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Ruling

Subject: Income tax exemption

Question

Is the ordinary income and statutory income of Company A exempt from income tax on the basis that Company A is a society or association established for the purpose of promoting the development of an Australian resource as described in item 8.2 of the table in section 50-40 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

This ruling applies for the following periods:

The scheme commenced on:

Relevant facts:

Company A is subsidiary company of a tax consolidated group (Consolidated Group).

Company A is ultimately wholly owned by Company B.

Company B is an income tax exempt entity on the basis that it is an association established for the purpose of promoting the development of a specified Australian resource.

Company A operates as a service provider to Company B to undertake the commercial exploitation of intellectual property (trademarks) owned by Company B.

Company A manages and operates the licensing program internationally for the trademarks owned by Company B.

Relevant legislative provisions

Section 50-1 Income Tax Assessment Act 1997

Section 50-40 Income Tax Assessment Act 1997

Reasons for decision

Section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) exempts from income tax the total ordinary and statutory income of an entity covered by section 50-40 of the ITAA 1997.

Item 8.2(a) of section 50-40 of the ITAA 1997 provides that a society or association established for the purpose of promoting the development Australian agricultural 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.

Accordingly, to qualify for exemption from income tax under section 50-1 of the ITAA 1997, the entity must satisfy the following requirements:

· it must be a society or association;

· it must be established for the purpose of promoting the development of an Australian agricultural resource under item 8.2(a) of the table in section 50-40 of the ITAA 1997; and

· it must not be carried on for the profit or gain of its individual members.

1. Society or Association

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

The Shorter Oxford English Dictionary defines 'association' to be 'a body of persons associated for a common purpose; the organisation formed to effect their purpose'. The Macquarie Dictionary defines it 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 90 at 35).

This approach is also confirmed in Taxation Determination TD95/56, which refers to the decision by Olsson J, in Quinton v. South Australian Psychological Board (1985) 38 SASR 523, who also stated that the term 'association' has come to be regarded as attaching to a body of persons associated for a common purpose.

These approaches emphasise a 'body of persons' and an 'organisation of people'. There is the forming of a purpose of various people. For there to be a 'common purpose' there needs to be more than one person. Accordingly, it follows that a single entity, without more, could not constitute an association or society as it cannot be said that there is a group or body or the forming of any common intention. It is accepted that associations can comprise only corporations (Theosophical Foundation v. Commr of Land Tax (1966) 67 SR (NSW) 70 at 82), but the associating which is essential to an association is not present with a corporation that has only one member.

Company A is wholly owned by Company B. Therefore, Company A has only one member and shareholder, being Company B.

It cannot be said that there is an associating of members of Company A given that there is only one member. A single entity on its own could not constitute an association or society, as it cannot be said that there is a group or body or the forming of any common intention. The ability to associate with oneself for a common purpose is not contemplated in the meaning of the words 'association' or 'society' as espoused in the case law above.

Accordingly, this condition has not been satisfied.

2. Established for the purpose of promoting the development of specified Australian resources

Australian agricultural resource

The word 'Australian' applied to the word '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.

Company A is a subsidiary company of a Consolidated Group and operates as a service provider to Company B. Company A manages and operates the global licensing of intellectual property (trademarks) that is owned by Company B.

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

The trademarks owned by Company B are an asset and is therefore a resource. At issue is whether it is considered to be an 'Australian agricultural resource' as contemplated in the legislation under item 8.2(a) of the table in section 50-40 of the ITAA 1997.

The Macquarie Dictionary defines 'agricultural' as 'of or relating to agriculture' and 'agriculture' as 'the cultivation of land, including crop-raising, forestry, stock-raising etc.; farming'. The Australian Oxford Dictionary defines 'agriculture' as 'the science or practice of cultivating the soil and rearing animals'.

Although global licensing of the trademark relates to the endorsement of an agricultural product, the trademark is intellectual property owned by Company B and does not fall within the ordinary meaning of an 'agricultural resource' described earlier as relating to the cultivation of land, including crop-raising, forestry, stock-raising or farming as contemplated under item 8.2(a) of the table in section 50-40 of the ITAA 1997.

Further, the fact that the trademarks are applied to agricultural products outside of Australia also indicates that the commercial exploitation of the trademarks do not relate to promoting the development of Australian agricultural resources as contemplated in item 8.2(a) of section 50-40 of the ITAA 1997.

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.

Promoting Development

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 240-₁69 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 Tax Office publication Income Tax Guide for Non-Profit Organisations (ITGNPO) at page 22 refers to methods of promotion and states

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

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

7. 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:-

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

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

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 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.

Dominant Purpose

To be exempt under section 50-40 of the ITAA 1997, an association needs to 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; Boating Industries Association of New South Wales at 85 ATC 4228-9;16 ATR 388). It is not sufficient that promoting the development of the resource(s) may be incidental to, a consequence of, or involved with an association's purposes.

Determining the dominant purpose of the association will be a question of fact and degreeand 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 FC 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.0 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.

Company A has been established as part of a Consolidated Group for the purpose of exploiting intellectual property owned by Company B.

Company A could not be described as having a dominant purpose of promoting the development of Australian resources as contemplated in section 50-40 of the ITAA 1997. Rather, the purpose of Company A is essentially to operate as a service provider to Company B to focus on the commercial exploitation of intellectual property.

In view of the above, it is considered that Company A has not been established for the purpose of promoting of the development of Australian agricultural resources for the purposes of item 8.2(a) of the table in section 50-40 of the ITAA 1997.

3. 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.

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.

Company A's constitution includes acceptable non profit clauses.

It is also necessary to examine whether the entity operates in a manner consistent with a non-profit character. If an entity operates principally to confer benefits on its members jointly or as a group, or is carried on for the profit or gain of its individual members it will fail the non-profit requirement.

Company A is ultimately wholly owned by Company B and essentially operates as a service provider to Company B in the commercial exploitation of intellectual property that is owned by Company B.

Company A has been set up to confer benefits to its one and only member, Company B, by providing services in relation to the commercial exploitation of its intellectual property.

Company A is carried on for the profit and gain of its individual member. Accordingly, this condition has not been met.

Conclusion

In view of the above, Company A fails to meet the requirements of an exempt entity under item 8.2 of the table in section 50-40 of the ITAA 1997.

· It is not a society or association ;

· It has not been established for the purpose of promoting the development of Australian agricultural resources pursuant to 8.2(a) of the table in section 50-40 of the ITAA 1997; and

· It is carried on for the benefit of Company B.

Therefore, the total ordinary income and statutory income of Company A is not exempt from income tax pursuant to section 50-1 of the ITAA 1997.