Edited version of private advice

Authorisation Number: 1051587653299

Date of advice: 27 September 2019

Ruling

Subject: Income tax exemption

Question

Is the Entity 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

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Entity is an incorporated association

The Entity has a Statement of Purpose in its governing documents which satisfies the requirements of promoting the development of an industrial resource

The governing documents state that membership is only open industry bodies

The Entity has an appropriate non-profit and winding up clause.

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

Summary

The total ordinary income and statutory income of the Entity is exempt from income tax pursuant to section 50-1 of ITAA 1997 as it is an association established for the promotion of the development of an industrial resource of Australia, pursuant to item 8.2 (c) of section 50-40 of the ITAA 1997. The Entity's dominant purpose is the promotion of the development of an Australian resource.

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 Entity 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 Entity's purpose is to promote the development of industry. 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.

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.

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 Court also confirmed that the status of the entity's incorporation does not have any bearing on whether the entity is considered a society or an association:

The interpretations of 'society' and 'association' as described above, emphasise a 'body of persons' and 'an organisation of people' with a 'common purpose'.

The Entity is an incorporated association. It is an organisation of people with a formal structure, formed to pursue a common purpose as stated in the Entity's Rules. The Entity is a society or association.

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.

It is considered that this requirement is satisfied.

Industrial Resources

The Entity is seeking income tax exemption on the basis that it is established for the purpose of promoting the development of industrial resources.

Taxation Ruling IT 2415 provides a basic explanation as to what is an industrial resource in Australia. The Ruling was based on a judgement by Sheppard J in October 1979 in the Supreme Court of New South Wales in 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 (Australian Insurance Association v. Federal Commissioner of Taxation, 79 ATC 4569; 10 ATR 333). Paragraph 23(h) of the ITAA 1936 is the predecessor to section 50-40 of the ITAA 1997.

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)...

The Ruling provides that industry training committees that are established to provide training in the resource areas covered by paragraph 23(h) of the ITAA 1936 would qualify for income tax exemption. That is, industry training committees that provide training to the agricultural industry are promoting the development of agricultural resources, those that provide training to the horticultural industry are promoting the development of horticultural resources, and those that provide training to the industrial industries are promoting the development of industrial resources and so on.

Resources or their elements include personnel, knowledge, expertise and skill and are essential to industry.

Membership of the Entity is within the meaning of "industrial resources" under item 8.2 (c) of the ITAA 1997.

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 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. 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. The promotion of development may be direct or indirect.

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)

The Entity's governing documents include a Statement of Purpose which satisfies the requirements for the promotion of the development of an industrial resource.

The Entity is principally or predominantly established for the purposes of promoting the development of an 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 Rules of the Entity do prohibit it from applying its assets for the benefit of individuals while it operates and on winding-up.

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

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 Entity's purpose 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, these are in the nature of incidental benefits which will often flow to members from activities promoting the development of resources with which they are involved. The Entity demonstrates a wider purpose which is to promote industry.

The Australian community at large will benefit from the organisation's activities. The Entity does not exist principally to confer benefits on its members.

Conclusion

A review of the Entity's application and supporting documents demonstrate that the Entity has been established principally or predominantly for the purpose of promoting the development of an Australian resource. The Entity is a non-profit organisation. The dominant purpose for which the Entity is established is the promotion of the development of an Australian resource, being an industrial resource. It does qualify 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.