Edited version of private advice

Authorisation Number: 1051845233497

Date of advice: 31 May 2021

Ruling

Subject: Exemption from income tax

Question

Is the entity exempt from income tax pursuant to section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as a non-profit society or association established for the purpose of promoting the development of Australian industrial resources under item 8.2(c) of the table in section 50-40 of the ITAA 1997 and, therefore, exempt from income tax under section 50-1of the ITAA 1997?

Answer

The entity is exempt from income tax pursuant to section 50-1 of the ITAA 1997 as a non-profit society or association established for the purpose of promoting the development of Australian industrial resources under item 8.2(c) of section 50-40 of the ITAA 1997.

This ruling applies for the following period periods:

Year ended 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The entity is a private company incorporated in Australia and limited by shares.

The entity is established to promote the development and improvement of industrial resources in a particular industry in Australia.

The entity operates to promote the optimisation of the relevant industry and to enable effective and efficient logistics and provision of services to relevant stakeholders of that industry and network.

The entity works with other organisations to promote the importance and development of the industry.

The membership of the entity is open to any person or organisation that operates and utilise the infrastructure of the relevant industry.

The activities of the entity are primarily conducted in Australia.

The entity has appropriate non-profit and winding up clauses in its constitution

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 50-A

Income Tax Assessment Act 1997 Section 50-1

Income Tax Assessment Act 1997 Section 50-40

Income Tax Assessment Act 1997 Section 50-47

Reasons for decision

Summary

The entity is exempt from income tax pursuant to section 50-1 of the ITAA 1997 as a non-profit society or association established for the purpose of promoting the development of Australian industrial resources under item 8.2(c) of section 50-40 of the ITAA 1997.

DetailedReasoning

Assessable income of a taxpayer is exempt under section 50-1 of the ITAA 1997 where the taxpayer falls within the description contained in item 8.2 of section 50-40 of the ITAA 1997. It states:

A society or association established for the purpose of promoting the development of any of the following Australian resources:

(a) agricultural resources

(b) horticultural resources

(c) industrial resources

(d) manufacturing resources

(e) pastoral resources

(f) viticultural resources

(g) aquacultural resources

(h) fishing resources

The exemption is subject to a special condition that the society or association is not carried on for the profit or gain of individual members.

The conditions to be satisfied before exemption under section 50-40 of the

ITAA 1997 can apply are:

•         the organisation is a non-profit association or society;

•         the dominant or principal purpose for which the organisation is established is promoting resource development;

•         the resources whose development is being promoted are within the umbrella of resources specified in the relevant section; and

•         the resources, are resources of Australia.

Section 50-47 of the ITAA 1997 provides a further condition that if an entity that is covered by one of the items in Subdivision 50-A of the ITAA 1997 and an Australian Charities and Not-for-profits Commission (ACNC) type of entity, they will not be exempt from income tax unless they are registered under the Australian Charities and Not-for-profits Commission Act 2012.

This section does not apply to the entity as it is not a charity.

The entity has applied for consideration as a society or association established for the purpose of promoting the development of Australian industrial resources pursuant to item 8.2(c) of the table in section 50-40 of the ITAA 1997.

If the society or organisation fails to satisfy all these requirements, it will not be exempt from income tax under section 50-1 of the ITAA 1997 as a non-profit society or association established for the purpose of promoting the development of Australian industrial resources under item 8.2(c) of section 50-40 of the ITAA 1997.

The conditions of section 50-40 of the ITAA 1997 are discussed below:

1. It must be a society or association.

The term society, association or club is not defined in the ITAA 1997. The term

is,therefore, construed according to the ordinary meaning of the words.

In Theosophical Foundation Pty Ltd v. Commissioner of Land Tax (NSW)[1966] 67 SR (NSW), Sugerman JA defines society at 82:

A society, in the relevant sense, is a number of persons associated together by some common interest or purpose, united by a common vow, holding the same belief or opinion, following the same trade or profession, etc; an association"

The meaning of "society" as the Oxford English Dictionary definition shows can be the equivalent of "association" and I do not think that any relevant distinction in nature exists between the two. It merely seems to have happened that some organisations are called "associations", others are called "societies", but no meaningful difference can be detected between the two.

Paragraph 2 of Taxation Determination TD 95/56 considers the definition of 'association' as follows:

...The Shorter Oxford English Dictionary defines the term 'association' to be 'a body of persons associated for a common purpose; the organisation formed to effect their purpose'. The Macquarie Dictionary defines 'association' as being 'an organisation of people with a common purpose and having a formal structure'. Olsson J, in Quinton v. South Australian Psychological Board (1985) 38 SASR 523, also stated that the term 'association' has come to be regarded as attaching to a body of persons associated for a common purpose.

The Macquarie Dictionary (Online Version) defines 'club' as a group of persons organised for a social, literary, sporting, political, or other purpose, regulated by rules agreed by its members.

The interpretations of society, association or club as described above, emphasise on a 'body of persons' and 'an organisation of people' with a 'common purpose'. The entity is a company limited by shares, an organisation of people with a common purpose (as per its objects) and a formal structure. It is considered to be a society or association.

2. Must not be carried on for the profit or gain of its members

The entity must not be carried on for the profit or gain of its individual members.

Where an association operates principally to confer benefits to its members jointly or as a group, it is unlikely to be predominantly for promotion of resource development and, therefore, not exempt from income tax under item 8.2(c) of section 50-40 of the ITAA 1997. If an association is carried on for the profit or gain of its individual members, it will fail the non-profit requirement. Such a purpose is unlikely to be consistent with the purpose of promoting resource development. It is necessary to distinguish from the dominant purpose of providing benefits to members as a group from the incidental benefit which will often flow to members from activities promoting the development of resources with which they are involved.

An association usually ensures they operate on a non-profit basis by including non-profit clauses in their constituent documents. It is considered that the entity has acceptable non-profit clauses in its Constitution.

It is also necessary that the association's actions are consistent with their constituent documents. As the cases below illustrate, there are instances where benefits to members have been accepted. However, what is important to distinguish is whether benefits are conferred to members along with others in the community or as individual members.

The phrase 'profit or gain of its individual members' was considered in the case Commissioner of Taxation v Co-operative Bulk Handling limited [2010] FCAFC 155 (CBH case). In the CBH case, the members had to be customers of CBH. However, CBH's services were not restricted to members; non-members could also contract for CBH's bulk handling services. It was held that CBH made its facilities available to any grain trader or miller, whether or not they were members. Further, it was held at 112:

While members do benefit from the activities of CBH, in its grain handling and storage activities, they do so at no greater extent than, and have no preference over, non-members who deal with the company, and on these circumstances such benefits do not accrue to them as 'individual members'.

Members of the entity

From the information provided the members of the entity do receive benefits. However, no individual member of the entity benefits to a greater extent than any other member. Additionally, it is the broader industry who will benefit from the entity carrying on its business. It is considered that the benefits provided to members do not accrue to them as 'individual members'.

However, benefits which are received jointly as members and which are incidental to the pursuit of the association's objects, will not prevent it from passing the non-profit test. For example business members will commonly receive some advantages, including financial advantages, as an incidental result of resource development (Australian Insurance Association case).

In the case of Inland Revenue Commissioners v Yorkshire Agricultural Society (1928) 1 KB 611, the provision of specific benefits to members to induce membership were disregarded. Although the Society applied as a charitable institution, it was found that the benefits to the members in the form of various privileges attaching to membership could be disregarded. The fact that benefits accrued to members of the Society did not detract from the fact that the Society had been established for the purpose of improvement of agriculture as a whole and not for any confined purpose of benefiting only the particular members of the Society. His Lordship said at 631:

...If the benefit given to members is only given to them with a view of giving encouragement and carrying out the main purpose which is a charitable purpose, then I think the mere fact that the members are benefited in the course of promoting the charitable purpose would not prevent the society being established for charitable purposes only.

The entity was formed out of regulatory obligations. Specifically, the entity was established to act as an Independent Expert in the industry. The entity was therefore formed to carry out functions prescribed by the State's Competent Authority.

These benefits are directly related to the greater purpose of promoting the broader industry as a whole, an industrial resource of Australia. It is considered that entity does not exist principally to confer benefits on its members.

3. It must be established for the purpose of 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.

The promotion of development may be direct or indirect. Methods of promoting resources include marketing, training, research, education, introduction of new and improved classes of product and facilitation of cooperation, and similar activities.

Taxation Ruling IT 2415 Income tax: associations promoting development of Australia resources (IT 2415) discusses paragraph 23(h) of the Income Tax Assessment Act 1936, now section 50-40 of the ITAA 1997, and provides the following at paragraphs 7 to 9:

7. 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 paragraph 23(h) 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.

8. It is important to note that paragraph 23(h) does not refer to the promotion of specified resources - it is directed to the promotion of the development of the specified resources. In the context of paragraph 23(h) the term "development" must be taken to be used in a commercial or business sense, i.e. it comprehends all the elements which must be taken into account to ensure that the specified resources are used in the best interests of Australia. Reference might usefully be made to the observations of the High Court in F.C. of T. v. Broken Hill Pty. Co. Ltd., 69 ATC 4029; 1 ATR 40 on the meaning of the term "development" in relation to the development of a mining property.

9. There can be little doubt that the identification of, and programmes to overcome, manpower needs and the establishment of systematic training schemes in a particular industry are necessary for the efficient operation of the industry - they are part and parcel of the development of the resources specified in paragraph 23(h).

The term industrial resource is not defined in the legislation. It takes its ordinary meaning. Based on paragraph 6 of IT 2415, the expression industrial resources in section 50-40 of the ITAA97, refers to resources such as those of the building, mining, quarrying, shipping and transport industries. It does not extend to business or commercial resources. Moreover, Australian Insurance Association v FC of T 79 ATC 1569 (Australian Insurance Association) identifies 'Industrial Resources' to be resources such as those of the building, mining, quarrying, shipping and transport industries.

As defined above, the entity's Purpose in its Constitution relates to the promotion and development of the particular industry. Applying the definition of 'natural resource' from Australian Insurance Association v. Federal Court of Taxation 79 ATC 4569 - which relates to both mining and transport - will classify the entity's activities as being related to the promotion and development of Australian industrial resources.

Additionally, in relation to the "development" requirement, IT 2415 explains that this refers to "commercial or business" activities. The entity's activities relate to the Core Business and Ancillary Services which are defined in the Shareholders' Deed. The scope of these activities are related to facilitating improvements in both the relevant transportation industries.

Based upon the above discussion, it is accepted that the entity has a purpose to promote the development of Australian industrial resources through their activities representing the promotion and development of the relevant transport network industry. To qualify for exemption under item 8.2(c) 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 the entity's dominant objects as per its Constitution and its dominant activity must be for this purpose.

The entity's principal purpose as per its Constitution is provided in its Constitution. The purposes are to promote the development of the relevant Network and Industry, amongst other things.

It is accepted that the entity by the operation of its objects in its Constitution and its variety of activities representing the interests of Australian transport network members, is established principally for the purpose of promoting the development of Australian industrial resources.

Conclusion

It is considered that the entity is a non-profit association that meets the requirements of item 8.2(c) of the table in section 50-40 of the ITAA 1997 and its ordinary and statutory income is exempt from income tax under section 50-1 of the ITAA 1997.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).