Edited version of your written advice

Authorisation Number: 1051490715686

Date of advice: 6 March 2019

Ruling

Subject: Entity established for the dominant purpose of promoting the development of Australian agricultural resources

Question

Is the Entity an exempt entity pursuant to section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) on the basis that it is covered by item 8.2(a) of section 50-40 of the ITAA 1997?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 2019

The scheme commences on:

1 July 2018

Relevant facts and circumstances

The Entity is a public company, limited by guarantee.

The Entity’s Constitution

The following sections of the Entity’s Constitution are relevant to this ruling:

OBJECTS

The primary activities and objectives of The Entity are to promote the development of agricultural resources, horticultural resources, pastoral resources, viticultural resources and manufacturing resources within the agricultural industry.

APPLICATION OF INCOME

The assets and income of the Company shall be applied solely in furtherance of its above-mentioned Objectives and Operating Aspects and no portion shall be distributed directly or indirectly to the Members of the Company except as bona fide compensation for services rendered or expenses incurred on behalf of the Company.

This does not prevent the Company from doing the following, provided that such acts are done in good faith and for a proper purpose:

● paying a Member for goods or services they have provided or expenses they have properly incurred at fair and reasonable rates or rates more favourable to the Company; or

● making a payment to a Member in carrying out the Company’s Objectives and Operating Aspects.

NON DISTRIBUTION OF PROPERTY

In the event of the Company being dissolved, the amount (including but not limited to the Property of the Company) that remains after such dissolution and the satisfaction of all debts and liabilities shall be transferred to another organisation with similar purposes which is not carried on for the profit or gain of its individual members and whose Constitution prohibits the distribution of its or their income and Property among its or their Members.

MEMBERSHIP

The initial Members of the Company are those persons who have consented to become Members and who are named in the application for registration of the Company to the Australian Securities and Investment Commission.

After registration, a person is eligible to become a Member of the Company if he/she has attained the age of 18 years and the person:

● is a current Director;

● is a former Director of the Company, or;

● has a connection with the Company which the Board believes necessary or desirable to further its Objectives.

ACTIVITIES

The Entity will undertake a number of activities that support its primary objects and purpose.

Relevant legislative provisions

Section 50-1 of the Income Tax Assessment Act 1997

Section 50-40 of the Income Tax Assessment Act 1997

Reasons for decision

Issue 1: Income tax exemption

Question 1

Is The Entity an exempt entity pursuant to section 50-1 of the ITAA 1997 on the basis that it is covered by item 8.2(a) of section 50-40 of the ITAA 1997?

Summary

The Entity is an exempt entity pursuant to section 50-1 of the ITAA 1997 on the basis that it satisfies the requirements in item 8.2(a) of section 50-40 of the ITAA 1997.

Detailed reasoning

Section 50-1 of the ITAA 1997 exempts from income tax the total ordinary and statutory income of an entity covered by section 50-40 of the ITAA 1997.

Section 50-40 of the ITAA 1997 provides that a society or association will be exempt from income tax if it is established for the purpose of promoting the development of one of the Australian resources listed in Item 8.2, which includes the following:

a) Agricultural resources;

b) Horticultural resources;

c) Industrial resources;

d) Manufacturing resources;

e) Pastoral resources;

f) Viticultural resources;

g) Aquacultural resources; and

h) Fishing resources.

To satisfy the requirements in item 8.2 of the table in Section 50-40 of the ITAA 1997, the entity must:

i. be a society or association;

ii. be established for the dominant or principle purpose of promoting the development of a specified Australian resource; and

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

i. Society or Association

The terms ‘association’ and ‘society’ are not defined in the income tax legislation, and should therefore be construed according to their ordinary meaning.

The Shorter Oxford English Dictionary defines the term 'association' to be “a body of persons associated for a common purpose; the organisation formed to affect their purpose”, and this definition was accepted by Olney J in Douglas and Ors v. Federal Commissioner of Taxation (1997) 77 FCR 112; 36 ATR 532; 97 ATC 4722 (‘Douglas’).

The court in Douglas accepted that a ‘society, association or club’ refers to a voluntary organisation having members associated together for a common or shared purpose. The organisation may be incorporated or unincorporated.

The Entity is registered as an Australian company limited by guarantee. It is an organised body of members instituted for the purposes of its constitution.

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

ii. Established for the Dominant Purpose of Promoting the Development of Australian Agricultural Resources

Established

In determining the dominant purpose of the association, it is necessary first to consider the meaning given to the term ‘established’.

The dominant purpose of the association must be determined at the time in which the exempt status of the association is being considered, as supported by the decision of Bargwanna Leagues Club Limited v. Commissioner of Taxation 90 ATC 4215 at 4220; (1990) 21 ATR 300 at 306 (‘Cronulla Sutherland’).

In the High Court case of Renmark Fruitgrowers Co-operated Ltd v. Commissioner of Taxation (1969) 121 CLR 501; (1969) 69 ATC 4135 Menzies J observed at 4137 that the term ‘established’ requires “attention to be directed to the [association’s] business, and its primary objects, at the time when the question… has to be determined.”

In accordance with Commissioner of Taxation v Co-operative Bulk Handling Limited [2010] FCAFC 155 (Co-operative Bulk Handling) at paragraph 14 “established” means maintained at the time in which qualification under the section is in issue.

Therefore, the dominant purpose must be determined at the time when the exempt status of the association in question is being considered.

Dominant Purpose of Promoting the Development of an Australian Resource

In order to be exempt from income tax under item 8.2(a) of section 50-40 of the ITAA 1997, The Entity must have the principal, dominant or main purpose of promoting the development of an Australian agricultural resource.

In Cronulla Sutherland 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.

Where there are a number of purposes for which an association is established, it may be difficult to identify the dominant purpose. In ascertaining the true character and nature of the entity and having regard to its objects, purposes and activities Lockhart J in Cronulla Sutherland at 4225 observed that an association:

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.

Lockhart J also observed at 4225 that:

The material facts and circumstances [of the association] which should be examined include 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.

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.

In Co-operative Bulk Handling the majority of the Full Federal Court concluded at paragraph 14 the ultimate question is what the true character and nature of the applicant is and that question of characterization is to be determined having regards to the objects, purposes and activities of the taxpayer.

The Court further (at paragraphs 71 to 73) took the approach that the meaning of “established for the purpose of promoting the development of Australian agricultural resources” needs to be understood in its entirety and within the context of the statue as a whole. In considering the expression in this way, meaning still needed to be given to the individual components within the expression but not in such a way that the individual parts of the expression assumed greater significance than the plain language of the expression as a whole.

Taxation Ruling 2415 Income Tax: Associations promoting development of Australian resources (TR 2415), at paragraph 8, clarifies the meaning of the term ‘development’:

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 interest of Australia.

“Agricultural Resource” is specified in item 8.2 as a resource in relation to which the exemption under section 50-40 may be considered.

The term ‘agricultural resources’ is not defined for the purposes of Division 50 of the ITAA 1997 and therefore consideration must be had to its ordinary meaning, and the applicable case law in informing the scope of the interpretation to be given to the term.

The Oxford English Dictionary defines ‘agriculture’ as “the science or practice of farming, including cultivation of the soil for the growing of crops and the rearing of animals to provide food, wool, and other products.” “Resource” is defined as “A stock or supply of money, materials, staff, and other assets that can be drawn on by a person or organisation in order to function effectively” and further “’A Country’s collective means of supporting itself or becoming wealthier as represented by its reserves of minerals, land and other natural assets”.

In considering the meaning to be given to the phrase ‘agricultural resources’, Mansfield and McKerracher JJ in Co-operative Bulk Handling at paragraph 73 were of the view that:

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.

In Tribunal Case U118 (1987) 18 ATR 3597 an association was set up by sugar cane growers for the purpose of financing the construction of a water storage facility to make additional water supplies available to irrigate their farms. This was accepted as a purpose of promoting the development of Australian resources. At par 31 the tribunal states:

31. The construction of the water storage seems easily to fit within the meaning of the words “promoting the development of…agricultural…resources of Australia” in sec 23H) of the Act. There can be little doubt that the construction of a water storage designed to provide additional water supplies for sugar-cane growers is the development of an agricultural resource. The ordinary meaning of the words must lead to that conclusion.

Application to the facts and circumstances of The Entity:

The Entity constitution states that the primary activities and objectives of the Company are to promote the development of agricultural resources, horticultural resources, pastoral resources, viticultural resources and manufacturing resources to those within the agricultural industry.

The activities and objectives specified in the constitution have a strong emphasis on developing an agricultural resource and include:

● identifying and promoting advancements in the agricultural resource

● providing education and continued engagement with Government and peak industry bodies.

● active promotion of the services the company provides, including educational services and industry promotional services.

● to investigate and support research and development in regards to the agricultural resource.

The Entity’s primary and ancillary activities support their primary objectives as set out the constitution. Both their objectives and the activities that they undertake illustrate a dominant purpose of providing stakeholders in the agricultural industry equal access to the economic, efficient and affordable use of the agricultural resource.

The Entity will promote the development of an Australian agricultural resource by facilitating access to the economic, efficient and affordable use of that resource to those within the agricultural industry.

By contributing to research on this topic, providing education industry participants and engaging with Government bodies, The Entity enables and improves the efficient and economic use the agricultural resource by stakeholders in the agricultural industry.

iii. Not for the profit or gain of individual members

Item 8.2 of Section 50-40 of the ITAA 1997 imposes the special condition, apart from the other requirements that must be met in order to qualify for the exemption afforded by section 50-1 of the ITAA 1997, that the society or organisation must not be carried on for the profit or gains of its individual members.

The Administrative Appeals Tribunal, in Tribunal Case 80 (1987) 18 ATR 3579 (Case 80) stated at par 41 that:

“Gain” means something wider than profit. Improvement, benefit and advancement are embraced within the ordinary meaning of gain whereas “profit”, although having a similar meaning requires that the improvement benefit of advancement be quantifiable in some way. That is not so with the word gain which includes other considerations of value obtained.”

Consideration of the condition “not carried on for the profit or gain of its individual members” by the Court in Co-operative Bulk Handling

The Court states at paragraph 88 that members may benefit along with others in the community but should not, by virtue of their membership alone, benefit more than others for whom the benefit of the activity is conducted.

At paragraph 95 and it is stated:

While it is true that most grain growers/deliverers in Western Australia are members of CBH and it is also true that the efficiency of CBH produce financial benefits for growers and others affected by the grain industry, members of CBH do not gain that benefit or gain solely by being members. They could be grower/deliverers and not be members and achieve the same gain or benefit.”…where a broader purpose prevails, incidental benefits to members, including specific benefits created by the body to induce membership, would not fall within the second limb as to disentitle exemption.

At paragraph 102 the decision in Incorporated Council of Law Reporting for England and Wales v Attorney-General and Others [1972] 1 Ch 73 is discussed, where the Court held that it was immaterial that the publication of the reports (in circumstances where profit could not be returned to members) also supplied professional men with the tools of their trades. The Court in this case is quoted as saying:

It seems to me that if the publication of reliable reports of decisions of the courts is for the benefit of the community and of general public utility in the charitable sense, it is an inevitable and indeed necessary step in the achievement of the benefit that the members of the legal profession are supplied with the tools of their trade.

Application to The Entity’ circumstances:

The Constitution of The Entity determines that no profit or gain will be distributed to the members before or after winding up.

Education services are provided to members and non-members.

The future benefits realised as a result of involvement by The Entity in research projects is not limited to The Entity’s members.

Therefore The Entity’s activities do not benefit members only.

The Entity is not carried on for the profit or gain of its individual members.

Conclusion

The Entity will meet the special conditions applicable to entities seeking exemption under item 8.2(a) of section 50-40 and therefore will be eligible for income tax exemption.