Edited version of your private ruling

Authorisation Number: 1012454393156

Ruling

Subject: Income tax exemption - resource development association

Question 1

Is the ordinary and statutory income of the Rulee exempt from income tax pursuant to section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) on the basis that it is a resource development organisation as described in item 8.2 of the table in section 50-40 of the ITAA 1997?

Answer

Yes

This ruling applies for the following periods:

01 July 2009 to 30 June 2015

The scheme commences on:

01 July 2009

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.

· The Rulee is company limited by guarantee.

· The Rulee is a non-profit association.

· The objects for which the Rulee is established are to promote and extend industrial and commercial relations between Australia and another country.

· The Rulee advised that its principal activity is to promote and encourage bilateral trade and investment between Australia and another country. It hosts conferences and seminars in Australia to educate industry participants of the benefits and capabilities of Australian resources and facilitates an increase in knowledge of the Australian resources by providing a forum for business to share their knowledge and promote their products and services.

· Membership to the Rulee is open to any persons or corporations engaged or interested in industry or commerce or cultural affairs between another country and Australia.

· The Rulee's members are mainly Australian companies. About sixth of its members are international companies.

· The Rulee sources its funding from membership fees, event revenue, service fees, publications and subsidies from the other country's government.

· In order to meet their objectives the Rulee carries out the following activities:

- Conducts conferences, meetings, forums, seminars and the like to promote business, investment and trade interest in various industries in Australia.

- Facilitates and/or encourages investment in Australian markets.

- Fosters collaboration between local and international markets by promoting Australian industries.

- Provides market research and information on Australia.

- Publishes, among other things, annual business guides, market reports, papers on industries, and quarterly news where the focus is on providing information on Australia.

- Provides assistance in the identification of trade partners.

· The Rulee focuses on industries, as evidenced from their website:

· The Rulee provides the following services to another country's companies that are interested in investing in Australian markets

- Researching applicable product standards and technical requirements

- Performing market studies to assess the competitive environment for the product or service

- Identifying potential business partners 

- Actively supporting their efforts to make contact with potential Australian customers or business partners

- Providing introductions to relevant associations and authorities

- Acting as their Australian representative

· The Rulee's activities are directed to promoting bilateral trade between Australia and another country. It conducts events that are aimed at promoting Australian resources.

· The Rulee provides a number of publications such as business guides, papers, and market reports.

· The Rulee provides a number of other services to its members which include:

- translation of business documents

- assistance with customs enquiries

- referrals to legal and tax consultancy members

- company credit checks

These services are minor and incidental to the Rulee's key activities.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 50-1

Income Tax Assessment Act 1997 section 50-40

Reasons for decision

Summary

The Rulee will be exempt from income tax if it is a non-profit association and its dominant purpose is the promotion and development of any of the resources of Australia specified in section 50-40 of the Income Tax Assessment Act 1997 (ITAA 1997). Having regard to its objects and activities, it is considered that the dominant purpose of the Rulee is the promotion or development of some of the specified resources of Australia.

Detailed reasoning

The ordinary and statutory 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:

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.

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.

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

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 Rulee is considered to be an association because as a company limited by guarantee it has a formal structure, it also has a number of members and is established for a defined purpose.

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.

Evidence that an association operates on a non-profit basis can be found in its constituent documents which should contain a prohibition against distribution of profit and assets among members while the association is functioning and on its winding up. The association's actions must also be consistent with this prohibition.

The Rulee's Memorandum of Association contains suitable non-profit clauses both whilst it is operating and on its winding up and so it is accepted as being a non-profit association.

Resources

An association described in item 8.2 of the table in section 50-40 of the ITAA 1997 must promote the development of one or more of the specified resources. The specified resources are not defined in the legislation and take on their ordinary meaning.

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

The Macquarie Dictionary defines agriculture as:

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

Pastoral is defined in the Macquarie Dictionary:

1. of or relating to the raising of stock, especially sheep or cattle, on rural properties: pastoral occupations; pastoral leases.
2. used for pasture, as land.

The terms 'manufacturing resources' and 'industrial resources' are discussed in Australian Insurance Association v FCT (1979)10 ATR 333; 79 ATC 4569. It was determined that manufacturing resources extend to "plant and equipment, manpower, skill and know-how in manufacturing such articles as steel products, clothing and furniture, and such non-tangible commodities as gas and electricity." Furthermore, it was held that "the term 'industrial resources' was intended to cover such resources as those of the building, mining, quarrying, shipping and other transport industries. It did not cover business or commercial resources".

The Rulee is involved with a number of industries and resources specified in section 50-40 of the ITAA 1997.

Resources of Australia

The words 'in Australia' limit the exemption to associations whose activities are directed to Australian resources. Where an association is established for the purpose of promoting the development of a foreign resource, or of both Australian and foreign resources the test for exemption is not met.

Associations promoting trade between Australia and another country may be exempt where it is clear that they are predominantly to promote Australia's resources. 

The Rulee promotes bilateral trade between Australia and another country. It will only be acceptable if it predominantly promotes Australian resources.

The Rulee's activities, as highlighted in its recent annual reports are more directed towards promoting Australian resources in order to encourage another country's investment in Australia and collaboration between another country and Australian companies. The majority of the Rulee's members are Australian companies and the majority of its conferences are held in Australia with the purpose of promoting the other country's industries that are relevant to Australian society. Whilst the other country's resources are promoted in Australia, they are done so in order to further develop Australian resources. Also, whilst investment in another country is promoted, it is not the main purpose. The dominant purpose appears to be the promotion of the Australian resources. The promotion of another country's resources is incidental to the promotion of the Australian resources.

Promoting Resource Development

It has already been established that the Rulee is an association involved with resources of Australia specified in section 50-40 of the ITAA 1997.

The exemption does not apply to entities that merely promote one or more of the specified resources of Australia. An entity must instead be established for the purposes of 'promoting development' of those resources. The term 'development' is used in section 50-40 of the ITAA 1997 in a commercial or business sense. 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.

Development of resources can be promoted by facilitating the cooperation of businesses and instrumentalities. In this regard, an entity like the Rulee may be considered a resource development organisation.

The Rulee's key purpose and its key activity involves creating situations that will facilitate the cooperation of businesses in order for these businesses to further develop certain specified resources of Australia.

These activities include the seminars, conferences and trade fairs, the publications it produces and research it undertakes, all to showcase the resources of Australia and to encourage the other country's companies to bring their resources and technology to the businesses in Australia in order to further develop the Australian resources.

It is accepted the Rulee promotes the development of the specified Australian resources.

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 promoting the development of resources (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 is the consequences of an association's purposes.

The term 'established' is not used in the narrow sense of considering only the motives and objectives which led 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 includes 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.

As outlined above, the key purpose of the Rulee is to conduct activities that lead to the development of Australian resources. Its actions are consistent with this purpose and the Rulee meets this requirement.

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 of the ITAA 1997.

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; 29 ATR 1108 the Tribunal found, as an alternative ground, that the association was not exempt under 23(h) of the Income Tax Assessment Act 1936, because it was found to be principally for the promotion of the interests of its members. It operated to look after the needs of consulting surveyors in 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.)

In Commissioner of Taxation v. Co-operative Bulk Handling Limited [2010] FCAFC 155, a majority of the Full Court (Mansfield, McKerracher JJ, Siopis J dissenting) confirmed the decision of Gilmour J that the activities of Co-operative Bulk Handling Limited (CBH) regarded as a whole were directed primarily to "promoting the development of agricultural resources of Australia" being the grain growing industry in WA. They concluded that "promoting the development of agricultural resources" in the expression extends beyond what is done on the farm or nearby. The expression includes developing the range of resources available to facilitate and support agriculture. And that the purpose for which CBH was established must be determined by considering globally all activities of CBH against the whole legislative expression. The Full Court also held that while members did benefit from the activities of CBH, they did so to no greater extent than, and had no preference over, non-members who dealt with the company and that in those circumstances the benefits did not accrue to them as individual members.

The Rulee's membership is open to any entity that is interested in commerce or cultural affairs between the other country and Australia. There is no limitation to who can be a member.

The Rulee provides some services to its members such as translation of business documents, assistance with customs enquiries, referrals to legal and tax consultancy members and company credit checks however these activities are considered incidental to the pursuit of its purpose. Part of facilitating the cooperation between the other country and Australian companies involves activities such as those referred to above.

It is apparent that the Rulee is not operating with the dominant purpose of providing a benefit to its members. Any entity can be a member and be in receipt of their services and the services carried out by the Rulee are merely in the course of pursuing their purpose.

Therefore, the principal purpose of the Rulee is considered to be the promotion of the development of Australian resources.