Edited version of private advice

Authorisation Number: 1051632212186

Date of advice: 10 February 2020

Ruling

Subject: Income tax exemption

Question

Is the entity exempt from Income Tax under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as an association not carried on for the purpose of profit or gain to the individual members, established for the purpose of promoting the development of manufacturing and industrial resources of Australia?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XY

The scheme commences on:

20XX

Relevant facts and circumstances

ABC Co. is an organisation connecting and supporting Australian defence industry to develop capability and increase industry's competitiveness in defence markets. ABC Co. has a large membership including Prime Defence Contractors, Small-to-Medium Enterprises, Professional Service Providers and Academic Institutions that are involved in supplying and supporting Defence capability.

ABC Co.'s objects are stated in its Constitution as follows:

The principal purpose of ABC Co. is to promote and develop Australian businesses with an interest in the defence industry, predominantly those businesses with industrial, manufacturing, engineering and professional resources, with key objects to:

- promote collaborative activities between the defence industry participants;

- act as a facilitator for collaborative bidding by defence industry participants in targeted defence projects;

- facilitate and contribute to the growth of the defence industry in Australia;

- assist and support defence industry participants in their interactions;

- advocate on behalf of defence industry participants in defence policy formulation process; and

- educate businesses to assist them to participate in the defence industry.

ABC Co.'s powers, as stated in its Constitution, include the following:

...As a not for profit organisation, ABC Co. must not distribute any surplus, income or assets directly or indirectly to its members.

With regards to Winding Up and Application of Surplus Assets, ABC Co.'s Constitution states the following:

- Subject to the Act, ABC Co. may be wound up voluntarily by special resolution. The body to which the surplus assets are to be given must be decided by special resolution.

- The surplus assets must be given to a body that has similar objects to ABC Co. and which is not carried on for the profit or gain of its individual members, but must not be distributed to any members or former members of ABC Co.

ABC Co. is currently self-assessing as an entity that is exempt under section 50-40 of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 50-40

Reasons for decision

Summary

ABC Co. is exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) on the basis that it is established for the purpose of promoting the development of Australian industrial resources under item 8.2(c) and manufacturing resources under item 8.2(d) of section 50-40 of the ITAA1997.

Detailed reasoning

Section 50-40 of the ITAA 1997 states that a 'society or association established for the purpose of promoting the development of any of the following Australian resources' will be exempt from income tax, subject to the fact that it is not carried on for the profit or gain of its individual members.

The items listed under item 8.2 include the following:

a)    Agricultural resources;

b)    Horticultural resources;

c)    Industrial resources;

d)    Manufacturing resources;

e)    Pastoral resources;

f)     Viticultural resources;

g)    Aquacultural resources; and

h)    Fishing resources.

In order for ABC Co. 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.    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.    it is not carried on for the profit or gain of its individual members.

The above criteria will be considered in turn.

Society or association

The terms 'association' and 'society' are not defined in the ITAA 1997, therefore they should be interpreted according to their ordinary meaning. For the purposes of section 50-40 of the ITAA 1997, the terms 'society' and 'association' generally have the same meaning.

The Macquarie Dictionary defines 'association' as an organisation of people with a common purpose and having a formal structure', with 'society' considered to have an equivalent meaning (Pro-campo Ltd v Commr of Land Tax (NSW) 81 ATC 4270 at 4279; (1981) 12 ATR 26 at 35). An association may be incorporated or unincorporated.

ABC Co. is an incorporated company. It is considered to be "an organisation of people with a common purpose" with a "formal structure" who have come together to promote the development of Australian industrial and manufacturing resources.

ABC Co. satisfies the above requirement.

Not a charity

ABC Co. is not a registered charity on the Australian Charities and Not-for-profits Commission (ACNC) website.

Australian industrial resources

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.

ABC Co. promotes the development of 'Australian' resources.

Promoting the development of Australian industrial resources

The term 'development' is used in section 50-40 of the ITAA 1997 in a commercial or business sense. It comprehends all the elements which must be taken into account to ensure that the specified resources are best used.

The meaning of 'development' was examined by the High Court in the case of

FC of T v. Broken Hill Pty Co. Ltd 69 ATC 4028; 1 ATR 40 where, in considering the phrase 'development of mining property' the majority of the High Court accepted the interpretation of Kitto J:

In its ordinary English sense the word 'development' when used in relation to a property refers to the unfolding, the bringing out, of some latent capability of that property...It covers I think, any preparation, adaption or equipment of the property for the exploration of an inherent potentiality which cannot be exploited or fully exploited, without some such preliminary treatment.

Promoting development can be by various means, including research, providing facilities, training, improving marketing methods, facilitating cooperation and similar activities.

The concept of industrial resources is considered in Taxation Ruling IT 2415 Income Tax: Associations Promoting Development of Australian Resources.

Resources or their elements include infrastructure, plant and equipment, livestock, personnel, knowledge, expertise and skills. An industry's businesses and their assets may be resources. Sheppard J said in Australian Insurance Association at 79 ATC 4573; 10 ATR 337:

... the undertakings of the Australian insurance companies, viewed as a whole, are a resource of Australia. I use the word "undertakings" in the broadest sense. I include within it not only the businesses of the various companies but also their assets and the knowledge and skill of their staffs.

ABC Co.'s objects are stated in its Constitution at clause 4.

ABC Co.'s objects are for the purpose of developing and supporting the defence industry. This is achieved by representation of its member organisations, consulting on government policy, promoting and developing the interests of the industry, co-ordinating education programs, professional development, information exchange and various cooperative arrangements.

It is necessary to consider whether defence is an "industry". In The Queen v The Commonwealth Conciliation and Arbitration Commission; Ex parte The Association of Professional Engineers, Australia (1959) 107 CLR 208:

"...It ordinarily carries a concept of work directly concerned with the production, maintenance, repair, distribution or transport of tangible things and also with the provision of intangible things such as gas and electricity....

...properly described as "industrial", the term ordinarily includes manual labour - which is prima facie industrial - and the direction, superintendence and management of such labour and the working, direction and management of machinery and plant used in connexion with the production or distribution of material things.

The 'defence industry' is the thousands of Australian businesses, men and women across the country who aren't in the Defence Force but use their expertise, experience and trade skills to supply and support it. This includes, but is not limited to, the design and manufacture of military vehicles, aircraft, and naval ships as well as logistics and health care systems, and equipment for intelligence, surveillance and reconnaissance. Accordingly, it is considered that defence is an industry.

It is accepted that ABC Co.'s involvement in the defence industry would come within the meaning of an industrial or manufacturing resource. It has a purpose to promote the development of Australian industrial and manufacturing resources as reflected in the objects of its constitution and its activities.

To qualify for exemption under item 8.2(c) and (d) of the table in section 50-40 of the ITAA 1997, that purpose must be the dominant purpose for which the association was established. Therefore, both ABC Co.'s dominant objects as per its Constitution and its dominant activity must be for this purpose.

Dominant purpose

To be exempt under section 50-40 of the ITAA 1997, an association must be established principally or predominantly for the purpose of promoting the development of one or more of the specified resources in item 8.2 of section 50-40 ITAA 1997: Australian Insurance Association at 79 ATC 4576; 10 ATR 341; Boating Industries Association of New South Wales at 85 ATC 4228-9; 16 ATR 388.

Determining the dominant purpose of an association will largely be a matter of fact and degree, and will involve the weighing up of various elements such as its objects, activities, history and proposed directions (Boating Industries Association of New South Wales v F C of T 85 ATC 4224; (1985) 16 ATR 383).

If an association operates principally to confer benefits on its members jointly or as a group, it is unlikely to be predominantly for promoting resources development and thus will not be exempt under section 50-40 of the ITAA 1997.

Paragraph 7 of Taxation Ruling IT 2415 states:

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 [Section 50-40] 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.

Therefore, on an analysis of the current activities of ABC Co., and the objectives contained in the constitution, it is apparent that ABC Co. is established with the dominant purpose of promoting the development of Australian industrial and manufacturing resources through focusing on connecting SMEs within the industry, creating training programs for leaders in the industry, mentoring, representation in government consultation, and publications creating awareness of achievements and opportunities in the industry.

Special conditions- 'not carried on for the profit or gain of its individual members'

Section 50-40 of the ITAA 1997 requires that an association is not carried on for the profit or gain of its individual members (non-profit). An organisation is accepted as being 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. The organisation's actions must also be consistent with this requirement.

Clause 5, Clause 15 and Clause 16 of ABC Co.'s constitution state that the company must not be carried on for the purpose of profit or gain of any member and prohibits the distribution of profits or assets to any member both while in operation and upon winding-up.

It is considered that while there are some member benefits, ABC Co. does not exist principally to confer benefits on its members.

It is therefore accepted that ABC Co. is not carried on for the profit or gain to its individual members.

Conclusion

On analysis of its objectives and current activities it is accepted that ABC Co. is established for the purpose of promoting the development of Australian industrial and manufacturing resources pursuant to section 50-40 of the ITAA 1997, and is not carried on for the profit or gain of its individual members.

The total ordinary and statutory income of the entity is therefore exempt from income tax pursuant to section 50-1 of the ITAA 1997.

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