Edited version of private ruling

Authorisation Number: 1011774918863

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Ruling

Subject: Income tax - exemption from income tax

Question 1

Is the ordinary and statutory income of the taxpayer exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) because it is an entity, described in item 8.2 of section 50-40 of the ITAA 1997 that meets the special conditions of that item?

Answer

Yes.

This ruling applies for the following period:

1 July 2010 to 30 June 2012

The scheme commences on:

1 July 2009

Relevant facts and circumstances

Object and functions of the taxpayer

The objects and functions of the taxpayer are specified in its Constitution. Relevant clauses of this Constitution were lodged with the private ruling application. This includes a non-profit clause and a winding-up clause.

Day-to-day activities of the taxpayer

The taxpayer has been established with two corporate members Co A and Co B to operate and maintain a database for the benefit of an industry body with the primary purposes of protecting and promoting the interests of the Australian resources.

The taxpayer has been established to support the promotion of the Australian resources. It will do this by administering the database for the benefit of the industry in Australia. This is its main function.

The operations of the taxpayer are funded by Co A, an association representing the industry and government grants such that the net income of the taxpayer should always be zero.

As the taxpayer is a corporation registered with the Australian Securities and Investment Commission, it has a written Constitution governing its activities.

Co A

Co A has been established to promote the industry in Australia and overseas. It is income tax exempt and is a rebatable for the purposes of subsection 65J(1) of the FBTAA.

Co B

Co B is a special purpose company that was established by Co A. Its objects and functions are to promote and administer the database and to improve the production and quality of the Australian resources.

Other relevant facts

The taxpayer is not a public benevolent institution or a health promotion charity.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6-20(1)
Income Tax Assessment Act 1997 Section 11-5
Income Tax Assessment Act 1997 Section 50-1
Income Tax Assessment Act 1997 Section 50-40

Reasons for decision

Income Tax Exemption

Section 6-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that an amount of ordinary income or statutory income is exempt income if it is made exempt from income tax by a provision of the ITAA 1997 or another Commonwealth law.

Sections 11-5, 11-10 and 11-15 of the ITAA 1997 set out summary lists of provisions about exempt income.

Exempt entities are covered in Division 50 of the ITAA 1997. Section 50-1 of the ITAA 1997 sets out:

The total ordinary and statutory income of the entities covered by the following tables is exempt from income tax. In some cases, the income is subject to special conditions.

Item 8.2 of section 50-40 of the ITAA 1997 includes as an exempt entity:

A society or association established for the purpose of promoting the development of any of the following Australian resources:

(i) agricultural resources;

(j) horticultural resources;

(k) industrial resources;

(l) manufacturing resources;

(m) pastoral resources;

(n) viticultural resources;

(o) aquacultural resources;

(p) fishing resources;

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

Broadly, the various requirements that must be satisfied for the income tax exemption under section 50-40, item 8.2 of the ITAA 1997 to apply are that:

· the organisation is a non-profit society or association; and

· the dominant or principal purpose for which the organisation is established is promoting the development of any of the Australian resources listed in item 8.2.

As relevant to this case, these requirements will be considered below in order to determine whether the taxpayer can satisfy them.

It is noted that the ATO has previously issued private rulings confirming that Co A is an exempt entity under Division 50 of the ITAA 1997. However, as stated in part in paragraph 8 of Taxation Ruling TR 2005/22 Income tax: companies controlled by exempt entities:

. . .in working out whether a particular company is exempt from income tax, in circumstances where that company has a relationship or a connection with another entity that is itself exempt, it is that company that must meet the requirements for exemption. This Ruling explains that it is not sufficient for an entity which controls the company to meet those requirements.

This means that the taxpayer, in its own right, must meet the above-mentioned requirements for the income tax exemption under section 50-40, item 8.2 of the ITAA 1997 to apply.

Non-profit

As explained in paragraph 22 of Taxation Ruling TR 97/22 Income tax: exempt sporting clubs the ATO accepts that an entity is non-profit where its constituent documents prevents that entity from distributing its profits or assets among members while the club is functional and upon its winding-up.

This view is supported in case W49 where it was held that, where the Memorandum and Articles of Association (constitution) of a company contain an appropriate non-profit clause and a winding up clause, the company should satisfy the "non-profit" requirement.

The taxpayer's constitution contains clauses which prohibits distribution of profits or assets among members while functional and upon its winding-up.

Therefore in line with TR 97/22 it is accepted that the taxpayer is a non-profit organisation for the purposes of section 50-40, item 8.2 of the ITAA 1997.

Society or association

Neither "society" nor "association' are defined in Division 50 of the ITAA 1997 or in section 995-1 of ITAA 1997. As such these terms take on their ordinary meanings.

Both the meaning of "society" and "association" involves groups of people who come together to pursue a purpose.

The Macquarie Dictionary (electronic version 5.0.0) describes a society at meaning 4 as 'an organisation of persons associated together for religious, benevolent, literary, scientific, political, patriotic, or other purposes'. '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 Macquarie Dictionary describes an association at meaning 1 as 'an organisation of people with a common purpose and having a formal structure'.

The Shorter Oxford English Dictionary defines 'association' to be a body of persons associated for a common purpose; the organization formed to effect their purpose.

The meaning of 'association is also discussed in Taxation Determination TD 95/56 where it is concluded:

"A body which is formed by government, is controlled by government and performs functions on behalf of government is clearly not formed to effect the purposes of the members of that body but is formed to effect the purposes of government. Combined with the fact that the members do not create the body (or have the power to dissolve it) and that the members do not have ultimate control over the functions of the body, such a body cannot be said to be an association".

Therefore, the ATO considers most bodies formed by the federal, state or territory governments, most statutory authorities (including those set up to market, regulate or promote agricultural or other products) and local governments councils are not "associations".

Whilst the operations of the taxpayer are partly funded by government grants, it is accepted that the taxpayer was not formed by government.

The fact that an entity may be incorporated does not of itself remove the entity from the definition of a society or association. However, groups of people who get together with the common purpose of trading, carrying on a business or carrying out activities for personal gain or profit are not societies or associations, and are generally treated as normal partnerships or companies under lax law.

It is accepted that a company limited by guarantee could be considered an "association" for the purposes of section 23(h) of the ITAA 1936 (the equivalent to the present section 50-40 Item 8.2) Australian Insurance Association v. FCT, 79 ATC 4569; see also 5 CT.B.R. Case 52.

The taxpayer is pursuing a purpose. This purpose is described in its Constitution.

The taxpayer has been established to support the promotion of the industry promoting the Australian resources. It will do this by administering the database for the benefit of the industry.

The taxpayer is a subsidiary of Co A and was established to perform the functions Co A formerly undertook in respect of the operation of the database. By separating Co A and the taxpayer's activities it is expected that the operation of the database will be more efficient.

The taxpayer has two members (Co A and Co B) who have a common purpose as described in the taxpayer's Constitution. Each member is a corporation and as such a 'person' for the purposes of the ITAA 1997.

In Theosophical Foundation Pty Ltd v Commr of Land Tax (NSW) (1966) 67 SR (NSW) 70 at 82 Sugerman JA, with whom McLelland JA agreed, said:

I see no difficulty in the notion that an association, or a society, simpliciter, may have a membership consisting wholly or in part of corporations.

However, the type of association may influence the sorts of members that will be acceptable:

But, having regard to the connotations of the expression 'religious society', I agree with Mr Deane that there is much difficulty in applying that expression to a corporation whose only members are corporations - in the present instance two other companies. (at 83).

Where an association is to develop industrial and other resources corporations would be the expected members.

Number of members

In Christian Enterprises Ltd v Commr of Land Tax (NSW) (1968) 88 WN (Pt 2) (NSW) 112 at 120 Walsh JA, with whom Asprey JA agreed, said, in relation to a company whose membership was confined to natural persons who had accepted certain articles of faith:

... it does not seem to me that there is any good reason for supposing that a society must be numerous in its membership ... At the relevant time the appellant had only seven members. But I do not think that the question before the court turns in any way on that fact. ... In the term 'religious society' I find no notion that size or numbers are of importance.

On the other hand in Pro-campo Ltd v Commissioner of Land Tax (NSW) (1981) 12 ATR 26 at 36 Lee J said:

There no doubt can be instances when a company would have so few members that it could not fairly be described as a society or association, let alone a club.

The minimum number of members of an association will vary with the type of association and the type of members. For example a religious association or choral society would generally have a fair number of natural persons as members. On the other hand a business or trade or industrial association would often have corporations as members and not necessarily in large numbers.

In Theosophical Foundation the decision that the company was not a religious society was not based on the fact that it had only two members. The judgments do not hold that the company was not a 'society'; rather they hold that it was not a 'religious society'. Indeed in the view of Sugerman JA: ... in relation to Mr Deane's argument that an incorporated company which has only two members, each itself incorporated, can never be considered to be a 'society' ... I think the real difficulty is whether such an incorporated company can be considered a 'religious society' ... (at 83).

On balance it seems possible that a group comprising only two companies could be an association.

The look through approach

A conclusion that two companies constituted an association might gain extra support from the numbers and commitments of the members of the companies. That is, if they were directed to the development of industrial resources, etc it might help to indicate that the companies were an association with that purpose.

This view can be contrasted with the decision in Theosophical Foundation. The case concerned a company which was formed to own and operate a building which was used by the national Theosophical society and its affiliated organisations and also for commercial letting. The new company had only two members and both of them were incorporated. One was a lodge of the national society. The other was a trust company which had been formed to be the legal holder of the property of the national society. It would be difficult to think that the new company, considered independently, could be regarded as a 'society' of people joined together to pursue a religious purpose or object. The means by which Wallace J [at first instance in Theosophical Foundation Pty Ltd v Commr of Land Tax (NSW) (1965) 82 WN (Pt 1) (NSW) 545 reached the conclusion that the appellant was a religious society was by treating it as a society made up in reality of all the persons who were themselves members of one or of both of the companies which were members of the appellant, all these persons being also members of or directly associated with the national society. He thought that 'the veil' could be lifted and that 'to regard the two members of the appellant as merely incorporated companies is for this special purpose an unreal approach.

On appeal the 'look-through' approach was not adopted. However, its use at first instance and its rejection on appeal did not concern the question of whether the company was a 'society'. Rather it concerned the characterisation of the company as a 'religious' society. The actual operations and purposes of the Company rather than the religious commitments of those who belonged to its constituent organisations, were determinative of its character. The characterisation of the company as existing to operate a commercial venture could not be changed merely because the people who were members of its constituent organisations shared religious commitments.

The taxpayer has been established to support the industry promoting the Australian resources. It will do this by administering the database for the benefit of the industry.

On balance, the combined facts that:

· the taxpayer is a subsidiary of Co A and was established to perform the functions Co A formerly undertook in respect of the operation of the database. By separating the activities of the taxpayer from Co A it is expected that the operation of the database will be more efficient;

· The taxpayer is engaged in administering the database for the benefit of the industry promoting the Australian resources;

· the taxpayer has two members who have a common purpose as described in the taxpayer's Constitution;

· Co A is an exempt entity under Division 50 of the ITAA 1997 on the basis that it is a non-profit association established for the purposes, having regard to the objects and functions contained in its Constitution and day-to-day activities, of promoting the resources of Australia; and

· Co A is accepted as a rebatable employer for the purposes of subsection 65J(1) of the FBTAA.

Outweigh doubts that may arise from the small number of members of the association.

It is considered that the taxpayer meets the minimum requirements to constitute an "association" for the purpose of section 50-40 of the ITAA 1997.

Established for the purpose of promoting the development of Australia's resources

An association must be established principally or predominantly for the purpose of promoting resource development to qualify for exemption under section 50-40 of the ITAA 1997. It is not sufficient that one of the associations purposes falls within the ambit of section 50-40 of the ITAA 1997, nor is it enough that resource development is incidental to, involved with or a consequence of the associations purposes.

The Income Tax Guide for Non-Profit Organisations states that in determining the main purpose of the association, the constituent documents, activities, use of funds and the associations history should be considered. Any other purpose of the association must be incidental, ancillary or secondary to promoting development of the relevant resources.

In respect of promoting development the Income tax guide for non-profit organisations states:

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

The purpose of the taxpayer is contained in its objects which are to promote the resources of Australia.

The main activity undertaken by the taxpayer is to maintain the database which enables the industry to ensure the safety and integrity of its Australian products. This in turn enhances Australia's reputation as a best-practice supplier in both the domestic and international markets.

As relevant to this application the taxpayer must be established principally or predominantly for the purpose of promoting the resources of Australia to qualify for exemption under section 50-40 of the ITAA 1997. On the facts, the resources relevant to this ruling application is that resources. Section 50-40 of the ITAA 1997 limits the exemption to associations whose activities are directed to Australian resources.

The term agricultural is not defined in the ITAA 1997 and accordingly, takes its ordinary meaning. The Oxford English Dictionary defines agriculture as the science and art of cultivating land; including the gathering in of the crops and the rearing of live stock; farming (in the widest sense).

The Macquarie Dictionary defines "agriculture" to mean:

the cultivation of land, including crop-raising, forestry, stock-raising, etc., farming.

Each of the objects and functions for which the taxpayer is established, as specified in its Constitution, relate to the resource industry in Australia. Each of the objects is framed solely with the intention of promoting a resource that comes within the definition of "agriculture".

On the facts, it is considered that the overriding aim of the database is to protect and promote the Australian resources domestically and overseas by ensuring that the Australian products are of the highest possible quality and integrity. By administering the system, the taxpayer can be seen to be established for the dominant purpose of promoting the development of the Australian industry. The taxpayer is engaged in promoting the development of an Australian resource.

Conclusion

The taxpayer therefore satisfies all the criteria for income tax exemption as a non-profit association whose principal purpose is to promote the development of the resources of Australia.

Consequently, the taxpayer falls within the requirements of section 50-40, item 8.2 of the ITAA 1997 as being an exempt entity for the purposes of Australian tax. As a result, section 50-1 of the ITAA 1997 will exempt from income tax all of the ordinary income and statutory income of the taxpayer.