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Ruling

Subject: Exemption from Income Tax - Entitlement to Fringe Benefit Tax Rebate

Issue 1

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 not carried on for profit or gain to individual members, established for the purpose of promoting the development of an Australian industrial resource under item 8.2(c) in section 50-40 of the ITAA 1997?

Answer

Yes

Issue 2

Question 1

Is the entity a rebatable employer under subsection 65J(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) as a non profit association established for the purpose of promoting the development of an industrial resource of Australia under section 65J(1)(l) of the FBTAA?

Answer

Yes

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

The entity is an incorporated under the Associations Incorporations Act 1981.

The primary purpose of entity as demonstrated in its objects and activities is to develop, promote and encourage certain aspects of the transport industry including establishing appropriate standards and safety.

The entity does more than enforce government regulations. It is also involved in implementing, monitoring, reviewing and enforcing an accreditation scheme for individuals and a registration scheme for businesses, as well as undertaking activities designed to develop, promote, and encourage the industry, industry participants, and the understanding and success of the industry.

The entity's constitution contains suitable non profit and dissolution clauses.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 50-1

Income Tax Assessment Act 1997 section 50-40

Fringe Benefits Tax Assessment Act 1986 subsection 65J(1)

Issue 1

Summary of decision

The entity is determined to be an association that has been established for the dominant purpose of promoting the development of Australian industrial resources and that is not carried on for the profit or gain of its members. Accordingly it is accepted as satisfying the requirements for income tax exemption pursuant to item 8.2(c) of section 50-40 of the ITAA 1997.

Question 1

Section 50-1 of the ITAA 1997 provides that the ordinary statutory income of the entities described in the tables which follow that section is exempt from income tax.

Included in those tables is item 8.2(c) of section 50-40 of the ITAA 1997 which refers to a society or association established for the purpose of promoting the development of Australian industrial resources. The special condition imposed on the society or association for the exemption to apply is that it is not carried on for the profit or gain of its individual members.

Accordingly, to be exempt from income tax under item 8.2(c) of the table in section 50-40 of the ITAA 1997, an entity must:

· be a society or association;

· be established for the purpose of promoting the development of an Australian industrial resource; and

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

1. Society or Association

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

An association may be incorporated or unincorporated. However, it does not include a body formed and controlled by government and performing functions on behalf of government.

Taxation Determination TD 95/56 at paragraph 2 provides:

…The shorter Oxford Dictionary defines the term 'association' to be a 'body of persons associated with 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.

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.

The entity is an incorporated body that was established with the purpose of promoting aspects within the transport industry including establishing appropriate standards and safety.

The entity is an incorporated entity brought into existence by its members to pursue a common purpose as stated in its constitution. It is not a body formed by government, controlled by government or performing functions on behalf of government. In view of the above, it is accepted that the entity is an association.

2. Resources specified in section 50-40 of the ITAA 1997

Australian resources which fall for consideration under section 50-40 of the ITAA 1997 include aviation, tourism, and agriculture, pastoral, horticultural, viticultural, manufacturing or industrial resources. These terms are not defined in the ITAA 1997 and have their ordinary meaning. Assistance can be provided by dictionary meanings and by court and tribunal decisions. Judicial interpretations of similar terms in different statutes and common usage of terms (such as industry), may be useful but are not determinative.

In the case Australian Insurance Association v. Federal Commissioner of Taxation, 79 ATC 4569; 10 ATR 333, (Australian Insurance) Sheppard J made the following comments (at 457 and 4575):

There is a degree of specificity in the words used in the section [Paragraph 23(h)]. It refers to aviation then to four resources of primary industry, then to manufacturing and finally to industrial resources. The use of these various expressions does not suggest that the draftsman intended to give the word "industrial" any wide meaning intended to embrace business or commercial resources. If it had been intended to do so, it would have been quite unnecessary to use the word "manufacturing" or to be as specific in relation to the primary industry resources which are mentioned. Even if the word "industrial" had been used alone (that is, without the word "manufacturing") I think there would have been a question as to whether commercial or business resources were included.

The building, mining and quarrying industries and the resources which these industries have, are not aptly described as manufacturing industries, but they are industries in the accepted sense of the word. Industries in a similar category are the shipping and transport industries.

The entity's objects as specified in its constitution detail its involvement with the transport industry in Australia.

As specified in Australian Insurance, industrial resources cover such resources as those of the building industry or the mining or the quarrying industries and also the shipping and transport industries. The shipping and transport industries are therefore included in the category of an industrial resource as specified in item 8.2(c) in the table in section 50-40 of the ITAA 1997.

It is accepted that the entity is involved in an industrial resource under item 8.2 (c) in section 50-40 of the ITAA 1997.

3. Established for the purpose of promoting the development of an Australian industrial resource

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 activities of the entity are carried out in Australia and are directed towards an Australian Industry. Furthermore, the entity's membership consists of only Australian organisations.

Therefore, it is accepted that the focus of the entity is on resources of Australia.

Promoting the development of Australian Resources

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

The term development is used in section 50-40 in a commercial or business sense. It comprehends all the elements which must be taken into account to ensure 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 promotion of development may be direct or indirect. For example, the development of agricultural resources might be directly promoted by research, experimental farms, control of pests, education in farming methods, or the introduction of new and improved classes of products. It might be indirectly promoted by improved marketing methods, cooperative buying and selling, solution of labour disputes, or ameliorative legislation.

Development of resources can be promoted by facilitating the cooperation of businesses and instrumentalities. Chambers of commerce and regional development bodies may help promote resource development in these ways.

Taxation Ruling IT 2415 Income tax: Associations promoting the development of Australian resources, provides at paragraphs 6 - 9:

6. The operation of paragraph 23(h) was considered by the Supreme Court of New South Wales in Australian Insurance Association v. F.C. of T., 79 ATC 4569 ; 10 ATR 333. The Court found the Association did not qualify for exemption under paragraph 23(h) because it was established for the predominant purpose of protecting and furthering the interests of Australian insurance companies. Furthermore, the Court concluded that the expression "industrial resources" in paragraph 23(h) refers to resources such as those of the building, mining, quarrying, shipping and transport industries - it does not extend to business or commercial resources or resources of the kind promoted by the Association.

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 interests 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.

9. There can be little doubt that the identification of, and programmes to overcome, manpower needs and the establishment of systematic training schemes in a particular industry are necessary for the efficient operation of the industry - they are part and parcel of the development of the resources specified in paragraph 23(h). Although the connection may not be as readily apparent the development of marketing techniques may also be relevant to the development of resources - it could be said that there is little point in developing resources if the products of the resources cannot be sold. Another area where the connection with development of resources may not be direct is the development of tourism - but it does play a part in the development of the resources specified in paragraph 23(h).

The Tax Office publication Income Tax Guide for Non Profit Organisations states at page 22 in relation to methods of promotion:

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

Dominant purpose

To be exempt under section 50-40 of the ITAA 1997, an association must be established principally or predominantly for the purpose of promoting resource development. It is not sufficient that one of an association's purposes falls within section 50-40 of the ITAA 1997. Nor is it enough that resource development is incidental to, involved with or a consequence of an association's purposes.

The association must be established for required purposes. The term 'established' is not used in a narrow sense. It is necessary to consider an association's constituent documents, and operations and activities.

Determining the dominant purpose will be largely a matter of fact and degree.

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 will not be exempt under section 50-40 of the ITAA 1997. Exemption will not be lost merely because benefits which are incidental to promoting the resource development are received by members.

For the purposes of item 8.2(c) in the table in section 50-40 of the ITAA 1997, it is accepted that the entity is an Association and that it is involved in a resource that falls within the category of an Australian industrial resource.

In order to consider whether the entity is in fact established for the purpose of promoting the development of an Australian industrial resource, we need to examine the purposes for which the entity was established and its actual activities.

In Boating Industries Association of NSW v FC of T 85 ATC 4224; (1985) 16 ATR 383 (Boating Industries) it was held that the Association's principal purpose was the promotion of safe boating and not the promotion of a manufacturing resource.

In Boating Industries 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 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. They could be established for another purpose altogether but still have the result mentioned.

In Co-operative Bulk Handling Ltd v F C of T [2010] FCAFC 155; 2010 ATC 20-231 (CBH), the Association was a major bulk handler of grain in Western Australia with the principal object of establishing, maintaining and conducting schemes for bulk handling of grain. The Court took the view that that the expression "promoting the development of" includes developing the resources to facilitate and support agriculture and that the purpose for which CBH was established must be determined by considering the totality of all its activities. It was concluded in that case that "promoting the development of agricultural resources" also extends to the development of resources available to facilitate and support agriculture.

In relation to the activities that the entity carries out, it is acknowledged that the entity's activities are directed towards improving and promoting certain aspects of the transport industry.

The principles outlined in the Boating Industries case do not apply to the entity. The primary objective of the Boating Industries Association was concerned with safe boating, and the nexus between safe boating and promoting the development of the industry was too far removed in that case. With respect to the entity, its objects do not show that its purposes relate to promoting the safety of the aspects of the transport industry.

Based on the constitution and activities of the entity, it is therefore accepted that the principal or dominant purpose of the entity is to promote the development of an Australian industrial resource.

Benefits to 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.

It is therefore necessary to distinguish a dominant purpose of providing benefits to members from the incidental benefits which will often flow.

In case 46/94 94 ATC 412; (1994) 29 ATR 1102 at ATC 417; ATR 1108, the Tribunal found, that the association was not exempt because it principally promoted the interests of its members. It operated to look after the needs of consulting surveyors though such matter 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.

In Australian Insurance, 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:

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 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 increase market profit between its members to the exclusion of others.

The members of the entity include members of certain industry and government bodies, and any other person admitted to membership. While benefits may flow to some of entity's members through their involvement in the transport industry it is considered that, as determined earlier, the entity's purpose is clearly defined through its objects and activities as being predominantly for the promotion of the development of the transport industry.

Accordingly, the entity is considered to have as a dominant purpose of promoting the development of an Australian industry resource and any benefit conferred on members of entity is considered incidental to that purpose.

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

Non Profit

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.

The Income Tax Guide for Non Profit Organisations (ITGNPO NAT 7967-03.2007) at page 6 states:

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 organisation's actions must be consistent with this requirement.

A non profit organisation can still make a profit but this profit must be used to carry out its purposes…the profits must not be distributed to owners.

There are two requirements in the statement of non profit character above. First an entity's constituent document must display a non profit character. Second, the entity's actions must be consistent with this non profit character.

The entity's constitution contains clauses that prevent it from distributing its profits or assets amongst members while it is operating or on its winding up.

It is accepted that the entity is a non profit association.

Conclusion

The entity meets the requirements of an exempt entity under item 8.2(c) of the table in section 50-40 of the ITAA 1997 as an association established for the purpose of promoting the development of an Australian industrial resource and is not be carried on for the profit or gain of its individual members.

Therefore, the ordinary and statutory income of entity is exempt from income tax pursuant to section 50-1 of the ITAA 1997.

Issue 2

Summary of decision

As the entity is not a public benevolent institution, is not a health promotion charity and is covered by paragraph (l) of subsection 65J(1) of the FBTAA, being a non profit society, or non profit association, established for the purpose of promoting the development of industrial resources of Australia, the entity is determined to be a rebatable employer.

Question 1

Subsection 65J(1) of the FBTAA states that an employer will be a rebatable employer if it is not a public benevolent institution, is not a health promotion charity and is covered by any one of a list of paragraphs, including at paragraph (l) a non profit society, or non profit association, established for the purpose of promoting the development of industrial resources of Australia.

Accordingly the entity will satisfy this criterion if it is:

(i) not a public benevolent institution and is not a health promotion charity; and

(ii) a non profit association established for the purpose of promoting the development of an industrial resource of Australia

(i) Not a public benevolent institution and not a health promotion charity

Public benevolent institution

Taxation Ruling TR 2003/5 Income tax and fringe benefits tax: public benevolent institutions, sets out the Australian Taxation Office view on what is a public benevolent institution. TR 2003/5 states at paragraph 7:

A public benevolent institution is a non-profit institution organised for the direct relief of such poverty, sickness, suffering, distress, misfortune, disability, destitution, or helplessness as arouses compassion in the community.

Health promotion charity

Taxation Ruling TR 2004/8 Income tax and fringe benefits tax: health promotion charities at paragraph 4 provides that the characteristics of a health promotion charity are that:

· it is a charitable institution, and

· its principal activity is promoting the prevention or the control of diseases in human beings.

The entity is established for the predominant purpose of promoting the development of certain aspects of the transport industry. It does not have a purpose that falls within that described for a public benevolent institution or a health promotion charity. Accordingly the entity is accepted as not being a public benevolent institution and not being a health promotion charity.

(ii) Non profit association established for the purpose of promoting the development of an industrial resource of Australia

As a non profit organisation found to be established for the purpose of promoting the development of an Australian industrial resource under item 8.2(c) in section 50-40 of the ITAA 1997, the entity also satisfies the requirement of section 65J(1)(l) of the FBTAA, being a non profit association established for the purpose of promoting the development of an industrial resource of Australia.

Conclusion

As the entity is not a public benevolent institution, is not a health promotion charity and is an entity covered by paragraph (l) of section 65J(1) of the FBTAA, being a non profit society, or non profit association, established for the purpose of promoting the development of an industrial resource of Australia, the entity is determined to be a rebatable employer.