Edited version of private advice

Authorisation Number: 1051569158022

Date of advice: 10 September 2019

Ruling

Subject: Not for profit exemption - association for the promotion of the development of aviation

Question

Is Club A a society or association established for the purpose of promoting the development of aviation under item 8.1(a) of section 50-40 of the Income Tax Assessment Act 1997 (ITAA 1997) and therefore exempt from income tax under section 50-1 of the ITAA 1997?

Answer

Yes

This ruling applies for the following period(s)

Year ending 30 June 2010

Year ending 30 June 2011

Year ending 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

Year ending 30 June 2015

Year ending 30 June 2016

Year ending 30 June 2017

Year ending 30 June 2018

Year ending 30 June 2019

The scheme commences on

1 July 2009

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

1.     Club A is a company.

2.     Club A is an aero club.

3.     Club A owns an aircraft, land including hangars and a clubhouse.

4.     The aircraft has traditionally been used to derive income from hire and used to provide training to trainee pilots.

5.     In the past Club A has both employed and contracted flight instructors. This activity depends largely on the availability of instructors.

6.     Club A teaches both practical and theory.

7.     Club A conducts annual open days where they promote all aspects of aviation and support any interested people wishing to participate in flight training and club activities.

8.     Club A runs a "Flying Competition" where they involve members and other Aero Clubs to participate in both flying and social activities.

9.     Club A leases the hangars to others, including to run information seminars.

10.  Club A has some social functions for members and participates in an air show.

11.  Club A advocates for improved facilities.

12.  A clause of the Memorandum of Association (MOA) of Club A states its objects.

13.  The Articles of Association of Club A establishes the number and categories of members.

14.  A clause defines the Membership.

15.  Club A is managed by a Board of Directors.

16.  All financial members are entitled to vote.

17.  A clause of the MOA of Club A requires the funds to only be used for the objects of Club A and not for the remuneration of members of Club A.

18.  A clause of the MOA of Club A requires the club upon winding up to transfer to another institution with similar objects any remaining funds or assets after the satisfaction of all debts and liabilities.

19.  Club A provided financial information.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 50-1

Income Tax Assessment Act 1997 section 50-40 table item 8.1(a)

Income Tax Assessment Act 1997 section 50-70

Reasons for decision

Section 50-1 of the ITAA 1997 exempts the ordinary and statutory income of an entity that:

·        Is a society or association established for the purpose of promoting the development of aviation (item 8.1(a) of the table in section 50-40 of the ITAA 1997);

·        Is not carried out for the profit or gain of its individual members.

·        Is not an ACNC type of entity.

Detailed reasoning

Entity

The term "entity" is defined in section 960-100 of the ITAA 1997 and includes a body corporate. Club A is a public company and satisfies this definition.

Society or Association

The terms association or society are not defined in the ITAA 1997 and, therefore, have their ordinary meaning.

In 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)?, the ATO considers the meaning of association as follows at paragraph 2:

.... The Shorter Oxford Dictionary defines the term 'association' to be a 'body of persons associated for a common purpose, the organisation formed to effect that 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.

In Pro-campo Ltd v. Commr of Land Tax (NSW) (1981) 12 ATR 26 at 35 Lee J said:

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. I believe, the fact that most organisations which are non-profit making in the sense that the members make no profit from the activities carried on will be found to be called societies, clubs or associations......Although clubs can in some respects and in some instances be seen to be distinguishable by reason of their purposes from societies or associations, they fall squarely within the dictionary definition of "society' set out above. In short the three words are describing bodies made up of groups of persons who have come together to implement common purposes and objects and the shades of distinction between the three for present purposes do not seem to me to require any analysis.

Club A is a body of members organised for the common purpose as set out in its objects. As such it can be classified as a society or association for the purposes of item 8.1(a) of section 50-40 of the ITAA 1997.

Non profit

Section 50-40 of the ITAA 1997 requires that the society or association not be carried on for the purpose of profit or gain to its individual members.

Generally we will accept an association 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 wind-up. The association's actions must, of course, be consistent with the prohibition.

Club A's Constitution contains appropriate prohibitions from making distributions to its members during operation and upon wind-up. There is nothing to indicate that the actions of Club A are not consistent with the prohibition. It is accepted that Club A is not carried on for the purpose of profit or gain to its individual members.

Promote the development of aviation

To qualify for exemption from income tax under item 8.1(a) of section 50-40 of the ITAA 1997, the principal or dominant purpose of the association must be to promote the development of aviation.

The term 'aviation' is not defined in the ITAA 1997 and, therefore, has its ordinary meaning.

The Macquarie English dictionary defines aviation as:

The act, art, or science of flying by mechanical means, especially with heavier- than- air craft.

It then relevantly defines 'development' as:

1. the act, process or result of developing.

2. a developed state, form, or product.

3. evolution, growth, expansion.

4. a fact or circumstance bringing about a new situation. ....

As can be seen from this ordinary meaning, 'development' connotes an idea of growth and expansion which is picked up by the ATO publication, Income tax guide for non-profit organisations, which gives examples of how this growth may be achieved in practice, and says:

Promoting development can be by various means, including research, providing facilities, training, improving marketing methods, facilitating co-operation, and similar activities.

From the Macquarie meanings of 'aviation' and 'development', promoting the development of 'aviation' can include the expansion or growth of the skill of flying. In that sense promoting the development of aviation is distinct from the categories in item 8.2, which promote the development of a resource, rather than a skill, and requires activities that include developing the latent potential of that resource. It is accepted that activities to promote the development of aviation can predominantly be marketing, education and training since they are all considered to promote the development, i.e. the expansion or growth, of the skill of flying. Therefore, for the purposes of item 8.1(a), an organisation that promotes the development of 'aviation' can include an organisation, such as Club A, that promotes the development of the skill of flying.

A clause of the Memorandum of Association sets out Club A's objects, the first of which is 'for the association of persons interested in the encouragement and development of aeronautics' and the second 'to provide a centre for information and advice on all matters pertaining to aeronautics'. 'Aeronautics' is defined in the Macquarie Dictionary as 'the science or art of flying', which would include the more specific area of 'aviation' as defined above. Therefore, both of these are directed at promoting the development of aviation.

Additionally, a number of other of Club A's objects promote development indirectly through:

·        providing facilities (e.g. hiring aircraft to derive income and train pilots),

·        education and training (e.g. theory and practical),

·        marketing (e.g. air shows and open days where they promote all aspects of aviation and support anyone interested in flight training and Club activities),

·        facilitating co-operation (e.g. interacting with other clubs in monthly 'flying competitions and lobbying for improved aviation facilities).

Further, Club A markets its training activities to the broader community at major regional air shows with the intent of attracting younger people's involvement.

Therefore, through its objects and actual activities Club A is considered a society or association established for the purpose of promoting the development of aviation as required by item 8.1(a) of the table in section 50-40 of the ITAA 1997.

Dominant purpose

To qualify as exempt from income tax under item 8.1(a) of section 50-40 of the ITAA 1997, an association must be established principally or predominantly for the purpose of aviation development. It is not sufficient that one of the association's purposes falls within the relevant provision; nor is it sufficient that aviation development is incidental to, involved with, or a consequence of an association's purpose.

Determining the dominant purpose is a question of fact and degree and may involve a weighing of the various elements such as objects, activities, history, proposed directions, etc.

As evidenced by Club A's objects and activities, it is considered that not only is Club A established for a purpose of promoting the development of aviation, but further the organisation is established principally for that purpose.

Benefit to members

Where an association operates principally to confer benefits on its members jointly or as a group, it is unlikely to be predominantly for the promotion of aviation development and therefore not exempt from income tax under item 8.1(a) of section 50-40 of ITAA 1997. Such a purpose is unlikely to be consistent with the purpose of promoting aviation development. It is necessary to distinguish from the dominant purpose of providing benefits to members as a group from the incidental benefit which will often flow to members from activities promoting the development of aviation with which they are involved.

While benefits may flow to Club A's members as a consequence of membership (e.g. social activities), these are in the nature of incidental benefits. The community benefits from Club A's activities and also the organisation demonstrates a wider purpose concerned with the broader development of Australian aviation. It is considered that Club A does not exist primarily to confer benefits on its members.

Not an ACNC type Entity

Section 50-47 of the ITAA 1997 provides a special condition for all entities covered by section 50-1 of the ITAA 1997, it states that:

An entity that:

(a) is covered by any item; and

(b) is an ACNC type of entity;

is not exempt from income tax unless the entity is registered under the Australian Charities and Not-for profits Commission Act 2012.

Broadly, an entity capable of being a registered charity is an ACNC type of entity. Therefore, if Club A is capable of being a registered charity it will not be exempt from income tax unless it is registered as such under the Australian Charities and Not-for profits Commission Act 2012 (ACNC Act).

Taxation Ruling TR 2011/4 Income tax and fringe benefits tax: charities (TR 2011/4) sets out the Commissioner's views on the meaning of 'charitable' in the terms 'charitable institution' and 'fund established for public charitable purposes' by reference to principles established by court decisions. Paragraph 26 provides that an institution is charitable if it's main or predominant or dominant purpose is charitable in the technical legal meaning and it was established and is maintained for that charitable purpose. Any other purpose can only be incidental or ancillary to the charitable purposes. The discussion above concludes that Club A's dominant purpose is to promote the development of aviation. Whilst this may be a charitable purpose, Club A has other purposes, which can provide benefits to members, which are not merely incidental or ancillary.

Therefore, Club A is not an ACNC type of entity and section 50-47 does not apply.

Conclusion

It is considered that Club A is a non-profit association that meets the requirements of item 8.1 of the table in section 50-40 of the ITAA 1997 as its dominant purpose is to promote the development of aviation. As such, its ordinary and statutory income is exempt from income tax under section 50-1 of the ITAA 1997.