Edited version of private advice

Authorisation Number: 1052230307085

Date of advice: 12 April 2024

Ruling

Subject: Exemption from income tax

Question

When the proposed amendments to the constitution are made, will the Company remain entitled to an exemption from income tax as a society or association established for the purposes of promoting the development of Australia's industrial resources in accordance with items 8.2(C) of table 50-40 of ITAA 1997?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The Commissioner has previously ruled that the Company is exempt from income tax.

The Company was established by participants in an industry.

The objects of the Company are to fund research into an industrial resource.

The Company funds the research by collecting funds from participants in the industry (Industry Participants).

The funds collected by the Company for research become the property of the Company and can only be used for the purposes of research.

The Industry Participants are members and non-members of the Company.

The Industry Participants receive non-monetary benefits from the research funded by the Company as a consequence of providing funds.

The Constitution of the Company contains clauses that prohibit the distribution of income and property to members and requires that the income and property is only applied towards the promotion of its objects.

The Company recently entered into a Funding Agreement to fund the Project. Under the Funding Agreement, the Company receives intellectual property (IP) rights, and rights to commercial exploitation of IP from the Project.

The Industry Participants also received IP rights and other rights but have no rights to commercially exploit the IP from the Project.

The Company is unlikely to use the IP rights from the Project.

The Company is unlikely to commercially exploit the IP from the Project.

The Company is also currently funding other projects or is in discussions to fund other projects.

Relevant legislative provisions

Section 50-1 of the Income Tax Assessment Act 1997

Section 50-40 of the Income Tax Assessment Act 1997

Section 50-47 of the Income Tax Assessment Act 1997

Detailed reasoning

Section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the ordinary and statutory income of the entities covered by the tables in Division 50 is exempt from income tax.

To be an exempt entity under item 8.2(c) of the table in section 50-40 of the ITAA 1997 an entity must be a society or association established for the purpose of promoting the development of Australian industrial resources. The society or association must also not be carried on for the profit or gain of its individual members and must satisfy the special condition in section 50-47 of the ITAA 1997.

Society or association

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

In Pro-campo Ltd. v. Commr of Land Tax (NSW) 81 ATC 4270; (1981) 12 ATR 26 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 members of the Company voluntarily associate for its purposes. The Company is a society or association.

Australian industrial resources

The expression 'industrial resources' is not defined in the ITAA 1997. In Australian Insurance Association v Federal Commissioner of Taxation 79 ATC 4569 (Australian Insurance Association), Sheppard J considered the meaning of 'industrial resources' for the purposes of paragraph 23(h) of the Income Tax Assessment Act 1936 (the predecessor to section 50-40 of the ITAA 1997):

There is a degree of specificity in the words used in the section. It refers to aviation, then to four resources of primary industry, then to manufacturing and finally to industrial resources. The use of these various expressions does not suggest that the draftsman intended to give the word "industrial" any wide meaning intended to embrace business or commercial resources...

The building, mining and quarrying industries, and the resources which these industries have... are industries in the accepted sense of the word. ... Thus a reference to the resources of those industries as the industrial resources of Australia does not impose upon the language any strain... (at 4574 and 4575)

Sheppard J also stated that 'industrial resources' include the businesses and their assets of an industry:

... the undertakings of the Australian insurance companies, viewed as a whole, are resources of Australia. I use the "undertakings" in the broadest sense. I include within it not only the businesses of the various companies but also their assets and the knowledge and skills of their staffs. (at 4573).

'Resources' or their elements also include infrastructure, personnel, knowledge, expertise and skill.

Taxation Ruling IT 2415 Income tax: association promoting development of Australian resources (IT 2415)sets out the Commissioners view of the operation of paragraph 23(h) of the Income Tax Assessment Act 1936 (the predecessor to section 50-40 of the ITAA 1997), and states the following on the meaning of 'industrial resources':

6. The operation of paragraph 23(h) was considered by the Supreme Court of New South Wales in Australian Insurance Association v. FCT, 79 ATC 4569; 10 ATR 333. ... the Court concluded that the expression "industrial resources" in paragraph 23(h) refers to resources such as those of the building, mining, quarrying, shipping and transport industries - it does not extend to business or commercial resources or resources of the kind promoted by the Association.

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.

The Company was established by participants in an industry to fund research into a resource. The resource is a resource of an industry and is an Australian industrial resource for the purposes of section 50-40 of the ITAA 1997.

Established for the purpose of promoting development

The term 'development' is used in section 50-40 of the ITAA 1997 in a commercial or business sense. It comprehends all the elements which must be taken into account to ensure that the specified resources are used in the best interests of Australia.

In Co-operative Bulk Handling Ltd v Federal Commissioner of Taxation [2010] FCA 508, Gilmour J (at first instance) accepted that 'promoting the development of resources' under section 50-40 of the ITAA 1997 entails "unlocking, exploiting or bringing out the inherent potentialities and latent capabilities" of the resources. (at paragraph 80)

This reflects the meaning of 'development' given by Kitto J in Federal Commissioner of Taxation v Broken Hill Proprietary Company (1969) 120 CLR 240 in the phrase 'development of mining property' used in section 122 of the Income Tax and Social Services Contribution Assessment Act 1936-1964 (Cth):

In its ordinary English sense the word "development", when used in relation to a property, refers to the unfolding, the bringing out, of some latent capability of the property... It covers, I think, any preparation, adaption or equipment of the property for the exploitation of an inherent potentiality which cannot be exploited, or fully exploited, without some such preliminary treatment. (at 247)

The promotion of development may be direct or indirect (direct promotion includes research, education, and new or improved products, and indirect promotion includes marketing), and may be promoted by facilitating the cooperation of businesses and instrumentalities.

IT 2415 states the following on the meaning of 'established for the purpose of promoting development':

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 interests of Australia. Reference might usefully be made to the observations of the High Court in FCT 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.

In Federal Commissioner of Taxation v Co-operative Bulk Handling Ltd [2010] FCAFC 155 Mansfield and McKerracher JJ made the following comments on the meaning of 'established' and 'purpose' in section 50-40 of the ITAA 1997:

Two aspects, at least, of s 50-40 may be disposed of at the outset as they are common ground.

First, "established" means maintained at the time at which qualification under the section is at issue...

Secondly, "for the purpose" means "for the sole or dominant purpose" of conducting the relevant activity... In Boating Industries, it was held that the requirement of s 23(h), a predecessor of s 50-40, was that the relevant organisation be "established" for, and not merely "involved" in, the purpose stated... The focus must be upon the periodic or recurrent purposes of the body in the year of income... (at paragraphs 13-15).

The objects of the Company are to fund research into an industrial resource. To this end, the Company collects funds which fund the research.

The Company funds the research by collecting funds from Industry Participants. The Industry Participants include members and non-members of the Company. All funds collected are the property of the Company and can be used only for the purposes of research. The research is made available for the benefit of the Industry Participants.

The Company entered into the Funding Agreement to fund the Project. Under the terms of the Funding Agreement, the Company and the Industry Participants are given IP rights, and the Company has rights in respect of the commercial exploitation of IP from the Project. However, the Company is unlikely to use the IP rights, and is unlikely to commercially exploit the IP from the Project. Industry Participants do not have rights to commercially exploit the IP from the Project.

In addition to the Project, the Company is also currently funding other projects or is in discussions to fund other projects.

The above analysis shows that the Company has a main purpose of promoting and funding research into an industrial resource. The Company is promoting the development of an industrial resource in the best interests of Australia.

The Company fulfills its objects by funding research into the industrial resource and collects funds from Industry Participants to achieve its objects. Consequently, Industry Participants receive certain rights or benefits from contributing funds, such as IP rights. It is considered that these rights or benefits are incidental to research purpose which is the main purpose of the Company.

Accordingly, it is accepted that the Company is established for the purpose of promoting the development of Australian industrial resources.

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

In Federal Commissioner of Taxation v Co-operative Bulk Handling Ltd 2010 ATC 20-231, Mansfield and McKerracher JJ stated 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. (at paragraph 95)

The Commissioner accepts an organisation is non-profit 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. These documents should contain acceptable clauses showing the organisation's non- profit character. The organisation's actions must be consistent with this requirement.

A non-profit organisation can still make a profit, but this profit must be used to carry out its purposes. The profits must not be distributed to owners, members or other private people.

There are two requirements in the statement of non-profit character above. First, an entity's constituent documents must display a non-profit character. Second, the entity's actions must be consistent with this non-profit character.

The Constitution of the Company contains clauses that prohibit its income and property from being distributed to its members and requires that the income and property of the company is only applied towards the promotion of its objects.

Although members do benefit from the research as Industry Participants, the Company is not set up to primarily promote the interests of members, but rather to fund research into an industrial resource. These benefits are considered to be merely incidental or ancillary to the Company's main purpose.

When the proposed changes to the Constitution are made, and Associate Contributors enter into Associate Contribution Deeds, it is not intended that Associate Contributors will obtain rights to generate IP. It is likely that the members will benefit from developments in an incidental manner. This may be true for both Full Members and Associate Members depending on the industry in which the Associate Members operate. However, this benefit will be incidental to the dominant purpose of the organisation which is the promotion of the development of industrial resources.

The activities of the Company are consistent with the prohibition in its constitution.

As such, the Company is not carried on for the profit or gain of its individual members.

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.

Broadly, an entity that can be registered as a charity with the Australian Charities and Not-for profits Commission (ACNC) is an 'ACNC type of entity'. The Charities Act 2013 (CA) sets out the requirements to be a charity. Section 12 of the CA provides purposes that are 'charitable purpose' and includes purposes such as advancing education and advancing health.

The Company has a main purpose of funding research into an industrial resource.

The purposes of the Company are not charitable. As such, the Company is not capable of being registered as a charity and is not an ACNC type of entity.

Section 50-47 of the ITAA 1997 does not apply to the Company.

Conclusion

Therefore, the ordinary income and statutory income of the Company is exempt from income tax under section 50-1 of the ITAA 1997.

The Company is a society or association established for the purpose of promoting the development of Australia's industrial resources and is an exempt entity under item 8.2(c) of the table in section 50-40 of the ITAA 1997 and will remain entitled to such an exemption should the proposed amendments to the Constitution be made.