Edited version of private advice

Authorisation Number: 1052118162051

Date of advice: 16 May 2023

Ruling

Subject: Scientific institute - income tax exemption

Question

Will Entity X continue to be an income tax exempt entity under item 1.3 in section 50-5 of the Income Tax Assessment Act 1997 (ITAA1997)?

Answer

Yes.

This ruling applies for the following periods:

Income year ending 30 June 20XX

Income year ending 30 June 20XX

Income year ending 30 June 20XX

Income year ending 30 June 20XX

Income year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Entity X in seeking the ruling provided a copy of its Constitution and copy of contracts that detail the work and activities it will undertake to achieve its objects.

Their Constitution contains clauses that state:

• the assets and income of Entity X shall be applied solely in furtherance of its objects and no portion shall be distributed directly or indirectly to any member;
• in the event if Entity X winds up, the amount that remains after such dissolution and the satisfaction of all debts and liabilities shall be transferred to another organisation with similar purposes which is not carried on for the profit or gain of its individual members;
• membership criteria;

Entity X:

• is established to enable the scientific research that are conducted principally in Australia
• is located in Australia; and
• incur its expenditure principally in Australia;

Entity X publishes their research result and share them with the industry and public.

Any income received by Entity X from any activity in its object expands the total pool of funding available for research and development, and education and training activities relevant to the industry.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 50-1

Income Tax Assessment Act 1997 section 50-5

Income Tax Assessment Act 1997 section 50-55

Reasons for decision

The statutory framework

Section 50-1 provides an exemption from income tax for the ordinary and statutory income of specified entities covered by one of the tables in Subdivision 50-A.

The items in table in section 50-5 refer to organisations whose primary purpose is charity, education, and science and notes special conditions which must be met for the exemption to apply. Specifically, section 50-1 exempts the ordinary income and statutory income of a scientific institution as described in item 1.3 of section 50-5, subject to special conditions set out in section 50-55.

Subsection 50-55(1) states that:

An entity covered by item 1.3 is not exempt from tax unless the entity:

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

(b)  is an institution that meets the description and requirements in item 1 of the table in section 30-15; or

(c)   is a prescribed institution which is located outside Australia and is exempt from income tax in the country in which it is resident;

and the entity satisfies the conditions in subsection (2).

Note: Certain distributions may be disregarded: see section 50-75.

Subsection 50-55(2) states:

The entity must:

(a)  comply with all the substantive requirements in its governing rules; and

(b)  apply its income and assets solely for the purpose for which this entity is established.

Scientific institution requirements

The Income tax guide for non-profit organisations (NAT 7967) by way of illustrationexplain scientific institutions. They are set up and operated primarily to advance science. Common ways of advancing science include research, exploration and teaching. Disseminating information will often be involved.

Scientific institutions do not include:

•         organisations run for the profit of their individual owners or members

•         professional associations primarily run for the professional or business interests of their members.

Therefore, in following this description, for the Commissioner to accept that Entity X is a scientific institution it must:

• be an institution
• have been set up and operates primarily to advance science
• is not run for the profit of their individual owners or members
• is not a professional association; and
• satisfies the requirements under section 50-55.

Institution

The term 'institution' is not defined in the ITAA 1997. Paragraph 24 of Taxation Ruling TR 2011/4 Income tax and fringe benefits tax: charities (TR 2011/4) provides a brief definition of what constitutes an institution and it states:

An institution is an establishment, organisation or association, instituted for the promotion of an object, especially one of public or general utility. It connotes a body called into existence to translate a defined purpose into a living and active principle. It may be constituted in different ways including as a corporation, unincorporated association or trust. However it involves more than mere incorporation. A structure with a small and exclusive membership that is controlled and operated by family members and friends and undertakes limited activities is not an institution.

In respect of Entity X there is a clear object which is mainly to fund research in the relevant Industry (Research Field); promote a managed and co-operative approach to research and education in the Research field. The membership is not via family relationship.

A clause in their constitution states that no portion shall be distributed directly or indirectly to any member except as bona-fide compensation for services or goods provided to, or expenses incurred on behalf of the Company.

Advancement of science

Neither the word 'science' nor 'scientific' is defined in the Income Tax Assessment Act 1936 or ITAA 1997, so they take on their ordinary meaning.

'Science' is defined by the Macquarie Dictionary (© Macquarie Dictionary Publishers, 2023) to mean:

(a)  the systematic study of the nature and behaviour of the material and physical universe, based on procedures determined by the scientific method, often leading to the formulation of laws to describe the results of such procedures in general terms.

(b)  a branch of such systematic study, as physics, biology, etc.

'Scientific' is defined in the Macquarie Dictionary (© Macquarie Dictionary Publishers, 2023) to mean:

(1)  of or relating to science or the sciences: scientific studies.

(2)  occupied or concerned with science: scientific researchers.

(3)  regulated by or conforming to the principles of exact science: a scientific method.

(4)  systematic or accurate.

For an institution to be a scientific institution, it must be set up and operated primarily to advance science. Common ways of advancing science include research, exploration and teaching. Disseminating information will often be involved. Scientific institutions do not include organisations for the profit of their members or professional associations.

In Royal Australasian College of Surgeons v FC of T (1943) 68 CLR 436, the Court held the promotion of science must be the main, substantial or primary object of the institution for it to qualify as a scientific institution. The inclusion of an institution as scientific also depends on the intrinsic character of the object which it promotes and not upon the benefit which may result from its transaction.

The objects of Entity X are to fund research in the Research field

On the basis of the objects and the activities, it is considered that Entity X is set up and operates primarily to advance science by conducting research to advance technology and scientific knowledge within the industry.

Run for the profit of their individual owners or members

The Income tax guide for non-profit organisations (NAT 7967) by way of illustrationexplains in detail the non-profit requirements and states in part:

A non-profit organisation is an organisation that is not operating for the profit or gain of its individual members, whether these gains would have been direct or indirect. This applies both while the organisation is operating and when it winds up.

Any profit made by the organisation goes back into the operation of the organisation to carry out its purposes and is not distributed to any of its members.

We accept an organisation as 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. These documents should contain acceptable clauses showing the organisation's non-profit character. The income tax law does not prescribe the words that a non-profit organisation must have in its constituent documents. The following example clauses would be acceptable, if other clauses do not contradict them. The organisation's actions must be consistent with this requirement.

A non-profit organisation can still make a profit, but this profit must be used to carry out its purposes and must not be distributed to owners, members or other private people.

Entity X:

•         will continue making annual investments into education and training;

•         have suitable non-profit clauses within its constitution, which restricts it to run the entity for the profit of its members or any individual;

•         follow the clause in its Constitution when offering membership to people.

Provided Entity X in their actions comply with their non-profit clauses it is accepted that it is not being run for the profit of its members.

Professional association

Entity X manages research projects within the industry and it is not a professional association.

Section 50-55

Section 50-55 of the ITAA 1997 stipulates that an entity covered by item 1.3 of section 50-5 on a basis of it being a scientific institution, is not exempt from income tax unless it:

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

(b) is an institution that meets the description and requirements in item 1 of the table in section 30-15; or

(c) is a prescribed institution which is located outside Australia and is exempt from income tax in the country in which it is resident.

Entity X carries out its activities in Australia. Therefore, they have a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia. Section 50-55 is satisfied.

Conclusion

As Entity X:

• promotes research and development, and education and training relevant to the industry;
• activities comply with its objects in its Constitution to advance science;
• shares the research outcomes and implications with the public;
• puts its net income in the total pool of funding available for research and development, and education and training activities relevant to the industry;

it will continue to be an income tax exempt entity under item 1.3 in section 50-5.

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