Edited version of private advice

Authorisation Number: 1051669091044

Date of advice: 30 April 2020

Ruling

Subject: Exemption from income tax as a not for profit organisation

Question

Is Company A 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 a manufacturing resource of Australia under item 8.2(d) of section 50-40 of the ITAA 1997?

Answer

Yes

This ruling applies for the following period(s)

01 July 2018 to 30 June 2019

01 July 2019 to 30 June 2020

01 July 2020 to 30 June 2021

The scheme commences on

01 July 2018

Relevant facts and circumstances

1)    Company A is a not for profit company limited by guarantee.

2)    Company A is an Industry Body. It is committed to advancing the health, integrity and sustainability of the industry at a National level, by promoting safety, professionalism and integrity of the industry to key national stakeholders.

3)    Company A's charter is not simply to advocate and respond on National issues of importance to the industry, but also to proactively create and execute strategies to enhance the credibility and longevity of the National industry.

4)    Company A is the national contact point within Australia, and is the first point of call for international interaction.

5)    Company A's objects are contained in their Constitution and include promoting and expanding the Industry and associated industries and activities throughout Australia and other Countries and to further the standards, goodwill, ethics, reputation, professional development and training within such industries for the betterment of Members, consumers and the Industry in general.

6)    Company A's Constitution contains it's a non-profit clause.

7)    The annual financial reports for the 2018 income year lists Company A's main sources of income as professional fees, membership fees and event income. Company A has used profits to carry out its purposes and no profits have been distributed to members.

8)    Company A's Constitution contains its dissolution and winding up clause and prevents distribution to members.

9)    Company A's Constitution includes information about Membership.

10) Each year from when it was established Company A has conducted activities that achieve its objects including holding events, trade shows and expos, conducting training and representing the industry.

11) Company A has recently purchased an industry related business which conducts a trade show and publishes a trade magazine.

12) Company A is not a charity registered under the Australian Charities and Not-for-profits Commission Act 2012.

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

Company A is 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 a manufacturing resource of Australia under item 8.2(d) of section 50-40 of the ITAA 1997.

Detailed reasoning

Under section 50-1 of Income Tax Assessment Act 1997 (ITAA 1997) the ordinary and statutory income of entities covered by the tables in sections 50-5 to 50-45 of the ITAA 1997 is exempt from income tax.

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 is an exempt entity. The special conditions of this item are that the society or association is not carried on for the profit or gain of its individual members and is not an 'ACNC type of entity'.

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'. Company A is a company limited by guarantee. It is an organisation of people with a formal structure, formed to pursue a common purpose as stated in it's constitution. Company A is a society or association.

Established principally or predominantly for the purpose of promoting the development of Australian manufacturing resources

To be exempt, an association must be established principally or predominantly for the purpose of promoting development of an Australian resource. To remain exempt the association must continue to pursue that purpose by its present activities.

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. Where an association is established for the purpose of promoting the development of a foreign resource, or of both Australian and foreign resources, the test for exemption is not met.

The Constitution provides that Company A is to promote the industry and associated industries and activities throughout Australia and further the standards, goodwill, ethics, reputation and development of the Industry.

As the principal activities of Company A are directed to Australian resources and conducted in Australia, this requirement is satisfied.

Manufacturing Resource item 8.2(d) of section 50-40

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 term 'manufacturing resource' is not defined in the legislation. It takes its ordinary meaning.

Resources or their elements include infrastructure, plant and equipment, livestock, personnel, knowledge, expertise and skills. An industry's businesses and their assets may be resources.

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': Australian Insurance Association at 79 ATC 4574; 10 ATR 339. The meaning does not include business or commercial resources.

The activities of Company A are concerned with manufacture and would come within the meaning of manufacturing resources.

Promoting Development

Item 8.2(d) of section 50-40 of the ITAA 1997 does not refer to promoting the specified Australian resources - it is directed to promoting their development.

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

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 that the specified resources are best used.

'Promoting the development' may be direct or indirect. It need not be on a large scale or use commercial means. However, not all activities connected with a resource will necessarily be for its development.

As the Tribunal pointed out in Case W49 at 89 ATC 474; 20 ATR 3602: 'The enlargement 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. The Association must be established for the required purposes. The term 'established' is not used in a narrow sense. It is necessary to consider an Association's constituent documents, operations and activities.

Not all activities connected with a resource will necessarily be for its development. For example, the improvement of marketing will ground an exemption only where it is undertaken as a means of promoting development of the particular resources. If the marketing or other purported means is not sufficiently connected or integrated with resource development, it will not be for the purpose of promoting development of those resources. It is not enough that a consequence of the activities may be resource development.

Company A's purpose expressed as objects in its Constitution is to promote and expand the industry and associated industries and activities throughout Australia and other countries; further the standards, goodwill, ethics, reputation and development and training within such industries and pursue issues of State, Territory, National and International concern relating to the Industry.

We note that to the extent 'promoting' is mentioned, it is in the first object; namely, to promote the industry. While 'promoting the development of manufacturing resources in Australia' is not specifically mentioned, it is reasonable to accept that promoting the industry would promote the development of its manufacturing resources.

Company A does promote the development of manufacturing by various means, including by hosting the national conventions and awards of excellence, trade shows and expos, including the delivery of educational workshops and seminars. Company A publishes the trade magazine and also offers accredited and non-accredited training programs across Australia. Company A also has an advocacy role and is actively associated with a number of professional bodies and committees and is involved in looking at the laws governing the industry.

These activities promote development of a range of manufacturing resources of the industry via a variety of acceptable means. Having regard to the objects and the activities collectively, we accept that Company A remains established principally for the purpose of promoting the development of an Australian manufacturing resource.

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 development of the resource, rather than the interests of its own members.

The principal activity of Company A is to be the peak national representative organisation for the industry.

This indicates that Company A has a purpose of protecting and promoting the interests of members. Company A members benefit from improvement to their industry as a result of Company A's actions. They also benefit from increasing their industry knowledge and skill via trade shows, expos, training; and award functions. While benefits flow to Company A's members as a consequence of membership, they 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. Non-members also benefit from the activities of the organisation. Company A does demonstrate a wider purpose which is to promote the entire industry in Australia and thus the broader development of Australian resources.

Special Conditions

The special condition set by Item 8.2(d) of section 50-40 of the ITAA 1997 requires that the association not be carried on for the profit or gain of its individual members. This is known as the non-profit requirement.

Company A's Constitution contains a non-profit clause that states that the income and property of Company A must be applied solely towards the promotion of its objects and no portion may be paid or transferred, directly or indirectly, by way of dividend, bonus or otherwise, to any Member.

Further, Company A's Constitution contains a dissolution and winding up clause which directs that any property remaining is not to be paid or distributed among Members.

Since the earlier ruling, Company A has used profits only to carry out its purposes; no profits have been or will be distributed to members.

Based on the above, Company A is not carried on for the profit or gain of its individual members and therefore meets the special condition of Item 8.2(d) of section 50-40 of the ITAA 1997.

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 Company A is a not-for-profit entity. Charitable purposes are listed in section 12 of the Charities Act 2013. It has also been concluded that Company A's purpose is to promote the development of manufacturing resources. This will not qualify as one of the charitable purposes listed and Company A will not be an 'ACNC type of entity'.

Accordingly, section 50-47 of the ITAA 1997 will not apply.

Conclusion

Company A is exempt from income tax under section 50-1 of the ITAA 1997 as an association established for the purpose of promoting the development of a manufacturing resource of Australia under item 8.2(d) of section 50-40 of the ITAA 1997 for the income years ending 30 June 2019, 2020 and 2021.