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Ruling

Subject: Income tax exempt entity

Question 1

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(c) of the table in section 50-40 of the ITAA 1997?

Answer

Yes

This ruling applies for the following periods:

1 July 2011- 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

· The entity is a company limited by guarantee.

· The entity is established to promote the development and improvement of industrial resources in a particular industry in Australia.

· The entity provides a forum for policy development, networking and communication and promotes the industry in various areas.

· The entity works with other organisations to promote the importance and development of the industry.

· The membership of the entity is open to any person or organisation that has an interest in the industry.

· The activities of the entity are primarily conducted in Australia.

· The entity has appropriate non-profit and winding up clauses in its constitution.

Relevant legislative provisions

Section 50-1 of the ITAA 1997

Section 50-40 of the ITAA 1997

Reasons for decision

Item 8.2 of the table in section 50-40 of the ITAA 1997 exempts the ordinary and statutory income of an entity under section 50-1 of the ITAA 1997 if it:

· is a society or association established for the purpose of promoting the development of specified Australian resources; and

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

Entity

The term 'entity' is defined in section 960-100 of the ITAA 1997 to include a body corporate. The entity is registered as a public company limited by guarantee which is considered to be a body corporate.

Association

The words 'society' and 'association' is not defined in the ITAA 1997 and therefore take on 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 a body of members organised for a common purpose as set out in its objects and effectuated by its activities. The entity can be classified as a society or association for the purposes of item 8.2 of section 50-40 of the ITAA 1997.

Non profit

The association must not be carried on for the purposes of profit or gain to its individual members. Its constituent documents should contain a prohibition against distribution of profits and assets among members while the association is operating and in its winding up.

The entity has suitable non-profit and winding-up clauses it is constitution. It is therefore considered as a non-profit association.

Resources

Item 8.2 of the table in section 50-40 of the ITAA 1997 exempts from income tax the ordinary and statutory income of a society or association established for the purpose of promoting the development of specified Australian resources. The entity is claiming specific exemption under item 8.2(c) industrial resources.

The Income tax guide for non-profit organisations at page 22 provides that the various resources referred to in item 8.2 have their ordinary meaning. Resources or their elements include infrastructure, facilities, plant and equipment, personnel, knowledge, expertise and skills. An industry's businesses and their assets may be resources.

Industrial resources 'cover such resources as those of the building industry or the mining or quarrying industries' and also the shipping and transport industries: Australian Insurance Association at 79 ATC 4574 and 4575; 10 ATR 339 and 340.

Page 22 of the Income tax guide for non-profit organisations further states that the term 'industrial resources' does not include all resources connected with the industry or described as industrial. Resources not covered include business and commercial resources such as insurance, and services such as surveying.

The entity is considered to be promoting the development of Australian resources particularly industrial resources by aiding in the development of a particular industry.

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.

The entity will be promoting the development of infrastructure that is located in Australia and the activities of the entity are primarily conducted in Australia.

Promoting development

The term 'development' is used in item 8.2 in a commercial or business sense. 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 FC of T v Broken Hill Pty Co. Ltd 69 ATC 4028 at 4031-4032. 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. 

The promotion of development may be direct or indirect. Methods of promoting resources include marketing, training, research, education, introduction of new and improved classes of product and facilitation of cooperation between businesses. 

The entity will provide a forum for policy development, networking and communication and promote the industry in various areas. Further, the entity will work with other interested parties to promote the importance and development of the industry.

Through the entity's objects and activities it is considered that the entity is promoting the development of Australian resources.

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. Any other purpose of the organisation must be incidental, ancillary or secondary to promoting development of the relevant resource.

Determining the dominant purpose will be a question of fact and degree and may involve a weighing of the various elements: objects, activities, history, proposed directions etc. Because those circumstances may change, an association's tax status may change over time.

As evidenced from objects and activities, the entity is established principally for the purpose of promoting industrial resources in a particular industry. Consequently, the entity's dominant purpose is consistent with item 8.2.

Benefits to members

If an association operates principally to provide benefits to 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(c). This is the case even if the services result in better use of resources by those members. However, an association that has a purpose of benefiting members should be distinguished from an association that provides incidental benefits to its members, which often flow from the activities of promoting the development of resources with which they are involved.

Both in terms of its objects and the manner of its operation, there is no indication or evidence to suggest that the entity exists to benefit its members in a manner that would contravene the non-profit requirement.

Conclusion

Taking into account all relevant factors, it is considered that the entity is a non-profit association which meets the requirements of item 8.2(c) of the table in 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.