Edited version of private advice

Authorisation Number: 1051970255518

Date of advice: 7 April 2022

Ruling

Subject: Section 50-40 - Income tax exemption

Question

Will the change in business structure from an incorporated association to a company limited by guarantee, allow Company X to continue to qualify as a tax-exempt entity under Item 8.2(c) in the table in section 50-40 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

yes

This ruling applies for the following period:

01/07/2021 - 30/06/2025

The scheme commences on:

1 July 2022

Relevant facts and circumstances

Company X is established in connection with the building, construction, and housing industry.

The main purpose for which Company X exists is detailed in its Constitution and includes promoting the interests and development of the building industry in Australia.

Clause X of the Constitution provides for the application of funds whilst in operation and states:

The Company must apply its funds and assets solely in pursuance of the objects of the company and must not conduct its affairs so as to provide a pecuniary gain for any of its members.

Clause X of the Constitution provides for the winding up of the company and states:

In a winding up of the company, any surplus property of the company is to be transferred to another organisation with similar objects and which is not carried on for the profit or gain of its individual members.

In this clause, a reference to the surplus property of the company is a reference to that property of the company remaining after satisfaction of the debts and liabilities of the company and the costs, charges and expenses of the winding up of the company.

Additional information

Company X is a Registered Training Organisation offering a wide range of relevant industry specific training programs which are available to members and non-members.

Company X will derive income from member fees, rent from assets, and return on investments and will use those funds to provide services to members in the Industry.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 50-A

Income Tax Assessment Act 1997 section 50-1

Income Tax Assessment Act 1997 section 50-40

Income Tax Assessment Act 1997 section 50-40 Item 8.2

Income Tax Assessment Act 1997 section 50-40 Item 8.2(c)

Income Tax Assessment Act 1997 section 50-47

Income Tax Assessment Act 1997 subsection 995-1(1)

Australian Charities and Not-for-profits Commission Act 2012 subsection 25-5(5)

Charities Act 2013 section 5

Charities Act 2013 section 12

Reasons for decision

All legislative references are to the ITAA 1997 unless otherwise stated.

Section 50-1 provides for the total ordinary and statutory income of certain entities listed in the tables within Subdivision 50-A to be exempt from income tax.

In previous private rulings issued to Company X, the entity has met the requirements contained in Subdivision 50-A. Relevant to Company X is whether by changing its business structure from an incorporated association to a company limited by guarantee will it continue to meet these requirements.

Column 2 in Item 8.2 in the table in section 50-40 sets out the entities that can be an exempt entity:

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

Column 3 in the table in section 50-40 lists the special conditions to be an exempt entity. The special condition for Item 8.2 in the table requires the society or association not be carried on for the profit or gain of its individual members.

Section 50-47 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', the entity will not be exempt from income tax unless they are registered under the Australian Charities and Not-for-profits Commission Act 2012 (ACNC Act).

Therefore, to be exempt from income tax under section 50-1, Company X must satisfy the following conditions:

(a)          be a society or association

(b)          established for the purpose of promoting the development of Australian industrial resources

(c)           not be carried on for the profit or gain of its individual members

(d)          not be a charity.

Column 2 for Item 8.2 in the table in section 50-40 requires the society or association to be established for the purposes of promoting the development of one of the Australian listed in that column.

Society or association

The terms 'society' and 'association' are not defined in the legislation and therefore take its ordinary meaning.

In Theosophical Foundation Pty Ltd v. Commissioner of Land Tax (1966) 67 SR (NSW) 70 at 82, Sugerman JA states:

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'

In Pro-Campo Limited v. Commissioner of Land Tax (N.S.W.) 81 ATC 4270 at 4279, Lee J states:

The meaning of 'society' as the Oxford English 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 organisations are called 'associations', others are called 'societies' but no meaningful difference can be detected between the two.

At paragraph two in Taxation Determination TD 95/56 titled 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 Commissioner similarly considers the definition of 'association' by reference to its ordinary meaning and states:

...The Shorter Oxford English Dictionary defines the term 'association' to be 'a body of persons associated for a common purpose; the organisation formed to effect their purpose'. The Macquarie Dictionary defines 'association' as being 'an organisation of people with a common purpose and having a formal structure'. Olsson J, in Quinton v. South Australian Psychological Board (1985) 38 SASR 523, also stated that the term 'association' has come to be regarded as attaching to a body of persons associated for a common purpose.

As outlined in Company X's Constitution it is a company limited by guarantee, its members/shareholders are associated for the common purpose of promoting the interests and development of the industry in Australia. Therefore, it is accepted that Company X is an 'association'.

Purpose of promoting the development of Australian industrial resources

Determining an association's purpose is largely a matter of fact and degree[1] and may involve a weighing up of the association's objects, activities, history, operation, and use of funds.

The term 'development' is used in a commercial or business sense. It comprehends all the elements which must be considered to ensure that the resources are used in the best interests of Australia[2].

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, facilitating cooperation and similar activities[3].

The Tribunal pointed out in Case W49 ATC 474; 20 ATR 3602 that 'the enlargement of the market is one of the objectives of "promoting the development" of any relevant industry.'

The term 'industrial resource' is not defined in the legislation and therefore takes its ordinary meaning.

Following the Supreme Court of NSW's decision in Australian Insurance Association v. FCT 79 ATC 4569, 10 ATR 333 and highlighted at paragraph six in Taxation Ruling IT 2415 titled Income tax: associations promoting development of Australian resources, 'industrial resources' refers to resources such as those of the building, mining, quarrying, shipping and transport industries it does not extend to business or commercial resources.

Company X's Constitution states that 'The main purpose for which the company exists is promoting the development of the building industry in Australia.'

Company X offers a wide range of industry specific training programs which are available to members and non-members designed to develop new skills and disseminate new information through seminars and workshops. These activities are aligned to promoting the development of an Industry that falls within an Australian industrial resource. Further the provision of support services to its members on various aspects of the industry would add to the member's knowledge and thereby also support promoting the development of the Australian industrial resources.

Company X's activities as stated in its Constitution are directed at promoting the development of the building industry in Australia. Company X will satisfy this requirement.

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

The special condition contained in Column 3 for Item 8.2 in section 50-40 requires the society or association not be carried on for the purpose of profit or gain to its individual members; referred to as the non-profit requirement. This requirement is explained in Taxation Ruling TR 97/22 titled Income Tax: exempt sporting clubs. Whilst explained in relation to sporting clubs it is also applicable to other types of organisations.

TR 97/22 relevantly states:

9. A club must not be carried on for the purpose of profit or gain to its individual members.

10. A club's Memorandum and/or Articles of Association or other constituent documents should contain a prohibition against a distribution of profits and assets among members while the club is functional and, on its winding-up. Alternatively, a club satisfies the test if the law governing its activities prevents the club from making distributions to members. The club's activities should conform to the prohibition.

Relevant to Company X is clause X and X of its Constitution.

Clause X dictates how Company X's funds are to be applied whilst in operation. Under this clause, Company X must only apply its funds and assets solely in pursuance of the objects of the company and must not conduct its affairs so as to provide a pecuniary gain for any of its members.

Clause X of Company's constitution dictates how Company X's funds are to be applied on its winding up. Under this clause Company X must transfer any surplus property to another organisation with similar objects and which is not carried on for the profit or gain of its individual members.

As the Clauses in Company X's Constitution contain appropriate prohibitions on making distributions to its members whilst in operation and upon winding up, it is accepted that Company X is not an association that is carried on for the purpose of profit or gain to its individual members.

Special condition - must not be a charity

Section 50-47 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', the entity will not be exempt from income tax unless they are registered under the ACNC Act.

An 'ACNC type of entity' is defined in subsection 995-1(1) 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 the ACNC Act describes a charity.

Section 5 of the Charities Act 2013 (Charities Act) defines 'charity' as 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.

Charitable purpose

Section 12 of the Charities Act defines charitable purpose to mean 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 preventing or relieving the suffering of animals

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).

One of the purposes listed above is the advancement of education. Company X is a registered training organisation offering a wide range of relevant industry specific training programs to members and non-members.

This activity would fall under 'the purpose of advancing education' as listed above and be considered a charitable purpose. However, this purpose is insufficient for Company X to qualify as a charity. The definition in section 5 of the Charities Act 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.

Company X has a number 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 bodies and committees. These purposes are not incidental and in furtherance of a charitable purpose, but in furtherance of Company X's main purpose of promoting the interests and development of the building industry in Australia. Consequently, Company X is not considered to be an 'ACNC type of entity' and therefore section 50-47 will not apply.

Conclusion

Company X has satisfied the requirement to be an exempt entity and the special condition in item 8.2 in the table in section 50-40. Therefore, the ordinary income and statutory income of Company X will continue to be exempt from income tax under section 50-1.

[1] Boating Industries Association of New South Wales at 85 ATC 4229 16 ATR 399.

[2] Refer to paragraph 8 of Taxation Ruling IT 2415 titled Income tax: associations promoting development of Australian resources.

[3] Refer to ATO website document titled Resource Development Organisations [QC 46338].