Edited version of private advice

Authorisation Number: 1051626162631

Date of advice: 10 January 2020

Ruling

Subject: Income Tax Exemption

Question

Is the entity an association exempt from income tax, either;

·                 under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as a society or

·                 an association established for the purpose of promoting the development of Australian manufacturing resources under item 8.2(d) of section 50-40 of the ITAA 1997?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 2018

Year ending 30 June 2019

Year ending 30 June 2020

Year ending 30 June 2021

Year ending 30 June 2022

Year ending 30 June 2023

The scheme commences on:

1 July 2017

Relevant facts and circumstances

The entity is an Australian public company limited by guarantee.

The entity's constitution states it objects and activities

The entity was established to represent and service members who specialise in products within its particular industry.

The entity's constitution prevents the distribution of income and profits to members during its operation, and also applies this prohibition to surplus assets remaining upon winding up.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 50-1

Income Tax Assessment Act 1997 Section 50-40

Reasons for decision

Question 1

Summary

The entity is an association that is:

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

·                 established for the principal purpose of promoting the development of Australian manufacturing resources pursuant to item 8.2(d) of the table in section 50-40 of the Income Tax Assessment Act 1997 (ITAA 1997).

Therefore, the income of the entity is exempt from income tax pursuant to section 50-1 of the ITAA 1997.

Detailed reasoning

The statutory conditions that the applicant must meet before being entitled to exemption from income tax are set out in sections 50-1 and 50-40 of the ITAA 1997 as follows:

Section 50-1 of the ITAA 1997 exempts from income tax the total ordinary and statutory income of an entity covered by section 50-40 of the ITAA 1997.

Item 8.2(d) of the table in section 50-40 of the ITAA 1997 provides that a society or association established for the purpose of promoting the development of Australian manufacturing resources 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.

The matters to be satisfied under section 50-40 of the ITAA 1997 are:

·                 The organisation is a society or organisation

·                 The dominant or principal purpose for which the organisation is established is promoting resource development; and

·                 The resources whose development is being promoted are within the umbrella of resources specified in the relevant section;

·                 The resources, are resources of Australia; and

·                 The organisation is not carried on for the profit or gain of its individual members.

Society or Association

The terms 'association' and 'society' are not defined in the ITAA 1997 and therefore take on their ordinary meaning. The Macquarie Dictionary defines 'association' as 'an organisation of people with a common purpose and having a formal structure'. 'Society' has an equivalent meaning (Pro-campo Ltd v. Commr of Land Tax (NSW) 81 ATC 4270 at 4279; (1981) 12 ATR 26 at 35). An association may be incorporated or unincorporated.

The entity is an incorporated association as a company limited by guarantee since its formation. It is considered to be 'an organisation of people with a common purpose' with a 'formal structure' who have come together to promote the development of an Australian manufacturing resource.

It is accepted that the entity is a 'society or association' for the purposes of section 50-40 of the ITAA 1997.

Established for the principal purpose of promoting development

To be exempt under section 50-40 of the ITAA 1997 an association must be established principally or predominantly for the purpose of promoting development of the specified 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. Taxation Ruling IT 2415 Income Tax: Associations promoting the development of Australian resources states the following on the meaning of development:

The term "development" must be taken to be used in a commercial or business sense, i.e. it comprehends all elements which must be taken into account to ensure that the specified resources are used in the best interests of Australia.

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

The development of marketing techniques may also be relevant to the development of resources. It could be said that there is little point in developing resources if the products of the resources cannot be sold. As the tribunal pointed out in Case W49 at 89 ATC 474; 20 ATR 3602:

'The development of the market is one of the objectives of "promoting the development" of any relevant industry.'

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. In Boating Industries Association of New South Wales v FCT (1985) 16 ATR 383; 85 ATC 4224. Lusher J commented:

The requirement is "established" not "involved" ... It does not follow that a body whose activities or involvement have the effect or result of promoting the development of manufacturing resources of Australia, who otherwise are within the section as to the disposition of income, is necessarily established for that purpose. They could be established for another purpose altogether but still have the result mentioned.'

In dismissing the appeal Lusher J took the view that on the principles established, the question was largely one of fact and degree and found that, on the whole of the material, the association was not established for the purpose of promoting the development of manufacturing resources of Australia:

The exhibitions and shows which were staged were directed, as I find, substantially towards promotion of sales of boats rather than the manufacture other than in a remote and indirect result of such sales. Mr Greaves accepted that the major activity of the association Boat Show was for the purpose of providing a major sales venue of members' products wherever manufactured. Similarly, there were activities and aspects of sales education and promotion.

Determining the dominant purpose will be largely a matter of fact and degree. It is necessary to consider an association's constituent documents, operations and activities.

The promotion of the development of an Australian manufacturing resource may be direct or indirect. Activities of the Association that directly promote the development of manufacturing resources are to educate, inform, review safety standards and lead the debate to ensure consumers, government and policy makers understand the solutions, benefits and possibilities of the Australian manufacturing resource.

The objectives contained in the entity's constitution, and the activities that the Association undertake, prima facie promote an improved manufacturing resource in Australia. Through promoting research, discussions and projects that develop enhanced ways to use the resource the Association enhances and modernises the system in the best interests of the sector in Australia.

Therefore, given consideration of the entity's primary activities and the objectives contained in its Constitution, it is accepted the entity is promoting the development of Australian manufacturing resources.

Manufacturing resources

The resources whose development is being promoted must fall within the umbrella of resources specified in item 8.2 of the table in section 50-40 of the ITAA 1997.

The entity is seeking income tax exemption on the basis that it is established for the purpose of promoting the development of manufacturing resources. These resources are not defined in the ITAA 1997 and so take on their ordinary meaning.

The term 'manufacturing resources' is discussed in Australian Insurance Association v FCT (1979) 10 ATR 333; 79 ATC 4569. It was determined that manufacturing resources extend to plant and equipment, manpower, skill and know-how in manufacturing such articles as steel products, clothing and furniture, and such non-tangible commodities as gas and electricity. The meaning does not include business or commercial resources.

Based upon the information provided in the application, the entity has:

·                 focused on the development of an Australian manufacturing resource;

·                 vision for the manufacturing resource of the future;

·                 objectives and activities of the entity aim to enhance and modernise the manufacturing resource in Australia; and

·                 a structure that includes the Association holding meetings, has committees that assists with government initiatives and also communicates to accelerate progress in the industry.

It is therefore considered that the entity's activities are directed to resources falling under 'manufacturing resources' as specified in item 8.2 of the table in section 50-40 of the ITAA 1997.

Australian resources

The use of the word "Australian" applied to resources in section 50-40 of the ITAA 1997 limits the exemption to associations whose activities are directed towards Australian resources.

Exemption is not limited to associations whose activities extend, or are intended to extend, throughout the whole of Australia. An association promoting the development of a particular region's resources may also be exempt. It is not required that the activities which promote development of the Australian resources be performed exclusively in Australia.

The entity has been established to promote the development of "Australian" resources as listed in its Constitution. This is also supported by the Association's activities which are all applied in the achievement of its purposes.

Therefore, the Association satisfies this requirement as it intends to promote the development of 'Australian' resources.

Special conditions - Non-profit

Section 50-40 of the ITAA 1997 requires that an association is not carried on for the profit or gain of its individual members. An organisation is accepted as being non-profit where its constituent or governing documents prevent it from distributing profits or assets for the benefit of particular people - both while it is operating and when it winds up. The organisation's actions must also be consistent with this requirement.

The entity's Constitution clearly states that the association must not be carried on for the purpose of profit or gain of any member. It prohibits the distribution of profits or assets to any member upon winding-up.

It is therefore accepted that the Association is not carried on for the profit or gain to its individual members.