Edited version of private advice

Authorisation Number: 1051533528330

Date of advice: 20 June 2019

Ruling

Subject: Income tax exemption - promoting the development of Australian viticultural resources

Question

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

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Association X is a product of an amalgamation of two associations.

Association X adopted a new Constitution on the date of its formation to replace the rules of the previous associations.

The Constitution complies with the requirements of Associations Incorporations Act in the relevant state.

Association X is an industry body.

Objects - Association X

The objects of Association X are:

a)    to represent the interests of industry participants on national and international issues affecting the industry, through a single organisation;

b)    to actively promote and protect the reputation and success of the industry;

c)    to encourage unanimity of opinion and action amongst Members in all national and international matters pertaining to the industry;

d)    to initiate legislative or other regulatory activity, or government response or action, or otherwise facilitate any outcomes, deemed desirable by the Association for the benefit of the industry in Australia;

e)    to provide a medium through which opinions of Members may be ascertained or expressed;

f)     to provide relevant information to Members;

g)    to foster co-operation and goodwill between relevant research and education bodies and all other bodies relevant to the industry;

h)    to encourage biosecurity in the industry;

i)      to facilitate access of industry participants to foreign markets;

j)      to encourage good practice and standards within the industry;

k)    to administer funds collected from Members in support of the activities and objects of the Association;

l)      to protect and enhance community and Government support for the industry;

m)  to promote economic, environmental and social responsibility in the production and consumption industry products in Australia; and

n)    to promote the interests of the Association and to do all such other lawful things as the Association may consider incidental or conducive to the attainment or advancement of the objects of the Association.

Activities undertaken to achieve objects

The activities undertaken by Association X to achieve its objects are:

a)    to represent the interests of industry participants on national and international issues affecting the industry, through a single organisation:

·  Developing and implementing strategy to support the industry.

·  Maintaining and building capability to respond to a wide range of issues.

·  Working with Government in order to advocate policy positions for the long-term sustainability of the industry.

·  Monitoring national and international developments.

b)    to actively promote and protect the reputation and success of the industry;

·  Work with Association Y and the Government to ensure compliance and regulatory systems are fit for purpose.

·  Promote the sector through national and international media.

·  To represent the sector in dealings with Government.

·  Monitor regulations and communicate to the sector.

·  Improve compliance, through recommendations to Association Y and Government.

c)    to encourage unanimity of opinion and action amongst Members in all national and international matters pertaining to the industry:

·  Well-developed communication networks with States, Regions, Members and Non-Members.

·  Development of national sector strategy/s to guide the development and structures of the sector.

d)    to initiate legislative or other regulatory activity, or government response or action, or otherwise facilitate any outcomes, deemed desirable by the Association for the benefit of the industry in Australia:

·  Work with the ACCC to ensure industry relations are transparent and effective.

f)     to provide relevant information to Members:

·  Media (Press Releases, Information updates).

·  Monthly communications to members.

·  Annual and/or specific roadshow meetings with members.

g)    to foster co-operation and goodwill between relevant research and education bodies and all other bodies relevant to the industry:

·  Collaboration with various organisations and Universities.

·  Active participation within the industry research and development.

i)      to facilitate access of industry participants to foreign markets:

·  Prepare applications to obtain approval for additives and processing aids to facilitate international trade.

j)      to encourage good practice and standards within the industry:

·  Continually review the industry Standards Code and ensure still fit for purpose.

·  Oversee the Code of Practice and the Industry Code of Conduct.

·  Provide workshops dealing with issues such as tax, in conjunction with the ATO.

m)   to promote economic, environmental and social responsibility in the production and consumption industry products in Australia; and

·  Work closely with Association Y to deliver a sustainability program that benefits the industry.

Constitution

The Constitution of Association X relevantly states the following:

The income and property of the Association must be applied solely towards the promotion of the objects of the Association and no portion thereof may be paid or distributed, directly or indirectly, by way of bonus or otherwise, by way of profit to Members.

The Association has various categories of membership based on the size of the member and their involvement in the industry. Each Member must pay such fee and levy as determined by the Board for that Member's Membership

The Association may be wound up in accordance with the Act [Associations Incorporated Act in the relevant state].

If, after the winding up of the Association, there remains surplus assets, they must not be paid or distributed to any Members, but must be given or transferred to:

a)    any organisation or organisations having objects similar to those of the Association and having rules prohibiting the distribution of their income and property to their members; or

b)    a recognised, non-denominational charity or charities conducted in Australia,

as determined by the Board.

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 of section 50-40 of the ITAA 1997.

Association X satisfies all of the requirements, as discussed below.

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 its activities in line with the objects stated in its constitution. Membership is open to all citizens, however specified criteria must be met by the applicant in order to become a member, i.e. Small, Medium or Large Winemaker; or a Vigneron.

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 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 in 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 organisation.

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 viticultural resources. Viticulture is not defined in the ITAA 1936/1997 and so takes on its ordinary meaning.

The Oxford Dictionary defines viticulture as 'the cultivation of grapevines' and 'the study of grape cultivation'.

Considering this definition, Association X is considered to be concerned with a 'viticultural resource' under the 'ordinary meaning' of the term 'viticulture'. Association X members are in the business of the cultivation of grapevines, and Association X itself is in the business of the development and promotion (study) of grape cultivation.

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 and 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 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 3606) 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 refers to 'promoting the development of Australian resources'. Taxation ruling IT 2415 Income tax: associations promoting development of Australian resources states the following on the meaning of development:

8. ...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.

Promoting the development of an Australian resource 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.

The objects stated in Association X's Constitution indicate that the organisation is promoting the development of Australian viticultural resources. In addition, Association X has detailed the activities undertaken to develop the viticultural resource, and these include:

·  Developing a National Approach to Biosecurity activities to develop and manage biosecurity.

·  Advocating to protect the rights of Australian grape and wine producers to use grape varietal names.

·  Advocating for energy and water policy.

·  Working to ensure research and development funds are available for viticulture research.

The services provided by Association X are not only for members of Association X, but for all winemakers and winegrape growers.

Some of the services Association X provide include:

·  Tracking domestic and international regulations, and advocating for favourable policy and measures that are evidence-based, ethically and socially acceptable, environmentally sustainable and economically feasible.

·  Working with members and stakeholders to formulate policy positions to take to Federal parliament to ensure the sector's voice is heard.

·  Providing industry leadership and supporting collaboration by working with colleagues in regional and state grape and wine associations.

·  Representing the Australian wine sector on the international stage to ensure barriers to trade are removed or reduced.

·  Providing workshops on business development, tax developments, marketing and other business related activities.

Association X is not a regulatory body however Association X does provide guidance and encouragement for winemakers and vignerons to follow:

·  the Code of Conduct for Winemakers/Vignerons;

·  the Diversity & Equality in Wine Charter; and

·  internal policies (e.g. Trade Practices Compliance) and guidance for Board & Committee members by way of set protocols.

Association X is also involved with conferences and workshops that are available to all relevant stakeholders including members and non-members, including.

·  Entity A and Association X run Conference A collaboratively. Association X coordinates the agenda and list of guest speakers on the first day of Conference A, as part of a broader industry organising committee.

·  Association X shares a stand at the Trade Exhibition with other industry organisations.

·  Association X is invited as a guest speaker to Conference B alongside other speakers. Conference B is open to all relevant industry stakeholders.

Any workshops Association X run are run as a value-add for all of industry (members and non-members) on a cost-recovery basis.

In order to ascertain Income Tax Exemption as an entity described in item 8.2(f) of section 50-40 of the ITAA 1997, the primary purpose of the association must be promoting the development of Australian viticultural resources, and all other activities must be ancillary.

Relevantly, Association X's objects and activities, as stated in its constitution include:

·  working with government advocating for favourable policies towards winemakers and winegrape growers;

·  representing the Australian wine sector on the international stage;

·  working with other organisations to ensure research and development into the viticulture industry;

·  providing workshops and conferences to the benefit of the wine industry within Australia; and

·  encouraging the use of code of conduct and wine charters by winemakers and vignerons.

The objects and activities of Association X point towards an association that has a principle purpose of promoting the development of Australian viticultural resources.