Edited version of private advice

Authorisation Number: 1051867665297

Date of advice: 20 July 2021

Ruling

Subject: Income tax exemption - resource development organisation

Question

Is the Entity 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 Australian manufacturing resources pursuant to item 8.2(d) of the table in section 50-40 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods:

For the income year ended 30 June 20XX

For the income year ended 30 June 20XX

For the income year ended 30 June 20XX

For the income year ended 30 June 20XX

For the income year ended 30 June 20XX

Relevant facts and circumstances

The Entity is a public company limited by guarantee. It is a peak industry association for an Australian manufacturing industry.

A copy of the Entity's Constitution was provided. The objects clause of the Constitution contains industry-based objects. This clause also contains some non-industry-based objects, for example, to pursue charitable purposes.

The Entity's membership includes persons, businesses, companies or organisations that are employers in this manufacturing industry.

The Constitution contains an appropriate non-profit clause and winding up clause.

The Entity provides training services for those involved in the manufacturing industry. These training services are provided to both members and non-members alike. It also provides various support services to promote the industry in Australia, including representing the industry on various industry committees, such as technical standards committees.

In regard to its members, the Entity provides information and advice services to its members on various aspects of the industry, such as advice on Australian technical standards and work health and safety. It also provides its members minor benefits such as networking opportunities.

A document setting out the description of duties and job title of each employee was provided. This document shows that a substantial number of the Entity's personnel are involved in providing training services.

A copy of the financial statements was provided. The Entity derives income from the provision of training services and memberships. The majority of the Entity's income is from the provision of training services.

Relevant legislative provisions

Section 50-1 of the Income Tax Assessment Act 1997;

Section 50-40 of the Income Tax Assessment Act 1997;

Item 8.2(d) of section 50-40 of the Income Tax Assessment Act 1997;

Section 50-47 of the Income Tax Assessment Act 1997;

Subsection 25-5(5) of the Australian Charities and Not-for-profits Commission Act 2012.

Reasons for decision

Detailed reasoning

Section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) provides:

The total ordinary income and statutory income of the entities covered by the following tables [in Division 50 of the ITAA 1997] is exempt from income tax. In some cases, the exemption is subject to special conditions.

Relevantly, item 8.2 in the table of section 50-40 of the ITAA 1997 provides that an entity is an exempt entity if it is a society, association or club established for the development of specified Australian resources. One of the resources specified is manufacturing resources in paragraph (d) of item 8.2.

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

Additionally, the exemption is subject to section 50-47 of the ITAA 1997 (see Note 3 to section 50-1). Section 50-47 requires that an entity covered by any of the tables in Division 50 and is ACNC type of entity is not exempt unless the entity is registered under the Australian Charities and Not-for-profits Commission Act 2012 (ACNC Act).

Accordingly, to be exempt from income tax under item 8.2(d) of the table in section 50-40, an entity must:

1. be a society, association or club
2. be established for the purpose of promoting the development Australian manufacturing resources;
3. not carried on for the profit or gain of its individual members; and
4. not be an ACNC type of entity; or, if it is an ACNC type of entity, it is registered under the ACNC Act.

Each of the above requirements are discussed below:

Society or Association

The terms 'association' and 'society' are not defined in the income tax provisions and therefore take on their ordinary meaning.

The Macquarie Dictionary [online version] 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. It does not include a body formed and controlled by government and performing functions on behalf of government (see 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)?).

The Entity is formed as an incorporated body. It is comprised by a number of members who have a common purpose. Therefore, it is accepted that the Entity is an 'association'.

Established for the purpose of promoting the development Australian resources

Manufacturing resources

The term 'manufacturing resource' is not defined in the legislation.

In Australian Insurance Association v. FCT 79 ATC 4569, 4573; (1979) 10 ATR 333, (Australian Insurance Association case), Sheppard J looked at the businesses, their assets, as well as knowledge, and skill of their staff. 'Resource' is therefore broader than plant and equipment or assets, and also includes stock, personnel, knowledge, expertise and skills of staff.

The term 'manufacturing resources' include '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': see Australian Insurance Association case.

From the material provided, the Entity is concerned with the skill and know-how of those involved in a manufacturing industry through its activities. Consequently, it is considered that the Entity is concerned with 'manufacturing resources'.

Australian resources

The exemption in item 8.2 of section 50-40 is restricted to associations whose activities are directed to certain '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 Entity is concerned with an Australian manufacturing industry. In this regard, the Entity provides training, information and resources to those involved in this industry in Australia. Therefore, the Entity is considered to be concerned with Australian resources, specifically Australian manufacturing resources.

Promoting development

Item 8.2 of the table in section 50-40 is directed to the promotion of the development of the specified resources. The term 'development' is used in a commercial or business sense. It comprehends all the elements which must be taken into account to ensure that the resources are used in the best interests of Australia (see paragraph 8 of Taxation Ruling IT 2415 Income tax: associations promoting development of Australian resources).

The promotion of development may be direct or indirect. Methods of promoting development can be by various means, including research, providing facilities, training, improving marketing methods and facilitating cooperation, through new innovative practices and similar activities - see ATO website document 'Resource Development Organisations' [QC 46338].

The activities which the Entity undertakes which point to it promoting the development of Australian manufacturing resources follows:

• the provision of training services for those involved in the industry. It is noted that in paragraphs 9 and 10 of IT 2415 industry training is an activity that is part and parcel of the development of a specified resource of Australia.
• Representing the industry on various industry committees including technical advisory and standards committees.
• The provision of support services to its members in the form of advice or information on various aspects of the industry for example, advice on Australian technical standards. It is considered that these services would add to the member's knowledge and ensure that acceptable operational standards are met within the industry thereby promoting the development of the industry.

Dominant Purpose

An entity must also be established principally or predominantly for the purpose of promoting the specified Australian manufacturing resources in order to be exempt under item 8.2(d) of section 50-40 of the ITAA1997 - see paragraph 7 of Taxation Ruling IT 2415 Income tax: Associations promoting the development of Australian resources.

In Cronulla Sutherland Leagues Club Ltd v F.C. of T 90 ATC 4215 (Cronulla Sutherland) the court considered 'dominant purpose' and the process of reconciling 'multiple purposes' for the purpose. Whilst Cronulla Sutherland considered the operation of a different exempting provision to that currently under consideration, its comments about determining an organisation's purpose are equally applicable to this case.

In Cronulla Sutherland, the court held, for an entity to qualify for the exemption, it must have as its main object or purpose, the purpose specified in the exempting provisions. This purpose need not be its only purpose. It may have other objects or purposes which are merely incidental or ancillary thereto or which are secondary and even unrelated to the main object or purpose without disqualifying the body from the exemption. But if it has two co-ordinate objects, one of which is outside the exemption, the exemption cannot apply because it would be impossible to say that one object is the main or predominant object.

The term 'established' in the legislation is not used in a narrow sense, considering only the motives and objectives which led to the initial formation of an association (Case W49 89 ATC 469 at 474; AAT Case 5127 (1989) 20 ATR 3597 at 3602-3). It is necessary to consider an association's constituent documents and also its history, operations and activities to determine its principal or dominant purpose (Boating Industries Association of New South Wales v. FC of T 85 ATC 4224 at 4228-9; (1985) 16 ATR 383 at 388).

The requirement that the association was established for the requisite purpose, and continues to pursue that purpose by its present activities, was also pointed out in Case W49 (at ATC 474; ATR 3603) when applying former paragraph 23(h) of the ITAA 1936 (corresponding to section 50-40):

'... whether during the period under review the organisation was in existence and was operated and maintained in an established or stable condition as an organisation having as its principal or dominant purpose, one of the purposes provided for in the subsection.'

Therefore, to determine whether the Entity is established for the principal purpose of promoting the development of Australian manufacturing resources, it is relevant to consider its constituent documents and its actual activities. It will not be sufficient if one of the purposes of the Entity falls within section 50-40 of the ITAA 1997; nor is it enough that resource development may be incidental to, involved with, or a consequence of its purpose.

The Entity's constituent document contains a mixture of objects, and some of these objects are directed to promoting the development of Australian manufacturing resources. For example, it contains an object which is directed to providing training and assessment for those involved in the industry.

However, there are some objects are inconsistent with the purpose of promoting the development of Australian manufacturing resources.

As mentioned above, an organisation's purpose is determined not only from the objects set out in its constituent document but also its actual activities and operations.

From the information provided about the Entity's actual activities and its operation, it is considered that the Entity's main activity and purpose is to provide various training services to the industry. In this regard, the Entity derives most of its income from providing training services. It also allocates a substantial number of its personnel to the activity of providing training services.

A secondary object of the Entity is to provide various support services to its members such as information and advice to its members about various aspects of the industry. It also represents the industry on various industry committees.

As explained earlier in this document, it is considered that the training services, representational activities and provision of advice or information to members are all activities which promote the development of Australian manufacturing resources.

Consequently, based on the above discussion, it is considered that the dominant purpose of the Entity is to promote the development of Australian manufacturing resources.

The Entity does provide some minor benefits to members such as networking opportunities. The object of providing these benefits are considered to be incidental to its main of purpose promoting the development of Australian manufacturing resources.

Accordingly, the Entity is established for the purpose of promoting the development of Australian manufacturing resources.

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.

However, it is necessary to distinguish a dominant purpose of providing benefits to members as a group from the incidental benefits which will often flow to members from activities promoting the development of resources with which they are involved.

In relation to the issue of whether benefits to members were incidental to the purpose of being established to develop a particular resource, Shepherd J in Australian Insurance Association v. Federal Commissioner of Taxation (1979) 10 ATR 333 (1979) 41 FLR 256 said the following:

"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."

The Entity does confer benefits to members as a group by providing certain member services such as advice or information services. However, it is considered that most of the benefits provided to members are directed to developing the members' industry knowledge and ensuring that the appropriate standards within the industry are maintained.

Additionally, the Entity confers benefits on its members by providing training services. However, these training services are provided to the industry generally and, therefore considered to benefit this industry as a whole.

Consequently, the benefits received by members as a group are considered to be incidental benefits which flow to members from activities promoting the development of Australian manufacturing resources.

Accordingly, the Entity meets the requirement that it be established for the purpose of promoting the development Australian manufacturing resources.

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

As mentioned earlier in this document, section 50-40 of the ITAA 1997 requires that an association not be carried on for the profit or gain of its individual members (non-profit).

An organisation will meet the non-profit requirement 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 be consistent with this requirement.

In Federal Commissioner of Taxation v Co-operative Bulk Handling Ltd 2010 ATC 20-231, Mansfield and McKerracher JJ stated at paragraph 95, the following about the meaning of 'not be carried on for the profit or gain of its individual members':

"In all cases of exemption, it must be the position that it is not open to the body to disburse any profits or dividends to members."

The Entity's Constitution contains clauses which prevents the distribution of income and property to its members whilst it is operating and when it winds up. The financial reports provided by the Entity indicate that that no income or property was distributed to the Entity's members.

Therefore, it is considered that the Entity is not carried on for the profit or gain of its individual members. Consequently, the Entity satisfies this requirement.

ACNC type of entity

The final requirement to consider is whether the Entity is an ACNC type of entity. Where an entity is an ACNC type of entity, it will not be exempt from income tax unless it is a registered charity -see section 50-47.

An '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 ACNC Act. Column 1 of the table in subsection 25-5(5) of ACNC Act describes a charity.

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 was previously concluded in this document that the Entity is a not-for-profit entity. Charitable purposes are listed in section 12 of the Charities Act 2013. One of the purposes listed is the advancement of education. Conducting vocational training, for example an industry training organisation, is considered to fall under the purpose of advancing education.

In the present circumstances, the provision of training by the Entity is considered to be a charitable purpose as it squarely falls under the heading of advancing education.

However, this purpose is insufficient for the Entity to qualify as a charity. The definition in section 5 requires that all of the purposes of a not-for-profit entity be charitable, and any other purposes be incidental and in furtherance of the charitable purpose.

In the Entity's case, it has a mixture of purposes some of which do not fall under any of the headings of charitable purpose, for example the provision of support services to its members or industry representation on industry bodies and committees. These purposes are not incidental and in furtherance of the Entity's purpose of delivering training.

Consequently, the Entity will not be an 'ACNC type of entity'. Accordingly, section 50-47 of the ITAA 1997 will not apply. the Entity meets this requirement.

In conclusion, the Entity has met all the requirements in item 8.2(d) of the table in section 50-40 and section 50-1. Therefore, the income of the Entity is exempt from income tax under section 50-1 as a society or association promoting the development of Australian manufacturing resources pursuant to item 8.2(d) of the table in section 50-40.