Edited version of your written advice

Authorisation Number: 1051321220452

Date of advice: 20 December 2017

Ruling

Subject: Tax exemption status

Question

Will the income of the Association post the acceptance of the responsibility for the management of the account remain exempt from tax pursuant to section pursuant to section 50-15 item 3.2 of the Income Tax Assessment Act 1997?

Answer

Yes

This ruling applies for the following periods:

1 July 2017 to 30 June 2018

1 July 2018 to 30 June 2019

1 July 2019 to 30 June 2020

1 July 2020 to 30 June 2021

1 July 2021 to 30 June 2022

The scheme commences on:

1 July 2017

Relevant facts and circumstances

The Association was formally incorporated under the Association Incorporations Act ( State A )1985.

The Association has a range of objectives, including those traditionally associated with the term trade union.

It is actively engaged in protecting and furthering the interests of its members, who are employees in the relevant industry.

The Commissioner accepted that the Association was entitled to income tax exemption as a trade union pursuant to section 50-15 item 3.2 of the Income Tax Assessment Act 1997 (ITAA 1997) in a previous ruling.

The association has achieved documented agreements over its period of operation with the employer.

As part of the review of the documented agreements, both parties have agreed that the responsibility for the management of an account will transition from the employer to the Association.

You advise there will be a set of new rules governing how the account will be managed that will be incorporated into the constituent documents of the Association.

You have also provided a proposed new document that indicates the employer will make contributions to the account, not by the Association.

The Association would like to apply for a private ruling confirming its exemption from income tax as a trade union will not alter as a result of the additional responsibility for management of the Account itself when transitioning from the employer to the Association.

Relevant legislative provisions

section 50-1 of the ITAA 1997

section 50-15 of the ITAA 1997

Reasons for decision

An entity must satisfy a number of requirements and special conditions in order for its ordinary and statutory income to be exempt from income tax under Division 50 of the ITAA 1997.

Section 50-1 of the ITAA 1997 states:

The total ordinary income and statutory income of the entities covered by the following tables is exempt from income tax. In some cases, the exemption is subject to special conditions.

The tables referred to in section 50-1 of the ITAA 1997 are contained in sections 50-5 to 50-45. A trade union is listed at item 3.2 in the table in section 50-15. The trade union must meet the special conditions detailed in item 3.2.

An entity is therefore exempt from income tax as a trade union if:

● it is a trade union; and

● it satisfies the special conditions.

Trade union

The term trade union is not defined for the purposes of the ITAA 1997. To establish whether an organisation is a trade union, it is necessary to adopt the ordinary meaning of the term which has been adopted by the Courts.

In the Victorian Employers' Federation v Federal Commissioner of Taxation (1957) 96 CLR 390, Kitto J stated:

The Act contains no definition of “trade union“. The expression is defined in the Oxford Dictionary as meaning “an association of the workers in any trade or in allied trades for the protection and furtherance of their interests in regard to wages, hours, and conditions of labour, and for the provision, from their common funds, of pecuniary assistance to the members during strikes, sickness, unemployment, old age, etc.”

In Norseman Amalgamated Distress and Injustices Fund v. Federal Commissioner of Taxation (1995) 56 FCR 512; 95 ATC 4227; (1995) 30 ATR 356, Justice Lee ruled that the first part of the Oxford English Dictionary meaning was predominant in that an association of employees may well administer a fund for the mutual aid and protection of its members in their time of need, but that association would not qualify as a 'trade union' unless:

…the association of employees in question has been formed to deal with the employers of the members and for the protection and furtherance of the interests of members in respect of the conditions of their employment.

Section 3 of the Trade Unions Act 1958 (VIC) defines the term trade union to mean:

…any combination whether temporary or permanent for regulating the relations between workmen and employers or between workmen and workmen or between employers and employers or for imposing restrictive conditions on the conduct of any trade or business whether such combination would or would not if this Act or any corresponding previous enactment had not been passed have been deemed to have been an unlawful combination by reason of some one or more of its purposes being in restraint of trade. …

In Taxation Ruling TR 97/22, the Commissioner has 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. Where an entity conducts ancillary or incidental activities this would not of itself change what is regarded as the entity's main purpose. In that regard, Lockhart J in Cronulla Sutherland Leagues Club Limited v. Federal Commissioner of Taxation (1990) 23 FCR 82; 90 ATC 4215; (1990) 21 ATR 300 said:

It may have other objects or purposes which are merely incidental or ancillary thereto or which are secondary and even unrelated to the main object or purpose without disqualifying the body from the exemption.

However, if an entity is equally involved in other purposes, then that entity would not be eligible for exemption. As Lockhart J said:

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.

Taxation Ruling TR 97/22 also indicates the Commissioner's view that it is appropriate to take into account the activities of an organisation to support a conclusion that the organisation's main purpose is relevant to the subject of the exemption provision.

It is considered that these aims and activities confirm that the Association is a trade union, as that term is ordinarily understood.

Special conditions

The special conditions listed at item 3.2 of section 50-15 of the ITAA 1997 states that a trade union:

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

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

(c) applies its income and assets solely for the purpose for which the trade union is established.

Taxation Ruling TR 2015/1 Income tax: special conditions for various entities whose ordinary and statutory income is exempt considers whether certain entities, including those listed at item 3.2 of section 50-15 of the ITAA 1997, satisfy special conditions (b) and (c).

TR 2015/1 explains at paragraph 106 that in most instances an entity’s governing rules are set out in writing.

Paragraph 124 of TR 2015/1 provides some examples of the substantive requirements which include:

● Objects/purposes

● Non-profit status

● Powers and duties of directors/officers

● Audit and accounts

● Winding up

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

The operations of the Association are now and will be for the foreseeable future undertaken principally in Australia.

It is accepted that special condition (a) is satisfied.

(b) complies with all the substantive requirements in its governing rules

In the Association’s case, the governing rules can be located in its Constitution. The Association’s Constitution contains the required clauses and in the absence of evidence to the contrary it is accepted that the Association complies with these requirements.

It is accepted that special condition (b) is satisfied.

(c) applies its income and assets solely for the purpose for which the trade union is established.

The Association’s constitution contains a clause that it must apply its income and assets solely for the purpose for which it was established.

It has been determined between the Association and the employer that the Association will be responsible for the management of the account. The account will be funded by the employer pursuant to the documented agreements. The payments to the retired workers will be paid from the account which is funded by the employer pursuant to the documented agreements.

It is considered that the Association is applying its income and assets solely for the purpose for which it was established.

Accordingly, the Association’s activities adhere to this non-profit clause.

It is accepted that special condition (c) is therefore satisfied.

Conclusion

The income of the Association is exempt from income tax post the proposed acceptance of the responsibility for the management of the account pursuant to section 50-1 of the ITAA 1997, as the income of a trade union, which satisfies the special conditions set out in item 3.2 of the table in section 50-15 of the ITAA 1997.

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