Edited version of your written advice

Authorisation Number: 1013067445204

Date of Advice: 20 December 2016

Ruling

Subject: Income Tax Exemption under items 1.3 and or 1.7 and FBT rebatable status

Issue 1

Income tax exemption

Question 1

Is the entity entitled to income tax exemption as an 'association established for the encouragement of science' in accordance with Item 1.7 of the table in section 50-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Is the entity entitled to income tax exemption as a 'scientific institution' in accordance with Item 1.3 of the table in section 50-5 of the ITAA 1997?

Answer

No

This ruling applies for the following periods:

1 January 2014 - 31 December 2014

1 January 2015 - 31 December 2015.

The scheme commences on:

Not applicable

Issue 2

Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986)

Question 1

Is the entity a rebatable employee under section 65J of the FBTAA 1986?

Answer

No

This ruling applies for the following periods:

1 January 2014 to 31 December 2014;

1 January 2015 to 31 December 2015.

The scheme commences on:

Not applicable

Relevant facts and circumstances

The entity's constitution includes objects that both promote science and promote the interests of members.

The entity undertakes activities that demonstrate both the promotion of science and the promotion of members' interests/benefits.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 50-1, Section 50-5

Fringe Benefits Tax Assessment Act 1986 Section 65J.

Reasons for decisions

Issue 1 Question 1

Summary

The entity does not have the main purpose of encouraging science. It is therefore, not covered by item 1.7 of the table in section 50-5 of the ITAA 1997.

Detailed reasoning

Section 50-1 of the ITAA 1997 provides that the total ordinary income and statutory income of the entities covered by the following tables (in Subdivision 50-A of the ITAA 1997) is exempt from income tax. In some cases, the exemption is subject to special conditions.

To be covered by item 1.7 of the table in section 50-5 of the ITAA 1997 as a society, association or club established for the encouragement of science, an entity must:

Be a not-for-profit society, association or club; and

Be established for the encouragement of science; and

Satisfy the special conditions in section 50-70 of the ITAA 1997.

1) Society, association or club

The term 'society, club or association' is not defined in the ITAA 1997. The term should therefore be construed according to the ordinary meaning of the words.

This approach was taken in Douglas v. Federal Commissioner of Taxation 36 ATR 532; (1997) 77 FCR 112; 97 ATC 4722. Reference was made by the court to the definitions contained in the Concise Oxford Dictionary for each of these terms. 'Society, association or club' was accepted by the court as referring to a voluntary organisation having members associated together for a common or shared purpose.

The entity is an incorporated entity established with the objects outlined in its constitution.

The entity's constitution contains the required not-for-profit clauses.

The entity is accepted as being a not-for-profit association.

2) Established for the encouragement of science

The next question is whether the entity is established for the encouragement of science.

Established

In Cronulla Sutherland Leagues Club Limited v. FCT 90 ATC 4215 at 4220; (1990) 21 ATR 300 at 306, Lockhart J explained the meaning of the word "established" as follows:

At first glance it might be thought that the use of the past tense "established", indeed, perhaps the use of "establish" in any tense, makes it necessary to look only to circumstances existing at the time of the incorporation or establishment of the body concerned to determine this question. This is not correct, Two criteria must be satisfied before the exemption from income tax is available: first, that the income is derived by a body that is not carried on for the purposes of profit or gain to its individual members, which necessarily looks to the circumstances existing in the relevant year of income; and secondly, that the body is a society, association or club established for the encouragement or promotion of the specified athletic game or athletic sport. I do not discern from the language of sec. 23 or the evident purpose of sec. 23(g) (iii) any reason for selecting different times for the application of the criteria.

Encouragement

'Encouragement' is not defined in item 1.7 of the table in section 50-5 of the ITAA 1997. Therefore the ordinary meaning of the term 'encouragement' applies.

According to the Macquarie Dictionary, 'encouragement' means 'stimulation by assistance.'

Science

'Science' is not defined in the ITAA 1997. The ordinary meaning of the term 'science' therefore applies.

The Macquarie Concise Dictionary defines science as:

The systematic study of humans and their environment based on the deductions and inferences which can be made, and the general laws which can be formulated, from reproducible observations and measurements of events and parameters within the universe.

The knowledge so obtained.

The High Court made it clear that science is not restricted to the theoretical study of science and does include the application of scientific knowledge and practice (Royal Australasian College of Surgeons v Federal Commissioner of Taxation [1943] 68 CLR 436 (Royal Surgeons case) at 447:

The College would not be the less a scientific institution because it does not confine its activities to abstract or speculative science but applies scientific knowledge and practice to the advancement of surgery.

The entity engages in activities that are scientific.

Main purpose

For the entity to be covered by item 1.7 of the table in section 50-5 of the ITAA 1997, its main purpose must be for the encouragement of science.

In Cronulla Sutherland Lockhart J stated:

For a society, association or club to qualify for the exemption granted by sec. 23(g)(iii) it must be one that has as its main object or purpose the encouragement or promotion of an athletic game or athletic sport in which human beings are the sole participants. It may have other objects or purposes which are merely incidental or ancillary thereto or which are secondary or even unrelated to the main object or purpose without disqualifying the body from the exemption. But if it has two co-ordinate objects, one of which is outside the exemption, the exemption cannot apply because it would be impossible to say that one object is the main or predominant object (at 4225).

An entity will not have its main purpose for the encouragement of science where it is a professional association primarily run for the advancement of the professional or business interests of its members.

An examination of the entity's constitution shows that the entity has two purposes: the advancement of professional interests, and the encouragement of science. It is therefore necessary to determine which of these is the entity's main purpose.

The determination of an entity's main purpose is a matter of fact and degree. In Cronulla Sutherland, Lockhart J in the Full Federal Court said, at ATC 4225; ATR 312:

The material facts and circumstances which should be examined to characterise the main purpose of the relevant body include its constitution, its activities, its history and its control. These may alter from time to time and the purpose of establishment may correspondingly change. It is not sufficient to look to the formation of the body and to ascertain what was at that time the purpose of its formation. The statute gives a periodic operation to the words and directs the inquiry 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.

Therefore, the material facts and circumstances which should be examined to characterize the main purpose of the entity include its constitution, its activities and its history. Other factors to consider include policies and plans, administration and finances of the entity.

Objects

An examination of the objects in the entity's constitution shows that the purposes of the entity include the advancement of the professional interests of members and the encouragement of science.

The Royal Surgeons case also relevantly states that the objects should not be looked at individually but 'in conjunction with one another and in the light of the circumstances in which the College was formed and of the manner in which the College is fulfilling the purposes for which it was incorporated.'

Taking the objects stated in the constitution as a whole, it appears that the entity has the dual purposes of the advancement of the professional interests of members and the encouragement of science.

History

It is accepted that the history of the entity shows that it has pursued both purposes of advancing the professional interests of its members and also the encouragement of science.

Activities

A significant number of the activities carried out by the entity are undertaken for the purpose of advancing the professional interests of members.

The entity's member-based activities are considered to be only for the professional interests of members, not for the encouragement of science (or incidental to the encouragement of science).

Conclusion - main purpose

It is considered that the entity's two purposes are separate and independent. In particular, the entity's purpose of advancing members' interests is not considered incidental or ancillary to the purpose of the encouragement of science. That is, the pursuit of members' interests is not merely a 'by-product' of or a 'means to an end' to encouraging science. An examination of all of the relevant facts and circumstances shows that the two purposes are separate and distinct.

After consideration of all the relevant facts and circumstances, we find that the entity does not have the main purpose of encouraging science. The entity is therefore not a society, association or club established for the encouragement of science.

The entity's total ordinary and statutory income is not exempt under section 50-1 of the ITAA 1997.

3) Special Conditions

Item 1.7 of the table in section 50-5 of the ITAA 1997 is subject to the special conditions set out in section 50-70 ITAA 1997. The entity satisfies these special conditions.

Conclusion

The entity does not have the main or dominant purpose of encouraging science. It is therefore, not covered by item 1.7 of the table in section 50-5 of the ITAA 1997. As a result, the entity is not exempt from income tax pursuant to section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) on the basis that it is covered by item 1.7 of the table in section 50-5 of the ITAA 1997.

Issue 1 Question 2

Summary

The entity does not have the main purpose of advancing science. Therefore, it is not a scientific institution and is not entitled to exemption under Item 1.3 of section 50-5 of the ITAA 1997.

Detailed reasoning

To be covered by item 1.3 of section 50-5 of the ITAA 1997, an entity must:

Be a not for profit institution

Be a scientific institution

Satisfy the special conditions contained in section 50-55 of the ITAA 1997.

(1) Institution

The entity is a not for profit entity.

“Institution” is not defined in the ITAA 1997; however paragraph 4 of Taxation Ruling TR 92/17 states that:

A body is an institution for the purposes of both the ITAA and the FBTAA if it is an establishment, organization or association, instituted for the promotion of some object (especially one of public or general utility) that is religious, charitable, educational, etc. That definition was accepted by the High Court in YMCA of Melbourne v FC of T (1926) 37 CLR 351 and later in Stratton v Simpson (1970) 125 CLR 138.

It is accepted that the entity is an institution.

(2) Scientific Institution

The term 'scientific institution' is not defined in the ITAA 1997. A 'scientific institution' for the purposes of item 1.3 of section 50-5 of the ITAA 1997 will be an institution whose main purpose is scientific.

It is accepted that the entity is an institution. Therefore, the fundamental issue to be resolved is whether the entity's main purpose is scientific. This issue requires the same technical analysis as the issues raised in Issue 1 Question 1. Whilst the entity has purposes that are both scientific in nature and targeted at members' benefits, the entity does not have the main or dominant purpose of encouraging science. This conclusion is based on the analysis of the history, objects and activities of the organisation undertaken above in relation to Issue 1 Question 1.

The entity does not have the main or dominant purpose of advancing science. It is therefore not covered by item 1.3 of the table in section 50-5 of the ITAA 1997. As a result, the entity is not exempt from income tax pursuant to section 50-1 of the ITAA 1997 on the basis that it is covered by item 1.3 of the ITAA 1997.

3) Special Conditions

Item 1.3 in section 50-5 of the ITAA 1997 is subject to the special conditions set out in section 50-55 ITAA 1997.

The entity meets these special conditions.

Issue 2 Question 1

Summary

As the entity is not an exempt entity under item 1.7 or item 1.3 of the table in section 50-5 of ITAA 1997, it is not a rebatable employer for the purposes of items 2 or 4 of the table in subsection 65J(1) of the FBTAA 1986.

Detailed reasoning

Subsection 65(J)(1) of the FBTAA 1986 provides that an employer is a rebatable employer if the employer is covered by any of the Items listed in 65J and meets the special conditions attached to the particular Item.

An organisation will be a rebatable employer under Item 2 of section 65J if it is a scientific institution covered by item 1.3 of the ITAA 1997. The entity is not a scientific institution under Item 1.3 of section 50-5 of the ITAA 1997 and therefore, is not a rebatable employer under Item 2 of section 65J.

An organisation will be a rebatable employer under Item 4 of the FBTAA 1986 if it is a society, association or club established for the encouragement of science and is covered by item 1.7 of section 50-5 of the ITAA 1997. The entity is not an association established for the encouragement of science under Item 1.7 of section 50-5 of the ITAA 1997 and is therefore, not a rebatable employer under Item 4 of the FBTAA 1986.

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