Edited version of your private ruling

Authorisation Number: 1012434745856

Ruling

Subject: Income tax exemption

Question:

Is the Entity exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as a non-profit association established for the purpose of promoting the development of an Australian agricultural resource under item 8.2(a) in section 50-40 of the ITAA 1997?

Answer:

Yes.

This ruling applies for the following periods:

1 January 2013 to 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

Year ended 30 June 2017

The scheme commences on:

1 January 2013

Relevant facts and circumstances:

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Background

The Entity is a not-for-profit company limited by guarantee which was established for the purposes of promoting the development of agriculture resources in Australia. The Entity was formed shortly after the commencement of "relevant" industry (the Industry) in Australia.

The Entity has self assessed itself to be income tax exempt under section 50-40 of the ITAA 1997 since its operation. To date, the Entity has never applied to either the ATO or the Australian Charities and Not-for-profits Commission (the ACNC) to be endorsed or registered as a charity.

Objects

The Entity's primary focus is in providing support to the Industry and its membership base consists primarily of individuals who work in different areas of the Industry including:

· Industry growers;

· Industry organisations and their employees; and

· Industry support staff including agronomists and consultants.

The Entity's Constitution also contains a non-profit and winding-up clause.

Activities

The Entity undertakes a number of activities which generates income to invest in research and development to look for new and innovative ways to develop the Industry. The Entity has specifically selected to invest in certain projects based on their contribution to the Industry and in areas where government funding has decreased in recent years.

The Entity has also entered into several licensing agreements and formalised joint ventures with relevant body for the purpose of incorporating the results of extensive research and development for the Industry.

Recent and future development

The Industry has benefited from a number of favourable market conditions which led to unexpected growth in surpluses recently. As a result, a substantial cash surplus has been accrued.

In accordance with its purpose, the Entity intends to reinvest all of these funds in the Industry and has undertaken a detailed financial forecast to consider how the cash will be utilised to further develop the Industry. The Entity wishes to reinvest in the industry through:

· investment in further R&D projects

· retention of a reserve to fund contractual obligations

· payment of a rebate to the Industry for reinvestment

In relation to the rebate arrangement, the Entity proposes to make a payment to the Industry participants. The distribution is not being provided as a distribution of profit; instead, the rebate is to facilitate further investment and to ensure they can continue to achieve result. The Entity estimates that out of the X number of participants who will receive the rebate, only Y are the Entity's members.

Relevant legislative provisions:

Item 8.2, Section 50-40 Income Tax Assessment Act 1997

Section 50-1 Income Tax Assessment Act 1997

Relevant Rules and Determinations:

Taxation Ruling IT 2415

Relevant Cases:

Australian Insurance Association v FC of T 79 ATC 4569; 10 ATR 333; (1979) 41 FLR 256

Boating Industries Association of New South Wales v F C of T 85 ATC 4224; (1985) 16 ATR 383

Case 46/94 94 ATC 412; (1994) 29 ATR 1102; ATR 1108

Case W49 89 ATC 474; 20 ATR 3602-3

FC of T v. Broken Hill Pty Co. Ltd 69 ATC 4028; 1 ATR 40

FC of T v. Co-operative Bulk Handling Limited [2010] FCAFC 155

Pro-campo Ltd v. Commr of Land Tax (NSW) 81 ATC 4270; (1981) 12 ATR 26

Summary of decision

The Entity will be exempt from income tax if it is a non-profit association whose dominant purpose is the promotion and development of agricultural resources of Australia. Having regarded to its objects and activities it is considered that the dominant purpose of the Entity is the promotion or development of Australian agricultural resources.

Detailed reasoning

Assessable income of an entity is exempt under section 50-1 of the ITAA 1997 where the entity falls within the following description contained in item 8.2 of section 50-40 of the ITAA 1997 (ITAA 1997):

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

(a)     agricultural resources

(b)     horticultural resources

(c)     industrial resources

(d)     manufacturing resources

(e)     pastoral resources

(f)      viticultural resources

(g)     aquacultural resources

(h)     fishing resources 

The exemption is subject to a special condition that the society or association is not carried on for the profit or gain of individual members.

For an association to be exempt from taxation under s50-40 of the ITAA 1997, it must be established predominantly for the purpose of promoting resource development. An essential element of the table in Item 8.2 above is that the section, in its application to production industries, applies only to Australian resources. 

Therefore, the matters to be satisfied before this exemption applies are:

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

· the dominant or principal purpose for which the entity is established is promoting resource development; and

· the resources whose development is being promoted are within the umbrella of resources specified in the relevant section; and

· the resources, are resources of Australia (see Taxation Ruling IT 2415 Income tax: Associations promoting the development of Australian resources at para 7).

 If the association fails to satisfy these requirements, its income will not be exempt under this provision.

Association

One of the requirements of section 50-40 of the ITAA 1997 is that the entity be a society or association.

The terms association and society are not defined and have their ordinary meaning. The Macquarie Dictionary defines association 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 26 at 35). 

The Entity is a company limited by guarantee incorporated under the Corporations Act 2001 and has been established by its members for a common purpose of developing the Industry in Australia. Therefore, it is accepted that the Entity is an association.

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.

The Entity constitution contains appropriate rules which prevent benefits or profits being distributed to members both during its operation and on winding up under Clause 20 and 22. The presence of appropriate non-profit and winding up clauses will usually satisfy the non-profit requirement; however, the Entity's proposal to pay the rebates to growers may contravene this requirement. Therefore, the underlying issue is whether the rebate is considered to be a distribution of profits or members' benefits which is discussed below under the "special conditions - benefits to members".

Resources

To fall within the section 50-40 of the ITAA 1997 criteria, an association's principal or dominant purpose must be to promote the development of one or more of the resources specified in that section.

The Entity is seeking income tax exemption on the basis that it is established for the purpose of promoting the development of agricultural resources. Agricultural resources are not defined in the ITAA 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.

Resources of their elements would include infrastructure, plant and equipment, livestock, personnel, knowledge, expertise and skills.

The Entity is concerned with providing support to the Australian Industry, especially the growers, relevant organisations and their employees. Therefore it is accepted that it is concerned with agricultural industry.

Resources of Australia

The words 'in Australia' limit the exemption to associations whose activities are directed to Australian resources. 

The Entity provides support to all Industry growers and related entities in Australia, hence it is accepted that it is concerned with resources of Australia.

Promoting Resource Development

It has already been established that the Entity is an association involved with agricultural resources of Australia.

However, section 50-40 of the ITAA 1997 does not refer to the promotion of the specified resources. It specifies the promotion of the development of those resources. The term 'development' is used in section 50-40 in a commercial or business sense. It takes in all the elements which must be taken into account to ensure that the specified resources are best used. 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.

The meaning of 'development' was examined by the High Court in FC of T v. Broken Hill Pty Co. Ltd 69 ATC 4028; 1 ATR 40 where, in considering the phrase 'development of mining property', the majority of the High Court accepted the interpretation of Kitto J:

In its ordinary English sense the word "development" when used in relation to a property. Refers to the unfolding, the bringing out, of some latent capability of that property…It covers I think, any preparation, adaptation or equipment of the property for the exploitation of an inherent potentiality which cannot be exploited or fully exploited, without some such preliminary treatment.

The Entity's object is to provide facilitation and support to the Industry by conducting activities or enter into arrangement with other associated body to promote the development of the Industry. The Entity achieves this by investing income in several research and development projects to look for new and innovative ways to develop the Industry. It also employs a team who are responsible for screening all the materials to monitor and control relevant diseases in order to protect its longevity. The Entity also funds the Industry events which indirectly promote the development of the Industry as these events provide opportunity for associated bodies and associations to liaise, communicate, and collaborate with each other. Consistent with the majority decision of the Full Federal Court in FC of T v. Co-operative Bulk Handling Ltd [2010] FCAFC 155 (the CBH case), the statutory expression requiring the entity to be established for the purposes of "promoting the development of agricultural resources" is a composite expression with a broader application than the component words. The Commissioner has accepted that the expression requires a global review of the activities of the relevant entity to determine the principal or dominant purpose for which it is established (see Decision Impact Statement DIS QAD 158 of 2010).

Therefore, the object of the Entity is considered to promote the development of agricultural resources through research, monitor and control of associated disease, introduction of results from research, education and production and sale of relevant material.

Principal or 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 resource development (Australian Insurance Association v FC of T 79 ATC 4569; 10 ATR 333; (1979) 41 FLR 256). It is not sufficient that one of the association's purposes falls within section 50-40, nor is it enough that resource development is incidental to, involved with, or consequences of an association's purposes.

The term 'established' is not used in the narrow sense of considering only the motives and objectives which let to the formation of an association (Case W49 at 89 ATC 474; 20 ATR 3602-3). It is necessary to consider an association's constituent documents, and also its history, operations and activities (Boating Industries Association of New South Wales v F C of T at 85 ATC 4228-9; 16 ATR 388). As the Tribunal pointed out in Case W49 at ATC 474; 20 ATR 3603 it is necessary to consider:

'…whether during the period under review the organisation was in existence and was operated and maintained in an established or stable condition as an organisation having as its principal or dominant purpose, one of the purposes provided for in the subsection.'

Therefore, determining the dominant purpose of the association will be a question of fact and degree and 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 F C of T 85 ATC 4224; (1985) 16 ATR 383).

Consequently, it will be necessary to consider each association on the merits of its particular circumstances. Also, because those circumstances may change, an association's tax status may change over time.

In order to determine the purpose of the Entity, it is necessary to consider its history and how it came into existence. As stated in the information provided, the Entity was established shortly after the commencement of the Industry in Australia with a purpose to promote the development of agriculture in Australia. Since its formation, it has operated within this framework as stated in the objects of the Entity's Constitution.

Although the Entity has accrued a substantial growth in cash surplus due to favourable market conditions recently, it continues to commit to achieve its main purpose by conducting detailed financial forecast to consider how these surpluses should be utilised to further develop the Industry.

As a result, the Entity's dominant purpose is considered to be promoting the development of agricultural resources in Australia.

Special condition - 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 the purpose of promoting resource development and thus not exempt under section 50-40.

As the following cases illustrate, 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.

In Case 46/94 94 ATC 412; (1994) 29 ATR 1102 at ATC 417; ATR 1108 the Tribunal found, as an alternative ground, that the association was not exempt under 23(h) because it was principally to promote the interests of its members. It operated to look after the needs of consulting surveyors through such matters 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. (The association was accepted as non-profit.) 

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

As a result of unexpected growth in surpluses due to a number of favourable market conditions, the Entity has a substantial cash surplus. In order to ensure these funds are utilised to further develop the Industry, the Entity has undertaken a detailed financial forecast to allocate the funds appropriately. The Entity proposes to make a payment of a rebate to all Industry participants. Such distribution arrangement is not supposed to be a distribution of profit; instead, the rebate is to facilitate further investment in the Industry.

The Entity's circumstances in relation to the provision of rebate can be compared with the CBH case where CBH is considered to be an income tax exempt association established for the purpose of promoting the development of Australian agricultural resources. In the CBH case, the members are grain growers and to become a member, it is a condition that the grower delivers grain to CBH for bulk handling. Therefore, a member must also be a customer of CBH. However, CBH's services are not restricted to members only, non-members can also contract for CBH"s bulk handling services. The evidence suggests that approximately 90% of CBH's customers are its members, but it was decided that the members did not benefit as members but because they were growers. Similarly, the Entity's proposal of the rebate distributions is not limited to members only, and in contrast with the CBH case where its services was provided to approximately 90% to its members, the Entity estimates that only approximately a small percentage are members.

Also, similar to Case W49 89 ATC 469 which was discussed above, the operation and activities of the Entity shows that the members do not benefit "as members", but benefit as Industry participants to further invest in their farms. Therefore, the benefits that flow to the Entity's members stem from the dominant purpose of promoting the development of agricultural resources. Any indirect benefit that may flow on to members is secondary to this overall purpose.

Consequently, the Entity is not considered to operate principally to confer benefits on its members jointly or as a group.

Conclusion

The Entity has satisfied all the requirements and is exempt from income tax under s50-1 of the ITAA 1997 as a non-profit association established for the purpose of promoting the development of an Australian agricultural resource under item 8.2(a) in section 50-40 of the ITAA 1997.