provides that a society or association established for the purpose of promoting the development of Australian industrial resources shall be exempt from income tax subject to the special condition that it is not carried on for the profit or gain of its individual members.

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

• the organisation is a society or association;

• the dominant or principal purpose for which the organisation is established is promoting resource development;

• the resources whose development is being promoted are within the umbrella of resources specified in the relevant section;

• the resources, are resources of Australia, and

• the organisation is not carried on for the profit or gain of its individual members.

Society or Association

The terms association and society are not defined in the Act and therefore take on 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. Commissioner of Land Tax (NSW) 81 ATC 4270 at 4279; (1981) 12 ATR 26 at 35). An association may be incorporated or unincorporated.

It is accepted that the entity is a 'society or association' for the purposes of section 50-40 of the ITAA 1997.

Principal purpose of promoting development

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. It is not sufficient that one of an association's purposes falls within section 50-40. Nor is it enough that resource development is incidental to, involved with, or a consequence of an association's purposes.

In Australian Insurance Association v. FC of T 79 ATC 4569, the issue was whether an association primarily promoted the interests of its members, or whether the benefits to members were incidental to the purpose of being established to develop a particular resource. In reference to the former paragraph 23(h) of the Income Tax Assessment Act 1936 Sheppard J concluded at ATC 4576:

…In my opinion the Commissioner is correct in his submission that the purpose which is referred to in sec. 23(h) must be the principal or dominant purpose for which the association or society was established.

Determining the dominant purpose will be largely a matter of fact and degree. It is necessary to consider an association's constituent documents, activities, history and proposed directions, etc (Boating Industries Association of New South Wales v F C of T 85 ATC 4224; (1985) 16 ATR 383). 'Established' refers not only to the motives and objectives which lead to the formation of the association but to its purpose since that time.

Taxation Ruling 2415 Income Tax: Associations promoting development of Australian resources (TR 2415) states at paragraphs 7 & 8:

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 paragraph 23(h) 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.

It is important to note that paragraph 23(h) does not refer to the promotion of specified resources - it is directed to the promotion of the development of the specified resources. In the context of paragraph 23(h) the term "development" must be taken to be used in a commercial or business sense, i.e. it comprehends all the elements which must be taken into account to ensure that the specified resources are used in the best interest of Australia. Reference might usefully be made to the observations of the High Court in F.C. of T. v. Broken Hill Pty. Co. Ltd., 69 ATC 4029; 1 ATR 40 on the meaning of the term "development" in relation to the development of a mining property.

The ATO's Income Tax Guide for Non-Profit Organisations (the Guide) states that promoting development can be by various means, including research, providing facilities, training, improving marketing methods, facilitating cooperation and similar activities. Development entails increase in operations, unlocking of potentialities, advancement of activity; not just conduct of ongoing activity (FC of T v. Broken Hill Pty Co Ltd (1969) 120 CLR 240 per Kitto J at page 248).

From a consideration of the objects and activities, it is accepted that the principle purpose of the entity is to promote the development of the industry primarily by means of research activities into new technologies and promotion of education in the field.

Australian Resources

The words 'Australian resources' limit the exemption to associations whose activities are directed to Australian resources, thereby excluding associations whose activities are directed to the resources of places beyond Australia. Where an association is established for the purpose of promoting the development of a foreign resource, or of both Australian and foreign resources, the test for exemption is not met.

Exemption is not limited to associations whose activities extend, or are intended to extend, throughout the whole of Australia. An association promoting the development of a particular region's resources may also be exempt.

The Guide states that:

…industrial resources include building, mining, quarrying, shipping and transport, but do not include business and commercial resources, such as insurance, and services, such as surveying. (emphasis added)

As described in the ruling application and on their website, the entity has been established to address a significant challenge facing the Australian resources industry. The entity conducts research with the aim of developing new technologies that will ensure the future of Australian industry and have applications for similar industries in other countries.

Based on its objects and activities as cited earlier, and other supporting information provided, it is considered that the entity is involved in researching and developing new technologies in Australia. Though results from research may be applied internationally in the future, it is clear that the main aim of their activities is directed toward developing Australian industry.

Therefore it is considered that the entity was established for the principal purpose of the promotion of the development of the specified Australian resources

Special conditions - Non-profit

If an association is carried on for the profit or gain of its individual members, it will not meet the special conditions for exemption from income tax under section 50-40 of the ITAA 1997. Such a purpose is inconsistent with a predominant purpose of promoting the development of Australian resources.

However, it is necessary to distinguish a purpose of providing benefits to members from the incidental benefits which will often flow to members as a result of the activities with which they are involved. Organisations will not be exempt where they have a purpose to protect or promote the interests of members.

The Guide states:

If the organisation's main purpose is merely to provide services to its members, it will not be exempt. This is the case even if the services result in better use of resources by those members.

We accept an organisation as 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. These documents should contain acceptable clauses showing the organisation's non-profit character. …The organisation's actions must be consistent with this requirement.

Any profit made by the organisation goes back into the operation of the organisation to carry out its purposes and is not distributed to any of its members.

To meet the non-profit requirement firstly, an entity's constituent documents must display a non-profit character and secondly, the entity's actions must be consistent with this non-profit character.

The entity's constitution prevents the distribution of income and profits to members during its operations, and also applies this prohibition to surplus assets remaining upon winding up.

Ownership of intellectual property and commercialisation

An Agreement provides for the ownership of intellectual property and the commercialisation of such property by member entities.

Under the Agreement the entity holds legal interest in IP and the beneficial interest is owned by member entities and the entity as tenants in common.

The Agreement outlines the rules for commercialisation of IP. The use of IP through commercialisation projects will be subject to an arm's length licence fee arrangement that is commensurate with the market value of the IP.

Where commercialisation income is derived by member entities in IP this is held on trust for the member entities as tenants in common in proportion to their respective interests in the research project from which the IP is derived.

Any money derived by the entity from the commercialisation of IP is to be reinvested by the entity in the activities of the entity in order to achieve stated outcomes.

Given that the use of intellectual property will be subject to an arm's length licence fee arrangement commensurate with the market value of that property, any benefits to members derived by way of the commercialisation arrangement are considered incidental to the overall purpose of promoting the development of industrial resources, and not a purpose in itself.

The entity's constitution contains acceptable clauses showing its non-profit character. Benefits to member entities in the form of ownership of intellectual property or commercialisation of intellectual property are considered incidental benefits and do not prevent the entity from having a non-profit character.

Based on the information provide it is concluded that the entity meets the requirement that it is not carried on for the profit and gain of its individual members.

Conclusion

It is accepted that the research and educational activities conducted by the entity are of benefit to the development of the Australian resources industry.

Based on the above, the total ordinary and statutory income of the entity is exempt from income tax pursuant to section 50-1 of the ITAA 1997 as it is considered to be an association established for promoting the development of Australian industrial resources, pursuant to item 8.2(c) of the table in section 50-40 of the ITAA 1997.

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