Edited version of private ruling

Authorisation Number: 1011727308633

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Ruling

Subject : Society or association - exemption from income tax

Question

Is the ordinary and statutory income of the entity exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) pursuant to item 8.2 of the table in section 50-40 of the ITAA 1997?

Answer

Yes

Relevant facts and circumstances

The entity has requested a private binding issue on whether it is exempt from income tax as a society or association established for the purpose of promoting the development of Australian resources pursuant to item 8.2 in the table in section 50-40 of the ITAA 1997.

The entity is an association.

The entity is a company limited by guarantee.

The members have a common interest in the objects expressed in the governing documents.

There will be no profit or gain by individual members.

All members of the entity are residing in Australia and there are no overseas members.

The principal or dominant purpose of the entity is to promote Australian resources.

To be exempt under section 50-40 of the ITAA 1997, an association must be established principally or predominantly for the purpose of promoting the development of one or more of the specified resources in reaching the view. It is necessary to consider the organisation's constituent documents, and its history, operations and activities.

Through better education of persons involved in the specified services, the entity effectively serves to promote various Australian resources.

The objects are listed in the governing documents and include the promotion of the study in the field, the development and improvement of business, holding of conferences and meetings for the discussion of business in all its phases, to publish information of services or interest to individuals engaged in the business.

The entity's activities include education and training of new and existing participants in the field of business, with particular emphasis on specified practices, including finance, legal and operational aspects of the process; the recruitment of new participants, the dissemination of information through publications, a web based information site and through the conduct of networking sessions.

Dissolution clause

The constitution relates to the winding up or dissolution of the company and states that after the winding up or dissolution of the company if there remains any property the same shall not be paid to or distributed among the members of the company, but shall be given or transferred to some other institution or institutions having similar objects of the company and prohibits the distribution of its or their income and property amongst their members.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 50-1

Income Tax Assessment Act 1997 Section 50-40

Income Tax Assessment Act 1936 Paragraph 23(h)

Summary

The entity is exempt from income tax as a non profit society or association within the description contained in section 50-1 and Item 8.2 of section 50-40 of the Income Tax Assessment Act 1997 (ITAA 1997).

It predominantly promotes the development of the following Australian resources:

· agricultural resources

· manufacturing resources

· viticultural resources

Reasons for decision

The assessable income of a non-profit society or association is exempt where it falls within the description contained in section 50-1 and Item 8.2 of section 50-40 of the Income Tax Assessment Act 1997 (ITAA 1997):

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) Aquaculture resources

(h) Fishing resources

Special conditions:

.Not carried on for the profit or gain of individual members.

For a society or association to be exempt from taxation under this section it must be established predominantly for the purpose of promoting resource development. An essential element in Item 8.2 of section 50-40 of the ITAA 1997 is that it applies to production industries, and only to Australian resources.

Society or Association

The terms association or society are not defined in the ITAA 1997 and, therefore, have their ordinary meaning.

In Taxation Determination TD 95/56 the Tax Office considers the meaning 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.

 In Pro-campo Ltd v. Commr of Land Tax (NSW) (1981) 12 ATR 26 at 35 Lee J said:

 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.

The entity is a company limited by guarantee.

The entity can be classified as an association for the purposes of item 8.2 of section 50-40 of the ITAA 1997.

Non profit

Section 50-40 of the ITAA 1997 requires that the association not be carried on for the purpose of profit or gain to its individual members.

The Income tax guide for non-profit organisations NAT 7967-03.2007 (Income Tax Guide) states at page 6 that:

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 the association it is operating and when it winds up.

The Constitution has a suitable non-profit clause and winding up clause for income tax exempt entities.

Promoting Development of Australian Resources

To fall within Item 8.2 of section 50-40 of the ITAA 1997 and be considered an exempt entity a society or association's principal or dominant purpose must be to promote the development of one or more of the resources specified in that section.

The terms aviation, tourism, and agricultural, pastoral, horticultural, viticultural, manufacturing or industrial resources are not defined in the legislation.

The applicant states its principal activities are specifically targeted at promoting the development of the relevant industries.

Section 50-40 of the ITAA 1997 does not refer to the promotion of the specified resources. It specifies the promotion of the development of those resources.

The term 'development' is used in section 50-40 of the ITAA 1997 in a commercial or business sense. It takes in all the elements which must be taken into account to ensure that the specified resources are best used. Methods of promoting resources include marketing, training, research, education, introduction of new and improved classes of product and facilitation of cooperation between businesses.

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 the 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, 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.

The promotion of development may be direct or indirect. Methods of promoting resources include improving marketing methods, providing facilities training, research, education, introduction of new and improved classes of product and facilitating cooperation and similar activities (see page 22 of Income Tax Guide).

However, where an association's purpose is properly characterised as promotion of the development of resources that are outside the scope of section 50-40 of the ITAA 1997, it will not be exempt under the section regardless of its effects on other resources.

The Income Tax Guide at page 22 further provides that the various resources referred to in item 8.2 of section 50-40 of the ITAA 1997 have their ordinary meaning.

Resources or their elements include infrastructure, plant and equipment, livestock, personnel, knowledge, expertise and skills. An industry's businesses and their assets may be resources.

The objects listed in the Constitution include a wide range of focused development programs. The entity engages in a number of activities including education and training, the dissemination of information through publications, a web-based information site and through the conduct of networking events addressed by government and industry professionals, and conduct of awards recognising excellence.

The objects and activities are sufficiently integrated with the relevant resources so that it is promoting the development of Australian resources by educating, informing, extending knowledge, expertise and skills of personnel and organisations.

Australian resources

The word 'Australian' applied to the resources 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.

It will be a matter of fact and degree whether an association is predominantly for the purpose of promoting the development of Australia's resources. Associations promoting trade between Australia and other countries may be exempt where it is clear that they are predominantly to promote Australia's resources. Such a conclusion will be reached where the activities and membership are primarily Australian.

It is neither necessary nor sufficient that all members be Australian-based. Membership can be relevant. It is not required that the activities which promote development of the Australian resources be performed exclusively in Australia.

The facts indicate that the resources in question are located in Australia and the activities of the organisation are primarily conducted in Australia. All the members are residing in Australia and there are no overseas members. It is a requirement that the members must accept the objects of the company.

This criterion is met.

Dominant purpose

To be exempt under item 8.2 of section 50-40 of the ITAA 1997, an association must be established principally or predominantly for the purpose of resource development. It is not sufficient that one of an association's purposes falls within the relevant provision. Nor is it enough that resource development is incidental to, involved with, or a consequence of an association's purpose. Determining the dominant purpose will be a question of fact and degree and may involve a weighing of the various elements such as objects, activities, history, proposed directions.

As evidenced by the entity's background, objects and activities the organisation is established principally for the purpose of promoting resource development through development and improvement of industry practices and processes. Weighing up all factors, it is concluded that the organisation's dominant purpose is consistent with item 8.2 of section 50-40 of the ITAA 1997.

Of Australia

Other than aviation and tourism the resources must be resources of Australia.

It is a matter of fact and degree whether an association is predominantly for the purpose of promoting the development of Australian resources.

Taxation Ruling IT 2415 emphasises that the section refers to the development of resources of Australia. It states at paragraph 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.

The entity is promoting the development of Australian resources.

Benefits to members

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

The entity's objects and activities indicate that the organisation is not established as a professional organisation to protect and promote the interests of members. While benefits may flow to members as a consequence of membership, these are in the nature of incidental benefits which will often flow to members from activities promoting the development of resources with which they are involved. Non members also benefit from the activities of the organisation. The Australian community at large will benefit from the organisation's activities. The organisation demonstrates a wider purpose concerned with the broader development of Australian resources.

It is considered that the entity does not exist principally to confer benefits on its members.

Conclusion

Taking into account all the relevant factors, the entity is a non profit association which meets the requirements of section 50-40 of the ITAA 1997. Accordingly, the ordinary and statutory income of the entity is exempt from income tax under section 50-1 of the ITAA 1997.