Edited version of private advice

Authorisation Number: 1051604624656

Date of advice: 4 November 2019

Ruling

Subject: Income tax exemption

Question

Is the entity an exempt entity as described in item 1.3 in section 50-5 of the Income Tax Assessment Act 1997?

Answer

Yes

This ruling applies for the following period:

1 July 2019 to 30 June 2029

The scheme commences on:

1 July 2019

Relevant facts and circumstances

1.       The entity is a company limited by guarantee.

2.       The entity conducts research.

3.       The Australian Charities and Not-for-Profits Commission (ACNC) considers that the entity is not a charity.

4.       The Constitution has objects which show that the entity has the dominant purpose of promoting and advancing science for the public benefit.

5.       The entity has a suitable non-profit clause and winding up clause.

Relevant legislative provisions

Section 50-1 of the Income Tax Assessment Act 1997

Section 50-5 of the Income Tax Assessment Act 1997

Section 50-47 of the Income Tax Assessment Act 1997

Section 50-55 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 1.3 of the table in section 50-5 of the ITAA 1997 an entity must be a scientific institution. The entity must also satisfy the special conditions in sections 50-47 and 50-55 of the ITAA 1997.

Institution

In Stratton v Simpson (1970) 125 CLR 138 Gibbs J gave the following meaning of the term 'institution':

In its ordinary sense "institution" means "an establishment, organization, or association, instituted for the promotion of some object, especially one of public utility, religious, charitable, educational etc" (The Shorter Oxford English Dictionary). It means, as was said in Mayor etc. of Manchester v McAdam (...), "an undertaking formed to promote some defined purpose ..." or "the body (so to speak) called into existence to translate the purpose as conceived in the mind of the founders into a living and active principle". Although its meaning must depend on its context, it would not ordinarily connote a mere trust...

The entity is an institution.

Scientific institution

The term 'scientific institution' is not defined in the ITAA 1997. In Royal Australasian College of Surgeons v Federal Commissioner of Taxation (1943) 68 CLR 436 (Surgeons Case), the Full High Court considered the meaning of 'scientific institution' for the purposes of section 23(e) of the Income Tax Assessment Act 1936, a predecessor of s 50-5. Each of the members of the Court held that the College was a scientific institution as the main, dominant or primary object of the College was to promote and advance the science of surgery.

In the Surgeons case Rich J stated the following on the meaning of 'scientific institution' (at 447):

The test is whether it can be predicated that the College is in the main scientific. The inclusion of an institution in the exemption clause depends upon the intrinsic character of the object which it promotes and not upon the scope of the benefits which may result from its transactions ... I have come to the conclusion that the main or real object of the college is the promotion and advancement of surgery. By this I mean that its essential purpose is to enlarge and extend the boundaries or area of the science of surgery. Its other objects are not collateral or independent but merely concomitant and incidental to the main object. And the fact that some of these subsidiary or ancillary functions and purposes may indirectly and incidentally be of benefit to the members of the profession does not destroy the exemption claimed.

Starke J stated (at 447-448):

The substantial question is whether the college is a body for the advancement of professional objects and interests or for "something higher and larger", namely, the promotion of science in the advancement of surgical knowledge and practice. The college would not be the less a scientific institution because it does not confine its activities to abstract or speculative science but applies scientific knowledge and practices to the advancement of surgery.

William J stated (at 451)

...whether it is a scientific institution... depends upon whether the main or dominant object for which the college is incorporated is to promote the science of surgery.

In Australian Tea Tree Oil Research Institute Ltd (in liq) v Commissioner of Taxation [2008] FCA 1653 Edmonds J stated that a 'scientific institution' must also be for the public benefit:

For an entity to claim status as a 'scientific institution', the results, ..., of the subject entity's activities should be freely available to the community at large; the public community as well as the scientific community. (at paragraph 225)

In The Commissioner of Inland Revenue v Forrest (Institute of Civil Engineers) (1890-1898) 3 TC 117 Lord Macnaghten stated the following on the meaning of 'science' in the term 'scientific Institution' (which was accepted by Starke J in the Surgeons Case at 447-448):

The first question is what is the meaning of the word science ... I see no reason why it should be confined to pure, or speculative, science. The expression plainly includes applied science, and it was intended, I think, to denote a particular branch of science, as well as universal science or science generally... I cannot therefore doubt that mechanical science... is science...

Scientific institutions are therefore primarily set up to advance science. 'Science' is not limited to the physical sciences and includes the human and applied sciences. Common ways of advancing science include research, exploration and teaching. Disseminating information will often be involved. Further, scientific institution must be for the benefit of the public and an entity that operates for the interests or profit of its members does not have a main purpose of advancing and promoting science.

The entity pursues its objects by undertaking research. It disseminates the results of its research in the form of publications available to the public and conferences.

As discussed in The Commissioner of Inland Revenue v Forrest (Institute of Civil Engineers) (1890-1898) 3 TC 117 engineering is within the definition of science.

The main purpose is considered to be the promotion and advancement of science, for the benefit of the public. As such, the entity is a scientific institution.

Special Conditions

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.

The ACNC considers that the entity is not a charity.

Section 50-55 of the ITAA 1997

Subsection 50-55(1) of the ITAA 1997 states that an entity covered by item 1.3 is not exempt from income tax unless one of the following applies:

·         it has a physical presence in Australia and, to that extent it pursues its objectives and incurs its expenditure principally in Australia; or

·         it is a deductible gift recipient; or

·         it is prescribed by law in the income tax regulations and it is located outside Australia and is exempt from income tax in its country of residence.

The entity is a resident of, and is located in, Australia. The entity carries on its activities in Australia. The entity pursues its objectives and incurs its expenditure principally in Australia.

Subsection 50-55(2) of the ITAA 1997 provides that an entity must:

·         comply with all the substantive requirements in its governing rules; and

·         apply its income and assets solely for the purpose for which the entity is established.

Taxation Ruling TR 2015/1 Income tax: special conditions for various entities whose ordinary and statutory income is exempt (TR 2015/1)provides guidance in respect of the conditions in subsection 50-55(2). Paragraph 9 of TR 2015/1 provides that an entity's 'governing rules' are those rules that authorise the policy, actions and affairs of the entity. Paragraphs 18 and 19 of TR 2015/1 explain that the substantive requirements in an entity's governing rules are those rules that define the rights and duties of the entity and include rules such as those that:

·         give effect to the object or purpose of the entity

·         relate to the non-profit status of the entity

·         set out the powers and duties of directors and officers of the entity

·         require financial statements to be prepared and retained

·         set out the criteria for admission as a member of an entity

·         require an entity to maintain a register of members, and

·         relate to the winding-up of the entity.

Paragraphs 33 to 35 of TR 2015/1 provide that an entity must solely apply its income and assets for the purpose for which the entity is established.

The Constitution restricts the use of the income and property of the entity to the promotion of its objects and prohibits distributions, transfers or payments to its members.

The Constitution requires the transfer of surplus income or property upon winding up to another not-for-profit organisation which is charitable and prohibits the distribution of surplus income or property to its members.

The supporting evidence shows that the entity complies with the substantive requirements set out in its constituent documents and it applies its income and assets solely for the purpose for which it was established.

The entity satisfies the special conditions in section 50-47 and section 50-55 of the ITAA 1997.

Conclusion

The entity is considered to be a scientific institution under item 1.3 of section 50-5 of the ITAA 1997. As such, the income of the entity is exempt from income tax under section 50-1 of the ITAA 1997.