Edited version of private advice

Authorisation Number: 1051844376617

Date of advice: 4 June 2021

Ruling

Subject: Income tax exemption: scientific institution

Question

Is the Company a scientific institution under item 1.3 of section 50-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following periods:

Income year ended 30 June 20XX

Income year ended 30 June 20XX

Income year ended 30 June 20XX

Income year ended 30 June 20XX

Income year ended 30 June 20XX

Income year ended 30 June 20XX

Income year ended 30 June 20XX

Income year ended 30 June 20XX

Income year ended 30 June 20XX

Income year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Company is a company limited by guarantee.

The Company is a government initiative.

The aim of the Company is to promote scientific research in an agricultural resource.

The Company's Constitution contains appropriate non-profit and winding up clauses

The Company's research gives rise to Intellectual Property (IP) which is owned by the Company and applied for and towards its objects.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 50-5

Income Tax Assessment Act 1997 section 50-1

Income Tax Assessment Act 1997 section 50-55

Income Tax Assessment Act 1997 section 50-47.

Reasons for decision

Question 1

Summary

The Company is a scientific institution under item 1.3 of section 50-5 of the ITAA 1997. As such, the income of the Company is exempt from income tax under section 50-1 of the ITAA 1997.

Detailed reasoning

To be an exempt entity under item 1.3 of the table in section 50-5 of the ITAA 1997 an entity must be a scientific institution. The entity must also satisfy the special conditions in sections 50-47 and 50-55 of the ITAA 1997.

Institution

In Stratton v Simpson (1970) 125 CLR 138 Gibbs J gave the following meaning of the term 'institution':

In its ordinary sense "institution" means "an establishment, organisation, or association, instituted for the promotion of some object, especially one of public utility, religious, charitable, educational etc" (The Shorter Oxford English Dictionary). It means, as was said in Mayor etc. of Manchester v McAdam (...), "an undertaking formed to promote some defined purpose..." or "the body (so to speak) called into existence to translate the purpose as conceived in the mind of the founders into a living and active principle". Although its meaning must depend on its context, it would not ordinarily connote a mere trust...

The Company is an institution.

Scientific institution

The term 'scientific institution' is not defined in the ITAA 1997. In Royal Australian College of Surgeons v Federal Commissioner of Taxation (1943) 68 CLR 436 (Surgeons Case), the Full High Court considered the meaning of 'scientific institution' for the purposes of section 23(e) of the Income Tax Assessment Act 1936, the predecessor of section 50-5. Each of the members of the Court held that the College was a scientific institution as the main, dominant or primary object of the College was to promote and advance the science of surgery.

In the Surgeons case Rich J stated the following on the meaning of 'scientific institution' (at 447):

The test is whether it can be predicated that the College is in the main scientific. The inclusion of an institution in the exemption clause depends upon the intrinsic character of the object which it promotes and not upon the scope of the benefits which may result from its transactions... I have come to the conclusion that the main or real object of the College is the promotion and advancement of surgery. By this I mean that its essential purpose is to enlarge and extend the boundaries or area of the science of surgery. Its other objects are not collateral or independent but merely concomitant and incidental to the main object. And the fact that some of these subsidiary or ancillary functions and purposes may indirectly and incidentally be of benefit to the members of the profession does not destroy the exemption claimed.

William J stated (at 451)

...whether it is a scientific institution...depends upon whether the main or dominant object for which the college is incorporated is to promote the science of surgery.

In Australian Tea Tree Oil Research Institute Ltd (in liq.) v Commissioner of Taxation (2008) FCA 1653 Edmonds J stated that a 'scientific institution' must also be for the public benefit:

For an entity to claim status as a 'scientific institution', the results..., of the subject entity's activities should be freely available to the community at large; the public community as well as the scientific community. (at paragraph 225)

Scientific Institutions are primarily set up to advance science. 'Science' is not limited to the physical sciences and includes the human and applied sciences.

In the Commissioner of Inland Revenue v Forrest (Institute of Civil Engineers) (1890-1898) 3 TC 117 Lord Macnaghten stated the following on the meaning of 'science' in the term 'Scientific Institution' (which was accepted by Starke J in the Surgeons Case at 447-448):

The first question is what is the meaning of the word science...I see no reason why it should be confined to pure, or speculative, science. The expression plainly includes applied science, and it was intended, I think, to denote a particular branch of science, as well as universal science or science generally... I cannot therefore doubt that mechanical science...is science...

Common ways of advancing science include research, exploration and teaching. Disseminating information will often be involved.

An entity that operates for the interests or profit of its members does not have a main purpose of advancing and promoting science.

The Company undertakes research in an agricultural resource. This is considered to be the main purpose of the Company.

The Company has a non-profit clause and winding up clause in its constitution.

The primary aim of the Company is to undertake research in an agricultural resource. The activities and facilities of the Company are primarily scientific in nature in relation to the agricultural resource This shows that the Company is established for the promotion or advancement of scientific research and that it will therefore be a scientific institution.

Special Conditions

Section 50-47 of the ITAA 1997

Section 50-47 of the ITAA 1997 provides a special condition for all entities covered by section 50-1 of the ITAA 1997, it states:

An entity that:

(a)  is covered by any item; and

(b)  is an ACNC type of entity;

is not exempt from income tax unless the entity is registered under the Australian Charities and Not-for-profits Commission Act 2012.

Broadly, an entity that can be registered as a charity with the Australian Charities and Not-for-profits Commission (ACNC) is an 'ACNC type of entity'. The Charities Act 2013 (CA) sets out the requirements to be a charity. Section 6 of the CA requires an entity to be not-for-profit (that is, it is prohibited from making distribution of income and assets to its members). ACNC Factsheet - Who can register with the ACNC states the following demonstrating not-for-profit character:

To be registered with the ACNC, you need to show that your organisation meets the requirement of being a not-for-profit. You can do this by having particular statements (clauses) in your organisations governing documents, and following these...

The Company is not an 'ACNC type of entity' in the relevant period. As such, section 50-47 of the ITAA 1997 does not apply to the Company.

Section 50-55 of the ITAA 1997

Subsection 50-55(1) of the ITAA 1997 states that an entity covered by item 1.3 is not exempt from income tax unless one of the following applies:

•         it has a physical presence in Australia and, to that extent it pursues its objectives and incurs its expenditure principally in Australia; or

•         it is a deductible gift recipient; or

•         it is prescribed by law in the income tax regulations and it is located outside Australia and is exempt from income tax in its country of residence.

The Company is a resident of, and is located in, Australia. The Company carries on its activities in Australia. The Company pursues its objectives and incurs its expenditure principally in Australia.

The Company meets the requirements of a scientific institution under item 1.3 of section 50-5 of the ITAA 1997.

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