Edited version of your written advice

Authorisation Number: 1013015924014

Date of advice: 26 May 2016

Ruling

Subject: Exempt entity and rebatable employer

Question 1

Is Company X exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as a society or association established for the purpose of promoting the development of Australian resources as listed under the table in item 8.2 of section 50-40 of the ITAA 1997?

Answer: Yes

Question 2

Is Company X a rebatable employer pursuant to section 65J of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer: Yes.

This ruling applies for the following periods:

Year ended 30 June 2015

Year ending 30 June 2016

Year ending 30 June 2017

Year ending 30 June 2018

Year ending 30 June 2019

Year ending 30 June 2020

The scheme commences on:

The scheme has commenced

Relevant facts and circumstances

Company X is an unlisted public company limited by guarantee with its own statement of rules and purposes and is governed by a board of directors.

Company X's constitution provides the following:

1/ It operates to assist and benefit the entire community and is not carried on for the profit or gain of its individual members;

2/ It is established to promote the development of listed Australian resources;

3/ It is non-profit with suitable non-profit and winding up clauses

Company X has employees.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 50-1

Income Tax Assessment Act 1997 section 50-40

Fringe Benefits Tax Assessment Act 1986 section 65J

Reasons for decision

Section 50-1 of the ITAA 1997 provides that the ordinary and statutory income of the entities described in the tables which follow that section are exempt from income tax.

Included in the tables is item 8.2 of section 50-40 which refers to 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 special condition imposed on the society or association by section 50-40 of the ITAA 1997 for the exemptions to apply is that it is not carried on for the profit or gain of its individual members.

Accordingly the issues that need to be addressed to ascertain an organisation's income tax status under item 8.2 of section 50-40 of the ITAA 1997 is determining whether:

• the organisation is an non-profit association or society;

• the dominant or principal purpose for which the organisation is established is promoting resource development;

• the resources whose development are being promoted are within the umbrella of resources specified under 8.2;

• the resources are resources of Australia

Association or society

The terms 'association' and 'society' are not defined and have their ordinary meaning.

An association may be incorporated or unincorporated. However, it does not include a body formed and controlled by government and performing functions on behalf of government (see Taxation Determination TD 95/56 Fringe benefits tax: can a body which is formed by government, is controlled by government and performs functions on behalf of government be an 'association' for the purposes of section 65J of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)? (TD 95/56)).

Paragraph 2 of TD 95/56 states:

…The Shorter Oxford Dictionary defines the term 'association' to be a 'body of persons associated for a common purpose; the organisation formed to effect their purpose'. The Macquarie Dictionary defines 'association' as being 'an organisation of people with a common purpose and having a formal structure'. Olsson J, in Quinton v. South Australian Psychological Board (1985) 38 SASR 523, also stated that the term 'association' has come to be regarded as attaching to a body of persons associated for a common purpose.

Company X is an incorporated entity brought into existence by its members to pursue a common purpose as stated in its constitution. It is not a body controlled or formed by government or performing functions on behalf of government.

It is accepted that Company X is an association.

Non-profit

In order to constitute an entity exempt from income tax, an association must also meet the special condition in item 8.2 of section 50-40 of the ITAA 1997 that it is: 'not carried on for the profit or gain of its individual members'.

Guide to company tax return for non-profit organisations 2014 (QC 40743) provides the following explanation of this requirement:

The basic premise of a non-profit organisation is that it is not operating for the profit or gain of its individual members, whether these gains are direct or indirect. This applies both while the organisation is operating and when it winds up.

Any profit made by the organisation goes back into the operation of the organisation to carry out its purposes and is not distributed to any of its members.

The ATO accepts an organisation as non-profit where its constituent or governing documents prevent it from distributing profits or assets for the benefit of particular people. These documents should contain acceptable clauses showing the organisation's non-profit character. The organisation's actions must be consistent with this requirement.

To meet the non-profit requirement firstly, an entity's constituent documents must display a non-profit character and secondly, the entity's actions must be consistent with this non-profit character.

Relevant clauses in Company X's constitution prevent it from distributing its profits or assets among members while it is operating or on it's winding up.

Company X has not undertaken any actions inconsistent with the required non-profit character.

It is accepted that Company X is a non-profit association.

Australian resources

The use of the word 'Australian' applied to resources in section 50-40 of the ITAA 1997 limits the exemption to associations whose activities are directed towards Australian resources.

The Macquarie Dictionary, [Online], viewed 11 May 2016, www.macquariedictionary.com.au (Macquarie dictionary) provides the following definition of 'resource':

a source of supply, support, or aid.

Company X's constitution provides that the company's principal purposes are in relation to promoting the development of listed Australian resources.

ATO publication Income tax guide for non-profit organisations (NAT 7967), under the heading 'resource development organisations' states:

[...] the various resources have their ordinary meaning. Industrial resources include building, mining, quarrying, shipping and transport, but do not include business and commercial resources, such as insurance, and services, such as surveying. Pastoral resources include infrastructure, facilities, plant and equipment, personnel, knowledge, expertise and skills relating to the raising of stock on rural properties.

The resources that Company X is helping to develop are located in Australia.

Therefore, Company X satisfies this requirement as it promotes the development of an 'Australian' resource.

Promotion of development

Taxation Ruling No. IT 2415 Income tax: associations promoting development of Australian resources (IT 2415) at paragraph 8 provides that [section 50-40 of the ITAA 1997] does not refer to the promotion of the specified resource. It is directed to the promotion of the development of the specified resource.

The term 'development' is used in section 50-40 of the ITAA 1997 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.

'Promoting the development' may be direct or indirect. It need not be on a large scale or use commercial means.

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.

Development of resources can be promoted by facilitating the cooperation of business and instrumentalities. Chambers of commerce and regional development bodies may help promote resource development in these ways.

Paragraph 9 of IT 2415 provides that resource development might also be promoted by the identification of, and programs to overcome, labour needs and the establishment of systematic training schemes in particular industries. Although the connection may not be readily apparent, the development of marketing techniques may also be relevant to the development of resources.

ATO publication NAT 7967, under the heading 'resource development organisations' states:

Promoting development can be by various means, including research, providing facilities, training, improving marketing methods, facilitating cooperation and similar activities.

It is accepted that Company X's objects provide for the purpose of the promotion of the development of resources that come within the umbrella of specified Australian resources under item 8.2 of section 50-40 of the ITAA 1997.

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 one or more of the specified resources in item 8.2 of section 50-40 ITAA 1997.

Determining the dominant purpose of an association will largely be a matter of fact and degree, and will involve the weighing up of various elements such as its objects, activities, history and proposed future innovations.

If an association operates principally to confer benefits on its members jointly or as a group, it is unlikely to be predominantly for promoting resources development and thus will not be exempt under section 50-40 of the ITAA 1997.

There are no provisions within the objects of Company X's constitution which operate principally to confer benefits on its members, jointly or as a group. Therefore, it is accepted that Company X has not been principally established for the benefit of its members.

Further, to be exempt under item 8.2 of section 50-40 of the ITAA 1997, Company X must be established principally or predominately for the purpose of promoting the development of an Australian resource as listed in item 8.2.

Company X's current operations and activities fall within the parameters of their objects, promoting the development of Australia's resources.

Therefore, it is accepted that with regard to Company X's activities, Company X is promoting the development of Australian resources as listed under the table in item 8.2 of section 50-40 of the ITAA 1997.

Special condition

Company X is not an ACNC type of entity as defined in subsection 995-1(1) of the ITAA 1997 which would be subject to the special conditions under section 50-47 of the ITAA 1997.

Conclusion

After analysis of its objectives and current activities it is accepted that Company X is an association that is not carried on for the profit or gain of its individual members, and is established for the principal purpose of development of resources that come within the umbrella of specified Australian resources under the table in item 8.2 of section 50-40 of the ITAA 1997.

Therefore, the income of Company X is exempt from income tax pursuant to section 50-1 of the ITAA 1997.

Question 2

Detailed reasoning

Subsection 65J(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) states:

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 following table; and

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

The relevant table item in these circumstances is item 9 which states:

Under item 9(b) of the table under subsection 65J(1) of the FBTAA, Company X must also be covered by item 8.2 of the table in section 50-40 of the ITAA 1997.

As reasoned in Question 1 above, it is accepted that Company X is exempt from income tax pursuant to section 50-1 of the ITAA 1997 on the basis that it is established for the purpose of promoting the development of Australian resources under the table in item 8.2 of section 50-40 of the ITAA 1997.

Accordingly, Company X satisfies the conditions set out in subsection 65J(1) of the FBTAA to be a rebatable employer.

A further qualifying condition for Company X to be a rebatable employer is set out in subsection 65J(5) of the FBTAA which states:

A society, association or club is not covered by table item 4, 5, 8, 9, 10, 11 or 12 in subsection (1) for a year of tax if it is:

(a) an incorporated company where all the stock or shares in the capital of the company is or are beneficially owned by:

(i) the Commonwealth, a State or a Territory; or

(ii) an authority or institution of the Commonwealth, a State or a Territory; or

(b) an incorporated company where the company is limited by guarantee and the interests and rights of the members in or in relation to the company are beneficially owned by:

(i) the Commonwealth, a State or a Territory; or

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

Company X is an incorporated company limited by guarantee under the Corporations Act 2001. However, there is no evidence to support that the interests and rights of the members in or in relation to Company X are beneficially owned by any of the Commonwealth, a State or a Territory or an authority or institution of the Commonwealth, a State or a Territory.

In conclusion, as Company X satisfies all the conditions set out in subsections 65J(1) and (5) of the FBTAA, it is accepted that Company X is a rebatable employer pursuant to section 65J of the FBTAA.