Edited version of private advice

Authorisation Number: 1051946413817

Date of advice: 7 February 2022

Ruling

Subject: Income tax exemption - scientific institution

Question

Does the Company meet the special conditions in section 50-55 of the Income Tax Assessment Act 1997 (ITAA 1997) for a scientific institution, as covered by item 1.3 of the table in section 50-5 of the ITAA 1997 so that its income is exempt from income tax under section 50-1 of the ITAA 1997?

Answer

Yes

This ruling applies for the following periods:

1 January 20XX to 31 December 20XX

1 January 20XX to 31 December 20XX

1 January 20XX to 31 December 20XX

1 January 20XX to 31 December 20XX

1 January 20XX to 31 December 20XX

The scheme commences on:

1 January 20XX

Relevant facts and circumstances

The Company is a public company limited by guarantee.

The Company is not registered as a charity under the Australian Charities and Not-for-profits Commission Act 2012.

The Company is a not-for-profit entity.

The Company's Constitution provides the Company's governing rules and regulations. The Constitution provides clauses including:

•         Objects

•         Powers of the Company

•         Membership categories and criteria

•         Membership subscriptions

•         Requirement to hold annual general meeting

•         Votes of Members

•         Power and duties of directions

•         Income and Property

•         Requirement to keep proper accounts and prepare and present financial reports and statements

•         Requirement to appoint auditors, and

•         Winding up Company.

The Company's object is to promote science within a particular field of medical profession.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 50-1

Income Tax Assessment Act 1997 section 50-5

Income Tax Assessment Act 1997 section 50-47

Income Tax Assessment Act 1997 section 50-55

Reasons for decision

Summary

The Company is a scientific institution under item 1.3 of section 50-5 of the ITAA 1997. As such, the income of the Company is exempt from income tax under section 50-1 of the ITAA 1997.

Detailed reasoning

Section 50-1 of the ITAA 1997 provides that the total ordinary income and statutory income of entities covered by the following tables in Subdivision 50-A of the ITAA 1997 is exempt from income tax.

A scientific institution is listed at item 1.3 of the table in section 50-5 of the ITAA 1997. To be an exempt scientific institution under item 1.3 the entity must also satisfy the special conditions in sections 50-47 and 50-55 of the ITAA 1997 (examined further below).

Scientific institution is not defined in the Act. The definition takes on its ordinary meaning which has been considered by the courts. The meaning is explored below.

Institution

In Stratton v Simpson (1970) 125 CLR 138 Gibbs J gave the following meaning of the term 'institution':

In its ordinary sense "institution" means "an establishment, organisation, or association, instituted for the promotion of some object, especially one of public utility, religious, charitable, educational etc" (The Shorter Oxford English Dictionary). It means, as was said in Mayor etc. of Manchester v McAdam (...), "an undertaking formed to promote some defined purpose..." or "the body (so to speak) called into existence to translate the purpose as conceived in the mind of the founders into a living and active principle". Although its meaning must depend on its context, it would not ordinarily connote a mere trust...

An 'institution' is 'an establishment, organisation or association, instituted for the promotion of an object, especially one of public or general utility' (Taxation Ruling TR 2011/4 Income tax and fringe benefits tax: charities (TR 2011/4), paragraph 24).

The Company was established for the purposes set out in its Constitution.

Based on its Constitution, the Company is an association instituted for the promotion and development of a particular field within the medical industry, being an object intended to be for public utility and not for profit. Accordingly, The Company is an 'institution' within the ordinary meaning.

Scientific institution

The term 'scientific institution' is not defined in the Act. In Royal Australian College of Surgeons v Federal Commissioner of Taxation (1943) 68 CLR 436 (Surgeons Case), the Full High Court considered the meaning of 'scientific institution' for the purposes of section 23(e) of the Income Tax Assessment Act 1936, the predecessor of section 50-5.

Each of the members of the Court held that the College was a scientific institution as the main, dominant or primary object of the College was to promote and advance the science of surgery.

In the Surgeons Case Rich J stated the following on the meaning of 'scientific institution' at page 447:

The test is whether it can be predicated that the College is in the main scientific. The inclusion of an institution in the exemption clause depends upon the intrinsic character of the object which it promotes and not upon the scope of the benefits which may result from its transactions... I have come to the conclusion that the main or real object of the College is the promotion and advancement of surgery. By this I mean that its essential purpose is to enlarge and extend the boundaries or area of the science of surgery. Its other objects are not collateral or independent but merely concomitant and incidental to the main object. And the fact that some of these subsidiary or ancillary functions and purposes may indirectly and incidentally be of benefit to the members of the profession does not destroy the exemption claimed.

Starke J stated at pages 447-448:

The substantial question is whether the college is a body for the advancement of professional objects and interests or for "something higher and larger", namely, the promotion of science in the advancement of surgical knowledge and practice. The college would not be the less a scientific institution because it does not confine its activities to abstract or speculative science but applies scientific knowledge and practices to the advancement of surgery.

William J stated at page 451:

...whether it is a scientific institution...depends upon whether the main or dominant object for which the college is incorporated is to promote the science of surgery.

In Australian Tea Tree Oil Research Institute Ltd (in liq.) v Commissioner of Taxation (2008) FCA 1653 at [225] Edmonds J stated that a 'scientific institution' must also be for the public benefit:

For an entity to claim status as a 'scientific institution', the results..., of the subject entity's activities should be freely available to the community at large; the public community as well as the scientific community.

Scientific Institutions are primarily set up to advance science. 'Science' is not limited to the physical sciences and includes the human and applied sciences.

In the Commissioner of Inland Revenue v Forrest (Institute of Civil Engineers) (1890-1898) 3 TC 117 Lord Macnaghten stated the following on the meaning of 'science' in the term 'Scientific Institution' (which was accepted by Starke J in the Surgeons Case at pages 447-448):

The first question is what is the meaning of the word science...I see no reason why it should be confined to pure, or speculative, science. The expression plainly includes applied science, and it was intended, I think, to denote a particular branch of science, as well as universal science or science generally... I cannot therefore doubt that mechanical science...is science...

Scientific institutions are therefore primarily set up to advance science. 'Science' is not limited to the physical sciences and includes the human and applied sciences. Common ways of advancing science include research, exploration and teaching. Disseminating information will often be involved. Further, scientific institution must be for the benefit of the public and an entity that operates for the interests or profit of its members does not have a main purpose of advancing and promoting science.

Main purpose

The purpose or purposes for which an organisation is established are determined by reference to the objects set out in its governing documents, its activities and other relevant factors, including:

•         other elements in the governing documents such as its powers, rules, not for profit and winding up clauses, and clauses governing who can benefit from the institution's activities and in what ways

•         how the institution is operated

•         any legislation governing its operation

•         the circumstances in which it was formed

•         its history, and

•         its control (TR 2011/4, paragraph 32)

If the objects and activities serve multiple purposes (for example scientific, professional and social purposes), the question of whether the organisation is established for the required purpose is decided according to the main or predominant purpose, leaving other purposes served only incidentally (Surgeons Case). The main purpose must not be promoting the professional or business interests of members.

In Surgeons case, the activities of the College included:

•         holding conferences for surgeons to discuss and study surgical matters,

•         providing a technical surgical library for members,

•         publishing surgical journals,

•         financing surgical research,

•         conducting examinations for admission to fellowship of the College, and

•         administering funds for research and scholarships to medical students.

In light of the activities, the objects that, in isolation, could have been to promote the professional interests of members, were determined to be incidental to the dominant purpose of advancing science (TR 2011/4, paragraph 197).

Direct and indirect activities which may encourage science include:

•         co-ordinating activities of a scientific nature

•         improving the abilities of participants

•         improving the standard of trainers and coaches

•         providing purchased or leased facilities for the activities for the use of members and visitors, or

•         encouraging increased and wider participation and improved performance.

The Company will be a scientific institution if it has a main purpose to promote and advance science and operates for the benefit of the public.

The Company's objects, as provided under its Constitution is to promote science within a particular field of medical profession.

The Company supports research and educational programs in a particular medical field. The Company hosts scientific meetings, conferences, workshops and courses.

The scientific meeting run by the Company supports professional development programs. These meetings include presentations by international and local speakers who are experts in the relevant medical field. These educational meetings also allow international and local experts to share their ideas, knowledge and results through presentations on various topics relevant to the particular medical field.

The Company has hosted numerous educational events by way of conferences, symposiums, workshops and courses education thousands of delegates in the specialty within the particular field of medical industry. The Company's scientific meetings actively encourage the participants to present their scientific research and studies at the meetings.

The Company offers support grants to research activities designed to improve understanding of the science, practice and techniques in the relevant medical field. The Company through its members has partnered with many universities and institutions both nationally and internationally and supported many research projects.

The Company supports a Research Fellow to work towards PhD. The Company also offers fellowship positions to specialists within the particular medical field. Each fellowship involves a research component that the fellow has to undertake and present it at the Company's scientific meeting.

The Company also educates the public at large regarding the particular medical industry via the Company's website and social media. Through these platforms, the Company educates the public regarding the qualifications, experience and training.

The activities conducted by the Company demonstrate that the primary purpose served is scientific. The meetings and conferences held by the Company are predominantly focused on disseminating scientific information in relation to the particular field of medical industry. The Company also disseminated information to the general public via its website on latest key industry news items. This shows that the Company is established for the promotion or advancement of the particular field of medical industry and that it will therefore be a scientific institution as listed in item 1.3 of the table in section 50-5 of the ITAA 1997.

Special Conditions

Section 50-47 of the ITAA 1997

Section 50-47 of the ITAA 1997 provides a special condition for all entities covered by section 50-1 of the ITAA 1997, it states:

An entity that:

(a)          is covered by any item; and

(b)          is an ACNC type of entity;

is not exempt from income tax unless the entity is registered under the Australian Charities and Not-for-profits Commission Act 2012.

The meaning of 'ACNC type of entity' is provided in Division 995 of the ITAA 1997. Section 995-1 of the ITAA 1997 refers to column 1 of the table in subsection 25-5(5) of the Australian Charities and Not-for-profits Commission Act 2012 for the meaning of 'ACNC type of entity'. The entity type at Column 1 of the table in subsection 25-5(5) is 'charity'.

The meaning of charity is provided at section 5 of the Charities Act 2013 (CA). Section 5 of the CA provides the following meaning of charity:

'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.

Section 11 of the CA provides the following meaning of 'disqualifying purpose':

'disqualifying purpose' means:

(a)          the purpose of engaging in, or promoting, activities that are unlawful or contrary to public policy; or

(b)          the purpose of promoting or opposing a political party or a candidate for political office.

Section 12 of the CA provides the following meaning of 'charitable purpose':

(1) ... 'charitable purpose' means any of the following:

(a)          the purpose of advancing health;

(b)          the purpose of advancing education;

(c)           the purpose of advancing social or public welfare;

(d)          the purpose of advancing religion;

(e)          the purpose of advancing culture;

(f)            the purpose of promoting reconciliation, mutual respect and tolerance between groups of individuals that are in Australia;

(g)          the purpose of promoting or protecting human rights;

(h)          the purpose of advancing the security or safety of Australia or the Australian public;

(i)            the purpose of advancing the natural environment;

(j)            the purpose of advancing the natural environment;

(k)           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);

(l)            the purpose of promoting or opposing a change to any matter established by law, policy or practice in the Commonwealth, a State, a Territory or another country, if:

                            (i)                in the case of promoting a change-the change is in furtherance or in aid of one or more of the purposes mentioned in paragraphs (a) to (k); or

                          (ii)                in the case of opposing a change-the change is in opposition to, or in hindrance of, one or more of the purposes mentioned in those paragraphs.

(2) Paragraph (l) of the definition of charitable purpose in subsection (1) is the only paragraph of that definition that can apply to the purpose of promoting or opposing a change to any matter established by law, policy or practice in the Commonwealth, a State, a Territory or another country.

(3) ..., it does not matter whether a purpose is directed to something in Australia or overseas.

The Company is not registered as a charity under the Australian Charities and Not-for-profits Commission Act 2012.

The Company's objects, as provided under its Constitution is to promote science within a particular field of medical profession.

The Company's purpose of advancing science is not a 'disqualifying purpose' under section 11 of the CA. However, the Company's purpose does not fall within the meaning of 'charitable purpose' as provided in section 12 of the CA. Therefore, the Company is not a 'charity' under section 5 of the CA and accordingly, the Company is not an 'ACNC type of entity'.

As such, section 50-47 of the ITAA 1997 does not apply to the Company.

Section 50-55 of the ITAA 1997

Subsection 50-55(1) of the ITAA 1997 states that an entity covered by item 1.3 is not exempt from income tax unless one of the following applies:

•         it has a physical presence in Australia and, to that extent it pursues its objectives and incurs its expenditure principally in Australia; or

•         it is a deductible gift recipient; or

•         it is prescribed by law in the income tax regulations and it is located outside Australia and is exempt from income tax in its country of residence.

The Company is a resident of, and is located in, Australia. It carries on its activities in Australia. The Company pursues its objectives and incurs its expenditure principally in Australia.

Subsection 50-55(2) of the ITAA 1997 provides that an entity must:

•         comply with all the substantive requirements in its governing rules; and

•         apply its income and assets solely for the purpose for which the entity is established.

Taxation Ruling TR 2015/1 Income tax: special conditions for various entities whose ordinary and statutory income is exempt (TR 2015/1)provides guidance in respect of the conditions in subsection 50-55(2).

Paragraph 9 of TR 2015/1 provides that an entity's 'governing rules' are those rules that authorise the policy, actions and affairs of the entity. Paragraphs 18 and 19 of TR 2015/1 explain that the substantive requirements in an entity's governing rules are those rules that define the rights and duties of the entity and include rules such as those that:

•         give effect to the object or purpose of the entity

•         relate to the non-profit status of the entity

•         set out the powers and duties of directors and officers of the entity

•         require financial statements to be prepared and retained

•         set out the criteria for admission as a member of an entity

•         require an entity to maintain a register of members, and

•         relate to the winding-up of the entity.

The following rules are provided in the Company's Constitution:

•         Objects

•         Powers of the Company in carrying out the object

•         Membership categories and criteria

•         Membership subscriptions

•         Requirement to hold annual general meeting

•         Votes of members

•         Power and duties of directors

•         Requirement to keep proper accounts and prepare and present financial reports and statements

•         Requirement to appoint auditors

•         Income and Property of the Company are applied solely towards the promotion of its objects. Further, no portion of income and property, as well as remuneration or other benefits are to be paid or transferred to the members, directors of the Company or particular persons, and

•         Winding up company.

The Company satisfies the requirements of section 50-55 of the ITAA 1997.

Conclusion

The Company meets the requirements of a scientific institution under item 1.3 of section 50-5 of the ITAA 1997. The Company's income will be exempt from income tax under section 50-1 of the ITAA 1997 during the ruling period.