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Ruling

Subject: Income Tax Exemption

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 pursuant to item 8.2 of the table in section 50-40 of the Income Tax Assessment Act 1997?

Answer

No

This ruling applies for the following periods:

1 July 2010 - 30 June 2011

1 July 2011- 30 June 2012

The scheme commences on:

1 July 2010

Relevant facts and circumstances

The Entity is an incorporated association.

The Entity has governing documents which have acceptable non-profit clauses.

The Statement of Purposes provides the objects of the Entity, which are to raise awareness and educate people on a particular agricultural method.

The Entity has activities which include; courses, workshops and field-days to teach people the particular agricultural method, so they can apply this knowledge and skills to farming and growing of plants.

These activities of the Entity are conducted in Australia.

Members and non-members are able to access the Entity's educational activities

The Entity's educational activities are directed to all sectors of the community. This includes people who would use the educational activities for private purposes and for commercial purposes.

The Entity provides benefits to members. This includes selling specific products to members only.

The selling of products to members comprises a small proportion of total income.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 50-1

Income Tax Assessment Act 1997 section 50-40

Reasons for decision

Item 8.2 of the table in section 50-40 of the Income Tax Assessment Act 1997 (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.

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 Statement of Purposes 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.

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.

Specific Australia resources under item 8.2 are:

(a)     agricultural resources

(b)     horticultural resources

(c)     industrial resources

(d)     manufacturing resources

(e)     pastoral resources

(f)      viticultural resources

(g)     aquacultural resources

(h)     fishing resources

Of those Australian resources listed above, the only two that are applicable to the Entity are agricultural and horticultural resources.

These resources are not defined in the ITAA 1997 and so take on their ordinary meaning.

The Macquarie Dictionary defines 'agriculture' as:

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

While 'horticultural' is defined as:

commercial cultivation of fruit, vegetables, and flowers, including berries, grapes, vines and nuts. The science or art of growing fruit, vegetables, flowers or ornamental plants. The cultivation of a garden.

The Income tax guide for non-profit organisations provides that 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.

From the governing documents of the Entity, it was established to increase awareness and educate people on a particular agricultural method.

The activities of the Entity are directed at improving the knowledge, expertise and skills of people involved in farming or growing of plants through the provision of courses, workshop and fields-days.

It is therefore considered that the Entity's activities are directed at both agricultural and horticultural resources.

Australian resources

The word 'Australian' applied to the term '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 an Australian resource be performed exclusively in Australia.

The Entity will be directing its activities to agricultural and horticultural resources that are located in Australia and the activities of the association are primarily conducted in Australia.

Promoting the development

Taxation Ruling 2415 Income Tax: Associations promoting development of Australian resources (IT 2415) states at paragraphs 7 -8, that 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 used in the best interests of Australia. 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. 

It was further stated by Kitto J:

It is development … of the property ….making it what it is was not before, namely a property commercially exploitable in respect of its mineral content- enabling it to be worked for the production of mineral as a commodity, a product possessing economic significance, instead of having to be left as land…

The promotion of development may be direct or indirect but must be to enable the resource to be exploited commercially. Methods of promoting resources include marketing, training, research, education, introduction of new and improved classes of product and facilitation of cooperation between businesses. 

Examples of activities connected with a resource that will not be for its development includes activities of historic appreciation or preservation, or collecting and using for a pastime or hobby.

The Entity's activities include the provision of workshops, courses and field-days to educate people on a particular agricultural method. The Entity will also sell certain products to its members. The Entity is considered to be promoting the development of agricultural and horticultural resources as they will provide education on a particular practice of farming and growing of plants for commercial purposes.

However, not all 'development' carried out by the Entity will be to enable resources to be exploited commercially. The Entity also directs its educational activities to people who will use the Entity's services for their own private purposes. This is considered not to be for commercial purposes.

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 the Entity's objects and activities, the Entity has been established principally to educate people on a particular agricultural method through the provision of workshops, field-days and courses and the selling of associated products.

The activities provided by the Entity are available to all sectors of the community. This includes people who use the Entity's educational courses for private purposes and commercial purposes. Those people who undertake the Entity's educational courses for their own private purposes are doing so to facilitate their own hobby or pastime and not for commercial or business purposes.

The Entity's dominant purpose is not to promote the development of agricultural or horticultural resources in a commercial or business sense.

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. 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.

As the following cases illustrate, it is necessary to distinguish a dominant purpose of providing benefits to members from the incidental benefits which will often flow to members from activities promoting the development of resources with which they are involved.

In Australian Insurance Association v. Federal Commissioner of Taxation 79 ATC 4569; 10 ATR 333 (Australian Insurance Association case), the association comprised the majority of general insurance companies carrying on business in Australia. At issue was whether it was primarily to promote the interests of its members, or whether the benefits to members were incidental to resource development. 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. But that, in my opinion, is only a consequence of what 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.

The members of the Entity do receive benefits this includes field-days, courses and workshops on a particular agricultural method and associated products. However, what remains to be determined is whether the benefits that the Entity provides to its members are its principal purpose or whether its principal purpose is the promotion of the development of Australian resources and the benefits that members received are only incidental to achieving this purpose.

From the information provided it is not apparent that the Entity is principally carried on to promote the interests of its members. Like the Australian Insurance Association case, the very nature of the Entity's purpose, which is to promote a particular agricultural method, will ultimately further the interests of its members. However, this benefit is considered to be a consequence of the Entity carrying out its activities.

The dominant purpose of the Entity is not to promote the interests of its members, however, the dominant purpose of the Entity is also not considered to be promoting the development of an Australian resource as it is not principally carried out for commercial or business purposes.

Special Condition - 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. This is known as the non-profit requirement. Where members, in their individual capacity, are to receive benefits from an association it will fail the non-profit test. An association usually ensures they operate on a non-profit basis by including non-profit clauses in their governing documents. It is considered that the Entity has acceptable non-profit clauses.

It is also necessary that the association's actions are consistent with their governing documents. As the cases below illustrate, there are instances where benefits to members have been accepted. However, what is important to distinguish is whether benefits are conferred to members along with others in the community or as individual members.

The phrase 'profit or gain of its individual members' was considered in the case Commissioner of Taxation v Co-operative Bulk Handling limited [2010] FCAFC 155 (CBH case). In the CBH case, the members had to be customers of CBH. However, CBH's services were not restricted to members; non-members could also contract for CBH's bulk handling services. It was held that CBH made its facilities available to any producer or grains whether or not they were members. Further, it was held at 112:

While members do benefit from the activities of CBH, in its grain handling and storage activities, they do so at no greater extent than, and have no preference over, non-members who deal with the company, and on these circumstances such benefits do not accrue to them as 'individual members'.

The members of the Entity do receive benefits. However, apart from selling certain products, members do not appear to benefit to a greater extent than non-members. Workshops, courses and field-days that are provided by the Entity are available to non-members as well as members. Therefore the benefits provided to members do not accrue to them as 'individual members'.

However, benefits which are received jointly as members and are incidental to the pursuit of the association's objects will not prevent it from passing the non-profit test. For example business members will commonly receive some advantages, including financial advantages, as an incidental result of resource development (Australian Insurance Association case).

In the case of Inland Revenue Commissioners v Yorkshire Agricultural Society (1928) 1 KB 611 (Yorkshire Agricultural case) the provision of specific benefits to members to induce membership were disregarded. Although the Society applied as a charitable institution, it was found that the benefits to the members in the form of various privileges attaching to membership could be disregarded. The fact that benefits accrued to members of the Society did not detract from the fact that the Society had been established for the purpose of improvement of agriculture as a whole and not for any confined purpose of benefiting only the particular members of the Society. His Lordship said at 631:

…If the benefit given to members is only given to them with a view of giving encouragement and carrying out the main purpose which is a charitable purpose, then I think the mere fact that the members are benefited in the course of promoting the charitable purpose would not prevent the society being established for charitable purposes only.

The Entity does confer specific benefits to members in their capacity as members. Some activities are solely targeted to members such as the selling of certain products. However these benefits are conferred jointly to members and not to individual members. Further, the income received from selling these products comprises only a small proportion of income. Similar to the facts in the Yorkshire Agricultural case, these benefits attached to membership can be considered as a way to induce membership to the Entity and further engage members to practice a particular agricultural method.

It is considered that the Entity is not carried on for the profit or gain of its individual members.

Conclusion

It is considered that the Entity does not meet requirements of item 8.2 of the table in section 50-40 of the ITAA 1997. Accordingly, the ordinary and statutory income of the Entity is not exempt from income tax under section 50-1 of the ITAA 1997.