Edited version of your written advice

Authorisation Number: 1051420952619

Date of advice: 30 August 2018

Ruling

Subject: Income tax exemption

Question

Is the Company entitled to exemption from income tax as a “society or association established for the purpose of promoting the development of” Australia’s industrial resources, in accordance with Item 8.2 (c) of the table in section 50-40 of the ITAA97?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 2019

Year ending 30 June 2020

Year ending 30 June 2021

Year ending 30 June 2022

The scheme commences on:

1 July 2018

Relevant facts and circumstances

The Company has applied for a private ruling to extend the period of a private ruling previously granted by the Commissioner of Taxation regarding its exemption from the payment of income tax.

The previous ruling was issued by the Commissioner on the basis that the Company was an exempt entity under item 8.2(c) of section 50-40 of the Income Tax Assessment Act 1997 (ITAA 1997).

The Company has advised that there has been no material change in the facts and circumstances as described in the previous ruling.

The Company has provided the following documents in support of this ruling application:

● its constitution;

● a sample Funding Agreement;

● Contribution Deed.

The Company’s Constitution contains the Objects, a Winding up clause and a Non-profit clause.

The Company has stated the following facts in relation to the scheme:

● The Company receives monetary contributions from its Contributors, to fund the Program, which the Company manages.

● Funding for the Program is provided by way of levies on its contributors. The levies are calculated by reference to the Company’s Contributors’ share of production. The Company holds those contributions in its own right and applies them for the purpose of the Program in accordance with the Contribution Deed.

● All members of the Company are required to pay contributions or levies to the Company for application to its objects. Accordingly it is concluded that members would also be contributors.

● The funds held by the Company are expended to develop and implement projects. The projects are carried out by research agencies, registered research agencies and Demonstration Project agencies.

An example of a Funding Agreement has been provided by the Company. In summary of the Agreement:

● the objective of the project is to make the results and outcomes of the research readily available to the Company through the Report for the benefit of the Company’s Contributors.

● The Recipient makes an irrevocable standing offer either to grant a non-exclusive licence of the generated intellectual property, or to sell technology at a discounted rate to each Contributor or their Related Bodies Corporate. The licence is to be offered on reasonable commercial terms and limited to the own use by each Contributor or their Related Bodies Corporate and excluding any further sublicensing.

● The fee or royalty payable by a Contributor to the Recipient must be:

● no higher than a royalty or fee payable for a similar licence by any other person to a comparable third party;

● further discounted by the Royalty Percentage

● Where the Recipient elects to sell technology to a Contributor, the sale price must be:

● the best commercial price at the time of sale;

● further discounted by the Royalty Percentage.

● The Royalty Percentage is determined as follows: the Total Company Contribution at the time, as compared to the total of the Total Funding Contribution and the contributions of other owners of the Generated Intellectual Property.

● If a Contributor declines the terms of the proposed licence or sale agreement, the Grantee's obligations in respect of its standing offer to that Contributor cease.

● The Company is entitled to receive from the Recipient an amount equal to the proportion of the Net Proceeds from Commercial Exploitation, which represents the Total Company Contribution (the Royalty Percentage). The Royalty Percentage is to reflect the relative contributions towards R&D which result in Generated Intellectual Property.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 50-1.

Income Tax Assessment Act 1997 section 50-40

Reasons for decision

Summary

The Company is an association established for the purpose of promoting the development of Australia's industrial resources in accordance with item 8.2(c) of the table in section 50-40 of the Income Tax Assessment Act 1997 (ITAA 1997).

The Company is therefore exempt from income tax under section 50-1 of the ITAA 1997.

Detailed reasoning

The Company has applied for a private ruling for income tax exemption under item 8.2(c) in the table in section 50-40 of the ITAA 1997 which states:

50-40 Primary and secondary resources, and tourism
Item	Exempt entity	Special conditions
8.2	a society or association established for the purpose of promoting the development of any of the following Australian resources: …	not carried on for the profit or gain of its individual members
	(c) industrial resources;
	…

Accordingly to be exempt from income tax as an exempt entity under section 50-40 of the ITAA 1997, the Company must:

● be a society, or association;

● be established for promoting the development of Australian industrial resources; and

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

Society or association

The Company is an incorporated entity under the Corporation Act 2001 and has more than one member.

It is accepted that the Company is an 'association or society' for the purposes of item 8.2(c) in section 50-40 of the ITAA 1997.

Established for the purpose of promoting the development of Australian industrial resources

Scheme Outline

The Company receives monetary contributions from its Contributors, to fund the Program, which the Company manages.

Funding for the Program is provided by way of levies on its contributors. The levies are calculated by reference to the Company’s Contributors’ share of production. The Company holds those contributions in its own right and applies them for the purpose of the Program in accordance with the Contribution Deed.

All members of the Company are required to pay contributions or levies to the Company for application to its objects. Accordingly it is concluded that members would also be contributors.

An amount equal to the levy collected is then contributed by the Company to approved projects. The projects are carried out by research agencies, registered research agencies and Demonstration Project agencies.

The members (and contributors) benefit from the knowledge of the technologies and obtain the rights to exploit intellectual property derived from the research and development and/or demonstration of those technologies for their internal non-commercial use. However the main benefit to members (and contributors) is the potential expansion of the market as a result of project developments.

The Company’s purpose, drawn from its agreements, would broadly be considered to be the development, demonstration, widespread implementation and use of technology by encouraging collaborative investment, by the state and industry, in these areas.

Taxation Ruling IT 2415 Income tax: association promoting development of Australian resources states that:

6. The operation of paragraph 23(h) was considered by the Supreme Court of New South Wales in Australian Insurance Association v. FCT, 79 ATC 4569; 10 ATR 333. … Furthermore, the Court concluded that the expression "industrial resources" in paragraph 23(h) refers to resources such as those of the building, mining, quarrying, shipping and transport industries - it does not extend to business or commercial resources or resources of the kind promoted by the Association.

7. 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.

8. 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. Reference might usefully be made to the observations of the High Court in FCT v. Broken Hill Pty. Co. Ltd., 69 ATC 4029; 1 ATR 40 on the meaning of the term "development" in relation to the development of a mining property.

It is considered that the Company is meeting the requirement of being established for a purpose of promoting the development of Australian industrial resources.

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

The Income tax guide for non-profit organisations at page 6 states that:

The Tax Office 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 – both while it is operating and when it winds up. These documents should contain acceptable clauses showing the organisation’s non- profit character. The organisation’s actions must be consistent with this requirement.

A non-profit organisation can still make a profit, but this profit must be used to carry out its purposes. …... the profits must not be distributed to owners, members or other private people.

There are two requirements in the statement of non-profit character above. First, an entity’s constituent documents must display a non-profit character. Second, the entity’s actions must be consistent with this non-profit character.

The constitution of the Company contains acceptable clauses prohibiting the distribution of income and property to its members directly or indirectly during its operations and when it winds up.

The first requirement that constituent documents must display a non-profit character is therefore satisfied.

Members of the Company are participating industrial enterprises. The Company’s constitution requires that the members pay contributions or levies to the Company which will be applied towards the promotion of the objects of the Company. Therefore all members of the Company make a financial contribution to the Company and are accordingly, contributors.

A clause of the Contribution Deed between a contributor and the Company provides for the results of the projects to be provided to contributors where possible under the funding agreements. Accordingly members receive benefits from the Company through the receipt of outputs (in the form of intellectual property).

However another clause of the Contribution Deed restricts the rights of the contributors in the Company. Further clauses in a Funding Agreement restrict the use of any intellectual property and project outputs by contributors for use only in activities other than commercialisation.

In Australian Insurance Association v. Federal Commissioner of Taxation 10 ATR 333;(1979) 41 FLR 256;79 ATC 4569 (Australian Insurance) Sheppard J concluded, at 79 ATC 4572; 10 ATR 336, that

…many of the activities of the appellant have been concerned with the protection and furtherance, directly and indirectly, of the interests and businesses of its members, not in the sense of protecting or furthering the interests of any one of them but rather in the sense of protecting and furthering the interests of Australian insurance companies generally and as a whole…

And that

The very nature of the appellant's undertaking is such that it must further the more selfish interests of its members by engaging in the various activities which it does. But that, in my opinion, is only a consequence of what it does and in any event itself leads to a situation pursuant to which the appellant's endeavours do have the overall effect of promoting the protection and furtherance of Australian insurance business.

While the Company’s members will receive advantages through reports and intellectual property that result from the projects undertaken they will not have the right to commercialise the project outputs. The rights in this regard accrue to the Company, as per the Agreement. All intellectual property generated is owned by the recipient, not the Company or Contributors. Neither do the Contributors have exclusive rights to the project outputs.

The Company’s overall purpose as determined from its constitution and the agreements provided is the promotion and development projects that have the potential to aid an Australian industry as a whole.

As found in Australian Insurance while the activities that the Company undertake do further the interests of its members, it mainly furthers their interests as a consequence of what it does, by its activities in developing and implementing research projects into the production of technology. This furthers the market in Australia, not just for the members of the Company but the Australian industry as a whole.

Accordingly the Company is not set up to primarily promote the interests of its members, rather to further the development of an industry in Australia.

It is therefore concluded that the Company’s constituent documents and activities are consistent with the requirement that it is not carried on for the profit and gain of its individual members.

Conclusion

The Company is an association established for the purpose of promoting the development of Australia's industrial resources in accordance with item 8.2(c) of the table in section 50-40 of the ITAA 1997.

The Company is therefore exempt from income tax under section 50-1 of the ITAA 1997.