Edited version of your written advice

Authorisation Number: 1051269075557

Date of advice: 16 August 2017

Ruling

Subject: Income Tax Exempt status

Question 1

Will the Trust be a public trading trust within the meaning of section 102R of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No

Question 2

Will the Entity, upon

1. Establishing the Trust; or

2. Deriving income from the Trust,

continue to be an exempt entity under section 50-15 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following period:

1 July 2017 – 30 June 2021

The scheme commences on:

1 July 2017

Relevant facts and circumstances

● The National Entity is an organisation of employers registered under the Fair Work (Registered Organisations) Act 2009 (FWA). The National Entity is a 'federal counterpart’ of the Entity

● The National Entity is comprised of branches in each State and Territory

● The Entity is a branch of The National Entity

● The Entity is registered as an industrial organisation of employers

● The Entity and the branch effectively act as a single organisation

● The Entity is an exempt entity under section 50-15 of ITAA 1997 as it is:

a) registered or recognised under the FWA or an Australian law relating to settlement of industrial disputes, and

b) is located in Australia, and incurs its expenditure and pursues its objectives principally in Australia, and

c) complies with all the substantive requirements in its governing rules, and

d) applies its income and assets solely for the purpose for which the association is established

● The objects of the Entity are:

b) The maintenance of the status of the Industry; the maintenance of law; to promote commerce and the Industry and the community; to promote and protect the rights of persons engaged in the Industry and Members of the State Organisation

c) To watch all proceedings in Parliament both Australia and State and measures introduced therein affecting any branch of the Industry and to take such steps as may from time to time be deemed necessary to initiate, promote, amend, modify or reject, as the case maybe, all or any such measures

d) To present effectively the views and requirements of the Industry in all matters and questions touching or affecting its interests by means of periodical conference, deputations, meetings, petitions and otherwise

e) To afford Members of the State Organisation all such assistance, legal or otherwise, as shall appear proper or desirable to the Council for the time being and in accordance with the Rules of the State Organisation

f) To consider any decisions of the court which may affect the Industry adversely and, if considered desirable or necessary to the Council, to institute proceedings to secure a review of or appear against such a decision. The Council may, in the interests of the Members, institute, carry on or subsidise any action at law not hereinbefore provided for

g) To stablish Employment Agencies, Information Bureau, Literary, Social, Education, Sporting or Trading Institutions for the benefit of Members

h) To establish and/or print, publish, issue and circulate communications (whether in electronic format or otherwise) such as websites, newspapers, magazines, and other papers, periodicals, books, circulars and other literary undertakings as may be deemed desirable or expedient for diffusion amongst the Members of the State Organisation on matters affecting the Industry, or as may seem calculated directly or indirectly to advance or contribute to the interests of the State Organisation or of its Members

i) To take such action as may be necessary or advisable to regulate and determine the rates of pay and conditions of employment of employees of Members or of employees in the Industry under applicable state or federal legislation

j) To do and execute all such other acts, matters and instruments incidental to or in extension of the foregoing objects as may be deemed necessary from time to time in the interests of the Industry, and generally perform all necessary acts for the advancement of the State Organisation or its Members

k) To promote, form and/or conduct an organisation to purchase commodities and products of all types used in the conduct of the Industry and to sell or otherwise dispose of such products and commodities for the benefit of Members upon such prices as it may from time to time determine

l) To take such actions as may be necessary or advisable to provide for the proper training of personnel engaged in the Industry

m) To act as an industrial organisation of employers

n) For any of the purposes of the State Organisation to purchase, acquire, hold and deal with property of any kind

● The Entity conducts activities in support of the objects of the organisation:

1. Maintaining effective working relationships with Federal, State and Local governments in relation to key industry issues

2. Co-operating in industry programs related to the Industry

3. Liaising with industry suppliers to achieve better commercial terms for Members

4. Researching and advising on a range of legal and industrial relations matters

5. Conducting seminars and training courses on relevant and topical issues

6. Providing a forum for Members to meet and discuss ideas and concerns

7. Circulating industry developments and news through their monthly magazine, a weekly online newsletter, bulletins reports and meetings, and

8. Monitoring social and community issues

● The Entity is often requested to provide assistance to various State and/or Territory Branches of the National Entity and/or their members and other employer associations and their members within the Industry

● The Entity is precluded from providing legal advice under an Act of Parliament to an entity apart from members of their own organisation

● The Entity and its members have an interest in the outcome of matters involving various State and Territory branches of the National Entity and/or their members and other employer associations and their members within the Industry insofar as those matters affect the Industry and/or employers operating within the Industry. The Entity is considering establishing an incorporated activity so it can provide services to those entities or bodies that are part of the Industry, but that are not members of the Entity

● The Entity is proposing establishing an activity by establishing a fixed trust with the income and capital held wholly for the benefit of the Entity, '…will be entitled to all of the income and capital of the trust fund’. The corporate trustee would register the activity as a Trust

● The Trust will not issue units; it will not be a public trading trust. It will not be a bare trust

● The Trust will be a fixed trust

● It is anticipated the Trust would provide services to

● Members of the Entity

● The Entity

● The National Entity and its various State and Territory branches and their related entities

● Members of the other State and Territory branches of the National Entity, and

● Other industry/employer associations within the Industry and/or their members

● The Trust will advise and represent clients in employment/industrial law and other matters

● The Trust will be settled by the Entity’s accountant and necessary further funds required by the Trust will be settled on the Trust or advanced as a loan to the trustee of the Trust. Any settlement or loan would be approved by a resolution of the Council of the Entity after satisfying itself that the settlement or loan is made in accordance with the rules and in furtherance of the Entity objects

● The draft trust deed of the Trust (the Deed) defines Member as, '…the Entity a registered unincorporated association as a State Industrial Organisation’

● The Deed defines Trust Fund as 'the Initial Sum, any money and other property having the nature of either capital or income acquired or accepted by the Trustee as an addition to the Initial Sum and the investments and property for the time being representing those sums or any part of them’

● The Deed defines Initial Sum

● Clause 4 of the Deed states

4.1 Entitlement to Trust Fund

a) the Trustee will hold the Trust Fund on trust for the member.

b) the Member is:

1) entitled to the Trust Fund as an entirety; and

2) not entitled to any security or investment comprised in the Trust Fund or any part of the Trust Fund.

c) the member may not transfer, assign or convey any of its interest in the Trust Fund to any person.

● Subclause 5.1 relates to net income of the Trust. The Deed states the trustee will pay from the gross income all costs of the Trust and will hold the net income that is not the subject of a Determination under the Deed, in trust for the Member

● Clause 6 relates to capital distribution of the Trust. The Deed states that distributions are made to the Member

● Under clause 11 of the Deed the trustee has, in addition to, all the specific powers provided in the Deed:

a) all the powers authorities and discretions of a natural person:

b) all powers, authorities and discretions conferred by the common law, equity and by legislation on trustees: and

c) will not be restricted or obligated by provisions relating to trustees contained in any legislation of the Commonwealth of Australia or any of its States or Territories.

● Clause 16 deals with the appointment of the trustee of the Trust. The Deed states that the appointment and removal of trustees is subject to the approval of the Member

● Clause 19 deals with variations of the Deed. The Deed states that variations to the Deed must have the consent of the Member

Relevant legislative provisions

Fair Work (Registered Organisations) Act 2009

Section 102R of Income Tax Assessment Act 1936

Section 50-15 of Income Tax Assessment Act of 1997

Reasons for decision

Issue 1

Income Tax exempt status

Question 1

Will the Trust be a public trading trust within the meaning of section 102R of the ITAA 1936?

Summary

As a public trading trust is a public unit trust that is also a trading trust it also must divide beneficial ownership into units. You stated beneficial interest in the Trust is not divided into units, therefore as there is no division of beneficial ownership based on the notion of shares the Trust is not a public trading trust under section 102R of ITAA 1936.

Detailed reasoning

Section 102R of ITAA 1936 states that a public trading trust is a public unit trust that is also a trading trust. It is necessary for the trading trust to be either a resident in the income year concerned or a public trading trust in a previous income year. Within Division 6C of ITAA 1936 it is necessary for something which fits a description of 'units’ within the functional, and descriptive, notion of a unit trust. The meaning of 'unit trust’ was discussed in Elecnet Australia) Pty Ltd v FCT [2016] HCA 51. It was determined that Division 6 accorded with the common usage of the expression 'unit trust’. The High Court held that the meaning of 'unit trust’ accorded with the common usage of the expression 'unit trust’, that is, a trust whereby the beneficial interest in the trust estate is divided into units as discrete parcels of rights, analogous to shares, which, when created or issued, are to be held by the persons for whose benefit the trustee maintains and administers the trust estate.

As a public trading trust is a public unit trust that is also a trading trust it also must divide beneficial ownership into units that are discrete parcels of rights, analogous to shares. You stated that beneficial interest in the Trust is not divided into units but, rather, is a fixed trust. Therefore, as there is no beneficial ownership division based on the notion of shares, the Trust is not a Public Trading Trust.

Question 2

Will the Entity, upon

1. Establishing the Trust; or

2. Deriving income from the Trust,

continue to be an exempt entity under section 50-15 of ITAA 1997?

Summary

Based on the Entity’s registration, membership rules, objects and activities, the purpose of the taxpayer is to represent the interests of employers in the industry and the majority of the taxpayer's resources are used for that purpose. The Entity will not compromise its income tax exempt status by establishing the Trust to conduct commercial activities. The Trust supports the Entity’s objects and furthers its purpose and will not affect its exempt entity status under section 50-15 of ITAA 1997.

Detailed reasoning

The definition of ’exempt entity' includes an entity whose whole ordinary and statutory income is exempt from income tax under ITAA 1997 or any other Commonwealth law, and all untaxable Commonwealth entities.

An organisation or fund that is not operated for profit, or for the individual gain of its members or promoters, is not automatically exempt from paying income tax. Section 50-1 of the ITAA 1997 describes entities whose ordinary income and statutory income is exempt.

ATO Interpretative Decision ATO ID 2006/155 Income tax exempt entities: Employer association (ATO ID 2006/155) describes the attributes of an employer association. It states:

An employer association is not defined in the legislation. In Associated Newsagents Co-operative Ltd at 70 ATC 4032 the High Court found an association of employers to be 'a combination of persons who associate in their capacity as employers of labour'. It contrasted this with 'an association of persons merely because they pursue the same calling'.

Whether an association is an employer association is a matter of fact to be determined in light of the circumstances. Relevant considerations will be both the extent to which the association's membership comprises employers and the extent to which its purposes concern employment matters. They will indicate whether the association is 'a combination of persons who associate in their capacity as employers of labour'.

Employer membership will be indicated by the eligibility rules for membership, the constituent documents, membership statistics, etc. Limitation of membership to employers will be a strong, but not determinative, indicator.

Employment matters are not limited to industrial relations and the settlement of disputes. They also include staff recruitment and development, superannuation and workers compensation, occupational health and safety, staff training and accreditation, terms and conditions of employment, managerial systems and job design, staff performance and appraisal, and dismissals.

An association will be an employer association if its members are predominantly employers and its purpose is to promote their common interests in relation to employment matters.

The Entity’s rules define Member or Member of the State Organisation as 'a Financial Member of the State Organisation….’, and Financial Member as an 'Employer of Labour …'. It defines Employer of Labour as,

… any person, partnership or corporation (including any person, partnership or corporation acting in the capacity as trustee of a trust) which employs, usually employees, or may from time to time employ labour

In Taxation Ruling TR 97/22 Income tax: exempt sporting clubs (TR 97/22) the Commissioner indicated that one of the tests for eligibility of an entity for income tax exemption under a particular provision is that its main purpose must relate to the subject of the exemption provision. TR 97/22 discusses the activities of an entity that are relevant to determining its main purpose and lists a number of factors that can be considered, including:

● the objects of the entity as stated in its constituent documents

● the activities conducted by the entity in the relevant period

● the purposes for which a significant proportion of the entity's available resources are expended; and

● the manner in which the entity presents itself to potential members and to the public.

Employer associations registered under a Commonwealth, state or territory law relating to the settlement of industrial disputes are income tax exempt. However the exemption is subject to special conditions.

Section 50-15, item 3.1, of ITAA 1997 lists special conditions relevant to employer associations, they are, the association:

a) is registered or recognised under the FWA or an *Australian law relating to the settlement of industrial disputes; and

b) is located in Australia, and incurs its expenditure and pursues its objectives principally in Australia; and

c) complies with all the substantive requirements in its governing rules; and

d) applies its income and assets solely for the purpose for which the association is established

Special condition (a)

The first special condition that must be satisfied for income tax exemption to apply is that the employer association must be registered under the FWA or an Australian law relating to the settlement of industrial disputes.

The Entity has advised that they are registered under IRA and so would meet this requirement.

Special condition (b)

The second special condition that must be satisfied for income tax exemption to apply is that the employer association must be located in Australia, incur its expenditure and pursue its objectives principally in Australia.

The Entity is incorporated in Australia and is located in Australia. Given that its members are also located in Australia and it is an employer association, it is accepted that it incurs its expenditure and pursues its objectives principally in Australia.

The Entity is considering establishing an Trust so it can provide services to those entities or bodies that are part of the Industry, but that are not necessarily members of the Entity. The establishment of the Trust may affect the Entity’s eligibility to meet section 50-15 of ITAA 1997 special conditions (c) and (d) and compromise their current income tax exempt status.

Taxation Ruling TR 2015/1 Income tax: special conditions for various entities whose ordinary and statutory income is exempt considers special conditions (c), complies with all the substantive requirements in its governing rules; and (d), applies its income and assets solely for the purpose for which the association was established.

Special condition (c)

The third special condition that must be satisfied for income tax exemption to apply is that the employer association complies with all the substantive requirements in its governing rules.

For the purpose of Division 50, 'governing rules' are those rules that authorise the policy, actions and affairs of the entity. That is, the rules that direct what the entity, and those who control it, are required and permitted to do in relation to the entity.

It is necessary to determine the 'substantive' requirements in the Entity’s governing rules. The word 'substantive' narrows the enquiry of the governing rules condition. That is, the governing rules condition focuses on whether the Entity will comply with all of the 'substantive' requirements in its governing rules if they create a Trust to operate a trust. The 'substantive' requirements in the Entity’s governing rules are those rules that define their rights and duties. The remainder of an entity's governing rules are merely procedural requirements. Substantive requirements are:

Objects/purposes

Rules that give effect to the object(s) or purpose(s) of an entity are substantive requirements. They set out what the entity is established to do. That is, such rules define the rights and duties the Entity.

The objects of the Entity are to maintain the status of the Industry, to promote and protect the rights of persons engaged in the Industry and Members of the State Organisation. Further, the Entity watches all proceedings in Parliament both Australia and State and measures introduced affecting any branch of the Industry and to take such steps as deemed necessary to initiate, promote, amend, modify or reject, as the case maybe, all or any such measures. It presents the views and requirements of the Industry in all matters and questions issues affecting its interests. It also affords Members of the State Organisation assistance, legal or otherwise, as shall appear proper and in accordance with the Rules of the State Organisation. It considers court decisions which may affect the Industry and acts, if necessary, to get adverse decisions reviewed. The Entity conducts activities in support of the objects of the organisation.

Powers and duties of directors/officers

Rules setting out the powers and duties of directors or officers of an entity are substantive requirements; they define the rights and duties of the entity.

Constitution matters are dealt with in clause 20 of the Deed. It states the Council is the governing body of the Entity and operates the Entity’s business; it is comprised of delegates elected by members of the sub-branches. A delegate must be a member of the sub-branch or a representative of the member. Clause 21 of the Deed sets out the roles and powers of the Council. The Council controls and manages property and funds of the Entity and invests and deals with moneys.

Clause 23 and 24 of the Deed deal with the Executive Committee and their powers; expressly that the Executive Committee manages the Entity subject to the direction and control of the Council.

Audit and accounts

Rules requiring that annual financial reports be prepared, audited and retained are substantive requirements as they define the duties of the Entity and are contained in clause 36 of the Deed. Clauses 35.9 and 35.10 state that the Council must approve a loan, grant or donation, they will not be made by the Entity unless the Council has satisfied itself that the loan, grant or donation would be in accordance with their rules. Further, the Council needs to be satisfied the proposed security and repayment of a loan is satisfactory. Therefore, the substantive rules of the Entity permit loans to be made with approval of the Council.

The Entity will comply with the 'substantive' governing rule requirements if, with Council approval, they create the Trust in furtherance of their objectives and use funds to establish it.

Special condition (d)

The fourth special condition that must be satisfied for income tax exemption to apply is that the employer association applies its income and assets solely for the purpose for which the association is established.

The income and assets condition tests whether the income and assets of an entity have been applied solely for the purpose or purposes for which the entity is established. The purpose for which the Entity was established is determined by considering all of the entity’s features. The main factors considered are the Entity and the Trust’s constituent objects, the activities of the entities and the control both the Entity and the Trust.

Purpose

The objects of the Entity are to maintain the status of the Industry, to promote and protect the rights of persons engaged in the Industry and Members of the State Organisation. Further, the Entity watches all proceedings in Parliament, both Australia and State, and the measures introduced affecting any branch of the Industry and takes such steps deemed necessary to initiate, promote, amend, modify or reject, as the case maybe, all or any such measures. Effectively, it presents the views and requirements of the Industry in all matters and questions affecting its interests. It also affords Members of the State Organisation all such assistance, legal or otherwise, as shall appear proper and in accordance with the Rules of the State Organisation. It considers court decisions which may affect the Industry and acts, if necessary, to get adverse decisions reviewed. The Entity conducts activities in support of the objects of the organisation.

Incidental or ancillary purpose

The purpose for which the entity is established can include an incidental or ancillary purpose. TR 2015/1 states that a purpose is incidental or ancillary to the purpose for which the entity is established if it tends to assist, or naturally goes with, the achievement of that purpose.

Establishment of the Trust supports the objects of the Entity but is ancillary in nature as its activities support the Entity and is not intended to further the Entity’s purposes.

Income and assets

The requirement that the Entity must 'apply' its income and assets means that it must make use of all of its income and assets, solely for the purpose for which it was established. The word 'apply' does not mean 'substantially apply' or 'apply, on the whole'.

The proposed activities of the Trust fall within the objects of the Entity:

● The maintenance of the status of the Industry, the maintenance of law, to promote and protect the rights of persons engaged in the Industry

● To watch all proceedings in Parliament both Australia and State and measures introduced therein affecting any branch of the Industry and to take such steps as may from time to time be deemed necessary to initiate, promote, amend, modify or reject, as the case maybe, all or any such measures

● To afford Members all such assistance, legal or otherwise, as shall appear proper or desirable to the Council in accordance with the Rules of the State Organisation

● To consider any court decisions that may adversely affect the Industry and to institute proceedings to secure a review of or appear against such a decision. The Council may, in the interests of the Members, institute, carry on or subsidise any action at law

● To act as an industrial organisation of employers

The Deed states the trustee will pay from the gross income all costs of the Trust and will hold the net income that is not the subject of a Determination under the Deed, in trust for the Member. The Deed states that distributions are made to the Member. The Entity is the sole Member of the Trust and is the sole beneficiary. Further, it is entitled to the entire Trust fund and may not transfer, assign or convey any of its interest in the Fund.

Control

The Deed deals with control of the Trust. It states that the appointment and removal of Trustees is subject to the approval of the Member. The Trustee has, in addition to, all the specific powers provided in the Deed all the powers authorities and discretions of a natural person, all powers, authorities and discretions conferred by the common law, equity and by legislation on trustees: and will not be restricted or obligated by provisions relating to trustees contained in any legislation of the Commonwealth of Australia or any of its States or Territories. All variations to the Deed must also have the consent of the Member.

Therefore, the Trust supports the objects of the Entity, makes all distributions to the Entity and is controlled by the Entity as the sole member.

Profit from commercial activities

The Trust anticipates providing services to the Entity, members of the Entity, the National Entity and their branches and related entities, members of the National Entity branches and other industry/employer associations within the Industry and/or their members. The Trust will advise and represent clients in employment/industrial law other matters.

TR 2015/1 expressly states that profit from commercial activities that are used to further an entity’s purpose does not breach the income and assets test. The proposed commercial activities of the Trust support the Entity’s objects and further its purpose.

Therefore, all income and assets of the Trust will be used solely for the purpose that the Entity was established. The Entity will not compromise its income tax exempt status by establishing the Trust and conducting commercial activities as the Trust supports the Entity’s objects and furthers its purpose and will not affect its exempt entity status under section 50-15 of ITAA 1997.

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