Edited version of private advice

Authorisation Number: 1051713726490

Date of advice: 07 July 2020

Ruling

Subject: Not-for-profit -income tax - exemption from tax

Question

Is Entity A exempt from income tax pursuant to section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as an association established for the purpose of promoting the development of Australian Industrial and manufacturing resources pursuant to item 8.2(c) and (d) respectively of the table in 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

Entity A is registered with the Australian Securities and Investments Commission (ASIC) as an Australian Public Company limited by guarantee.

The Constitution of Entity A contains a rule that states the objects for which the entity is established is to promote the industrial and manufacturing resources in Australia.

A rule in Entity A's Constitution deals with the income and property of the company and states that:

·   the income and property of the Organisation will only be applied towards the promotion of the Objects, and no portion will be paid or transferred directly or indirectly by way of dividend, bonus or otherwise to the Members;

·   the Organisation must not distribute, pay or transfer to the Members directly or indirectly by way of dividend, bonus or otherwise any of the property or income of the Organisation provided that nothing will prevent the payment in good faith of remuneration to any officers or servants of the Organisation or to any Member in return for any services actually rendered to the Organisation or for goods supplied in the ordinary and usual way of business nor prevent the payment of interest at reasonable and proper commercial rates on money borrowed from any Members or reasonable and proper rent for premises demised or let by any Member;

A Winding up rule of Entity A's Constitution states:

If any surplus remains following the winding up of the Organisation, the surplus must not be paid to or distributed amongst Members, but will be given or transferred to another organisation which, by its constitution, is:

·   a not-for-profit organisation;

·   required to pursue charitable purposes only;

·   required to apply its profits (if any) or other income in promoting its objects similar to those of the Organisation; and

·   prohibited from making any distribution to its members, such organisation to be determined by the Members at or before the winding up and in default, by application to the Supreme Court of that State;

Entity A's policies ensures that the decisions made by the Organisation and its Board are to further the stated Objects of the Organisation.

Entity A's Constitution confirms that the Organisation may only exercise its powers to carry out the Objects and in consenting to their appointment, each Director agrees to comply at all times with this Constitution, the Policies, procedures and other regulations of the Organisation, and the confidentiality obligations required of a Director

Activities

Entity A is focused on the development of industrial resources in Australia. The activities will service across a diverse range of industries through direct engagement with several governmental and non-governmental entities, providing written submissions to them, appearing before inquiries and participation in a range of policy committees promoting the industrial and manufacturing resources of Australian industries.

Entity A's policy work will cover a range of industries and sectors, including manufacturing.

Entity A will engage relevant industry experts to discuss the issue with a view to forming a policy position on the topic.

Entity A will provide services to improve industry competitiveness by:

·   operating important national business networks;

·   providing online sources;

·   providing grant and export assistance; free seminars and events;

Entity A seeks to extend its reach and programs both nationally and into supporting Australia's rural and regional industry priorities.

Income

Entity A will generate income primarily from:

·   subsidised programs;

·   fees for services to both members and non-members; and

·   membership fees.

Membership

Any organisation, firm, corporation, company or person is eligible for membership of Entity A. There is no limit on the number of members;

Same level of service is available to all eligible entities regardless of their membership status.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 50-1

Income Tax Assessment Act 1997 section 50-40

Unless otherwise stated, all legislative references are to the Income Tax Assessment Act 1997.

Reasons for decision

Section 50-1 provides that the total ordinary income and statutory income of entities covered by tables in Subdivision 50-A (including section 50-40) is exempt from income tax.

Assessable income of an entity is exempt under section 50-1 where the entity falls within the following description contained in item 8.2 of section 50-40:

A society or association established for the purpose of promoting the development of any of the following Australian resources:

(a)  agricultural resources

(b)  horticultural resources

(c)   industrial resources

(d)  manufacturing resources

(e)  pastoral resources

(f)    viticultural resources

(g)  aquacultural resources

(h)  fishing resources

Items 8.2(c) and 8.2(d) of the table in section 50-40 provides that a society or association established for the purpose of promoting the development of Australian industrial and manufacturing resources shall be exempt from income tax subject to the special conditions contained in the table in section 50-40.

The exemption is subject to a special condition that the society or association is not carried on for the profit or gain of individual members.

In order for the entity to satisfy the requirements in item 8.2 of the table in section 50-40 it must:

1. be a society or association;
2. be established for the purpose of promoting the development of an Australian resource (listed under Item 8.2 of section 50-40); and
3. not carried on for the profit or gain of its individual members.

If the association fails to satisfy these requirements, it will not be exempt from income tax under section 50-1.

1.    Society or Association

One of the requirements of section 50-40 is that the entity be a society or association.

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

The Macquarie Dictionary (online version on https://www.macquariedictionary.com.au/) defines association as:

an organisation of people with a common purpose and having a formal structure

...........

(Macquarie Dictionary Publishers, 2020)

The meaning of "association" was considered by Olney J in Douglas & Ors v FCT 97 ATC 4722 in relation to section 23(g)(v) of the Income Tax Assessment Act 1936 (ITAA 1936) and the following was found:

As the section contains no definition of either 'society, association or club' or "community services purposes" it should be construed according to the ordinary meaning of the words used and, if necessary, after resort to the relevant explanatory memorandum and second reading speech.

Unassisted by authority I would construe the collation "society, association or club" to refer to a voluntary organisation having members associated together for a common or shared purpose. Such a description is consistent with various dictionary definitions of the several words used. The following examples can be found in the Concise Oxford Dictionary:

·         Society: Association of persons united by a common aim or interest or principle;

·         Association: Organised body of persons for a joint purpose:

·         Club: Association of persons united for some common interest, usually meeting periodically for shared activity.

Entity A is registered with the Australian Securities and Investments Commission (ASIC) as an Australian Public Company limited by guarantee. Their Constitution states that the number of members is unlimited and work towards a common goal as expressed in their Constitution.

In applying the definition, Entity A is considered to be an 'association' or 'society' for the purpose of section 50-40.

This condition is therefore satisfied.

2.    Principal or dominant purpose - Established for the purpose of promoting the development of Australian resources

Entity A is seeking income tax exemption on the basis that it is established for the purpose of promoting the development of industrial and manufacturing resources as listed under items 8.2(c) and (d) respectively of the table in section 50-40.

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

Section 50-40 is directed to 'promoting the development' of the specified resources and requires that the association be established principally or predominantly for the purpose of resource development.

It is not sufficient that promoting the development of the resource(s) may be a consequence of or incidental to, involved with, or a consequence of an association's purposes.

Determining the dominant purpose of the association will be a question of fact and degree and will involve a weighing of the various elements which include its objects, activities, history, proposed directions, etc. 'Established' refers not only to the motives and objectives which lead to the formation of the association but also to its purpose since that time.

Taxation Ruling IT 2415 Income tax: associations promoting development of Australian resources (IT 2415) states at paragraphs 7 and 8:

7.    The reasoning in the decision in the Australian Insurance Association case highlights the matters that need to be satisfied in any case before exemption under paragraph 23(h) applies:-

a)    Promotion of the specified resources must be the predominant purpose for which a particular body is established.

b)    The resources, the development of which is being promoted, must come within the umbrella of the specified resources.

8.    It is important to note that paragraph 23(h) does not refer to the promotion of specified resources - it is directed to the promotion of the development of the specified resources. In the context of paragraph 23(h) the term "development" must be taken to be used in a commercial or business sense, i.e. it comprehends all the elements which must be taken into account to ensure that the specified resources are used in the best interest of Australia. Reference might usefully be made to the observations of the High Court in F.C. of T. v. Broken Hill Pty. Co. Ltd., 69 ATC 4029; 1 ATR 40 on the meaning of the term "development" in relation to the development of a mining property.

IT 2415 states that section 50-40 does not refer to the promotion of the specified resource. It is directed to the promotion of the development of the specified resource.

The purpose must be primary and dominant purpose, to satisfy section 50-40.

The Income Tax Guide for Non Profit Organisations (ITGNPO) on page 22 regarding methods of promotion states:

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

Entity A's activities will service across a diverse range of industries. Entity A will engage relevant industry experts to discuss the issue with a view to forming a policy position on the topic and will cover a range of industries and sectors, including manufacturing.

Entity A will provide services to improve industry competitiveness and seeks to extend its reach and programs both nationally and into supporting Australia's rural and regional industry priorities.

It is accepted that Entity A's objects provide for the purpose of the promotion of mainly the development of industrial and manufacturing under item 8.2(c) and (d) of section 50-40 and the promotion of the development of resources that come within the umbrella of specified Australian resources under item 8.2 under section 50-40.

The facts support the promotion of industries and therefore the promotion of the development of industrial and manufacturing resources.

Based on the objects, purpose and activities of Entity A under its constituent documents and the supporting information provided above, it is considered that Entity A's purpose is considered to be established to promote the development of specified Australian resources, in this case, the industrial and manufacturing resources related to the Australian industry.

Special Conditions - 'Not carried on for the Profit or Gain of its individual Members'

The exemption under item 8.2 of section 50-40 is also subject to the special condition that the entity is "not carried on for the purposes of profit or gain of its individual members". An association or society will fail the non-profit test if the members, in their individual capacity, are to receive any benefits.

If an association operates principally to confer benefits on its members jointly or as a group, its predominant purpose may not be considered to be promoting resource development and thus not exempt under section 50-40.

The Commissioner considers that to qualify, the entity must be prevented by law or its constitution documents from distributing its profits or assets among members, either while the entity is functional or on its winding up, and it must act consistently with those restrictions. Paragraph 23 of the Taxation Ruling TR 97/22 - Income tax: exempt sporting club (TR 97/22) states that:

Where the law or the constituent documents do not prohibit distributions, it is a question of fact in each case as to whether the club is not carried on for purposes of profit or gain to the individual members. Factors that we consider relevant include whether distributions have been made, whether there is a stated or demonstrated policy to make or not to make such distributions and whether winding-up is contemplated. Where it is clear from the objects, policy statements, history, activities and proposed future directions of the club that there will be no distributions to members, we accept that the non-profit test has been satisfied.

Entity A contains non-profit and dissolution rules in its Constitution which prevents them from distributing its profits and assets among members while it is operating and on winding up. Therefore, it is accepted that Entity A operates on a non-profit basis and does not make any distributions to its members and therefore meets the non-profit test.

Conclusion

It is considered that Entity A meets the requirements for tax exempt status under items 8.2(c) and (d) of the table in section 50-40 as an association promoting the development of an Australian industrial and manufacturing resources. Therefore, the ordinary and statutory income of Entity A will be exempt under section 50-1.