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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

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Edited version of private advice

Authorisation Number: 1051610666826

Date of advice: 20 November 2019

Ruling

Subject: Income tax exemption under section 50-40 of the ITAA 1997, the fringe benefit tax rebate and goods and services tax concessions

Question 1

Can an Industry Regulator self-assess its income tax exemption under Division 50 of the Income Tax Assessment Act 1997?

Answer

Yes

Question 2

Is the Industry Regulator a not-for-profit entity that can access the fringe benefit tax rebate and the goods and services tax concessions?

Answer

Yes

This ruling applies for the following period:

1 July 20xx to 30 June 20xx

The scheme commences on:

xx June 20xx

Relevant facts and circumstances

The Industry Regulator was established as a corporate entity limited by guarantee in response to the propagation of a new government regulatory regime for the management of product in an industry. The government published a report on the implementation of the regulatory regime, considering its effectiveness in the context of ensuring positive outcomes in the industry. The report also considered opportunities to improve the system and lower costs to both industry and government.

The report recognised opportunities for industry to take greater responsibility for proactively managing risks within the industry. Subsequent to this, industry developed the industry program. The industry program is a program that will provide an equivalency to the regulatory regime; however the industry program will achieve this via a different method.

Currently, the industry program is not a substitute for the government regulatory regime; these compliance regimes are complementary to one another. However the industry program will be less financially burdensome upon participants. By demonstrating the industry program compliance with endorsement from the Industry Regulator, it is intended that the industry participant in question will also achieve the regulatory regime's standards.

The Industry Regulator was established to administer The Industry Program, although its purposes contemplate activities beyond this singular purpose. Industry Regulator will appoint and train endorsement bodies, as appropriate, across markets in order to capture a totality of industry participants. Once those endorsement bodies are appointed and trained, the Industry Regulator will coordinate the conduct of endorsements by those endorsement bodies in those markets to endorse compliance with the industry program standards. The Industry Regulator will also perform ongoing verification of competency and conduct internal audits of the approved endorsement bodies and their staff. The Industry Regulator will also investigate instances of non-compliance with program standards and report to industry and government on these matters and on issues relevant to the industry. The Industry Regulator will be responsible to the relevant government department for all activities that relate to the industry program.

In order to place itself in a position to undertake the above activities, the Industry Regulator is currently undertaking a range of establishment activities, including the finalisation of commercial agreements, assignment of intellectual property rights, sourcing IT infrastructure and obtaining necessary registrations.

On an ongoing basis, it is expected that the Industry Regulator's expenditure will be driven by the cost of providing such regulatory and endorsement services (and their associated overhead costs.

In order to have the financial capacity to deliver endorsement, audit and investigation services, the Industry Regulator will raise revenue from a range of sources. In its formative years the Industry Regulator will receive the majority of its income from a government grant and from industry grants. As the Industry Regulator develops, its main sources of income will be market charges, and fees charged to conduct audits for endorsement purposes.

An income stream that is broadly referred to as 'membership fees' is also anticipated to form a significant portion of the Industry Regulator's overall income. These fees are not from members of the entity, but are instead from participants within industry that are endorsed as industry program compliant. These entities are characterised as members of a group that are the industry program compliant, rather than members of the Industry Regulator itself.

The members of the Industry Regulator are currently peak industry bodies. The only direct benefit of membership is voting rights. Members will not receive a discount for services such as audit or endorsement. Even though the constitution provides the ability to establish an ordinary class of membership, it is not intended that this class be established, and the only direct benefit will be voting rights.

The Industry Regulator has provided relevant clauses of its constituent documents.

Reasons for Decision

Question 1

Detailed reasoning

Section 50-1 of the ITAA 1997 provides that the ordinary and statutory income of the entities described in the tables which follow that section is exempt from income tax.

Included in those tables are items of the table in section 50-40 of the ITAA 1997 which refers to a society or association established for the purpose of promoting the development of Australian industry resources. The special condition imposed on the society or association for the exemption to apply is that it is not carried on for the profit or gain of its individual members.

In addition to these requirements, section 50-47 of the ITAA 1997 provides that if an entity is entitled to registration with the Australian Charities and Not-for-profits Commission (ACNC), it is not entitled to tax exemption unless it is so registered.

Accordingly, to be exempt from income tax under an item of the table in section 50-40 of the ITAA 1997, an entity must meet all of the following criteria:

·        be a society or association

·        be established for the purpose of promoting the development of an Australian industry resource

·        not be carried on for the profit or gain of its individual members

·        must not be an ACNC type of entity

1. Society or association

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

An association may be incorporated or unincorporated. However, it does not include a body formed and controlled by government and performing functions on behalf of government.

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)? at paragraph 2 provides:

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

For there to be a 'common purpose' there needs to be more than one person. Accordingly it follows that a single entity, without more, could not constitute an association or society as it cannot be said that there is a group or body, or the forming of any common intention. It is accepted that associations can comprise only corporations (Theosophical Foundation v. Commr of Land Tax (1966) 67 SR (NSW) 70 at 82), but the associating which is essential to an association is not present with a corporation that has only one member.

The Industry Regulator is incorporated as a company limited by guarantee. It was established to administer the industry program and engage in the endorsement and regulation of industry participants.

The Industry Regulator's constituent documents provide the objects of the company, stating the purpose and range of activities for which its members carry on the company.

Whilst the Industry Regulator may seek to obtain the same outcomes as the regulatory regime, though the industry and independent audit, it goes about obtaining these objects through an industry-based compliance model.

The Industry Regulator is an incorporated entity brought into existence by its members to pursue a common purpose as stated in its constitution. It is not a body formed by government, controlled by government or performing functions on behalf of government. In view of the above, it is accepted that the Industry Regulator is an association.

2. Resources specified in section 50-40 of the ITAA 1997

Australian resources that fall for consideration under section 50-40 of the ITAA 1997 include aviation, tourism, and agriculture, pastoral, horticultural, viticultural, manufacturing or industrial resources. These terms are not defined in the ITAA 1997 and take their ordinary meaning. Their ordinary meaning is determined by dictionary meanings and tribunal decisions.

It is accepted that the Industry Regulator engages in activities associated with an industry resource under an item of the table in section 50-40 of the ITAA 1997.

3. Established for the purpose of promoting the development of an Australian industry resource

3.1 Australian Resources

The word 'Australian' applied to the term 'resources' in the table in section 50-40 of the ITAA 1997, limits 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.

However, it is not required that the activities that promote development of the Australian resources be performed exclusively in Australia.

The activities of the Industry Regulator, although some of which will be carried out in overseas markets, will be entirely for the development of an Australian industry resource.

Therefore, it is accepted that the Industry Regulator engages in activities associated with a resource of Australia.

3.2 Promoting the development of Australian resources

Section 50-40 of the ITAA 1997 does not refer to the promotion of the specified resources. It is directed to the promotion of the development of the specified resources.

Paragraph 8 of Taxation Ruling IT 2415 Income tax: Associations promoting the development of Australian resources (IT 2415) provides that the term development is used in section 50-40 in a commercial or business sense. It comprehends all the elements which must be taken into account to ensure the specified resources are best used. A similar approach to 'development' is used in Federal Commissioner of Taxation v. Broken Hill Pty Co Ltd (1969) 120 CLR 240; 69 ATC 4028; (1969) 1 ATR 40. In considering the phrase 'development of the mining property' the majority of the High Court accepted the interpretation of Kitto J:

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 preliminary treatment.

Development entails an increase in operations, an unlocking of potentialities, or advancement of activity; not just conduct of ongoing activity (FC of T v. Broken Hill Pty Co Ltd (1969) 120 CLR 240 per Kitto J at page 248).

The promotion of development may be direct or indirect. For example, the development of industry resources might be directly promoted by research 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, or ameliorative legislation.

Development of resources can be promoted by facilitating the cooperation of businesses and instrumentalities. Chambers of commerce and regional development bodies may help promote resource development in these ways.

Co-operative Bulk Handling Ltd v Federal Commissioner of Taxation (2010) 189 FCR 322 (Co-operative Bulk Handling) considered whether the taxpayer was established for the purpose of promoting the development of Australian agricultural resources. Co-operative Bulk Handling was the major operator of grain bulk handling in Western Australia. It was incorporated for the purpose of establishing, maintaining and conducting schemes or systems for the handling of wheat and other grain in bulk. It derived its income primarily from charges imposed on growers and others who used its services.

The Commissioner argued in this case that, in effect, the 'development of agricultural resources' was confined to the farm side of the 'farm gate', but could not extend, beyond the 'farm gate' to the receiving, handling, storage and transporting of grains grown on farms.

Gilmour J stated in response that this interpretation of 'development of agricultural resources' was unduly narrow. Our Decision Impact Statement on Co-operative Bulk Handling provides:

The Commissioner accepts that the statutory expression regarding the entity to be established for the purposes of "promoting the development of agricultural resources of Australia" is a composite expression with a broader application than the component words. Thus the reference to "promoting the development of agricultural resources" in that context is not limited to promoting activities on the farm side of the farm gate. The expression requires a global review of the activities of the relevant entity to determine the principal or dominant purpose for which it is established.

Our view remains consistent with the Decision Impact Statement on Co-operative Bulk Handling in the present case.

3.3 Dominant purpose

To be exempt under section 50-40 of the ITAA 1997, an association must be established principally or predominantly for the purpose of promoting resource development. It is not sufficient that one of an association's purposes falls within section 50-40 of the ITAA 1997. Nor is it enough that resource development is incidental to, involved with or a consequence of an association's purposes.

The association must be established for required purposes. The term 'established' is not used in a narrow sense. It is necessary to consider an association's constituent documents, and operations and activities.

Determining the dominant purpose will be largely a matter of fact and degree.

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 will not be exempt under section 50-40 of the ITAA 1997. Exemption will not be lost merely because benefits which are incidental to promoting the resource development are received by members.

For the purposes an item in the table in section 50-40 of the ITAA 1997, it is accepted that the Industry Regulator is an association and that it engages in activities regarding a resource that falls within the category of an Australian industry resource.

In order to consider whether the Industry Regulator is in fact established for the purpose of promoting the development of an Australian industry resource, we need to examine the purposes for which it was established and its actual activities.

In relation to the activities that the Industry Regulator carries out, it promotes the development of the specific industry, as a subset of the broader industry by conducting training around control standards. The Industry Regulator will endorse elements of the industry, conducting audits and investigations where appropriate.

Activities of a similar nature (ie the establishment of systematic training schemes in a particular industry) are specifically listed in IT 2415 as an example of promoting resource development.

The Co-operative Bulk Handling case took a holistic view whereby it was determined that the expression 'promoting the development of' extends to developing the range of resources available to support and facilitate agriculture. Similarly the Industry Regulator purpose is entirely composed of the development of an Australian industry resource.

Based on the constituent documents and activities of the Industry Regulator, it is accepted that the principal or dominant purpose of the Industry Regulator is to promote the development of an Australian resource of a particular industry.

3.4 Member benefits

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.

It is therefore necessary to distinguish a dominant purpose of providing benefits to members from the incidental benefits which will often flow.

In the case of Australian Insurance Association v. Federal Commissioner of Taxation 79 ATC 4569 (Australian Insurance), the association comprised the majority of general insurance companies carrying on business in Australia. At issue was inter alia, whether the association 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.

Case W49 89 ATC 469; at 474 states:

The enlargement of the market is one of the objectives of "promoting the development" of any relevant industry. In my view the relevant test is satisfied provided that members do not benefit "as members". I find that the association does not have as an object the generation of increased profits to any one or more members to the exclusion of others or have as an object the equal or equitable distribution of any increase market profit between its members to the exclusion of others.

The members of the Industry Regulator includepeak bodies representing businesses in the industry. While benefits may flow to some of the members of these peak bodies, through lower participation costs, the Industry Regulator does not direct or limit these benefits to the membership of these bodies. The industry participants will not receive benefits in their capacity as members. The benefits are a by-product of the success of the regulatory regime and industry program which are not within the control of the Industry Regulator. As determined earlier, the Industry Regulator's purpose is clearly defined through its objects and activities as solely for the purposes of establishing, operating, administering, developing and promoting endorsement programs that lead to the support and promotion of trade in the industry.

Accordingly, the Industry Regulator is considered to have as a dominant purpose promoting the development of an Australian resource of a particular industry.

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

4.1 Not for profit

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

As addressed above, the Industry Regulator will not operate for the dominant purpose of a gain to members, so any gain to members will be incidental to the Industry Regulator's dominant purpose.

Taxation Ruling TR 97/22 Income tax: exempt sporting clubs (TR 97/22) clearly articulates the Commissioner's view on the requirement for an entity not to convey profit to members in the context of sporting clubs gaining income tax exemption based upon the same special condition as entities under section 50-40. Paragraph 22 of TR 97/22 states

We accept a club as being non-profit where, by operation of law (for example, a statute governing a club's activities) or by its constituent documents, the club is prevented from distributing its profits or assets among members while the club is functional and on its winding-up. The club's actions must, of course, be consistent with the prohibition. Examples of suitable clauses in constituent documents are:

Non-profit clause

The assets and income of the organisation shall be applied solely in furtherance of its above mentioned objects and no portion shall be distributed directly or indirectly to the members of the organisation except as bona fide compensation for services rendered or expenses incurred on behalf of the organisation.

Dissolution clause

In the event of the organisation being dissolved, the amount that remains after such dissolution and the satisfaction of all debts and liabilities shall be transferred to any organisation that is carried on predominantly for the encouragement of a game or sport and is not carried on for the profit or gain of its individual members.

Alternative words may be used provided the result is achieved that funds and assets of the club cannot find their way to members (or their associates or nominees).

There are two requirements in the statement of not for profit character above. First an entity's constituent document must display a not for profit character. Second, the entity's actions must be consistent with this not for profit character.

A clause of the Industry Regulator's constituent documents prevents it from distributing its profits or assets amongst members while it is operating, instead dictating that the Industry Regulator must apply the profits (if any) or other income and property solely towards the promotion of its objects set out in clause 5.

Another clause limits the distribution of any surplus, in the event of a wind up, to entities with similar objects to that of the Industry Regulator, and whose constitution prohibits the distribution of its or their income or property to no lesser extent than that imposed on the Industry Regulator.

It is clear the Industry Regulator's actions will not violate any of their constituent articles therefore it is accepted that the Industry Regulator is a not for profit association.

5. Not an ACNC type entity

Section 50-47 of the ITAA 1997 provides that if an entity is entitled to registration with the ACNC, it is not entitled to tax exemption unless it is so registered.

An entity may be entitled to registration with the ACNC where an entity 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 (ACNC Act).

Item 11 of the aforementioned table in subsection 25-5(5) of the ACNC Act lists an entity whose purposes are 'beneficial to the general public and analogous to the other charitable purposes.'

Charitable purposes are defined in subsection 12(1) of the Charities Act 2013. Paragraph 12(1)(k) lists 'any other purpose beneficial to the general public that may reasonably be regarded as analogous to, or within the spirit of, any of the purposes mentioned in paragraphs (a) to (j).' Item 7 of Schedule 2 to the Charities (Consequential Amendments and Transitional Provisions) Act 2013 provides that for the purposes of paragraph 12(1)(k) of the Charities Act 2013, any charitable purpose that was a charitable purpose before the commencement of the Charities Act 2013,and that is not in direct alignment with paragraphs (a) to (j), is still treated as being 'a purpose beneficial to the general public that may reasonably be regarded as analogous to, or within the spirit of, any of the purposes' listed.

For the Commissioner's view on charitable purposes before the commencement of the Charities Act 2013, Taxation Ruling TR 2011/4 Income tax and fringe benefits tax: charities (TR 2011/4) can be relied upon. Paragraph 10 provides that for a purpose to come within the technical legal meaning of 'charitable' it must be both:

·        within the spirit and intendment of the Statute of Elizabeth, or deemed to be charitable by legislation applying for that purpose

·        for the public benefit, or deemed to be for the public benefit by legislation applying for that purpose.

Paragraph 12 of TR 2011/4 then outlines the common grouping of charitable purposes following the terminology used in The Commissioners for Special Purposes of Income Tax v Pemsel [1891] AC 531; [1891-1894] All ER Rep 28 as the 'four heads of charity'. These heads are the relief of poverty, the advancement of education, the advancement of religion and other purposes beneficial to the community.

Paragraph 337 in Appendix 2 of TR 2011/4 provides a list of purposes which courts have found to be charitable under the fourth head of charity. The purpose of promoting industry, commerce and agriculture is notable as a purpose that requires further analysis in relation to the Industry Regulator. If the Industry Regulator purpose is found be for the promotion of industry, commerce and agriculture, then it will be precluded from obtaining the income tax exemption unless it is registered with the ACNC.

As discussed at section 3.3 of this private binding ruling the Industry Regulator's dominant purpose is to promote the development of an Australian industry resource through its certification and regulatory function. When considering the charitable purpose of the promotion of industry, commerce and agriculture, the Law Institute of Victoria v Commissioner of State Revenue (Vic) [2015] VSC 604 (Law Institute of Victoria) case is relevant. In this case, the LIV sought an exemption from payroll tax on the basis of being a charitable organisation. The LIV carried on, amongst other things, a largely regulatory function.

At 145 Digby J held that the exercise of a power 'to regulate members of a profession is not by its nature a charitable pursuit. Digby J then stated 'in my view, [the LIV], is not fulfilling a charitable objective or undertaking charitable work by undertaking such regulatory tasks.'

In this case, the Industry Regulator performs a mainly regulatory function, which is not a charitable purpose as per the Law Institute of Victoria case. As such, the Industry Regulator is not an ACNC type entity and is not entitled to registration with the ACNC.

6. Conclusion

The Industry Regulator meets the requirements of an exempt entity under an item of the table in section 50-40 of the ITAA 1997. It is an association established for the purpose of promoting the development of an Australian industry resource and is not carried on for the profit or gain of its individual members. The Industry Regulator is not entitled to registration with the ACNC.

Therefore, the ordinary and statutory income of The Industry Regulator is exempt from income tax pursuant to section 50-1 of the ITAA 1997.

Question 2

Detailed reasoning

1. Can the Industry Regulator access the FBT rebate

Certain employers that are not entitled to an income tax deduction for fringe benefits tax payable on benefits provided to their employees are entitled to a rebate of the amount of FBT otherwise payable.

The purpose of the rebate is to ensure that the cost of providing fringe benefits to employees of certain organisations is not substantially different from employers who are able to claim an income tax deduction for the amount of FBT paid. To qualify for a rebate of the FBT otherwise payable, the employer must be a rebatable employer.

Paragraph 65J(1)(a) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) states that an employer will be a rebatable employer if it is exempt from income tax at any time during the year of tax under any of the provisions set out in the table listed at paragraph 65J(1)(b).

Item 9 in the table refers to a society or association established for the purpose of promoting the development of Australian industry resources and the entity must be covered by an item of the table in section 50-40 of the ITAA 1997.

A special condition on item 9 of the table refers to an exemption at subsection 65J(5) of the FBTAA which provides that an entity is not covered by item 9 if it is:

·              an incorporated company where the company is limited by guarantee and the interests and rights of the members in or in relation to the company are beneficially owned by:

-      the Commonwealth, a State or a Territory

-      an authority or institution of the Commonwealth, a State or a Territory.

As discussed in the answer to question one, the Industry Regulator meets the requirements of an exempt entity under an item of the table in section 50-40 of the ITAA 1997 as an association established for the purpose of promoting the development of an Australian industry resource and is not carried on for the profit or gain of its individual members.

The Industry Regulator is a company limited by guarantee. None of its members are the Commonwealth, a State or a Territory; or an authority or institution of the Commonwealth, a State or a Territory.

Accordingly, the Industry Regulator will satisfy the requirements to be a rebatable employer and can access the FBT rebate.

2. Can the Industry Regulator access the GST concessions

The GST Act provides several concessions to not for profit bodies. These concessions include, but are not limited to:

·              an increased GST registration turnover threshold

·              payments made as a gift to a not for profit body is not considered to be the provision of consideration.

Goods and Services Tax Ruling GSTR 2012/2 Goods and services tax: financial assistance payments (GSTR 2012/2) outlines the Commissioner's view on the definition of a 'non-profit body' for GST purposes in the context of gifts to a 'non-profit body.'

Paragraph 74 and 75 of GSTR 2012/2 mirror the not for profit definition as discussed in the answer to question one:

74. A body is a non-profit body if, by operation of law (for example, a statute governing a body's activities) or by its constituent documents, the body is prevented from distributing its profits or assets amongst its members while the body is functional and on its winding-up.

75. Where it is clear from the objects, policy statements, history, activities and proposed future directions of the body that there will be no distributions to members, we accept that the non-profit test has been satisfied.

As discussed in the answer to question one, by the operation of articles of the Industry Regulator constituent documents, its objects and its proposed future directions, the Industry Regulator successfully prevents the distribution of profits or assets amongst its members while the body is functional and on its winding-up.

So, the Industry Regulator is considered a 'non-profit body' for the purposes of the GST Act.