Edited version of private advice

Authorisation Number: 1051511522903

Date of advice: 9 May 2019

Ruling

Subject: Income tax exemption

Question

Is the Company exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as an association established for the purpose of promoting the development of an industrial resource of Australia under item 8.2(c) of section 50-40 of the ITAA 1997?

Answer

Yes

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

Year ended 30 June 20XX

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

1. The Company was registered with ASIC as an Australian public company limited by guarantee

2. Objects:

The Association is a leading industry organisation and peak industry body

3. The Company is a non-profit entity.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 50-1

Income Tax Assessment Act 1997 Section 50-40

Income Tax Assessment Act 1997 Section 50-47

Reasons for decision

Detailed Reasoning

Section 50-1 of the ITAA 1997 provides that the ordinary income and statutory income of certain entities is exempt from income tax. Item 8.2(c) of section 50-40 of the ITAA 1997 provides that a society or association established for the purpose of promoting the development of Australian industrial sources shall be exempt from income tax subject to the special condition that it is not carried on for the profit or gain of its individual members.

Accordingly, to be an exempt entity described in item 2.1 of section 50-10 of the ITAA 1997, an entity must:

(a)  be a society or association

(b)  the purpose for which the organisation is established is promoting industrial resource development

(c)  the industrial resource is a resource of Australia, and

(d)  the organisation is not carried on the profit or gain individual members.

The entity must also satisfy the special conditions in section 50-47 of the ITAA 1997.

ACNC type entity condition

Section 50-47 of the ITAA 1997 provides a special condition that if an entity that is covered by one of the items in subdivision 50-A is an 'ACNC type of entity', they will not be exempt from income tax unless they are registered under the Australia Charities and Not-for-profits Commission Act 2012.

'ACNC type of entity' is defined in subsection 995-1(1) of the ITAA 1997 as an entity that meets the description of a type of entity in column 1 of the table in subsection 25-5(5) of the Australian Charities and Not-for-profits Commission Act 2012. Column 1 of the table in subsection 25-5(5) of the Australian Charities and Not-for-profits Commission Act 2012 describes a charity. The Charities Act 2013 provides a definition of 'charity' that applies to all Commonwealth laws.

The definition of 'charity' in section 5 of the Charities Act 2013 provides that 'charity' means an entity:

a)    That is a not-for-profit entity; and

b)    All of the purposes of which are:

                      i.        Charitable purposes that are for the public benefit; or

                     ii.        Purposes that are incidental or ancillary to, and in furtherance or in aid of, purposes of the entity covered by subparagraph (i); and

c)    None of the purposes of which are disqualifying purposes; and

d)    That is not an individual, a political party or a government entity

It has been concluded that the Company is a not-for-profit entity. Charitable purposes are listed in section 12 of the Charities Act 2013. It has also been concluded that the Company's purpose is to promote the development of an Australian resource and advance the interest of members. This will not qualify as one of the charitable purposes listed and the entity will not be an 'ACNC type of entity'.

Accordingly, section 50-47 of the ITAA 1997 will not apply.

Society or Association

The words 'society' and 'association' are not defined in the ITAA 1997 and therefore take their ordinary meaning.

Guidance on the terms 'society' and 'association' can be found in Pro-campo Ltd. v. Commr of Land Tax (NSW) 81 ATC 4270; (1981) 12 ATR 26. In that case the court made the following comments on the meaning of society and association (at 4279):

In Theosophical Foundation Pty Ltd v. Commr of Land Tax (NSW) [1966] 67 SR (NSW)... Sugerman JA stated at 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, 'Society'...

The meaning of "society" as the Oxford Dictionary definition shows can be the equivalent of "association" and I do not think that any relevant distinction in nature exists between the two. It merely seems to have happened that some organizations are called "associations", others are called "societies" but no meaningful difference can be detected between the two... In short the ... words are describing bodies made up of groups of persons who have come together to implement common purposes and objects...

The interpretations of 'society' and 'association', as described above, emphasise a 'body of persons' and 'an organisation of people' with a 'common purpose'. The Company is a public company limited by guarantee. It is an organisation of people with a formal structure, formed to pursue a common purpose as stated in the constitution. The Company is a society or association.

Industrial Resource of Australia

Taxation Ruling IT 2415 provides a basic explanation as to what is an industrial resource in Australia. The Ruling is based on a judgement by Sheppard J in Australian Insurance Association v. Federal Commissioner of Taxation, 79 ATC 4569; 10 ATR 333. This is an appeal by the Australian Insurance Association against a decision of the Commissioner of Taxation to disallow the Association exemption from income tax under paragraph 23(h) of the Income Tax Assessment Act 1936 (ITAA 1936) as a non-profit association established for the purpose of promoting an industrial resource of Australia (Paragraph 23(h) of the ITAA 1936 is the predecessor to section 50-40 of the ITAA 1997.

In the Australian Insurance Association case, Sheppard J. made the following comments (at 4574 and 4575):

There is a degree of specificity in the words used in the section [Paragraph 23(h)]. It refers to industrial resources. The use of these various expressions does not suggest that the draftsman intended to give the word "industrial" any wide meaning intended to embrace business or commercial resources. If it had been intended to do so, it would have been quite unnecessary to use the word "manufacturing" or to be as specific in relation to the primary industry resources which are mentioned.

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.

IT 2415 states at paragraph 6:

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.

IT 2415 states at paragraph 9:

There can be little doubt that the identification of, and programmes to overcome, manpower needs and the establishment of systematic training schemes in a particular industry are necessary for the efficient operation of the industry - they are part and parcel of the development of the resources specified in paragraph 23(h). Although the connection may not be as readily apparent the development of marketing techniques may also be relevant to the development of resources - it could be said that there is little point in developing resources if the products of the resources cannot be sold. Another area where the connection with development of resources may not be direct is the development of tourism - but it does play a part in the development of the resources specified in paragraph 23(h).

The Macquarie Dictionary states that a commodity is:

1. a thing that is of use or advantage.

2. an article of trade or commerce.

The resource is a commodity and would fall within the meaning of industrial resource.

The words 'of Australia' limit the exemption to associations whose activities are directed to Australian resources, thereby excluding associations whose activities are directed to the resources of places beyond Australia. Where an association is established for the purpose of promoting the development of a foreign resource, or of both Australian and a foreign resource, the test for exemption is not met.

The resource is in Australia and is an Australian industrial resource.

Established principally or predominantly for the purpose of promoting the development of specified Australian resources

Item 8.2 of the table in section 50-40 of the ITAA 1997 is directed to the promotion of the development of the specified resources. 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 and similar activities.

The term 'development' is used in section 50-40 of the ITAA 1997 in a commercial or business sense. 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 Co-operative Bulk handling Ltd v Federal Commissioner of Taxation 2010 ATC 20-183, Gilmour J (at first instance) accepted that 'promoting the development of resources' under section 50-40 of the ITAA 1997 entails "unlocking, exploiting or bringing out the inherent potentialities and latent capabilities" of the resources. (at paragraph 80)

This reflects the meaning of 'development' given by Kitto J in Federal Commissioner of Taxation v Broken Hill Proprietary Company (1969) 120 CLR 240 in the phrase 'development of mining property' used in section 122 of the Income Tax and Social Services Contribution Assessment Act 1936-1964 (Cth):

In its ordinary English sense the word "development", when used in relation to a property, refers to the unfolding, the bringing out, of some latent capability of the property... It covers, I think, any preparation, adaption or equipment of the property for the exploitation of an inherent potentiality which cannot be exploited, or fully exploited, without some such preliminary treatment. (at 247)

It is not sufficient that one of an association's purposes falls within section 50-40 of the ITAA 1997. Nor is it enough that resource development is incidental to, involved with or a consequence of an association's purposes. The association must be established for the required purposes. The term 'established' is not used in a narrow sense. It is necessary to consider an association's constituent documents, operations and activities.

However, not all activities connected with a resource will necessarily be for its development. For example, the improvement of marketing will ground an exemption only where it is undertaken as a means of promoting development of the particular resources. If the marketing or other purported means is not sufficiently connected or integrated with resource development, it will not be for the purpose of promoting development of those resources. It is not enough that a consequence of the activities may be resource development.

The Company's objects as stated in its current Constitution.

The Annual Reports from 20XX to 20XX indicate the principal activity of the Company is to promote the specific industry generally, through dissemination of information, ongoing market and scientific research. Activities have been undertaken in research and development through government funding. The Company hosts a national annual conference, which provides industry stakeholders with access to prominent experts in the field of the resource. Additionally, some specific industry training has occurred with the development of facts sheets on the Company's website, which are available to the public, and it is currently developing webinars and on-line training materials.

The activities currently undertaken by Company and outlined in the national strategy for 20XX-20XX indicate that the organisation is continuing to increase the focus on promoting the development of the resource. This will be achieved through raising awareness of the benefits and methods of the developing the resource which could enlarge and develop the industry.

The Company is established for the purposes of promoting the development of the industrial resource.

Benefits to members

If an association operates principally to confer benefits on its members jointly or as a group, it is unlikely to be predominantly for promoting resource development and thus not exempt under section 50-40 of the ITAA 1997.

In Case 46/94 at 94 ATC 417; 29 ATR 1108 the tribunal found, as an alternative ground, that the association was not exempt under 23(h) because it was principally to promote the interests of its members. It operated to look after the needs of consulting surveyors through such activities as public liability insurance, professional development, training of employees, assuring quality client service, publishing business practice and technical material, and lobbying to obtain work for members particularly from government.

In Australian Insurance Association v. Federal Commissioner of Taxation (1979) 10 ATR 333 (1979) 41 FLR 256, the Association comprised the majority of general insurance companies carrying on business in Australia. At issue was inter alia, whether it 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. Sheppard J in concluding said, at ATC 4572:

In my opinion the difference between the parties in the way that each views the evidence is one of emphasis. 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 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.

An organisation must be able to demonstrate that it has a predominant purpose of promoting resource development of the industrial resource rather than the interests of its own members.

The Company's objects and activities indicate that the organisation is not established as a professional organisation to protect and promote the interests of members. While benefits may flow to its members as a consequence of membership, its principal purpose is not to benefit members. Non-members, other participants in the industry, also benefit from the activities of the organisation and the Australian community at large will benefit from the organisation's activities. The Company demonstrates a wider purpose which is to promote the development of the resource and the resource industry.

While the Company does represent member's interests to government in relation to regulatory changes and their impact on members, and it aims to broaden its membership base, it is principally or predominantly established for the purposes of promoting the development of the industry and in doing so promotes the development of the industrial resource.

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

In Federal Commissioner of Taxation v Co-operative Bulk Handling Ltd (Supra) Mansfield and McKerracher JJ stated the following about the meaning of 'not be carried on for the profit or gain of its individual members':

In all cases of exemption, it must be the position that it is not open to the body to disburse any profits or dividends to members. (at paragraph 95)

The governing documents of the Company prohibit it from applying its assets for the benefit of individuals while it operates and on winding-up.

We accept that the Company is not carried on for the profit or gain of its individual members.

CONCLUSION

A review of the Company's application and supporting documents demonstrate that it has been established principally or predominantly for the purpose of promoting the development of an Australian industrial resource. The Company is non-profit.

The dominant purpose for which the Company is established is the promotion of the development of an Australian resource, being an industrial resource. It qualifies for income tax exemption under section 50-1 of the ITAA 1997 as an association established for the purpose of promoting the development of an Australian resource pursuant to item 8.2 in the table in section 50-40 of the ITAA 1997.