Edited version of private advice

Authorisation Number: 1052231617233

Date of advice: 15 March 2024

Ruling

Subject: Income tax exempt - scientific institution

Question 1

Are you an income tax exempt entity, specifically as being recognised as 'scientific institution' pursuant to item 1.3 of section 50-5 of the Income Tax Assessment Act 1997 (ITAA 1997) for the income year ended 30 June 20XV and subsequent income years?

Answer

Yes.

Question 2

Do you qualify as an FBT rebatable employer for the purposes of subsection 65J(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) for the FBT year ended 31 March 20XV and subsequent FBT years?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XV

Year ended 30 June 20XW

Year ended 30 June 20XX

Year ended 30 June 20XY

Year ended 30 June 20XZ

The scheme commenced on:

20XU

Relevant facts and circumstances

You are a company limited by guarantee located in Australia and governed by your Constitution.

You previously received private ruling authorisation number XXXXXXXXXXXXX. Since then, you have amended your Constitution.

You have been established to conduct research in a particular field.

You have provided a copy of your Constitution and information that details the work and activities you have undertaken to achieve your objects.

Your membership is comprised mainly of a mix of government bodies, research institutions and publicly listed corporations. You are funded through government grants, membership fees and direct investments.

You have also provided a copy of documents that detail the relationship between yourself and your members, and documents pertaining to the projects you undertake.

Your research outcomes are available to the public.

You may only exercise your powers to carry out its objects and must not exercise your powers for the benefit of your members.

Your Constitution restricts the use of your income and property to the promotion of your objects and prohibits distributions, transfers, or payments to your members.

Your Constitution requires the transfer of surplus income or property upon winding up to another not-for-profit organisation which is charitable and prohibits the distribution of surplus income or property to your members.

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

Fringe Benefits Tax Assessment Act 1986 section 65J

Reasons for decision

Question 1

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

Summary

You are an income tax exempt entity, specifically as being recognised as 'scientific institution' pursuant to item 1.3 of section 50-5 for the income year ended 30 June 20XV and subsequent income years.

Detailed reasoning

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

A scientific institution is listed at item 1.3 of the table in section 50-5. 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.

Scientific institution is not defined in the ITAA 1997. The definition takes on its ordinary meaning which has been considered by the courts.

Institution

'Institution' is not defined in the ITAA 1997, but paragraphs 8 and 9 of Taxation Ruling TR 2019/3 Fringe benefits tax: benefits provided to religious practitioners state:

In its ordinary sense, an 'institution' is an establishment, organisation, or association, instituted for the promotion of an object, especially one of public or general utility. Such a body is called into existence to translate a defined purpose into a living and active principle.

In the context of the FBTAA, the word 'institution' refers to a significant body which is a recognised part of society, and for which the grant of an exemption is seen to provide a public benefit. Whether a body has these characteristics depends on the facts in each case. Relevant factors include an entity's activities, size, permanence and recognition. A structure which conducts activities of limited scale, controlled and operated by family members or friends is not an 'institution' in this context.

Paragraph 24 of Taxation Ruling TR 2011/4 Income tax and fringe benefits tax: charities states:

An institution is an establishment, organisation or association, instituted for the promotion of an object, especially one of public or general utility. It connotes a body called into existence to translate a defined purpose into a living and active principle. It may be constituted in different ways including as a corporation, unincorporated association or trust. However it involves more than mere incorporation. A structure with a small and exclusive membership that is controlled and operated by family members and friends and undertakes limited activities is not an institution.

You are a company limited by guarantee and governed by your Constitution. You were established to conduct research in your field.

You may only exercise your powers to carry out your objects and must not exercise your powers for the benefit of your members.

Your membership is comprised mainly of a mix of government bodies, research institutions and publicly listed corporations. You are funded through government grants, membership fees and direct investments from industry and research bodies.

As you are an organisation instituted for the promotion of a public utility you are considered to satisfy the definition of an institution.

Scientific

For an institution to be a scientific institution, it must be set up and operated primarily 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. Scientific institutions do not include organisations for the profit of their members or professional associations.

In Royal Australasian College of Surgeons v Federal Commissioner of Taxation [1943] HCA 34 (Surgeons Case), the High Court held that the promotion of science must be the main, substantial, or primary object of the institution for it to qualify as a scientific institution. The inclusion of an institution as scientific also depends on the intrinsic character of the object which it promotes and not upon the benefit which may result from its transaction.

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.

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).

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.

Considering 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.

Application to your circumstances

Based on your Constitution, your objects are consistent with being a scientific institution.

Your activities are consistent with your objects.

Any benefits that members receive are part of their participation in your activities.

Most of the benefits to project participants relate to the scientific research.

The intrinsic character of the object which you promote is the advancement of science in your field and any benefits which members receive are related to their participation in your scientific activities. Therefore, your objects and activities are consistent with a main purpose of advancing science, and any other purposes are incidental.

Consequently, you are a scientific institution.

Section 50-47 Special conditions for all items

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 defined in subsection 995-1(1) to mean 'an entity that meets the description of a type of entity in column 1 of the table in subsection 25-5(5) of the Australian Charities and Not-for-profits Commission Act 2012. The entity type at Column 1 of the table in subsection 25-5(5) is charity.

Charity is defined in section 5 of the Charities Act 2013 (CA). You do not meet the definition of a charity therefore, it is not an ACNC type of entity and section 50-47 does not apply.

Section 50-55 Special conditions for item 1.3

Subsection 50-55(1) provides 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.

You are in Australia and pursue your objectives and incur your expenditure principally in Australia.

Subsection 50-55(2) 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

Your activities are consistent with your objects as set out in your Constitution.

The Constitution restricts the use of your income and property to the promotion of your objects and prohibits distributions, transfers, or payments to your members.

The Constitution requires the transfer of surplus income or property upon winding up to another not-for-profit organisation which is charitable and prohibits the distribution of surplus income or property to your members.

All profits you derive are retained to further research and development activities and for the benefit of members in accordance with the Constitution. There are no profit distributions to any specific individuals or organisations.

You meet the special conditions in section 50-55.

As you are a scientific institution as listed at item 1.3 of the table in section 50-5 and you satisfy the special conditions in sections 50-47 and 50-55, your total ordinary income and statutory income is exempt in accordance with section 50-1.

Question 2

Summary

You qualify as an FBT rebatable employer as you are income tax exempt under the provision set out in item 2 in the table in subsection 65J(2) of the FBTAA, and you satisfy the conditions for that item.

Detailed reasoning

In accordance with subsection 65J(1) of the FBTAA an employer will be a rebatable employer for a year of tax, if the employer:

• is exempt from income tax at any time during the year of tax under any of the provisions in the table in subsection 65J(1), and
• satisfies the special conditions (if any) set out in that table.

Item 2 of the table is relevant to your activities. For you to be considered as a rebatable employer, it needs to satisfy the conditions outlined under the item 2 of the table.

Item 2 of the table includes a scientific institution covered by item 1.3 of the table in section 50-5.

Your total ordinary income and statutory income is exempt from tax in accordance with item 2 of the table in subsection 65J(1) of the FBTAA being a scientific institution covered by item 1.3 of the table in section 50-5.

The special condition for item 2 is that the scientific institution is not an institution of the Commonwealth, a State or a Territory, the exception being:

an institution established by a law of the Commonwealth, a State or a Territory, that is not conducted by or on behalf of the Commonwealth, a State or a Territory and is engaged solely in research into the causes, prevention or cure of diseases in humans.

The table in subsection 65J(1) of the FBTAA was inserted as part of the amendments in Tax Laws Amendment (2013 Measures No.2) Bill 2013. The Explanatory Memorandum to that legislation notes:

9.29 These amendments provide greater certainty for taxpayers by ensuring that the effect of section 65J is largely unchanged from that which existed prior to the commencement of the ACNC Act, with updates to the terminology and structure of the section.

Prior to this amendment, as is relevant, subsection 65J(1) of the FBTAA stated:

For the purposes of this section, an employer is a rebatable employer for a year of tax if the employer is not a registered public benevolent institution, is not a registered health promotion charity, and is covered by any of the following paragraphs at any time during the year of tax:

(a) (Repealed by No 169 of 2012)

(aa) a non-profit scientific institution that:

(i) is engaged solely in research into the causes, prevention or cure of diseases in humans; and

(ii) is established by a law of the Commonwealth, a State or a Territory; and

(iii) is not conducted by or on behalf of the Commonwealth, a State or a Territory;

(b) a scientific or public educational institution (other than an institution of the Commonwealth, a State or a Territory);

...

Former paragraph 65J(1)(aa) of the FBTAA was inserted by Taxation Laws Amendment (FBT Cost of Compliance) Act 1995. The Explanatory Memorandum to that legislation provides the following explanation:

6.1 Schedule 4 of this Bill will amend the Fringe Benefits Tax Assessment Act 1986 (FBTAA) so that certain non-profit medical research bodies that are not operated for governments will be entitled to a rebate of fringe benefits tax under section 65J. The amount of the rebate is broadly equivalent to the amount of tax paid under the grossing up provisions.

Purpose of the amendments

6.2 Section 65J provides to certain non-profit, non-government bodies a rebate of fringe benefits tax (FBT) broadly equivalent to the amount of additional tax paid under the grossing up provisions. Medical research bodies which are not established under a Commonwealth, State or Territory law qualify for this rebate.

6.3 This amendment will extend the section 65J rebate to certain medical research bodies established under Commonwealth, State or Territory laws but which are not conducted by or on behalf of a government.

...

Medical research bodies

6.8 A medical research body is entitled to the section 65 rebate providing that it is not an institution of the Commonwealth, a State or a Territory. It is a rebatable employer under paragraph 65J(1)(b) because it is a scientific institution.

6.9 However, a medical research body established under a Commonwealth, State or Territory law is not entitled to the rebate. Under subsection 65J(3), such a body is an institution of the Commonwealth, State or Territory, even if it does not engage in activities for or on behalf of the Commonwealth, State or Territory. It is therefore excluded from being a rebatable employer under paragraph 65J(1)(b).

Explanation of the amendments

6.10 Subsection 65J(1) will be amended so that certain medical research bodies established under a Commonwealth, State or Territory law but which do not engage in activities for or on behalf of the Commonwealth, State or Territory will qualify as rebatable employers and therefore be entitled to the rebate under subsection 65J(2)

Under the special conditions for item 2 of the table in subsection 65J(1), the only requirement is that you are not an institution of the Commonwealth, a State or a Territory.

Subsection 65J(3) of the FBTAA states that:

For the purposes of this section 65J, an institution established by a law of the Commonwealth, a State or a Territory is taken to be an institution of the Commonwealth, the State, or the Territory, as the case requires.

The mere incorporation under the Corporations Act 2001 or a law of a State or Territory which relates to the incorporation of Associations does not mean that an institution is 'established by a law of the Commonwealth, a State or a Territory' under subsection 65J(3) of the FBTAA.

You are a company limited by guarantee. You have not been established by a law of the Commonwealth, a State or a Territory, therefore you satisfy the special conditions for item 2 of the table in subsection 65J(1) of the FBTAA.

Consequently, as you are income tax exempt under the provision set out in item 2 in the table in subsection 65J(2) of the FBTAA and you satisfy the conditions for that item, you qualify as a rebatable employer.