Edited version of your written advice

Authorisation Number: 1012991417811

Date of advice: 5 April 2016

Ruling

Subject: Exempt income and FBT rebatable employer status

Question 1

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 Australian pastoral, agricultural and manufacturing resources pursuant to item 8.2 in the table in section 50-40 of the ITAA 1997?

Answer

Yes

Question 2

Can the Entity claim a rebate pursuant to subsection 65J(2A) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) on the basis that it is a rebatable employer pursuant to subsection 65J(1) of the FBTAA?

Answer

Yes

This ruling applies for the following periods:

For Question 1: For Question 2:

Year ended 30 June 2016 Year ended 31 March 2016

Year ended 30 June 2017 Year ended 31 March 2017

Year ended 30 June 2018 Year ended 31 March 2018

Year ended 30 June 2019 Year ended 31 March 2019

The scheme commences on:

01 April 2015

Relevant facts and circumstances

Background

• The Entity is a public company limited by shares established under the provisions of the Corporations Act 2001.

• The Entity has received favourable rulings in 20XX, 20XX, 20XX and 20XX effectively confirming its income tax exemption under section 50-40 of ITAA 1997 for the years ending 30 June 20XX to 30 June 20XX.

• The Entity has received favourable rulings in 20XX, 20XX, 20XX and 20XX effectively confirming its rebatable employer status under subsection 65J(1) of the FBTAA for the years ending 31 March 20XX to 31 March 20XX and 31 March 20XX to 31 March 20XX.

• The Entity has advised that the facts and circumstances of its affairs have not materially changed from the previous application for a private ruling and that it is unlikely that the fundamental business operations and the facts & circumstances will change in the foreseeable future.

• There have not been changes to the objects and activities of the Entity since the previous application for a private ruling.

Constitution

• The Constitution contains a list objects. Overall, the Entity's objects are to receive funding from the Commonwealth and other sources for research and development, innovation and other activities for the benefit of Australian industry in which the Entity operates.

• The Constitution contains non-profit and dissolution clauses that outline restrictions around the appropriation of income and property to the promotion of the Entity's object.

• The Constitution limits issuing of shares to only applicants who have a relevant Levy Amount or are engaged in the particular business.

Activities

The Entity conducts activities for the benefit of the Australian industry within which the Entity operates. These include:

• Assist growers in producing a higher yields

• Enable a more cost effective processing of product by processors

• Enable the transformation of raw material into end-use products for a range of new markets

• Assist operators in making better business decisions through the use of latest market intelligence, and

• Lift the demand for Australian commodities by providing a range of industry services in the areas of market development, after sales support and addressing trade barriers.

Website

The Entity's website provides detailed information for operators on each stage of the product life cycle from the beginning to the end product at retail level.

The website also contains information in relation to the Entity's industry, including:

• media release for each month

• events for each state including workshops, forums, expos and shows

• publications for corporate, industry and so on

The website outlines the Entity's mission is to invest in research, development and marketing to:

• enhance the profitability, international competitiveness and sustainability of the industry, and

• increase demand and market access for the Entity's industry in Australia.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 50-1,

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

Fringe Benefits Tax Assessment Act 1986 Subsection 65J(1),

Fringe Benefits Tax Assessment Act 1986 Subsection 65J(2A) and

Fringe Benefits Tax Assessment Act 1986 Subsection 65J(5).

Reasons For Decision

1 - Income Tax Exemption

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 society or association; 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.

Society or association

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

The terms society or association 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 incorporated under the Corporations Act 2001 and is governed by its Constitution. The common purpose for which the Entity's shareholders have joined together is expressed in the Constitution to promote the Entity's industry in Australia through research and development and innovation activities. Therefore, it is accepted that the Entity is an association.

Non-profit

The exemption under item 8.2 of section 50-40 of the ITAA 1997 is also subject to the special condition that the entity is "not carried on for the purposes of profit or gain of its individual members". An association or society will fail the non-profit test if the members, in their individual capacity, are to receive any benefits.

If an association operates principally to confer benefits on its members jointly or as a group, its predominant purpose may not be considered to be promoting resource development and thus not exempt under section 50-40. The test does not require the association to be carried on for altruistic purposes and an entity may be for the professional benefit of members without being considered to have been carried on for the profit or gain of individual. These principles were affirmed by the Full Federal Court in FC of T v Co-operative Bulk Handling Ltd 2010 ATC. The full court found that, while members did benefit from the activities of the taxpayer, they did so to no greater extent than, and had no preference over, non-members who dealt with the taxpayer. In these circumstances, such benefits did not accrue to them as "individual members"

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.

The Commissioner considers that to qualify, the Entity must be prevented by law or its constitution documents from distributing its profits or assets among members, either while the Entity is functional or on its winding up, and it must act consistently with those restrictions. Where it is clear from the objects, policy statements, history, activities and proposed future directions of the club that there will be no distributions to members, the Commissioner accepts that the non-profit test has been satisfied (Taxation Ruling TR 97/22, paragraph 23).

As discussed before, the Entity contains non-profit and dissolution clauses in its Constitution which prevents the Entity from distributing its profits and assets among members while it is operating and on winding up. Therefore, it is accepted that the Entity operates on a non-profit basis and does not make any distributions to its members.

Also, it is evident from the Entity's objects and activities that it operates for the benefit of all industry operators in Australia and its services are not limited to members only.

The Entity's Constitution contains appropriate clauses which prevent benefits or profits being distributed to members both during its operation and on winding up. Therefore, it is accepted that the Entity meets the non-profit test.

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 pastoral, agricultural and manufacturing resources. These 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.

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.

Manufacturing is explained in Australian Insurance Association v. FC of T 79 ATC 4569 by Sheppard J, at 4574:

If, as I think is the case, plant and equipment, manpower, skill and know-how in manufacturing such article as steel products, clothing and furniture, and such non-tangible commodities as gas, electricity are manufacturing resources…

The Entity concerns itself with all aspects of the production process from harvesting through to the manufacturing and retail of products. It does so for the benefit of the industry within which it operates and all operators within the industry. Therefore, it is accepted that the Entity's affairs are concerned with the relevant resources.

Resources of Australia

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

The Entity aims to benefit the industry operators in Australia and so it is accepted that it is concerned with Australian resources.

Promoting Resource Development

It has already been established that the Entity is an association involved with 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 receives and seeks funds for research and development and innovation to assist Industry operators in producing high quality product. The Entity educates Australian operators so that they can more efficiently to produce end-use products for a range of new market segments. The Entity also educates operators in relation to the use of latest intelligence on market demand and product performance requirements so that operators can make better business decisions in relation to their production.

Therefore, the object of the Entity is considered to promote the development of Australian resources through research and development, innovation, education, and the introduction of improved methods and processes.

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 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 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, constituent document and activities. The Entity's objects clearly states that it seeks funds for 'research and development, innovation and other activities for the benefit of the industry operators in Australia'. Its main activities are to disseminate relevant information through media releases, workshops, forums, expos…etc to assist operators in producing higher quality products with improved processes that are more cost efficient.

Therefore, by considering its objects and underlying activities, it is considered that the predominant purpose of the Entity is to promote the development of Australian resources.

Conclusion

Section 50-1 of ITAA 1997 exempts the ordinary and statutory income of a non-profit society or association established to promote the development of the resources that fall under item 8.2 of section 50-40. The exemption is subject to the special condition that the society or association is not carried on for the profit or gain of individual members.

The Commissioner accepts that the Entity is a non-profit organisation whose dominant purpose is the promotion and development of Australian resources. The Entity's object and activities under its constitution also show that it does not operate principally to confer benefits on its members jointly or as a group. Therefore, the Entity is an exempt entity and its ordinary and statutory income is exempt from tax.

2) Rebatable Employer

In determining whether the Entity may claim a rebate pursuant to subsection 65J(2A) of the FBTAA, we must first determine if the Entity is an eligible rebatable employer pursuant to subsection 65(J)(1) of the FBTAA, which states in part:

An employer is a rebatable employer for a year of tax if the employer:

(a) is exempt from income tax at any time during the year of tax under any of the provisions set out in the table; and

(b) satisfies the special conditions (if any) set out in the table.

Specifically, item 9 under the table states that:

(a) a society, or non-profit association, established for the purpose of promoting the development of any of the following Australian resources:

(i). agricultural resources:

(ii). horticultural resources;

(iii). industrial resources;

(iv). manufacturing resources;

(v). pastoral resources;

(vi). viticultural resources;

(vii). aquacultural resources;

(viii). fishing resources; and

(b) covered by item 8.2 of the table in section 50-40 of the ITAA 1997.

Further, a rebatable employer under item 9, must also satisfies the special condition set out in subsection 65J(5). Essentially, it excludes any society or association from being a rebatable employer where it is an incorporated company that is beneficially owned by:

(a) the Commonwealth, State or Territory; or

(b) an authority or institution of the Commonwealth, State or Territory.

Therefore, to qualify as a rebatable employer under subsection 65J(1) of the FBTAA, an entity must:

• be a non-profit society or association;

• be established for the purpose of promoting the development of at least one of the resources of Australia as specified in this paragraph; and

• Must not be a company that is owned, controlled or established by the Commonwealth, State or Territory.

Non-profit

As discussed above, the Entity is considered to be non-profit as its Constitution contains appropriate non-profit and dissolution clause. The Entity qualifies as an exempt entity for income tax purposes as it is established for the purpose of promoting the development of at least one of the resources of Australia.

Society, association or club

As discussed in relation to the Entity's income tax exemption status, the Entity meets the ordinary meaning of an association.

However, Taxation Determination TD 95/56 serves to slightly modify the ordinary meaning of an "association" for the purpose of section 65J of the FBTAA. It states that a body cannot be an association where it is:

• formed by government;

• controlled by government; and

• performs functions on behalf of government.

The reasoning being that such body is clearly not formed to give effect to the purposes of the members of that body, but to give effect to the purpose of government.

The Entity is a public company limited by shares formed pursuant to the provisions of the Corporations Act 2001 and is not directly created as a result of an Act or law passed by the government. Its Constitution was developed in consultation with its shareholders, being Australian producers. Clause 4 of the Entity's Constitution serves to limit ownership of shares to Australian producers. For these factors, the Commissioner accepts that the Entity is not a body formed by government.

While the Entity is required to report to the government on its use of the government grants, the Entity effectively controls and manages its affairs without any requirement to take direction from the government. Therefore, The Entity's is not considered to be controlled by the government or performs functions on behalf of the government.

As such, the Entity is considered to be an association for the purposes of subsection 65J(1) as well as TD 95/56.

Conclusion

The Entity is an exempt entity for income tax purpose as it is a non-profit entity established for the purpose of promoting the development of Australian resources. The Commissioner also accepts that the Entity is not a Government body. The Entity therefore satisfies all the necessary conditions to be considered a rebatable employer under subsection 65J(1) of the FBTAA and is therefore entitled to a rebate of fringe benefits tax under subsection 65J(2A) of the FBTAA.