Edited version of your written advice

Authorisation Number: 5010045560269

Date of advice: 29 September 2017

Ruling

Subject: Income tax exemption

Issue 1

Is the corporation a society or association that is established for the purpose of promoting the development of any of the resources listed in section 50-40 of the Income Tax Assessment Act 1997 (ITAA 1997) so that it is exempt from income tax under section 50-1 of the ITAA 1997?

Question 1

Is the corporation a society or association whose purpose is to promote the development of one of the resources listed in item 8.2 of section 50-40 of the ITAA 1997?

Summary

The corporation is a society or association whose purpose is to promote the development of an industrial resource. Industrial resources are listed in item 8.2 of section 50-40 of the ITAA 1997.

Detailed Reasoning

Section 50-1 of the ITAA 1997 provides that the total ordinary income and statutory income of certain entities is exempt from income tax. Item 8.2 of the table in section 50-40 of the ITAA 1997 provides that a society or association established for the purpose of promoting the development of (a) agricultural resources, (b) horticultural resources, (c) industrial resources, (d) manufacturing resources, (e) pastoral resources, (f) viticultural resources, (g) aquacultural resources, or (h) fishing resources, is an exempt entity.

‘Society or association’

‘Society’ and ‘association’ are not defined in the ITAA 1997. In construing ‘society, association or club’ in the context of former section 23 of the Income Tax Assessment Act 1936, a predecessor of section 50-40, Justice Olney in Douglas and Others v. FCT (1977) 77 FCR 112; 97 ATC 4722; 36 ATR 532 stated that they would be construed according to their ordinary meanings. His Honour referred to the definitions of ‘society’ and ‘association’ in the Concise Oxford Dictionary and found the following definitions:

Society: Association of persons united by a common aim or interest or principle;

Association: Organised body of persons for a joint purpose;

The definitions of ‘society’ and ‘organisation’ therefore require an organised body of persons with a common or joint purpose. The fact that the corporation is incorporated does not prevent it from being a ‘society’ or ‘organisation’ as long as it is an organised body of persons with a common purpose. As Justice Lee stated in Pro-Campo Limited v. Commissioner of Land Tax (NSW) (1981) 81 ATC 4270; 12 ATR 26, ‘one knows that many organisations which give themselves the title society or association or club are as often incorporated as they are unincorporated’.

The corporation is an incorporated association established for the common purposes set out in its Constitution and is therefore a ‘society’ and/or ‘organisation’ for the purposes of section 50-40 of the ITAA 1997.

What is the purpose for which the corporation was established?

Item 8.2 of the table in section 50-40 of the ITAA 1997 requires the determination of the purpose for which the society or association was established. A society or association will only be exempt under item 8.2 of the table in section 50-40 if they were ‘established for the purpose of promoting the development’ of any of the listed Australian resources.

In the context of section 50-40 of the ITAA 1997, ‘”established” means maintained at the time at which qualification under the section is in issue’, and ‘”for the purpose” means “for the sole or dominant purpose”’ (FCT v. Co-Operative Bulk Handling Ltd (2010) 189 FCR 322; [2010] FCAFC 155; 2010 ATC 20-231; (2010) 81 ATR 312 (Bulk Handling)). It is not enough that promoting the development of a listed Australian resource is incidental to or a consequence of a society or association’s purposes. It is also not enough that an association or society has two co-ordinate purposes, one of which is outside the exemption, as it would not be a predominant purpose (Cronulla-Sutherland Leagues Club v. FCT (1990) 23 FCR 82; 90 ATC 4215; (1990) 21 ATR 300).

In R v. Federal Court of Australia; Ex parte WA National Football League (1979) 143 CLR 190; [1979] HCA 6 at CLR 208; HCA 53, Barwick CJ stated:

the nature of a company may not be discernible from a perusal of its memorandum. The only sure guide to the nature of the company is a purview of its current activities, a judgment as to its nature being made after an overview of all those activities.

Therefore, in determining purpose, the association or society’s constituent documents are relevant, but it is also necessary to refer to their operations and activities.

It is also important to note that the requisite purpose is not the promotion of a resource, but the promotion of the development of one of the listed Australian resources. In FCT v. Broken Hill Pty Co. Ltd 69 ATC 4028; (1969) 1 ATR 40 the majority of the High Court accepted at ATC 4031-4032; ATR 45 the following interpretation of ‘development’ in relation to mining property:

It covers…any preparation, adaptation or equipment of the property for the exploitation of an inherent potentiality which cannot be exploited, or fully exploited, without some such preliminary treatment.

In FCT v. Co-operative Bulk Handling Ltd 2010 ATC 20-231, 80; 81 ATR 312, 332, Mansfield and McKerracher JJ held that activities focused on the following were directed at promoting the development of the grain growing industry:

1) Improving the quality of grain both as grown and maintained through its delivery, storage and handling;

2) Securing its continued marketability so that production can be maintained and increased

3) Enhancing the reputation of wheat growth in Western Australia

It is therefore clear the meaning of ‘development’ in section 50-40 is broad, and covers any activity that ensures the specified resource is best used or fully exploited. Based on this, we accept that ‘promoting the development’ of a resource may be direct or indirect. For example, the development of a resource may be directly promoted by research, the introduction of new and improved classes of products, or education. The development of a resource may also be indirectly promoted, for example, by facilitating cooperation of businesses, improved marketing methods, lobbying for legislation, or solution of labour disputes. Taxation Ruling IT 2415 Income tax: associations promoting development of Australian resources also states that identifying and establishing training schemes and programmes to overcome manpower needs are ‘part and parcel of the development of resources’.

We have reviewed the list of objects for which the corporation is established in the Constitution. A number of the objects are exceptionally broad, simply stating that the corporation is established ‘to provide benefits’ for particular entities or sectors. However, as the interpretation of ‘development’ is also broad, we consider that the following objects point towards a purpose of promoting the development of the resource for the following reasons:

● A clause promotes the development of the resource by advancing the resource’s Australian market through the provision of benefits to all entities who operate in the market

● Multiple clauses promote the development of the resource by encouraging education, research and more efficient use of the resource through the provision of benefits to entities engaged in recycling, recovery, and disposal of the resource

● A clause promotes the development of the resource by promoting research and product development in relation to the resource’s Australian market and the recycling, recovery and disposal of the resource

● Several clauses promote the development of the resource by advocating for the interests of its members, which are all involved in the resource’s industry, on all issues

● Several clauses promote the development of the resource by influencing the legislative and regulatory landscape in which the resource’s industry operates through negotiating, making submissions, and providing information to all levels of government and regulatory authorities

● A clause promotes the development of the resource by facilitating cooperation and sharing of information between all entities involved with the resource’s industry in Australia

The corporation’s statement on their website is also indicative of a purpose of promoting the development of the resource. In particular, there is an emphasis on dealing with commercial and environmental challenges, and finding a solution to a problem.

The statement from the corporation’s company secretary is consistent with these objects; the corporation’s main activities are funding research into the resource, public education on the resource’s use, involvement with government departments in establishing new standards, and collation and distribution of data and information provided by members. All of these activities are consistent with the objects in the Constitution, and for similar reasons, indicate that the corporation’s purpose is the promotion of the development of the resource.

In considering the corporation’s Constitution, information provided on their website, and a statement on their activities, it is concluded that the corporation is a society or association established for the purpose of promoting the development of the resource.

‘Australian resource’

Before considering whether the resource is a resource listed in item 8.2 of the table in section 50-40 of the ITAA97, a precondition is that the resource must be an ‘Australian resource’. That is, the corporation must be a society or association established for the purpose of promoting the Australian resource.

Because the objects refer to the ‘the resource’s industry in Australia’, the Australian market, practices and regulations in Australia, and because one of their activities is working with Australian government departments, it is concluded that the corporation is a society or association established for the purpose of promoting the resource in Australia.

Is the resource a resource within item 8.2 of the table in section 50-40 of the ITAA 1997?

The resources listed in item 8.2 of the table in section 50-40 are:

a) Agricultural resources;

b) Horticultural resources;

c) Industrial resources;

d) Manufacturing resources;

e) Pastoral resources;

f) Viticultural resources;

g) Aquacultural resources;

h) Fishing resources

In considering the resource, the most relevant of these are industrial resources and manufacturing resources.

‘Resource’ is not defined. In Australian Insurance Association v. FCT 79 ATC 4569, 4573; (1979) 10 ATR 333, 337, in deciding that the undertakings of Australian insurance companies are a resource of Australia, Sheppard J looked at the businesses, as well as the assets, knowledge, and skill of staff. ‘Resource’ is therefore broader than plant and equipment or assets, and also includes stock, personnel, knowledge, expertise and skills.

In Australian Insurance Association v. FCT 79 ATC 4569, 4574; (1979) 10 ATR 333, 339, Sheppard J considered ‘plant and equipment, manpower, skill and know-how in manufacturing such articles as steel products, clothing and furniture, and such non-tangible commodities as gas and electricity’ to be within the ambit of ‘manufacturing resources’. Sheppard J also determined that ‘industrial resources’ has a wider meaning than ‘manufacturing resources’, and is taken to include resources in the building, mining and quarrying industries, as well as resources in the shipping and transport industries (79 ATC 4574-4575; (1979) 10 ATR 339-340).

The resource is an important asset in many manufacturing industries. More aptly, the resource is a vital part of the transport industry. It is concluded that the resource is an asset of the transport industry within Sheppard J’s interpretation. As ‘industrial resources’ covers resources in the transport industry, it is concluded that the resource is an ‘industrial resource’ within the meaning of section 50-40 of the ITAA 1997.

There are a number of special conditions that the corporation must meet before it can be considered income tax exempt under section 50-1 of the ITAA 1997.

Special Condition 1

Is the corporation carried on for the profit or gain of its individual members?

Summary

The corporation is not carried on for the profit or gain of its individual members.

Detailed reasoning

Item 8.2 of section 50-40 of the ITAA 1997 provides a special condition for societies or associations that are established for the purpose of promoting the development of the listed Australian resources before they are income tax exempt under section 50-1; the society or association must not be carried on for the profit or gain of its individual members. Generally, it is accepted that an entity is not carried on for the profit or gain of its individual members where its governing documents prevent distribution of profits or assets to members or other private persons, both while it operates and when it winds up.

The corporation has the necessary clauses in its constitution. A clause provides that the corporation must not be operated for the purpose of the profit or gain of any member, and that the corporation does not have to power to issue shares or pay or transfer income or property to members other than as provided in other clauses specified. The other clauses specified outline the resignation and removal of directors, and there is nothing contained in those clauses or any other clauses allowing payment or transfer of property.

A clause provides that if the corporation is wound up or dissolved, members have no right to participate in any distribution or payment of the assets or property of the corporation, and that any assets or property available for distribution after satisfaction of all debts and liabilities shall be given or transferred to institution/s which have similar objects and whose constitution prohibits the distribution of income and property.

Furthermore, review of the corporation’s financial statements shows that there have been no distributions of income during the 2014, 2015 and 2016 financial years, with all profits being retained by the corporation. Accordingly, it is accepted that the corporation meets the special condition in item 8.2 of the ITAA 1997 as an entity that is not carried on for the profit or gain of its individual members.

Special Condition 2

Is the corporation an ACNC type of entity?

Summary

The corporation is not an ACNC type of entity.

Detailed Reasoning

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

‘ACNC type of entity’ is defined in subsection 995-1(1) of the ITAA 1997 as an entity that meets the description of a type of entity in column 1 of the table in subsection 25-5(5) of the Australian Charities and Not-for-profits Commission Act 2012. Column 1 of the table in subsection 25-5(5) of the Australian Charities and Not-for-profits Commission Act 2012 describes a charity. The Charities Act 2013 provides a definition of ‘charity’ that applies to all Commonwealth laws.

The definition of ‘charity’ in section 5 of the Charities Act 2013 provides that ‘charity’ means an entity:

a) That is a not-for-profit entity; and

b) All of the purposes of which are:

a. Charitable purposes that are for the public benefit; or

b. Purposes that are incidental or ancillary to, and in furtherance or in aid of, purposes of the entity covered by subparagraph (i); and

c) None of the purposes of which are disqualifying purposes; and

d) That is not an individual, a political party or a government entity

It has been concluded that the corporation is a not-for-profit entity. Charitable purposes are listed in section 12 of the Charities Act 2013. It has also been concluded that the corporation’s purpose is to promote the development of the resource. This will not qualify as one of the charitable purposes listed and the corporation will not be an ‘ACNC type of entity’.

Accordingly, section 50-47 of the ITAA 1997 will not apply.

Conclusion

The total ordinary and statutory income of the corporation is exempt from income tax under section 50-1 of the ITAA 1997 as it is a society or association established for the purposes of promoting the development of an industrial resource that is not carried on for the profit or gain of its individual members pursuant to section 50-40 of the ITAA 1997, and it is not an ACNC type of entity pursuant to section 5-47 of the ITAA 1997.

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