Edited version of private advice

Authorisation Number: 1052249370074

Date of advice: 8 May 2024

Ruling

Subject: Income tax - tax exemption

Question 1

Will Entity X satisfy the requirements under item 8.2 of the table in section 50-40 of the Income Tax Assessment Act 1997 (ITAA 1997) such that the total ordinary and statutory income of Entity X is exempt under section 50-1 of the ITAA 1997, once Entity X has restructured its affairs into a new legal structure specifically by registering as an incorporated association?

Answer

Yes

Question 1

Will Entity X satisfy the requirements under item 8.2 of the table in section 50-40 of he ITAA 1997 such that the total ordinary and statutory income of Entity X is exempt under section 50-1 of the ITAA 1997, once Entity X has restructured its affairs into a new legal structure specifically by registering as a company limited by guarantee?

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

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Entity X is a not-for-profit business that was established for a specific purpose.

The principal activities of Entity X are to assist the interests of business members and contributors via representation and advocacy to Government and policy makers.

Entity X provides programs, information and support to both members and non-members, to ensure a diverse and robust business community. Entity X is committed to being the most trusted advocate for its members.

Entity X is able to achieve its aim through the provision of the services it offers.

Entity X is currently an unincorporated, registered Employer Association under the Fair Work (Registered Organisations) Act 2009 (Fair Work Act).

Entity X currently self-assesses its income tax exempt status under item 3.1 in section 50-15 of the ITAA 1997, as an employer association registered under the Fair Work Act.

Entity X is seriously contemplating restructuring its operations and transferring its operations to a new corporate structure, specifically:

•                     registering as an incorporated association, and

•                     subsequently registering as a company limited by guarantee.

(collectively, the Restructure)

The Restructure is being contemplated as a means of ensuring that Entity X is at all times represented by a Board that shares its vision. The current structure and the requirements of the Fair Work Act at times makes this difficult to achieve.

The services being offered currently by Entity X will be continued to be offered in the new structure.

Entity X is aware that once it is no longer registered as an Employer Association under the Fair Work Act it will no longer be able to self-assess its income tax exemption under section 3.1 in section 50-15 of the ITAA 1997.

As part of this proposed restructure, Entity X has amended and updated its Rules (the Proposed Rules) and Constitution (Amended Constitution).

It outlines its objects, not-for-profit clauses, membership and winding-up clauses.

Entity X is currently not and is not intending on being registered with the Australian Charities and Not-for- profits Commission) (ACNC).

Relevant legislative provisions

Income Tax Assessment Act 1997 section 50-1

Income Tax Assessment Act 1997 section 50-40

Income Tax Assessment Act 1997 section 50-47

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

Reasons for decision

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

Question 1

Summary

Entity X will satisfy the requirements under item 8.2 of the table in section 50-40 such that the total ordinary and statutory income of Entity X will be exempt under section 50-1 once Entity X has restructured its affairs into a new legal structure specifically by registering as an incorporated association.

Detailed reasoning

The ordinary and statutory income of an entity is exempt under section 50-1 where the entity falls within the following description contained in item 8.2 of section 50-40:

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

The exemption is subject to the special condition in item 8.2 of section 50-40, that the society or association is not carried on for the profit or gain of individual members.

Further, the exemption is subject to the special condition in section 50-47, that where an entity is covered by an exempt entity category but also meets the description of an 'ACNC type entity', it will not be exempt from income tax unless it is registered as a charity with the ACNC and endorsed by the ATO.

The matters to be satisfied before this exemption applies are:

•                     the entity is a non-profit association or society

•                     the dominant or principal purpose for which the entity is established is promoting resource development

•                     the resources whose development is being promoted are within the umbrella of resources specified in the relevant section

•                     the resources are resources of Australia, and

•                     the entity is not an 'ACNC type of entity'.

If the association fails to satisfy these requirements, its income will not be exempt under this provision.

Special condition - 'ACNC type of entity'

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

'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 2012. Column 1 of the table in subsection 25-5(5) of the ACNC Act 2012 describes a charity. The Charities Act 2013 provides a definition of 'charity' that applies to all Commonwealth laws.

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

Entity X is currently not and is not intending on being registered with the ACNC. Entity X is a not-for-profit entity. Entity X will remain a not-for-profit entity after it undergoes the proposed restructure into an incorporated association. Section 12 of the Charities Act 2013 lists charitable purposes. Entity X's purposes and objects in its Proposed Rules are not charitable purposes. Furthermore, one of Entity X's objects is to represent the interests of its members.

Therefore, Entity X will not be an 'ACNC type of entity' upon restructure and section 50-47 will not apply.

Society or association

The terms 'association' and 'society' are not defined and have their ordinary meaning. The Macquarie Dictionary 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).

Upon the restructure, Entity X will be registered as an incorporated association, which will have a formal structure. It will also have members and will be established for a defined purpose. Therefore, Entity X will meet the definition of society or association.

Non-profit

Section 50-40 requires that the association not be carried on for the purposes of profit or gain to its individual members. This is known as the non-profit requirement.

Evidence that an association operates on a non-profit basis can be found in its constituent documents which should contain a prohibition against distribution of profit and assets among members while the association is functioning, and on its winding up. The association's actions must also be consistent with this prohibition.

Entity X's Proposed Rules contains a suitable non-profit clause and a suitable winding up clause.

Entity X will be accepted as a non-profit association upon its restructure into an incorporated association.

Specified resources

Taxation Ruling No IT 2415 Income tax: associations promoting development of Australian resources (IT 2415) at paragraph 7 provides that the resources, the development of which is being promoted, must come within the umbrella of the specified resources in the table in section 50-40. The specified resources are not defined in the legislation and take on their ordinary meaning.

Resources or their elements include infrastructure, plant and equipment, livestock, personnel, knowledge, expertise and skills.

The Macquarie Dictionary defines agriculture as 'the cultivation of land, including crop-raising, forestry, stock-raising, etc.; farming'.

The terms 'manufacturing resources' and 'industrial resources' are discussed in Australian Insurance Association v FCT (1979) 10 ATR 333; 79 ATC 4569. It was determined that manufacturing resources extend to "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." Furthermore, it was held that "the term 'industrial resources' was intended to cover such resources as those of the building, mining, quarrying, shipping and other transport industries. It did not cover business or commercial resources".

The services being offered currently by Entity X will be continued to be offered in the new structure.

Entity X was established for a specific not-for-profit purpose. A clause in Entity X's Proposed Rules lists Entity X's industry focuses which are in line with item 8.2 of the table in section 50-40.

It is accepted that the resources Entity X will focus on upon its restructure are resources listed under item 8.2 of the table in section 50-40.

Australian resources

The words 'in Australia' limit the exemption to associations whose activities are directed to Australian resources. 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.

In Case U70 87 ATC 440, the associations' constituent documents included the words 'in Australia and elsewhere' in its purpose. The Tribunal found that expression 'and elsewhere' did not prevent exemption because in practical terms the principal activities were all concerned with Australia and not with 'elsewhere'.

Associations promoting trade between Australia and other countries may be exempt where it is clear that they are predominantly to promote Australia's resources. Such a conclusion will be assisted where the activities and membership are primarily Australian. For example, the Australian committee of an international trade society might be exempt where the membership was of Australian companies and it concentrated on the promotion of Australian resources. On the other hand an association established primarily to promote or facilitate investment by Australians in another country may not be developing Australia's resources, even though it may generate profits for Australia.

Entity X's Primary Purpose as listed under a in the Proposed Rules specifies a state of Australia.

The principal activities of Entity X are to assist the interests of an Australian state's business members and contributors via representation and advocacy to Government and policy makers. Entity X provides programs, information and support to both members and non-members, to ensure a diverse and robust business community in that state.

The services being offered currently by Entity X will be continued to be offered in the new structure.

Therefore, as Entity X's primary purpose and principal activities are focused and located in Australia, it is accepted that Entity X's activities are directed towards Australian resources.

Promotion of development

IT 2415 at paragraph 8 provides that the exemption does not apply to entities that merely promote one or more of the specified resources of Australia. An entity must instead be established for the purposes of 'promoting development' of those resources.

The term 'development' is used in section 50-40 in a commercial or business sense, meaning that it comprehends all the elements which must be taken into account to ensure the specified resources are used in the best interests of Australia. The promotion of development may be direct or indirect. For example, the development of agricultural resources might be directly promoted by research, experimental farms, control of pests, education in farming methods, or the introduction of new and improved classes of products. It might be indirectly promoted by improved marketing methods, cooperative buying and selling, solution of labour disputes, or ameliorative legislation.

The meaning of 'development' was examined by the High Court in FC of T v. Broken Hill Pty Co. Ltd 69 ATC 4028; 1 ATR 40 where, in considering the phrase 'development of mining property', the majority of the High Court accepted the interpretation of Kitto J:

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 that property...It covers I think, any preparation, adaptation or equipment of the property for the exploitation of an inherent potentiality which cannot be exploited or fully exploited, without some such preliminary treatment.

Furthermore, as the Tribunal pointed out in Case W49 at 89 ATC 474; 20 ATR 3602: 'The enlargement of the market is one of the objectives of "promoting the development" of any relevant industry.'

Development of resources can also be promoted by facilitating the cooperation of businesses and instrumentalities. In this regard, an entity of the type of Entity X may be considered a resource development organisation.

Entity X conducts various activities in pursuit of its objects to promote industry, trade and commerce and economic development in the specified state. Many of Entity X's activities are directed towards facilitating the cooperation of entities for the development of Australian resources.

Entity X is able to achieve its aim through the provision of the services it offers.

The services being offered currently by Entity X will be continued to be offered in the new structure.

Through these activities, Entity X promotes development by providing education and market information on its key industry focus areas in the specified state. It is accepted that Entity X promotes the development of Australian resources specified in section 50-40.

Dominant purpose

To be exempt under section 50-40, an association must be establishedprincipally or predominantly for the purpose of promoting resource development (Australian Insurance Association v FC of T 79 ATC 4569; 10 ATR 333; (1979) 41 FLR 256). It is not sufficient that one of the association's purposes falls within section 50-40. It is also not enough that resource development is incidental to, involved with, or the consequences of an association's purposes.

The term 'established' is not used in the narrow sense of considering only the motives and objectives which led to the formation of an association (Case W49 at 89 ATC 474; 20 ATR 3602-3). It is necessary to consider an association's constituent documents, and also its history, operations and activities (Boating Industries Association of New South Wales v F C of T at 85 ATC 4228-9; 16 ATR 388). As the Tribunal pointed out in Case W49 at ATC 474; 20 ATR 3603 it is necessary to consider:

'...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, determining the dominant purpose of the association will be a question of fact and degree and will involve a weighing of the various elements which includes its objects, activities, history, proposed directions, etc (Boating Industries Association of New South Wales v F C of T 85 ATC 4224; (1985) 16 ATR 383).

Consequently, it will be necessary to consider each association on the merits of its particular circumstances. Also, because those circumstances may change, an association's tax status may change over time.

Upon the restructure, the activities of Entity X will be carried out in line with its objects in its draft Constitution. As outlined above, the activities of Entity X are focussed on the development of Australian resources.

However, if an association operates principally to confer benefits on its members jointly or as a group, it is unlikely to be predominantly for the purpose of promoting resource development and thus not exempt under section 50-40.

As the following cases illustrate, 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 Commissioner of Taxation v Co-operative Bulk Handling Limited [2010] FCAFC 155, a majority of the Full Court stated that if as a consequence of pursuing the purposes of the association, the members derive a benefit or gain, that gain or benefit will not preclude exemption unless it is a gain produced only by reason of individual membership. In this case the members had to be customers of CBH. However, CBH's services were not restricted to members; non-members could also contract for CBH's bulk handling services. It was held that CBH made its facilities available to any grain trader or miller, whether or not they were members. Further, it was accepted that the benefits to members did not arise because they were members but because they were grain growers.

In contrast, in Case 46/94 94 ATC 412; (1994) 29 ATR 1102 at ATC 417; 29 ATR 1108 the Tribunal found, as an alternative ground, that the association was not exempt under 23(h) of the Income Tax Assessment Act 1936, because it was found to be principally for the promotion of the interests of its members. It operated to look after the needs of consulting surveyors in such matters as public liability insurance, professional development, training of employees, assuring quality client service, publishing business practice and technical material, and lobbying to obtain work for members particularly from government.

Features which may help determine whether an association's main purpose is to benefit members are integration with other organisations that are clearly established for resource development, encouragement of broad membership, substantial funding from government and participation in benefits by non-members.

Membership of Entity X is open to members of the general public. It is not limited to any specific group.

Entity X's activities are generally not restricted to members. Many of Entity X's events and training courses available online are open to members and non-members. It also offers consulting support, which is open to both members and non-members.

Entity X's other main activities do provide benefit to its members, but also to non-members.

Further, the dominant purpose of the activities is promoting the development of Australian resources and the benefits to members are merely received in the course of achieving this dominant purpose.

It is accepted that as the activities of Entity X will remain consistent upon the restructure, Entity X continues to be established predominantly for the purpose of promoting resource development.

Conclusion

It is accepted that upon the restructure, Entity X will not be carried on for the profit or gain of its individual members, will not be an 'ACNC type of entity', and is established for the purpose of the promotion of the development of Australian resources that come within the umbrella of specified Australian resources under the table in item 8.2 of section 50-40. Therefore, the ordinary and statutory income of Entity X will be exempt from income tax under section 50-1.

Question 2

Summary

Entity X will satisfy the requirements under item 8.2 of the table in section 50-40 such that the total ordinary and statutory income of Entity X will be exempt under section 50-1 once Entity X has restructured its affairs into a new legal structure specifically by registering as a company limited by guarantee.

Detailed reasoning

Entity X's objects, non-profit and winding up clauses, and clauses related to membership in the Amended Constitution are consistent with those in the Proposed Rules.

Entity X's activities and Principal Purpose will remain the same after it is registered as a company limited by guarantee.

It is accepted that when Entity X has restructured its affairs into a new legal structure specifically by registering as a company limited by guarantee, it will not be carried on for the profit or gain of its individual members, will not be an 'ACNC type of entity', and will be established for the purpose of the promotion of the development of Australian resources that come within the umbrella of specified Australian resources under item 8.2 of the table in section 50-40. Therefore, the ordinary and statutory income of Entity X will be exempt from income tax under section 50-1.