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Edited version of private ruling
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Ruling
Subject: Income tax exempt status
Question 1
Is the entity exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as an association established for the purpose of promoting the development of Australian manufacturing resources pursuant to item 8.2(d) of section 50-40 of the ITAA 1997?
Answer
No
This ruling applies for the following periods:
1 July 2008 to 30 June 2009
1 July 2009 to 30 June 2010
1 July 2010 to 30 June 2011
The scheme commences on:
1 July 2008
Relevant facts and circumstances
The entity is a registered incorporated association.
The entity is established for a number of purposes which are outlined in its constitution.
The entity's objectives include ensuring that:
· its members comply with the industry code of practice and safety standards;
· it can provide accurate and comprehensive advice to the industry on technical and safety issues;
· it delivers services to its members and where appropriate to the wider community.
The members of the entity are Australian manufacturers and suppliers of parts and accessories to manufacturers.
An application for membership to the entity is conditional upon the applicant agreeing to manufacture their products in accordance with the relevant standards and code of ethics and to attach a badge to each product manufactured and to purchase those badges from the entity. They must also grant permission for the entity to audit their premises for compliance.
Members who refuses or neglect to comply with the rules or who are found guilty of conduct unbecoming of a member or prejudicial to the interests of the entity can be fined, have their membership suspended or be expelled from the entity.
Each member is required to pay a marketing fee each month to a separate body. The marketing fee is to fund marketing and promotional campaigns to increase awareness of the industry.
The entity's constitution provides that the income and property of the entity shall be applied solely for the promotion of its objects and no portion can be paid or transferred directly or indirectly by way of dividend, bonus or otherwise to any member.
The entity's constitution also provides that if the entity is wound up its surplus assets will not be distributed amongst its members but will be transferred to another organisation with similar purposes which also prohibits the distribution of its income amongst its members.
The entity provided information on the activities it undertakes, including the time devoted to these activities.
The entity provides newsletters to its members which provide an update on the activities/projects that it is involved in as well as providing members with technical information relating to the manufacture of the product.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 50-1
Income Tax Assessment Act 1997 section 50-40
Reasons for decision
Summary
The entity will be exempt from income tax if it is a non-profit association whose dominant purpose is the promotion and development of the manufacturing resources of Australia.
Having regard to its objects and activities it is considered that the dominant purpose of the entity is to provide benefits to its members and not the promotion or development of Australian manufacturing resources.
Detailed reasoning
Assessable income of an entity is exempt under section 50-1 of the ITAA 1997 where the entity falls within the following description contained in item 8.2 of section 50-40 of the ITAA 1997:
A society or association established for the purpose of promoting the development of any of the following Australian resources:
· agricultural resources
· horticultural resources
· industrial resources
· manufacturing resources
· pastoral resources
· viticultural resources
· aquacultural resources
· 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 matters to be satisfied before this exemption applies are:
· the entity is a non-profit association or society; and
· the dominant or principal purpose for which the entity is established is promoting resource development; and
· 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 (see Taxation Ruling IT 2415 Income tax: Associations promoting the development of Australian resources at paragraph 7).
If the society or association fails to satisfy these requirements, its income will not be exempt under this provision.
Association
One of the requirements of section 50-40 of the ITAA 1997 is that the entity be a society or association.
The terms association and society are not defined and have their ordinary meaning. The Macquarie Dictionary defines association as an organisation of people with a common purpose and having a formal structure. Society has an equivalent meaning (Pro-campo Ltd v. Commr of Land Tax (NSW) 81 ATC 4270 at 4279; (1981) 12 ATR 26 at 35).
The entity is comprised of a number of members who share a common purpose and has a formal structure as an incorporated association.
Therefore, it is accepted that the entity is an association.
Resources
The entity is seeking income tax exemption on the basis that it is established for the purpose of promoting the development of manufacturing resources.
Manufacturing resources include 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: Australian Insurance Association v. FCT at 79 ATC 4574; 10 ATR 339.
It is clear from the documentation submitted that the entity is concerned with the manufacturing aspects of products of a particular industry.
Although it will be examined further below whether the principal or dominant purpose of the entity is the promotion of the development of Australian manufacturing resources, it can be concluded at this stage, based on the information on had, that the entity is concerned with improvements to manufacturing processes and improvements to the skill and know-how of persons involved in the manufacture of the product.
Therefore it is accepted that the entity is concerned with manufacturing resources.
Resources of Australia
The words 'in Australia' limit the exemption to associations whose activities are directed to Australian resources. Where an association is established for the purpose of promoting the development of a foreign resource, or of both Australian and foreign resources, the test for the exemption is not met.
The entity's membership base consists of only Australian manufacturers and suppliers. Therefore, entity's activities are directed towards assisting and promoting Australian manufacturers.
The entity has also undertaken some activities in relation to bringing to the attention of consumers and regulatory bodies issues in relation to imported products as being of inferior quality and therefore compromising safety. This activity is not seen as being undertaken as a way of promoting the development of imported products but a way of further promoting the quality and care taken in the manufacture of Australian products so consumers do not purchase cheap, inferior imports which could compromise their safety.
Therefore it is accepted that the focus of the entity is on resources of Australia.
Principal or dominant purpose - promote development of resources of Australia
It has already been established that the entity is an association involved with manufacturing resources of Australia.
However, section 50-40 of the ITAA 1997 is directed to 'promotion of the development' of the specified resources and requires that the association be established principally or predominantly for the purpose of resource development (Australian Insurance Association v FC of T 79 ATC 4569; 10 ATR 333; (1979) 41 FLR 256).
It is not sufficient that promoting the development of the resource may be incidental to, involved with, or a consequence of an association's purpose. Determining the dominant purpose of the association will be a question of fact and degree and will involve a weighing of the various elements which include its objects, activities, history, proposed directions, etc (Boating Industries Association of New South Wales v F C of T 85 ATC 4224; (1985) 16 ATR 383). The term 'established' refers not only to the motives and objectives which lead to the formation of the association but also its purposes since that time.
Taxation Ruling No, IT 2415 Income Tax: Association promoting development of Australian resources states:
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.
In Boating Industries Association of New South Wales v F C of T 85 ATC 4224; (1985) 16 ATR 383 it was determined that the association, whose purpose was the promotion of safe boating, was not established for the purposing of promoting manufacturing resources.
The association's primary object was the promotion of safe boating and the activities that it carried out were the running of an annual international boating show as well as regional shows, negotiations with government on legislation affecting the boating industry, negotiations with suppliers of raw materials for the establishment of quality control standards and in particular to resin uses in the manufacture of fibreglass boats, the promotion of safe boating, negotiations with State Government departments, instrumentalities and councils on development of marinas and mooring facilities, preparation of submissions and development of standards of performance and construction in the design and manufacture of recreational boats and the collection and dissemination of statistical information relating to such boats. Only 33% of the members of the taxpayer were manufacturers with the remaining being retailers, marinas and boatsheds, importers, service providers and other associations.
It was held that the association's objects, although not necessarily determinant or conclusive, say nothing concerning manufacturing or the promotion of the development of manufacturing resources of Australia. The extent that promotion is mentioned is in the first object which is regarding the promotion of interest in safe boating. The evidence suggested that the association's principal activity was safe boating and not the promotion of Australian manufactured boats. The membership of the association was not limited to manufacturers or even to Australian manufacturers, but extended to those with interests in the boating industry, including importers, not only of boats, but of manufactured gear and accessories for use with boats. It was held that the association's activities directed towards standards were not concerned so much with manufacturing as with the safety of boats. The exhibitions and shows which were staged were directed substantially towards the promotion of sales of boats rather then the manufacture other than in a remote and indirect result of such sales. The major activity of the boat show was for the purpose of providing a major sales venue of members' products wherever manufactured.
In the Boating case Lusher J said, at 85 ATC 4228' 16 ATR 387-8:
"It is argued and accepted that although the basic fundamental objective or purpose is safe boating, safe boating in turn leads to sales which in turn require standards, particularly in manufacture so that there is a nexus between safe boating and sales through to manufacture so that in substance, the requirement of the section for promoting the development and manufacturing of resources of Australia is obtained.
This approach rather ignores the basic requirement of the section that its application is to associations established for the purpose set out in the section… The requirement is "established" not "involved"… It does not follow that a body whose activities or involvement have he effect or result of promoting the development of manufacturing resources of Australia, who otherwise are within the section as to the disposition of income, is necessarily established for that purpose. They could be established for another purpose altogether but still have the result mentioned."
The entity's objects do not indicate that its purposes relate to the promotion of the safety of the use of the product. It has purposes that relate to promoting, developing and advancing specific aspects of manufacturing, selling, dealing in, or disposing of the product, also providing advice to members and fostering their interest, promoting the industry, promoting high quality and monitoring compliance with manufacturing codes as well as providing advice and developing solutions to specific problems confronting the industry.
The activities of the entity are somewhat similar to those in the Boating case in that the entity participates in trade shows, negotiates with government on legislation affecting the industry (however in relation to manufacturing), establishes quality control standards and collects and disseminates statistical information in relation to products manufactured.
However the entity also undertakes additional activities which indicate a far greater role in monitoring compliance to manufacturing codes, providing information to manufacturers in relation to specific aspects of manufacturing and promoting and developing training programs in relation to manufacture of the product.
The members of entity are all Australian manufacturers or suppliers of parts and accessories, unlike the Boating case whose members were not limited to manufacturers. In relation to the activities the entity carries out, although some are similar to the Boating case, they are directed more towards the improvement of manufacturing processes and the promotion of Australian manufactured products as being superior to imports rather then simply directed at safety in the use of the product. The entity, although indirectly promoting safety though ensuring that manufacturers are making quality products, does not promote itself as promoters of safety.
The main activity of the entity is to undertake compliance audits and provide advice to manufacturers. These activities, together with the stated objects of the entity indicate that its purpose is greater then simply the promotion of safety. The activities of the entity indicate that it has a purpose of promoting the development of manufacturing resources.
The entity also spends a significant amount of its resources in promotion of its badge and logo. This is evident from its business plan and from the financial statements. The purpose of these promotional activities is for the public to be made aware of the badge and the fact that its use on the product would signify to consumers that the product is built in accordance with Australian standards.
We would therefore need to ascertain whether this activity provides the members of the entity with any benefit that would detract from the main purpose of the entity being considered as being established to promote the development of manufacturing resources.
Non-profit and benefits to members
Section 50-40 of the ITAA 1997 requires that the association not be carried on for the purposes of profit or gain to its individual members. This is known as the non-profit requirement. Where members, in their individual capacity, are to receive benefits from an association it will fail the non-profit test.
The ATO publication Income tax guide for non-profit organisations (NAT 7967-03.2007) on page 6 provides the following:
The basic premise of a non-profit organisation is that it 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.
The Tax Office accepts 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 organisations non-profit character. The organisations actions must be consistent with this requirement.
The constitution of the entity contains appropriate clauses which show its non-profit character whilst operating and on winding up.
As the following cases illustrate, it is necessary to distinguish a dominant purpose of providing benefits to members as a group from the incidental benefits which will often flow to members from activities promoting the development of resources with which they are involved.
In Case 46/94 94 ATC 412; (1994) 29 ATR 1102 at ATC 417; ATR 1108 the Tribunal found, as an alternative ground, that the association was not exempt under 23(h) because it principally promoted the interests of its members. It operated to look after the needs of consulting surveyors through such matters as public liability insurance, professional development, training of employees, assuring quality client service, publishing business practice and technical material, and lobbying to obtain work for members particularly from government. (The association was accepted as non-profit.)
In Australian Insurance Association v. Federal Commissioner of Taxation 79 ATC 4569; 10 ATR 333, the association comprised the majority of general insurance companies carrying on business in Australia. At issue was, inter alia, whether it primarily promoted the interests of its members, or whether the benefits to members were incidental to the purpose of being established to develop a particular resource. Sheppard J in concluding said, at ATC 4572; ATR 336
I conclude that many of the activities of the appellant have been concerned with the protection and furtherance, directly and indirectly, of the interests and businesses of its members, not in the sense of protecting or furthering the interests of any one of them but rather in the sense of protecting or furthering the interests of Australian insurance companies generally and as a whole. The aim has been to keep insurance business in Australia, to direct it towards Australian companies and to keep as much premium income here as possible, rather than have it disbursed overseas. None of these objectives can be directly achieved. A wide range of activities is involved, some having more relevance to the purposes I have mentioned than others. A separate objective has been to foster underwriting skills in Australia. The appellant's aim is to create in Australia a pool of underwriting skill and knowledge so that insurance companies carrying on business here, whether they be Australian or overseas companies, will have access to sufficient numbers of expert personnel whom they will be prepared to employ, thus avoiding or reducing the need to post overseas people to Australia or to bring overseas people to Australia or to bring overseas people here for the purpose of underwriting the risks involved in particular projects, for example, the North West Shelf project mentioned in Mr Frews evidence.
The trend of cross-examination by counsel for the Commissioner was that the appellant was established and carried on its activities for the more selfish interests of its members. It was established, so it was suggested, in order to achieve a build up of the businesses of its members at the expense of the business of overseas companies. This led to a submission that the appellant was not so much established for the purpose of promoting any resource of Australia but for the purpose of preserving and increasing the businesses of its members. Counsel for the Commissioner also submitted that it was not correct that any prime purpose of the appellant was to nurture and foster underwriting skill on the part of insurance staffs in Australia.
In my opinion the difference between the parties in the way that each views the evidence is one of emphasis. The very nature of the appellant's undertaking is such that it must further the more selfish interests of its members by engaging in the various activities which it does. But that, in my opinion, is only a consequence of what it does and in any event itself leads to a situation pursuant to which the appellant's endeavours do have the overall effect of promoting the protection and furtherance of Australian insurance business.
Case W49 89 ATC 469; at 474 states;
The enlargement of the market is one of the objectives of "promoting the development" of any relevant industry. In my view the relevant test is satisfied provided that members do not benefit "as members". I find that the Association does not have as an object the generation of increased profits to any one or more members to the exclusion of others or have as an object the equal or equitable distribution of any increased market profit between its members to the exclusion of others.
The entity does confer benefits to its members.
This is evident through its purposes, activities and its business plan which indicate that the Association mainly provides technical information and support to its members in relation to manufacturing issues. However, it also is involved to a lesser extent, in providing information to the public or in a public forum such as at trade shows and also in providing information to government regulatory authorities.
It is also evident from its business plan that the mission of the entity is to supports its members.
The primary focus of the entity is the audit of its members to ensure compliance with relevant standards.
The main expenditure and a further key focus area of the entity is on the promotion of its image and its badge and what these represent.
What remains to be determined is whether these benefits that the entity provides to its members are its principal purpose or whether its principal purpose is the promotion of the development of manufacturing resources and the benefits that its members receive are only incidental to achieving this purpose.
The issue then turns to how entity promotes itself.
Based on the information provided, the entity's activities, so far as promoting development of manufacturing resources, is mainly promoting the development of its member's manufacturing resources.
Therefore it is considered that members of the entity are receiving benefits as 'members'. Other activities the entity undertakes that are not targeted to members are incidental and not considered to be associated with a dominant purpose of promoting the development of Australian manufacturing resources.