Edited version of private advice

Authorisation Number: 1051575319017

Date of advice: 2 September 2019

Ruling

Subject: Exemption from income tax

Question

Is the Company exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as a society or association established for the purpose of promoting the development of Australian industrial resources pursuant to item 8.2(c) of section 50-40 of the ITAA 1997?

Answer

Yes

This ruling applies for the following periods:

Income year ending 30 June 2019

Income year ending 30 June 2020

Income year ending 30 June 2021

Income year ending 30 June 2022

Income year ending 30 June 2023

Income year ending 30 June 2024

Income year ending 30 June 2025

Income year ending 30 June 2026

Income year ending 30 June 2027

Income year ending 30 June 2028

The scheme commences on:

01 August 2018

Relevant facts and circumstances

1.       The Company was established in 2018

2.       The Company advocates for the businesses in an industry to have more opportunities.

3.       The Company's constitution prohibits distribution of its income and property to its members while operating and on winding up

4.       The company undertakes various activities in furtherance of its purpose.

Relevant legislative provisions

Section 50-1 of the Income Tax Assessment Act 1997

Section 50-40 of the Income Tax Assessment Act 1997

Section 50-47 of the Income Tax Assessment Act 1997

Reasons for decision

Section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the ordinary and statutory income of the entities covered by the tables in Division 50 is exempt from income tax.

To be an exempt entity under item 8.2(c) of the table in section 50-40 of the ITAA 1997 an entity must be a society or association established for the purpose of promoting the development of Australian industrial resources. The society or association must also not be carried on for the profit or gain of its individual members, and must satisfy the special condition in section 50-47 of the ITAA 1997.

Society or association

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

In Pro-campo Ltd. v. Commr of Land Tax (NSW) 81 ATC 4270; (1981) 12 ATR 26 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 members of the Company voluntarily associate together for the purposes and objects of the Company, which undertakes activities in furtherance of its objects.

The Company is considered to be a society or association.

Australian industrial resources

The expression 'industrial resources' is not defined in the ITAA 1997. In Australian Insurance Association v Federal Commissioner of Taxation 79 ATC 4569 (Australian Insurance Association), Sheppard J considered the meaning of 'industrial resources' for the purposes of paragraph 23(h) of the Income Tax Assessment Act 1936 (the predecessor to section 50-40 of the ITAA 1997):

There is a degree of specificity in the words used in the section. It refers to aviation, then to four resources of primary industry, then to manufacturing and finally 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... (at 4574)

The building, mining and quarrying industries, and the resources which these industries have... are industries in the accepted sense of the word. ... Thus a reference to the resources of those industries as the industrial resources of Australia does not impose upon the language any strain... (at 4575)

Sheppard J also stated that 'industrial resources' include the businesses and their assets of an industry:

... the undertakings of the Australian insurance companies, viewed as a whole, are resources of Australia. I use the "undertakings" in the broadest sense. I include within it not only the businesses of the various companies but also their assets and the knowledge and skills of their staffs. (at 4573).

'Resources' or their elements also include infrastructure, personnel, knowledge, expertise and skill.

The Company advocates for businesses in an industry to have more opportunities. The businesses of an industry are resources of that industry.

Established for the purpose of promoting development

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] FCA 508, 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)

The promotion of development may be direct or indirect (direct promotion includes research, education, and new or improved products, and indirect promotion includes marketing), and may be promoted by facilitating the cooperation of businesses and instrumentalities.

In Federal Commissioner of Taxation v Co-operative Bulk Handling Ltd [2010] FCAFC 155 Mansfield and McKerracher JJ made the following comments on the meaning of 'established' and 'purpose' in section 50-40 of the ITAA 1997:

Two aspects, at least, of s 50-40 may be disposed of at the outset as they are common ground.

First, "established" means maintained at the time at which qualification under the section is at issue...

Secondly, "for the purpose" means "for the sole or dominant purpose" of conducting the relevant activity... In Boating Industries it was held that the requirement of s 23(h), a predecessor of s 50-40, was that the relevant organisation be "established" for, and not merely "involved" in, the purpose stated... The focus must be upon the periodic or recurrent purposes of the body in the year of income... (at paragraphs 13-15).

The company advocated for businesses in an industry to have more opportunities. Giving businesses in the industry more opportunities will ensure that a greater number of Australian businesses (industry resources) have the skills and capability to manage in the industry, and will encourage greater competition and growth within the industry. As such, the Company is considered to have the dominant purpose of promoting the development of resources in the industry.

The purposes of the Company will have benefits for its members such as increased opportunities in the industry. However, such benefits are considered incidental to the purpose of developing industrial resources as all businesses will benefit and not just members of the Company.

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 income and assets for the benefit of individual members while it operates and on winding-up. There is no evidence that the Company acts contrary to this prohibition.

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

Section 50-47 of the ITAA 1997

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:

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 that can be registered as a charity is an Australian Charities and not-for profits Commission (ACNC) type of entity. The Charities Act 2013 (CA) sets out the requirements to be a charity. Section 5 of the CA provides that a charity is a not-for-profit entity with purposes that are only charitable purposes for the benefit of the public, or purposes that are incidental or ancillary to charitable purposes. Section 12 of the CA provides the meaning of charitable purpose, and includes advancing education, advancing social and public welfare, and advancing the security or safety of Australia or the Australian Public.

Purposes concerned with promoting the development of businesses of an Australian industry are not charitable purposes. As such, the Company is not capable of being a registered charity, and is not an ACNC type of entity.

Section 50-47 of the ITAA 1997 does not apply to the Company.

Conclusion

The Company is considered to be a society or association established for the purpose of promoting the development of Australian industrial resources as required under item 8.2(c) of section 50-40 of the ITAA 1997. As such, the income of the Company is exempt from income tax under section 50-1 of the ITAA 1997.