Edited version of your written advice

Authorisation Number: 1051409148260

Date of advice: 2 August 2018

Ruling

Subject: Income Tax Exemption – Promotion of Australian Agricultural Resources

Question

Is Association X exempt from income tax under section 50-1 of the Income Tax Assessment Act (ITAA 1997) as an entity described in item 8.2(a) of the table in section 50-40 as a non-profit association established for the purpose of promoting the development of Australian agricultural resources?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Association X has applied for a private ruling that it continues to be exempt from income tax under section 50-1 of the ITAA 1997 as an association established for the purpose of promoting the development of Australian agricultural resources under item 8.2(a) in section 50-40 of the ITAA 1997.

Association X has not changed its Constitution or activities since its establishment.

Association X is a Single Breed Club in Australia.

Association X has over 2,200 members.

All members pay a joining fee, an initial annual fee and subsequent annual renewal fees. Training activities attract a weekly fee of $3.00 and there are additional fees for partaking in “official club events”.

All “officials” of Association X are volunteers – there are no paid members or employees of Association X.

Association X does not, of itself, conduct breeding activities. The breeding of dogs involves a minority of the membership (4% of the overall membership). One percent of members provide breeds to industry services such as security. These members conduct their own breeding activities independently, providing members with dogs of sound temperaments and physique, in accordance with the Rules and Regulations of Association X under its Statement of Purposes.

The Statement of Purposes is included in Association X’s Constitution. Association X’s Purposes can be summarised as follows:

● Affiliations

● Socialisation and Training Activities

● Sporting/Games Activities

● Education Activities

● Support for Community Events and Worthy Causes

● Guidelines for the operation of Association X

Association X is affiliated with Association Y, which is in turn affiliated with Association Z. In addition, Association X is affiliated with Association A and members are bound to comply with Association A’s Rules and Codes of Ethics.

Other breeds are not excluded from training with Association X.

Members, under the supervision of Association X Accredited Instructors, train their breeds for specific events at various levels of difficulty or simply to learn to become good breed citizens. Instructors also assist breed handlers who wish to participate in breed sports events. This is a primary aim of Association X.

Sporting Activities

The aim of these activities is to get members and their breeds out of backyards and into healthy exercise, activities and play.

Association X’s Sporting Activities include:

a) Obedience Trials

a. Obedience Trials consist of competitions where Members compete to obtain a Passing Score at the ascending levels of Community Companion Breed, Companion Breed, Companion Breed Excellent, Utility Breed and Utility Breed Excellent.

b) Rally Obedience Trials (Rally-O)

c) Exhibitions – Breed exhibitions are conducted in a competitive environment where the breeds complete a series of exercises designed to assess their conformation and suitability for breeding.

d) Tracking Trials

e) Tracking and Search Rescue

f) Agility and Jumping Trials

g) Herding Trials – Breeds control the movement of stock under instruction from Handlers.

h) Endurance Trials

Education Activities

Association X runs information sessions, seminars, and workshops by external breed behaviour experts, such as vets, tertiary trained animal behaviourists, and specialist breed trainers.

Association X publishes a monthly magazine which informs members of upcoming events and includes articles written by vets and breed experts about the keeping of animals, breed healthy foods, foods dangerous to breeds and other training and competition information. Association X’s website also contains useful training and breed sports information for members.

Support for Community Events and Worthy Causes

Association X has over many years, through its volunteer members, raised substantial funds for philanthropic purposes.

Each year members participate in community events, demonstrating the obedience skills of breeds and handlers. Association X has participated in several festivals and parades in the past.

Guidelines for the Operation of Association X

Social activities are not the Purpose of Association X, although some Social activities do take place. These are only incidental to Association X’s Purposes, designed to promote harmony among members and to reward members who have contributed to Association X.

Constitution

The Constitution of Association X relevantly states as follows:

● To promote interest in the breed and to secure proper appreciation and recognition of its place in society.

● To promote and raise the standards of Breeding, rearing, keeping and the sale of the breed.

● To promote and encourage in every way the recreation, sport, exhibition and training of the breed and to provide facilities for those purposes.

● To educate members, and the general public in relation to all aspects of the breed and to inform members on all other matters of concern or interest to them.

● To inform members of the laws and regulations of the State relating to the ownership and care of breeds, and the responsibility of owners for the conduct and actions of their breeds.

● To maintain membership with Association X for the purpose of achieving national uniformity in all breed matters so long as the purposes, decisions and rulings of Association X are compatible with the purposes and domestic rules, regulations and operations of Association X.

● To liaise, cooperate and reciprocate with other bodies in matters of common interest or concern and of mutual benefit.

● To promote, assist and make contributions to any worthy causes.

● To make representations to and negotiate with Government authorities on matters relating to canine affairs and the protection of the interests of members.

● To promote and support approved canine festivals, displays and kindred functions and entertainments and any other approved canine activities.

● To educate and encourage Members, Breeders, Exhibitors and Judges to abide by the requirements and standards approved by Association A for the conduct of Exhibitions.

● To provide awards and donate prizes for competition at Exhibitions and for the competition by Breeders and Exhibitors of the breeds.

● To collect and have published information relating to the breed including but not limited to genetics, Breeding programs, rearing of litters, dietary and veterinary articles, training and handling, and all other educational material for the benefit of members and the breed.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 50-1

Income Tax Assessment Act 1997 Section 50-40

Reasons for decision

The assessable income of a taxpayer is exempt under section 50-1 of the ITAA 1997 where the taxpayer falls within the 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 exemption as an entity described in section 50-40 of the ITAA 1997 are:

● the organisation is a non-profit association or society;

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

● 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 society or association fails to satisfy all these requirements, it will not be exempt from income tax under section 50-1 of the ITAA 1997 as a non-profit society or association established for the purpose of promoting the development of Australian resources under item 8.2(a) of section 50-40 of the ITAA 1997.

Society or association

The terms association and society are not defined in the ITAA 1936/1997 and therefore take on 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). An association may be incorporated or unincorporated. It does not include a body formed and controlled by government and performing functions on behalf of government (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)?).

Association X is an association that is governed by its constitution (constituent documents) and conducts it activities in line with the objects stated in its constitution. Membership is open to all citizens, not just owners of the specific breed. It is open to all who support the purposes of the association.

It is accepted that Association X is a ‘society or association’ for the purposes of section 50-40 of the ITAA 1997.

Non profit

In order to constitute an entity exempt from income tax, Association X 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".

To meet this special condition the constituent documents and any governing legislation of the entity must prevent it from ever distributing profits or assets for the benefit of members and the organisation must act in accordance with those governing clauses.

Clauses 12.6, 12.7, 12.8, 12.9(a) and 12.9(b) of the constitution of Association X prevents the distribution of income to members in operation and upon winding up and directs income and property to be applied solely towards the promotion of the objects of the company.

Therefore, it is accepted that Association X is a non-profit entity.

Principal purpose of promoting development of Australian resources

Australian resources

Association X is seeking income tax exemption on the basis that it is established for the purpose of promoting the development of Australian agricultural resources. These resources are not defined in the ITAA 1936/1997 and so take on their ordinary meaning.

The Shorter Oxford English Dictionary defines agriculture as 'the science and art of cultivating land; including the gathering in of the crops and the rearing of livestock; farming (in the widest sense)'.

The Macquarie Dictionary similarly defines agriculture as the ‘cultivation of land, including crop-raising, forestry, stock-raising, etc.; farming’. ‘Stock’ is defined to include ‘livestock’, which is defined as the ‘the horses, cattle, sheep and other useful animals kept or bred on a farm or ranch’.

According to the Agriculture, Forestry and Fishing division of ANZSIC (Australian and New Zealand Standard Industrial Classification), operators in this division are involved in the cultivation and production of a range of livestock, dairy, horticulture and marine goods. These goods may be divided into 13 categories: horticulture and fruit; grain; sheep; beef cattle farming; dairy cattle farming; poultry farming; other livestock; other crops; agricultural services; hunting and trapping; forestry and logging; marine fishing and aquaculture. These goods are predominantly purchased by manufacturers for further processing or exported into the international market.

According to the Agriculture Victoria website (Agriculture Victoria, last updated 20 June 2018, www.agriculture.vic.gov.au) ‘other livestock’ refers to pig, goat and deer industry.

Resources or their elements include infrastructure, plant and equipment, livestock, personnel, knowledge, expertise and skills. An industry's businesses and their assets may be resources.

Considering these definitions, the breed is not considered to be an ‘agricultural resource’ under the ‘ordinary meaning’ of the terms ‘agriculture’ and ‘resource’. The breed is not included in livestock as part of the 13 categories of livestock as defined by ANZSIC, and do not fall under the other definitions as well.

The constituent documents of Association X do not indicate the promotion and development of Australian agricultural resources is a dominant purpose or activity.

Principal purpose of promoting development

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 of the ITAA 1997.

In Cronulla Sutherland Leagues Club Ltd v F.C. of T 90 ATC 4215 (Cronulla Sutherland) the court considered ‘dominant purpose’ and the process of reconciling ‘multiple purposes’. Whilst Cronulla Sutherland considered a different legislative provision to that currently under consideration, the court’s consideration of an comments concerning determining an organisation’s purpose are also applicable to this case. Lockhart J stated at 4225 that:

For a society, association or club to qualify for the exemption granted by sec. 23(g)(iii) it must be one that has as its main object or purpose the encouragement or promotion of an athletic game or athletic sport in which human beings are the sole participants. It may have other objects or purposes which are merely incidental or ancillary thereto or which are secondary or even unrelated to the main object or purpose without disqualifying the body from the exemption. But if it has two co-ordinate objects, one of which is outside the exemption, the exemption cannot apply because it would be impossible to say that one object is the main or predominant object.

The term ‘established’ in the legislation is not used in a narrow sense, considering only the motives and objectives which led to the initial formation of an association (Case W49 89 ATC 469 at 474; AAT Case 5127 (1989) 20 ATR 3597 at 3602-3). It is necessary to consider an association’s constituent documents and also its history, operations and activities to determine its principal or dominant purpose (Boating Industries Association of New South Wales v. FC of T 85 ATC 4224 at 4228-9; (1985) 16 ATR 383 at 388).

In Cronulla Sutherland Lockhart J also observed at 4225 that:

The material facts and circumstances [of the association] which should be examined includes its constitution, its activities, its history and its control…It is not sufficient to look to the formation of the body and to ascertain what was at that time the purpose of its formation. The statute gives periodic operation to the words and directs the inquiry to a particular time, namely, the year of income so that consideration must be given not only to the purpose for which the society was established but also the purpose for which it is currently conducted.

The requirement that the association was established for the requisite purpose, and continues to pursue that purpose by its present activities was also pointed out in Case W49 (at ATC 474; ATR 3603) when applying former paragraph 23(h) of the ITAA 1936:

‘… 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.’

Accordingly, establishing the dominant purpose of an association will largely be a matter of fact and degree. An entity will not possess the requisite purpose where such a purpose is either a co-ordinate purpose of the dominant purpose, or where the purpose is merely incidental or ancillary to the dominant purpose of the association.

It is necessary to consider an association’s constituent documents, and the history, operations and activities of the association in their entirety, rather than focusing on any particular aspect of the association. This approach was accepted by the High Court in the case of A & S Ruffy Pty Ltd v. Federal Commissioner of Taxation (1958) 98 CLR 637 at 649.

Section 50-40 of the ITAA 1997 does not refer to the promotion of the specified resources. It is directed to the promotion of the development of the specified resources. Taxation ruling IT 2415 Income tax: Associations promoting the development of Australian resources states the following on the meaning of development:

The term “development” must be taken to be used in a commercial or business sense, i.e. it comprehends all elements which must be taken into account to ensure that the specified resources are used in the best interests of Australia.

The meaning of ‘development’ was examined in FC of T v. Broken Hill Pty Co. Ltd 69 ATC 4028 at 4031-4032; (1969) 1 ATR 40 at 45. In considering the phrase 'development of the mining property' the majority of the High Court accepted the interpretation of Kitto J:

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.

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.

The promotion of development may be direct or indirect. Methods of promoting development can be by various means, including research, providing facilities, training, improving marketing methods, facilitating cooperation, through new innovative practices and similar activities.

To determine whether Association X has been established for the principal purpose of promoting the development of an Australian resource it is relevant to consider its constitutional documents and its activities. It will not be sufficient if one of the purposes of Association X falls within section 50-40 of the ITAA 1997; nor is it enough that resource development may be incidental to, involved with, or a consequence of its purpose.

Association X specifies its purpose in its Constitution. The purposes specified in the Constitution are consistent with Association X stating it exists solely for the purposes or promoting and raising the standard of breeding, rearing, keeping and selling of the breed.

A number of the purposes specifically state it has a purpose ‘To promote…’.

The main use of the word “promote” within the constitution is in the context of raising interest in the breed, promoting and supporting approved canine activities, promoting breeding standards, and to advertise or make aware of certain aspects of Association X or the breed in regard to ordinary domestic use or competitions.

In addition, it has a number of other purposes which can be summarised as: educating members in all aspects of the breed and ownership of the breed; educating the community; liaising, affiliating with and making representations to other like associations or relevant authorities; raising standards of breeding, keeping and sale; to inform, etc.

There is no stated purpose to indicate Association X has a purpose that is to facilitate or support agriculture.

Whilst none of its purposes are expressed in terms of the language used in section 50-40 of the ITAA 1997, the absence of a purpose expressed in such language is not necessarily an indication that the required purpose is absent. The purpose expressed in the Constitution is also not conclusive of its principal or dominant purpose. It is not only a matter of having such promotion as its main object in its constitutional documents but it must also be its main activity. Any other purposes and activities must be incidental, ancillary or secondary to promoting the development of the particular resource.

The main activity of Association X is to train the breed for domestic use (95% of members are non-breeders), the rearing and breeding of the breed for domestic use (98% of Association X’s breeders (i.e. 4% of the overall membership) resale the breed in the local Australian Family Pet Market), as well as the promotion of the breed in relation to recreation and sport exhibitions such as canine festivals.

Association X’s website, provides information on how to choose a breed as a pet, how to exercise your puppy, how to feed your puppy, and train your breed. It also has information on competitions and show trials such as endurance tests, track & search competitions, rally-o competition, tracking trials, herding competitions and making a dog’s life fun. The website does offer insight into breed improvement as well, however it is in relation to breed standards for competitions and shows rather than breed improvements for farming or working dogs.

In order to ascertain Income Tax Exemption under special condition item 8.2(a) of Section 50-40 of the ITAA 1997, the primary purpose must be the promotion of the development of Australian agricultural resources, and all other activities must be ancillary.

Association X’s constitution indicates its primary purpose as the education, training and breeding of the breed for recreation, sport and exhibition use. The activities undertaken by Association X are consistent with its stated purposes in its Constitution (and as stated on Association X’s website and in its annual report).

Therefore Association X does not have a principle purpose of promoting development of Australian agricultural resources.