Edited version of your written advice

Authorisation Number: 1051181256687

Date of advice: 25 January 2017

Ruling

Question 1

Is the X Inc income tax exempt under section 50-1 of the Income Tax Assessment Act 1997 by virtue of item 8.2(c) of the table in section 50-40?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 2015

Year ended 30 June 2016

Year ending 30 June 2017

Year ending 30 June 2018

Year ending 30 June 2019

The scheme commences on:

Late 20XX

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 X Inc Constitution provides the following:

2. Objects

The objects of the Association shall be:

(a) To establish, promote and maintain the specialised discipline of Y.

(b) To provide and support a code of conduct and ethics allied with the aims of integrity, responsibility and service.

(c) To seek approval and recognition by governmental, professional and industrial institutions on the basis of demonstrated knowledge and skills.

(d) To provide a body of knowledge arrived at from lengthy periods of theoretical and practical training, in conjunction with extensive practical experience.

34. Funds - Source

(a) The funds of the Association shall be derived from entrance fees and annual subscriptions of members, donations, student course fees and, subject to any resolution passed by the Association in general meeting or by such other sources as the Council determines.

(b) …

35. Funds Management

(a) Subject to any resolution passed by the Association in general meeting, the funds of the Association shall be used in pursuance of the objects of the Association in such manner as the Council determines

42. Surplus Property

(a) In the event of the winding up or the cancellation of the incorporation of the Association, all surplus property shall be vested in Y, or some other tax-exempt Z charity as shall be determined by the Council.

(b) The incorporated association so nominated shall be one which fulfils the requirements specified in the relevant sections of the Corporations Act 2001 or any other applicable Regulation or Act as applies to the Association.

Relevant legislative provisions

Income Tax Assessment Act 1936

former section 23(h)

Income Tax Assessment Act 1997

Subdivision 50-A

section 50-1

section 50-40

Reasons for decision

Summary

It is the Commissioner's view that X Inc is not established for the purpose of promoting the development of Australian 'industrial resources', as used in item 8.2 of section 50-40 of the Income Tax Assessment Act 1997 (ITAA 1997). As such, X Inc is not entitled to the exemption provided in section 50-1.

Detailed reasoning

Section 50-1 of the ITAA 1997 provides that the total ordinary income and statutory income of entities covered by tables in Subdivision 50-A (including section 50-40) is exempt from income tax.

Section 50-40 of the ITAA 1997 deals with societies or associations established for the purpose of promoting the development of Australian resources in item 8.2 of the table within the section, item 8.2(c) specifies industrial resources.

Society or association

The term society, association or club is defined in ITAA 1997. The term is therefore construed according to its ordinary meaning.

In Pro-Campo Ltd v. Commissioner of Land Tax (N.S.W) 81 ATC 4270; (1981) 12 ATR 26 (Pro-Campo) (at 4278-4279), which concerned exemption from New South Wales land tax, Lee J said:

'The three words 'society, club or association' are words in frequent use in our community and societies, clubs and associations are well-known entities...

In Theosophical Foundation Pty Ltd v. Commr. of Land Tax (1966-1967) 67 SR 70 ... Sugerman JA stated at p.82

'A society, in the relevant sense, is 'a number of persons associated together by some common interest or purpose, united by a common vow, holding the same belief or opinion, following the same trade or profession, etc: an association.' (Oxford English Dictionary,...) A society as thus described, in which the common element pertains to areas concerned with religion, may aptly be described as a religious society.'

... the three words are describing bodies made up of groups of persons who have come together to implement common purposes and objects...'

Although Pro-Campo was considered in the context of State land tax, it is instructive as to the meaning of the terms contained in section 50-40 of the ITAA 1997 and throughout Subdivision 50-A.

Industrial resources

Guidance provided on the ATO website (see Resource Development Organisations, quick search code QC 46338 explains under the heading 'Purposes' that 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.

This information reflects the discussion and decision in Australian Insurance Association v. FC of T 79 ATC 4569; (1979) 10 ATR 333 (the AIA case) and other cases. In the AIA case, Sheppard J considered the meaning of the term 'industrial resources', as differentiated from manufacturing resources, both used in former section 23(h) of the Income Tax Assessment Act 1936, remade as section 50-40 of the ITAA 1997. In the AIA case (at 4574-4575) Sheppard J said:

'An analysis of the section discloses that the first group of resources dealt with (omitting from consideration that of aviation) are all of primary industry, namely, agricultural, pastoral, horticultural and viticultural. Next are the manufacturing resources. It would seem to have been the draftsman's intention to distinguish between separate resources and the final category of industrial resources. There is a question as to whether there are two separate and distinct categories, or whether there may not be some overlapping between the two. Whether that be so or not, one must reach a conclusion as to what type of resources were intended to be referred to as industrial resources as opposed to those which were embraced by the expression “manufacturing resources”…

In the submission of counsel for the Commissioner, the words “industrial resources” were inserted to cover such resources as those of the building industry or the mining or quarrying industries. The word “industrial” was thus said to have been used in its traditional or conventional sense.

Having reflected on the matter, I have reached the conclusion that the submission made by counsel for the Commissioner should be accepted. There is a degree of specificity in the words used in the section. It refers to aviation then to four resources of primary industry, then to manufacturing and finally to industrial resources. The use of various expressions does not suggest that the draftsman intended to give to the word “industrial” any wide meaning intended to embrace business or commercial resources…

Even if the word “industrial” had been used alone (that is, without the word “manufacturing”) I think there would have been a question as to whether commercial or business resources were included.

The AIA case was applied the by Administrative Appeals Tribunal in case 46/94 (1994) 29 ATR 1102; (1994) 94 ATC 412 (Case 46/94), rejecting an association of surveyors claim for exemption under the section. In Case 46/94, at 416-417, Beddow SM said:

'His Honour [in the AIA case] said that the building, mining and quarrying industries and the resources which these industries have are not aptly described as manufacturing industries, but they are industries in the accepted sense of the word. Industries in a similar category are the shipping and transport industries…

I am not satisfied, in the light of what was said by Sheppard J, that surveying comes within the meaning of “industrial resources” of Australia because the association promotes what can only be described as a service industry. It is undoubtedly true that all forms of industry in Australia will have a need for the services of a surveyor from time to time, although certain industries will clearly have a much greater demand for the work of surveyors than others. It is also equally clear, on the material before me, that persons who are not in business will also have a demand for the use of surveyors… I cannot see, in the light of what his Honour said in the AIA case how it can be said that the surveying industry itself or, perhaps more correctly describing it the surveying profession, can be said to be an industrial resource of Australia…'

X Inc is an association established to promote the development of Y. Applying the principles in the AIA case and Case 46/94, Y is not an industry in the traditional or conventional sense, and could be more correctly described as a service and profession.

Y, as a profession, provide services to the owners of a broad range of vessels, both commercial and non-commercial including freight ships, cruise liners, leisure vessels and other small craft. The 'shipping industry', referred to in Case 46/94, relates to the transport of goods by sea. Y provides services in a much broader context than the 'shipping industry' in the terms of the meaning of “industrial resources”. Many different types of businesses and private individuals outside the 'shipping industry' require the services of Y. Therefore, consistent with the decision in Case 46/94, Y is not an Australian industrial resource.

It is the Commissioner's view that X Inc is not established for the purpose of promoting the development of Australian 'industrial resources', as used in item 8.2 of section 50-40 of the ITAA 1997. As such, X Inc is not entitled to the exemption provided in section 50-1.