Edited version of private advice

Authorisation Number: 1051564649106

Date of advice: 10 September 2019

Ruling

Subject: Not-for-profit entity- income tax exempt - entity promoting manufacturing resources

Question

Is the entity exempt from income tax in terms of section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as a society or association promoting Australian manufacturing resources pursuant to item 8.2(d) of the table in section 50-40 of ITAA 1997?

Answer

Yes

This ruling applies for the following periods:

Financial Year ending 30 June 2019

Financial Year ending 30 June 2020

Financial Year ending 30 June 2021

The scheme commences on:

1 July 2018

Relevant facts and circumstances

The entity is the national association for a manufacturing industry in Australia. The entity aims to build a sustainable product category by undertaking activities that maintain and improve the quality of the product produced and marketed in Australia.

A copy of the entity's Constitution has been provided in support of the private ruling application.

The Constitution includes the entity's objects, focusing on representation of the industry members, advancement of professional and technical standards, development of benchmarks to ensure premium quality of the product, and consumer education.

The entity's Constitution includes a non-profit clause and a winding up or dissolution clause.

The entity's membership may be comprised of an individual, company, partnership or other business that are either producers, or suppliers, or otherwise connected to the Australian manufacturing industry, or are a member of the Australian media.

Members are located across Australia (there are currently XX producer members and YY associate members), both in rural and urban areas.

One of the entity's key achievements has been the launch of the quality label which is only available to members whose product meets the high quality standard. The development of the label has been financed by a grant from the Relevant Government.

The entity applied to be registered as a charity with the Australian Charities and Not-for-profits Commission (ACNC). ACNC recommended withdrawing the application as the entity didn't meet the registration criteria.

Relevant legislative provisions

Section 50-1 of the Income Tax Assessment Act 1997

Item 8.2 (d) section 50-40 of the Income Tax Assessment Act 1997

Section 50-47 of the Income Tax Assessment Act 1997

Section 995-1 of the Income Tax Assessment Act 1997

Sections 5, 25 and 65 of the Associations Incorporation Act 2009 (NSW)

Reasons for decision

In order to be exempt from income tax under section 50-1 of ITAA 1997 as a society or association promoting the development of Australian manufacturing resources pursuant to item 8.2(d) of the table in section 50-40 ITAA 1997, the entity must meet all of the following relevant conditions:

·        It must be a society or association;

·        It must be established for the purpose of promoting the development of Australian manufacturing resources;

·        It must not be carried on for the profit or gain of its individual members; and

·        It must not be "an ACNC-type of entity"

Society or association

The terms 'society' and 'association' are not defined in the Income Tax Assessment Act 1997. These terms are therefore construed according to their ordinary meaning.

In Theosophical Foundation Pty Ltd v. Commissioner of Land Tax (1966) 67 SR (NSW) 70, 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"

In Pro-Campo Limited v. Commissioner of Land Tax (N.S.W.) 81 ATC 4270, Lee J stated at 4279:

The meaning of "society" as the Oxford English 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 organisations are called "associations", others are called "societies" but no meaningful difference can be detected between the two.

Taxation Determination TD 95/56 at paragraph 2 considers the definition of 'association' as follows:

...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'. The Macquarie Dictionary defines 'association' as being 'an organisation of people with a common purpose and having a formal structure'. Olsson J, in Quinton v. South Australian Psychological Board (1985) 38 SASR 523, also stated that the term 'association' has come to be regarded as attaching to a body of persons associated for a common purpose.

Based on the governing documents and the information provided by the entity, it is a society or association consisting of the members who are united by the common purpose to develop and/or promote Australian manufacturing industry.

The entity has a formal structure registered as an "other incorporated entity" under the state legislation.

Purpose of promoting the development of Australian manufacturing resource

Manufacturing resources

The term 'manufacturing resource' is not defined in the legislation.

In Australian Insurance Association v. FCT 79 ATC 4569, 4573; (1979) 10 ATR 333, 337, Sheppard J looked at the businesses, its assets, as well as knowledge, and skill of staff. 'Resource' is therefore broader than plant and equipment or assets, and also includes stock, personnel, knowledge, expertise and skills.

In Australian Insurance Association v. FCT 79 ATC 4569, 4574; (1979) 10 ATR 333, 339, Sheppard J considered 'plant and equipment, manpower, skill and know-how in manufacturing such articles as steel products, clothing and furniture, and such non-tangible commodities as gas and electricity' to be within the definition of 'manufacturing resources'.

Based on the information provided, the activities of the entity revolve around such resources as raw materials used in the production, knowledge and experience of the producers, government regulations around the product, the product judging and benchmarking, as well as equipment, supplies and services used in the production. We consider all of the above manufacturing resources.

Promoting development

Item 8.2 of the table in section 50-40 is directed to the promotion of the development of the specified resources. The term 'development' is used in a commercial or business sense. It comprehends all the elements which must be taken into account to ensure that the resources are best used (as discussed in paragraph 8 of Taxation Ruling IT 2415 Income tax: associations promoting development of Australian resources).

The promotion of development may be direct or indirect. The ATO's Income Tax Guide for Non-Profit Organisations (the Guide) states that promoting development can be by various means including research, providing facilities, training, improving marketing methods, facilitating cooperation and similar activities.

For example the development of agricultural resources might be directly promoted by research, experimental farms, control of pests, education in farming methods, or the introduction of new and improved classes of products. It might be indirectly promoted by improved marketing methods, cooperative buying and selling, solution of labour disputes, etc.

Kitto J in FC of T v. Broken Hill Pty Co Ltd (1969) 120 CLR 240 specifies thatdevelopment entails increase in operations, unlocking of potentialities, advancement of activity; not just conduct of ongoing activity.

In FCT v. Co-operative Bulk Handling Ltd 2010 ATC 20-231, 80; 81 ATR 312, 332, Mansfield and McKerracher JJ held that activities focused on the following were directed at promoting the development of the grain growing industry:

1) Improving the quality of grain both as grown and maintained through its delivery, storage and handling;

2) Securing its continued marketability so that production can be maintained and increased

3) Enhancing the reputation of wheat growth in Western Australia

We consider that the following activities and objects of the entity point towards the promotion of the development of the specified manufacturing resources:

˗   The object to represent the interests of the members on national and international issues affecting the industry promotes the development of Australian manufacturing industry as a whole by representing the interests of all entities who operate within this industry;

˗   The object to encourage professional and technical development, information sharing and benchmarking enhances the knowledge and expertise of the producers and develops benchmarks for quality control as an important step in manufacturing process;

˗   The object to actively promote the industry and create marketing opportunities and strategies to assist producers to grow their businesses promotes the manufacturing resources indirectly by securing its continued marketability so that production can be maintained and increased;

˗   The object to provide a central point of contact for the industry and foster intra-industry discussion and action facilitates cooperation and sharing of information between all entities involved with the resource's industry in Australia. By putting its producer and supplier members in contact, the entity insures continuous use of quality resources in the manufacturing process.

˗   The object to facilitate policy development and present the common views of the industry to government and other bodies promotes the development of the resource by influencing the legislative and regulatory landscape in which the manufacturing industry operates through negotiating, making submissions, and providing information to all levels of government and regulatory authorities;

˗   The object to educate consumers about the product develops the manufacturing resources indirectly by increasing the consumer awareness and enhances the reputation of the high quality Australian product.

˗   The object to provide relevant information to members develops a number of manufacturing resources by ensuring the members stay up to date with the latest changes in production technology, benchmarking and relevant legislation.

˗   Local production boosts demand for quality raw materials and further benefits the suppliers by removing lower quality raw materials from the market, thereby increasing the average quality and price of the raw materials in Australia, and offers an alternative market for produce.

Resources of Australia

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. The entity meets this requirement by ensuring that its members use Australian raw materials in their production process.

Dominant Purpose

To be exempt under Item 8.2(d) of the table in section 50-40, an association must be established principally or predominantly for the purpose of promoting the resource development.

Determining the association's dominant purpose will be largely a matter of fact and degree (Boating Industries Association of New South Wales at 85 ATC 4229; 16 ATR 399). It may involve a weighing up of the association's objects, activities, history, operation, and use of funds.

As per the entity's Constitution, its main purpose is to build a sustainable product category through maintaining and improving the quality of the product produced and marketed in Australia. As seen from the discussion above, this purpose is achieved through promoting the development of the manufacturing resources, such as the quality of the raw materials used in the production, the knowledge and experience of the producers and the benchmarks around the quality of the product. The objects of the entity and its primary activities predominantly focus on Australian resources and its actions are consistent with this purpose.

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.

However, it is necessary to distinguish a dominant purpose of providing benefits to members as a group from the incidental benefits which will often flow to members from activities promoting the development of resources with which they are involved.

In this case, it can be seen that the benefits provided by the entity to its members are designed to add to the member's industry knowledge and assist them to learn the latest industry trends and methods by way of training and development. Accordingly, these benefits are received jointly as members and are considered to be incidental benefits which flow to members from activities promoting the development of resources with which they are involved.

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

Section 50-40 requires that the society or association not be carried on for the purpose of profit or gain to its individual members. Where members, in their individual capacity, are to receive benefits from an association it will fail the non-profit test. However, benefits which are received by members jointly as members and are incidental to the pursuit of the association's objects will not prevent it passing the non-profit test.

As per our Tax basics for non-profit organisations NAT 7966, an association will be accepted as being non-profit where, by operation of law or by its constituent document the association is prevented from distributing its profits or assets among members while the association is operating, and on its winding up. The association's actions must be consistent with the prohibition.

The Constitution of the entity contains appropriate not for profit and dissolution clauses.

Not an ACNC-type of entity

As per the information provided in the Relevant Facts and Circumstances, the entity applied to be registered with ACNC as an ACNC-type of entity. ACNC recommended withdrawing the entity's application as it did not meet the definition of a "charity". Therefore, the entity is not an ACNC type of entity.

Conclusion

The entity is exempt from income tax under section 50-1 of ITAA 1997 as a society or association promoting the development of Australian manufacturing resources pursuant to item 8.2(d) of the table in section 50-40 ITAA 1997.