Edited version of private ruling

Authorisation Number: 1011678751553

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Ruling

Subject:

Income tax exemption under item 8.2(c), section 50-40 of the ITAA 1997

Question 1

Is Deep Exploration Technologies CRC Limited (DET CRC), a non profit organisation 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 Income Tax Assessment Act 1997 (ITAA 1997) and therefore exempt from income tax under section 50-1 of the ITAA 1997?

Answer

Yes

This ruling applies for the following period/s:

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

Facts

The entity is registered with the Australian securities and Investments Commission (ASIC) as an Australian Public Company limited by guarantee.

It has registered an ABN.

A copy of the entity's constitution as well as a document reflecting the agreement reached between the participants of the project has been included with the private ruling application.

Relevant details extracted from the constitution include objects of the company, how the income will be applied, its membership, and how surplus assets are treated should the company be wound up.

The other document provided is an agreement between the entity and a number of named participants.

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 50-40

Income Tax Assessment Act 1997 Section 50-50

Income Tax Assessment Act 1997 Section 50-52

Income Tax Assessment Act 1936 Section 23(g)(iii)

Reasons for decision

Item 8.2 of section 50-40 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a society or association established for the purpose of promoting the development of any of the following Australian resources shall be exempt from income tax, subject to the special condition that it is not carried on for the profit or gain of its individual members.

Australian resources listed in the table under item 8.2 are as follows:

· agricultural resources;

· horticultural resources;

· industrial resources;

· manufacturing resources;

· pastoral resources;

· viticultural resources;

· aquacultural resources;

· fishing resources.

Australian Resources

The word 'Australian' applied to the term 'resources' in the table in section 50-40 of the ITAA 1997 limits the exemption to associations whose activities are directed to Australian resources, thereby excluding associations whose activities are directed to the resources of places beyond Australia.

Exemption is not limited to associations whose activities extend, or are intended to extend, throughout the whole of Australia. An association promoting the development of a particular region's resources may be exempt. It is not required that the activities which promote development of the Australian resources be performed exclusively in Australia.

The ATO's Income tax guide for non-profit organisations - NAT 7967-03.2007 (ITGNPO), at page 22 under the heading 'Resource Development Organisations' states that:

… industrial resources include building, mining, quarrying, shipping and transport, but do not include business and commercial resources such as insurance and services such as surveying.

An industry's businesses and their assets may be resources (Australian Insurance Association v. FC of T 79 ATC 4569; (1979)10 ATR 333).

The objects of the entity's constitution stipulate it is a non profit institution to promote research into and development of Australia's resources. This is supported by the entity's activities as advised in the document provided detailing the agreement reached between the participants of the project.

Based on the objects in its constitution and its activities, it is considered that the entity is involved in researching and developing new mining technologies.

The case Australian Insurance Association v FCT (1979) 10 ATR 333 established that the term "industrial resources" refers to resources of industries such as the building, mining, quarrying, shipping and transport industries.

It is therefore accepted that the objects and activities of the entity are directed towards research into the development of new technologies for the relevant industry, and to this extent, it is an entity associated with developing Australian industrial resources.

Society or Association

The word 'society' and 'association' are not defined in the ITAA 1997 and have their ordinary meaning.

An association is a voluntary organisation having members associated together for a common or shared purpose (Douglas & Ors v FCT 97 ATC 4722). Society has an equivalent meaning (Pro-Campo v Commissioner of Land Tax (NSW) 81 ATC 4270). An association may be incorporated or unincorporated.

The entity is:

· registered with the Australian Securities and Investments Commission (ASIC) as an Australian Public Company, Limited by Guarantee, and

· an organised body of members instituted for the purpose of its constitution.

Based on the above, it is accepted that the entity meets the definition of association as it is a voluntary organisation with members associated together for a common purpose.

This condition is therefore satisfied.

Principal or dominant purpose - 'Established for the Purpose of Promoting the Development'

Section 50-40 of the ITAA 1997 is directed to 'promoting 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(s) may be a consequence of or incidental to, involved with, or a consequence of an association's purposes.

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). 'Established' refers not only to the motives and objectives which lead to the formation of the association but also to its purpose since that time.

In the High Court in A. & S. Ruffy Pty. Ltd. v. F.C of T 98 CLR 637, Fullagar J. at p652 said:

One must look at the memorandum but this cannot be conclusive either way but in addition there is also to be looked at the activities and the history and control.

Taxation Ruling 2415 Income Tax: Associations promoting development of Australian resources (TR 2415) states at paragraphs 7 & 8:

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:-

Promotion of the specified resources must be the predominant purpose for which a particular body is established.

The resources, the development of which is being promoted, must come within the umbrella of the specified resources.

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 interest 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.

In Cronulla Sutherland Leagues Club Limited v. Federal Commissioner of Taxation 90 ATC 4215, Lockhart J at 4220 said:

Section 23(g) (iii) is concerned with the periodic or recurrent, not the static, purposes of the relevant body in the year of income. It is relevant, however, to look at the objects or purposes for which the body was incorporated including the objects clauses in the Memorandum of Association, and also any subsequent activities of the body which may throw light on its activities in the relevant year of income.

Section 23(g)(iii) of the Income Tax Assessment Act 1936 (ITAA 1936) provides exemption to a society, association or club 'established for' the encouragement of a game or sport and is similar to the wording in item 8.2 in section 50-40 of the ITAA 1997 which provides exemption to a society or association 'established for the purpose' of promoting the development of specified resources.

Purpose, must be primary and dominant purpose, to satisfy section 50-40 of the ITAA 1997.

In Boating Industries Association of New South Wales v. Federal Commissioner of Taxation 85 ATC 4224, Lusher J. at 4228 said:

In Inland Revenue Commissioners v. Aberdeen Medico-Chirurgical Society (1931) 16 Tax Case 237 at p. 249 it was said by the Lord President that the question must always be what is the true nature and objects and activities and if they are of a mixed character the question must be decided according to the prevalent or main character. This was accepted by Latham C.J in Royal Australasian College of Surgeons v. F.C. of T. ((1943) 68 CLR 436) at p.444. Starke J. at p. 448 referred to main and dominant. See also Williams J. at p.452. This was in relation to a similar subparagraph, 23(e).

Other examples such as Australian Chemical Industry Association (Case W49 89 ATC 469; Case W49 (1989) 20 ATR 3597), Australian Insurance Association (Australian Insurance Association v. FC of T 79 ATC 4569; (1979) 10 ATR 333; (1979) 41 FLR 256), Surveyors' association (Case 46/94 94 ATC 412; (1994) 29 ATR 1102) all had express promotional purposes and little or no other activity at all.

Case U118 87 ATC 710 (Cane Growers case) at 714 states:

The construction of the water storage seems easily to fit within the meaning of the words "promoting the development of … agricultural ….resources of Australia" in sec. 23(h) of the Act. There can be little doubt that the construction of a water storage designed to provide additional water supplies for sugar-cane growers is the development of an agricultural resource. The ordinary meaning of the words must lead to that conclusion.

And again at 714:

…… However, para 23(h) does not require that there be a development of an agricultural resource, but rather a purpose of promoting the development of an agricultural resource. …

In Boating Industries Association of New South Wales v. Federal Commissioner of Taxation 85 ATC 4224, Lusher J at 4228 said:

It does not follow that a body whose activities or involvement have the 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.

The term 'development' is used in item 8.2 of the table in section 50-40 of the ITAA 1997 in a commercial or business sense. The promotion of development may be direct or indirect. It comprehends all the elements which must be taken into account to ensure that the specified resources are best used. A similar approach to 'development' is used in Federal Commissioner of Taxation v. Broken Hill Pty Co. Ltd (1969) 120 CLR 240; 69 ATC 4028; (1969) 1 ATR 40. In considering the phrase 'development of the mining property' the majority of the High Court accepted the interpretation of Kitto J:

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

Development entails increase in operations, unlocking of potentialities, advancement of activity; not just conduct of ongoing activity (FC of T v. Broken Hill Pty Co Ltd (1969) 120 CLR 240 per Kitto J at page 248).

The ITGNPO on page 22 regarding methods of promotion states:

Promoting development can be by various means, including research, providing facilities, training, improving marketing methods, facilitating cooperation and similar activities.

To achieve the entity's objectives as stated in its constitution, the entity will undertake research in a number of interrelated research programs.

The key impact of the entity's research will be to improve efficiencies in the relevant industry.

It is considered that the activities of the entity falls within the ambit of TR 2415 in that it is considered that it is established for the predominant purpose of the promotion of the development of the specified industry.

The facts available do support the entity as fulfilling a particular gap or barrier blocking development of the specified resources. The establishment of this entity seeks to develop methods which will serve to enhance the output, productivity and efficiency of the relevant industry.

It is therefore considered that the activities of the entity are for a purpose of promoting the development of industrial resources where a perceived gap or barrier to that development exists.

Furthermore, it is also considered the entity's activities are directed at researching new technologies for the industry which can lead to an enhancement of the operations of the industry as a whole.

Based on the objects, purpose and activities of the entity outlined under its constituent documents and the supporting information provided above, it is therefore considered that the entity's purpose is considered to be established to promote the development of specified Australian resources.

Special Conditions - 'Not carried on for the Profit or Gain of its individual Members'

If an association operates principally to confer benefits on its members jointly or as a group, it is unlikely to be predominantly for promoting resource development and thus not exempt under item 8.2 of the table in 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.

However, 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. Organisations will not be exempt where their main objects and activities are to protect or promote the interests of members.

As stated at page 22 of the ITGNPO:

If the organisation's main purpose is merely to provide services to its members, it will not be exempt. This is the case even if the services result in better use of resources by those members.

Furthermore, at page 6 of the ITGNPO:

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 organisation's non-profit character. The organisation's actions must be consistent with this requirement.

There are two requirements in the statement of non-profit character above.

First, an entity's constituent documents must display a non-profit character. Second, the entity's actions must be consistent with this non-profit character.

It is accepted that the relevant clauses of the entity's constitution meet the first requirement that constituent documents display a non-profit character.

It is now necessary to examine whether the second requirement is met i.e. whether the entities' actions are consistent with a non-profit character.

In Australian Insurance Association v. Federal Commissioner of Taxation 10 ATR 333;(1979) 41 FLR 256;79 ATC 4569 (Australian Insurance) Sheppard J concluded, at 79 ATC 4572; 10 ATR 336, 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 and furthering the interests of Australian insurance companies generally and as a whole…

And that:

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.

Based on the information provided it is also concluded that the entity meets the requirement that it is not carried on for the profit and gain of its individual members.

Conclusion

It is accepted that the research that the entity undertakes will be of benefit to the relevant Australian Industry.

Based on the above the total ordinary income and statutory income of the entity is therefore exempt from income tax pursuant to section 50-1 of ITAA 1997 as it is considered to be an association established for promoting the development of industrial resources, pursuant to item 8.2(c) of the table in section 50-40 of the ITAA 1997.

ATO view documents

Income Tax Ruling IT 2415 Income Tax: Associations promoting development of Australian resources.

Other references (non ATO view, such as court cases)

Income Tax Guide for Non-Profit Organisations (NAT 7967-03.2007)

& S. Ruffy Pty. Ltd. v. F.C of T 98 CLR 637

Australian Insurance Association v. FC of T 79 ATC 4569

Boating Industries Association of New South Wales v. Federal Commissioner of Taxation 85 ATC 4224

Cronulla Sutherland Leagues Club Limited v. Federal Commissioner of Taxation 90 ATC 4215

Douglas & Ors v FCT 97 ATC 4722

Federal Commissioner of Taxation v. Broken Hill Pty Co. Ltd (1969) 120 CLR 240; 69 ATC 4028; (1969) 1 ATR 40