Edited version of your written advice

Authorisation Number: 1013073066673

Date of advice: 17 August 2016

Ruling

Subject: Not For Profit - Exempt Entities

Question

Is the Committee Incorporated an entity covered by Items 8.2 (a) and (f) of the table in section 50-40 of the Income Tax Assessment Act 1997 (ITAA 1997) so that its ordinary and statutory income is exempt from income tax under section 50-1 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods

Income year ended 30 June 2017

Income year ended 30 June 2018

Income year ended 30 June 2019

Income year ended 30 June 2020

Income year ended 30 June 2021

The scheme commences on

1 July 2016

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 Committee Incorporated was incorporated in Australia in 20XX.

The Committee adopted the Model Rules and is governed by The Rules of the Committee (the Rules) and has its own purposes and is governed by a board of directors.

The Committee Incorporated's rules provide the following:

• it operates to assist and benefit the community and is not carried on for profit or gain of its individual members

• it is established to promote the development of listed Australian resources

• it has suitable non-profit and winding up clauses.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 50-1

Income tax Assessment Act 1997 section 50-40

Reasons for decision

These reasons for decision accompany the Notice of private ruling for the Committee.

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Summary

The Committee is established for the purposes of promoting the development of Australian agricultural and viticultural resources pursuant to items 8.2(a) and (f) of the table in section 50-40 of the Income Tax Assessment Act 1997 (ITAA 1997) and is exempt from income tax under section 50-1 of the ITAA 1997.

Detailed reasoning

The statutory provisions which must be satisfied in order to be entitled to exemption for the total ordinary income and statutory income of entities are set out in sections 50-1 and 50-40 of the ITAA 1997.

Section 50-1 of the ITAA 1997 states the total ordinary income and statutory income of the entities covered in the tables in provisions under Division 50 is exempt from income tax. In some cases the exemption is subject to special conditions.

Items 8.2(a) and 8.2(f) of the table in section 50-40 of the ITAA 1997 provides that a society or association established for the purpose of promoting the development of Australian agricultural resources and viticultural resources shall be exempt from income tax subject to the special conditions contained in the table in section 50-40 of the ITAA 1997.

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.

In order for the entity to satisfy the requirements in item 8.2 of the table in section 50-40 of the ITAA 1997 it must:

1. be a society or association;

2. be established for the dominant or principle purpose of promoting the development of an Australian resource as described in item 8.2 of the table in section 50-40 of the ITAA 1997; and

3. not carried on for the profit or gain of its individual members.

If the association fails to satisfy these requirements, it will not be exempt from income tax under section 50-1 of the ITAA 1997.

1. Society or Association

The terms "society" and "association" are not defined in the ITAA 1997.

The meaning of "association" was considered by Olney J in Douglas & Ors v FCT 97 ATC 4722 in relation to section 23(g)(v) of the Income Tax Assessment Act 1936 (ITAA 1936) and the following was found:

As the section contains no definition of either 'society, association or club' or "community services purposes" it should be construed according to the ordinary meaning of the words used and, if necessary, after resort to the relevant explanatory memorandum and second reading speech.

Unassisted by authority I would construe the collation "society, association or club" to refer to a voluntary organisation having members associated together for a common or shared purpose. Such a description is consistent with various dictionary definitions of the several words used. The following examples can be found in the Concise Oxford Dictionary:

• Society: Association of persons united by a common aim or interest or principle;

• Association: Organised body of persons for a joint purpose:

• Club: Association of persons united for some common interest, usually meeting periodically for shared activity.

The Committee is an incorporated entity brought into existence by its members to pursue a common purpose as stated in its Rules.

In applying the definition the Committee is considered to be an 'association' or 'society' for the purpose of section 50-40 of the ITAA 1997.

2. Established for the Dominant Purpose of Promoting the Development of Resources

It is a requirement under section 50-40 of the ITAA 1997 that the primary or predominant purpose of the entity must be directed at promoting the development of a specific resource. It will not be sufficiently satisfied if the promotion or development is incidental to the entity's operations.

In all cases the 'association' or 'society' must be established for "the purposes of promoting development" of the particular resource. This is not only a matter of having such promotion as its main object in its constituent documents (the Rules), but also it must be its main activity for the particular income year in question.

Taxation Ruling IT 2415 - Income Tax: associations promoting development of Australian resources (IT 2415) states at paragraphs 7 & 8:

The reasoning in the decision in the Australian Insurance Association case highlights the matters that need to be satisfied in any case before exemption under paragraph 23(h) applies:-

a) Promotion of the specified resources must be the predominant purpose for which a particular body is established.

b) The resources, the development of which is being promoted, must come within the umbrella of the specified resources.

It is important to note that paragraph 23(h) does not refer to the promotion of specified resources - it is directed to the promotion of the development of the specified resources. In the context of paragraph 23(h) the term "development" must be taken to be used in a commercial or business sense, i.e. 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.

In Australian Insurance Association v. FC of T 79 ATC 4569, concerned the issue of whether an association primarily promoted the interests of its members, or whether the benefits to members were incidental to the purpose of being established to develop a particular resource. In reference to the former paragraph 23(h) of the Income Tax Assessment Act 1936 (ITAA 1936) Sheppard J, Supreme Court of New South Wales concluded at ATC 4576:

…In my opinion the Commissioner is correct in his submission that the purpose which is referred to in sec. 23(h) must be the principal or dominant purpose for which the association or society was established

Determining the dominant purpose will be largely a matter of fact and degree. It is necessary to consider an association's constituent documents, activities, history and proposed directions, etc. 'Established' refers not only to the motives and objectives which lead to the formation of the association but to its purpose since that time.

Australian agricultural or viticultural resource

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 version, viewed on 26 July 2016) defines:

Agriculture as:

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

Viticulture as:

• the culture or cultivation of the grapevine; grape-growing;

• the study or science of grapes and their culture.

In Cooperative Bulk Handling v FCT [2010] FCAFC 155 Mansfield and McKerracher JJ state, at paragraph 72:

'the expression "agricultural resources" is broader than "agriculture". It may reasonably be understood to mean the range of resources available to facilitate and support agriculture."

At paragraph 73 they state;

'This approach of dissecting "agriculture" from "agricultural resources" does not give full meaning to the expression. What is to be "promoted" is not agriculture or a specific agricultural activity but "the development of Australian agricultural resources." Neither "agriculture' nor "agricultural" stands alone. The "development of Australian agricultural resources" extends beyond cultivation of land as agriculture.

This requirement is satisfied.

Promoting the development of an agricultural or viticultural resource

In Cooperative Bulk Handling v FCT [2010] FCA 508 Gilmour J, primary judge in the Federal Court, provided the following definitions of "promoting" and "development":

• promoting - to further the growth, development, progress, etc.

• development - the act, process or result of developing, evolution, growth, expansion.

In the full Federal Court decision, Cooperative Bulk Handling v FCT [2010] FCAFC 155 at paragraph 81, Mansfield and McKerracher JJ found that CBH had promoted the development of the grain growing industry through the development of innovative practices, including new crops, new technology and new methods, such that "its business [was] continually open to development by advancement rather than having matured to the point of being static"

Purpose to provide benefits to its members

If the association's main purpose is merely to provide services to its members, it will not be exempt, even if the services result in better use of resources by those members.

There are no provisions within the objects of the Committee's Rules which operate principally to confer benefits on its members, jointly or as a group. It is therefore accepted that the Committee has not been principally established for the benefit of its members.

The Committee's current operations and activities fall within the parameters of their objects, promoting the development of Australian Resources.

Therefore, it is accepted with regard to the Committee's activities the Committee is an association for the promotion of the development of Australian agricultural or viticultural resource for the purposes of items 8.2(a) and (f) of the table in section 50-40 of the ITAA 1997.

3. Not carried on for the profit or gain of its individual members

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.

The Committee operates on a non-profit basis, meaning its constituent documents contain a prohibition against distribution of profit and assets among members while the association is functioning and on its winding up.

Accordingly, it is accepted that the Committee is not carried on for the profit or gain of its members and it meets the special condition under section 50-40 of the ITAA 1997

Conclusion

It is considered that the Committee meets the requirements for tax exempt status under items 8.2(a) or (f) of the table in section 50-40 of the ITAA 14997 as a society or association promoting the development of an Australian agricultural and viticultural resources. Therefore the ordinary and statutory income of the Committee will be exempt under section 50-1 of the ITAA 1997.