Edited version of private advice

Authorisation Number: 1052265928245

Date of advice: 2 July 2024

Ruling

Subject: Australian manufacturing resources - income tax exemption

Question

Is the Company exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as an association established for the purpose of promoting the development of Australian manufacturing resources pursuant to item 8.2(d) of the table in section 50-40 of the ITAA 1997?

Answer

Yes

This ruling applies for the following periods:

Income tax year ending 30 June 20XX

Income tax year ending 30 June 20XX

Income tax year ending 30 June 20XX

Income tax year ending 30 June 20XX

Income tax year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Background and History

1.     The Company is a public company limited by guarantee and was incorporated in 19XX.

2.     The Company is a peak industry association for an Australian manufacturing industry.

3.     The Company is a result of a merger of two other industry associations.

4.     The Company is not registered with the ACNC.

Company's Constitution

5. The objects of the Company are set out under the Constitution. The objects clause of the Constitution contains industry based objects. This clause also contains some non-industry-based objects, for example, to pursue charitable purposes.
6. The Company's Constitution has the appropriate non-profit and winding up clauses.

Membership

8. The term 'Members' is defined in the Constitution to mean a person whose name is entered in the Register of Members as a member.
9. The Constitution provides classes of membership and includes persons, businesses, companies or organisations that are employers in this manufacturing industry.

Activities

10. The Company's main activity is the provision of trade training services that support the Australian manufacturing industry to both Members and non-members, apprentices and businesses.
11. The Company regularly consults with industry to develop and maintain relevant training programs.
12. The Company provides trade training services to both Members and non-Members.
13. The Company also provides various support services to promote the Australian manufacturing industry, including mentoring services to apprentices and representing the industry on various committee.

Members Support

14. The Company also provides the following services to its Members through different levels of paid membership such as advice on Australian technical standards and work health and safety. It also provides its members minor benefits such as networking opportunities.

Personnel

15. The Company currently employs personnel in positions including trade training apprentices, student liaison officers, admissions and other business management functions including marketing, human resources and business development.

Strategic Plan

16. The Company's strategic priorities include growing member numbers; pursuing mergers; expanding training nationally; developing premium membership model; enhancing consumer related content; enhance links with related associations; implementing programs; undertaking review for succession planning and diversification of income sources.

Financials

17. The Company derives its income from training income, grants income and memberships.
18. The majority of its training services income is from State Government contracts.
19. The financial statements for the income year ended 30 June 20XX show the Company receiving $XXXX in grant funding to assist with delivering of trade training.
20. The Company also received monies from Membership Services Income and Membership Renewals.

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

Subsection 25-5(5) of the Australian Charities and Not-for-profits Commission Act 2012

Reasons for decision

The Company is a society or association established for the purpose of promoting the development of Australian manufacturing resources, and is an exempt entity under item 8.2(d) of the table in section 50-40 of the ITAA 1997.

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

Detailed reasoning

Section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) provides:

The total ordinary income and statutory income of the entities covered by the following tables in Division 50 of the ITAA 1997 is exempt from income tax. In some cases, the exemption is subject to special conditions.

Item 8.2(d) in the table of section 50-40 of the ITAA 1997 provides that an entity is an exempt entity if it is a society, association or club established for the development of Australian manufacturing resources.

The exemption is subject to a special condition that the entity is not carried on for the profit or gain of its individual members.

Additionally, the exemption is subject to section 50-47 of the ITAA 1997 (see Note 3 to section 50-1). Section 50-47 requires that an entity covered by any of the tables in Division 50 and is an ACNC type of entity is not exempt unless the entity is registered under the Australian Charities and Not-for-profits Commission Act 2012 (ACNC Act).

Accordingly, to be exempt from income tax under item 8.2(d) of the table in section 50-40, an entity must:

•         be a society, association or club;

•         be established for the purpose of promoting the development of Australian manufacturing resources;

•         not carried on for the profit or gain of its individual members; and

•         not be an ACNC type of entity; or if it is an ACNC type of entity, it is registered under the ACNC Act.

Each of the above requirements are discussed below.

Society or association

The terms 'association' and 'society' are not defined in the income tax provisions and therefore take on their ordinary meaning.

In Douglas v. Federal Commissioner of Taxation 97 ATC 4722 reference was made by the court to the definitions contained in the Concise Oxford Dictionary for each of these terms. 'Society or association' was accepted by the court as referring to a voluntary organisation having members associated together for a common or shared purpose.

In Pro-campo Ltd. v. Commr of Land Tax (NSW) 81 ATC 4270 the court considered the meaning of 'society, club or association'. The court stated at 4279:

In Theosophical Foundation Pty Ltd v. Commr of Land Tax (NSW) [1966] 67 SR (NSW)...Sugarman 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'...

The meaning of "society" as the Oxford English Dictionary 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...Although clubs can in some respects and in some instances be seen to be distinguishable by reason of their purposes from societies or associations, they nevertheless fall squarely within the dictionary definition of "society" set out above. In short three words are describing bodies made up of groups of persons who have come together to implement common purposes and objects...

The meaning of 'society or association' emphasise a 'body of persons' and an 'organisation of people' with a 'common purpose'.

The Company is established under a constitution for the common purpose of its members. Therefore, the Company is a society, association or club.

Australian Manufacturing resources

Resources or their elements include infrastructure, plant and equipment, livestock, personnel, knowledge, expertise and skills. An industry's businesses and their assets may be resources.

Manufacturing resources include plant and equipment, manpower, skill and know-how in manufacturing such as steel products, clothing and furniture, and such non-tangible commodities as gas and electricity (Australian Insurance Association v Federal Commissioner of Taxation 79 ATC 4569 at 4574).

The words 'of Australia' limit the exemption to associations whose activities are directed to Australian resources, thereby excluding associations whose activities are directed to the resources of places beyond Australia. 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.

The Company is a peak industry body for the Australian manufacturing industry. The Company provides training, mentoring and advice for the Australian manufacturing industry and represents these industries in various industry forums in Australia. Training offered by the Company leads to nationally recognised qualifications. The knowledge, expertise, skills and personnel within the Australian manufacturing industry are manufacturing resources of Australia.

The Company is concerned with the manufacture of Australian resources and is promoting manufacturing resources of Australia.

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.

The enlargement of the market is one of the objectives of promoting the development of any relevant industry (Case W49 89 ATC 469 at 474).

Taxation Ruling IT 2415 Income Tax: Associations promoting development of Australian resources (IT 2415) states the following on the meaning of 'established for the purpose of promoting development':

7.   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.

8.   There can be little doubt that the identification of, and programmes to overcome, manpower needs and the establishment of systematic training schemes in a particular industry are necessary for the efficient operation of the industry - they are part and parcel of the development of the resources specified in paragraph 23(h). Although the connection may not be as readily apparent the development of marketing techniques may also be relevant to the development of resources - it could be said that there is little point in developing resources if the products of the resources cannot be sold...

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 s50-40 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 section 23(h), a predecessor of s50-40, 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).

If an association operates principally to confer benefits on its members jointly or as a group, it is unlikely to be predominantly for promoting resource development and thus not exempt under section 50-40 of the ITAA 1997.

The objects and activities of the Company show its main purpose is to develop the Australian manufacturing industry through training. The Company is a registered training organisation offering nationally recognised qualifications to apprentices and businesses in those industries. The Company also provides advice and information services for Members and non-members, and represents the Australian manufacturing industry in Australia.

The Company is concerned with education and training of the Australian manufacturing industry and is ensuring that these manufacturing resources are used in the best interest of Australia.

Members of the Company do benefit from the operations of the Company through its activities. However, the Company exists to benefit the industry as a whole and any benefits the Company members receive are considered incidental or ancillary to its main purpose of promoting the development of those resources.

Accordingly, it is accepted that the Company is promoting the development of Australian manufacturing resources.

Not to 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 to 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 a 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 Company's constitution prohibits it from applying its income and property for the benefit of individuals while it operates and on winding-up.

There is no evidence that the Company acts contrary to this prohibition.

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 sets out the requirements to be a charity. Section 12 of the Charities Act provides purposes that are a 'charitable purpose' and includes purposes such as advancing education and advancing health.

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

The Company is a society or association established for the purpose of promoting the development of Australian manufacturing resources, and is an exempt entity under item 8.2(d) of the table in section 50-40 of the ITAA 1997.

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