Edited version of private advice

Authorisation Number: 1052280906189

Date of advice: 31 July 2024

Ruling

Subject:Income tax exemption

Question

Is Company A 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 industrial and manufacturing resources pursuant to item 8.2(c) and item 8.2(d) respectively of the table in section 50-40 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 2025

Year ending 30 June 2026

Year ending 30 June 2027

Year ending 30 June 2028

Year ending 30 June 2029

The scheme commenced on:

1 July 2024

Relevant facts and circumstances

Company A is an incorporated company limited by guarantee that was established to carry out certain activities that were previously performed by a related entity.

Company A undertakes activities which promote the development of Australian industrial and manufacturing resources that fall within item 8.2(c) and item 8.2(d) of section 50-40 of the Income Tax Assessment Act 1997 (ITAA 1997).

The Constitution of Company A contains a rule that states the objects for which the entity is established is to promote industrial and manufacturing resources in Australia.

Constitution and Objects

A rule in the Constitution confirms not-for-profit commitment and provides income and property of Company A can only be applied towards the promotion of the objects.

Upon winding up any remaining surplus of Company A must not be paid or distributed amongst members and will be given to an entity which is:

• a not-for-profit organisation;
• required to pursue charitable purposes only;
• required to apply its profits (if any) or other income in promoting its objects similar to those of Company A; and
• prohibited from making any distribution to its members.

Governance Charter

Company A introduced a Governance Charter (the Charter) as an overarching statement of governance framework and policy to ensure that the decisions made by Company A and its Board are to further the stated objects of Company A.

The Charter provides, amongst other things, for the following matters:

•         responsibilities of the Board;

•         the appointment of Board members and the role expected to be played by independent non-executive Board members;

•         the establishment of Policy Forums.

The Charter also includes pro-forma terms of reference which will be used for each Policy Forum.

Board and governance structure

•         the Board will comprise up to a specified number of directors who are elected by the members and up to a specified number of directors who are appointed by the Board, provided that there is always a majority of member elected directors.

•         a Board appointed director must have the skills in the categories or fields specified by the Board from time to time and may be independent of the members.

•         Company A may only exercise its powers to carry out the objects.

•         in consenting to their appointment, each Director agrees to comply at all times with this Constitution, the Policies, procedures and other regulations of Company A and the confidentiality obligations.

The activities of Company A fall into two categories:

•         policy advocacy; and

•         services to improve industry competitiveness.

Policy advocacy

The policy and advocacy activities of Company A are focused on the development of industrial resources in Australia. The activities of Company A will not be focused on a particular industry or sector but will instead deliver benefits and services across a diverse range of industries.

Company A provided a list of various industries and sectors it supports along with examples of policy and advocacy activities it has undertaken and various activities and services it provides to improve industry competitiveness.

Income

Company A anticipates that it will generate income primarily from:

•         subsidised programs;

•         fees for services; and

•         membership fees.

Membership

You state:

•         any organisation, firm, corporation, company or person is eligible for membership of Company A;

•         there is no limit on the number of members of Company A;

•         existing members of Company A are required to renew their memberships annually and to pay membership subscription fees on an annual basis;

•         new members who join Company A can choose to also become members of a related entity if they require access to Fair Work related services;

•         membership applications will be assessed pursuant to rules of the Constitution of Company A;

•         the same level of service is available to all eligible entities regardless of their membership status.

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 50-40 item 8.2(c)

Income Tax Assessment Act 1997 section 50-40 item 8.2(d)

Income Tax Assessment Act 1997 section 50-47

Income Tax Assessment Act 1997 section 995-1

Australian Charities and Non-for-profits Commission Act 2012 section 25-5

Charities Act 2013 section 12

Reasons for decision

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

Summary

Company A is considered an association established for the purpose of promoting the development of industrial and manufacturing resources of Australia pursuant to items 8.2(c) and 8.2(d) of the table in section 50-40. Company A's object and activities under its constitution also show that it does not operate principally for the benefit of its members jointly or as a group. Therefore, its ordinary and statutory income is exempt from tax under section 50-1.

Detailed reasoning

Section 50-1 states:

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

The tables referred to in section 50-1 are contained in sections 50-5 to 50-45. A society or association established for the purpose of promoting the development of Australian industrial or manufacturing resources are listed at items 8.2(c) and 8.2(d) in the table in section 50-40. The society or association must meet the special conditions detailed at item 8.2 in the table in section 50-40, namely it not being carried on for the profit or gain of its individual members.

Further, the exemption is subject to the special condition in section 50-47 of the ITAA 1997, 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.

Accordingly, to be exempt from income tax under items 8.2(c) and 8.2(d) of the table in section 50-4 the entity must:

•         be a society or association,

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

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

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

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

Society or Association

One of the requirements of section 50-40 is that the entity be a society or association.

The terms "society" or "association" are not defined in the ITAA 1997. The terms are therefore construed according to the ordinary meaning of the words.

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 the terms. The 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 (at 4726).

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)...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'...

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...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 the 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 as described above, emphasises a 'body of persons' and 'an organisation of people' with a 'common purpose'.

Application to your circumstances

Company A is registered with the Australian Securities and Investments Commission (ASIC) as an Australian Public Company limited by guarantee. Company A is managed by its board and is governed by the rules in the Constitution and Charter. The Constitution of Company A states that the number of members is unlimited and work towards a common goal as expressed in their Constitution.

In applying the definition, Company A is considered to be an 'association' or 'society' for the purpose of section 50-40.

This condition is therefore satisfied.

Established for the purpose of promoting the development of Australian resources - principal or dominant purpose - industrial and manufacturing resources

Company A is seeking income tax exemption on the basis that it is established for the purpose of promoting the development of industrial and manufacturing resources as listed under items 8.2(c) and 8.2(d) respectively of the table in section 50-40.

The use of the word "Australian" applied to resources in section 50-40 limits the exemption to associations whose activities are directed towards Australian resources.

Section 50-40 is directed to 'promoting the development' of the specified resources and requires that the association be established principally or predominantly for the purpose of resource development.

It is not sufficient that promoting the development of the resource(s) may be a consequence of or incidental to, involved with, or a consequence of an association's purposes.

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 include its objects, activities, history, proposed directions, etc. 'Established' refers not only to the motives and objectives which lead to the formation of the association but also to its purpose since that time.

Taxation Ruling IT 2415 Income tax: associations promoting development of Australian resources (IT 2415) states at paragraphs 7 and 8:

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.

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 interest of Australia. Reference might usefully be made to the observations of the High Court in F.C. of T. 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.

IT 2415 states that section 50-40 does not refer to the promotion of the specified resource. It is directed to the promotion of the development of the specified resource.

The purpose must be primary and dominant purpose, to satisfy section 50-40.

The Income Tax Guide for Non Profit Organisations (ITGNPO) on page 22 regarding methods of promotion states:

Promoting development can be by various means, including research, providing facilities, training, improving marketing methods, facilitating cooperation and similar activities.

The Constitution of Company A contains a rule that states the objects for which the entity is established is to promote the industrial and manufacturing resources in Australia.

It is accepted that Company A's objects provide for the purpose of the promotion of mainly the development of Australian industrial and manufacturing under items 8.2(c) and 8.2(d) of section 50-40 and the promotion of the development of resources that come within the umbrella of specified Australian resources under item 8.2 under section 50-40.

Company A's activities will service across a diverse range of industries and sectors. Company A undertakes various policy and advocacy activities and provides various services to improve industry competitiveness.

It is considered that Company A, is established for the predominant purpose of the promotion of the development of the Australian industrial and manufacturing resources (by falling within the ambit of IT 2415).

The available facts support the promotion of industries and therefore the promotion of the development of Australian industrial and manufacturing resources.

Based on the objects, purpose and activities of Company A under its constituent documents and the supporting information provided above, it is therefore considered that Company A's purpose is considered to be established to promote the development of specified Australian resources, in this case, the industrial and manufacturing resources related to the Australian industry.

Special Conditions

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

The exemption under item 8.2 of section 50-40 is also subject to the special condition that the entity is "not carried on for the purposes of profit or gain of its individual members". An association or society will fail the non-profit test if the members, in their individual capacity, are to receive any benefits.

If an association operates principally to confer benefits on its members jointly or as a group, its predominant purpose may not be considered to be promoting resource development and thus not exempt under section 50-40.

The Commissioner considers that to qualify, the entity must be prevented by law or its constitution documents from distributing its profits or assets among members, either while the entity is functional or on its winding up, and it must act consistently with those restrictions. Paragraph 23 of the Taxation Ruling TR 97/22 - Income tax: exempt sporting club (TR 97/22) states that:

Where the law or the constituent documents do not prohibit distributions, it is a question of fact in each case as to whether the club is not carried on for purposes of profit or gain to the individual members. Factors that we consider relevant include whether distributions have been made, whether there is a stated or demonstrated policy to make or not to make such distributions and whether winding-up is contemplated. Where it is clear from the objects, policy statements, history, activities and proposed future directions of the club that there will be no distributions to members, we accept that the non-profit test has been satisfied.

The relevant rule in the Constitution considers distribution of income and profits whilst the entity is in operation.

The relevant rule of the Constitution considers distribution of profits in the event of the entities' dissolution.

It is accepted that these rules meet the requirement that constituent documents display a non-profit character.

Company A contains non-profit and dissolution rules in its Constitution which prevents Company A from distributing its profits and assets among members while it is operating and on winding up.

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

Therefore, it is accepted that Company A operates on a non-profit basis and does not make any distributions to its members and therefore meets the non-profit test.

Special conditions

Section 50-47

Section 50-47 provides a special condition for all entities covered by section 50-1, 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.

'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.

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

Application to your circumstances

Company A's purpose is a non-charitable purpose. As such, Company A is not capable of being a registered charity and is not an ACNC type of entity.

Section 50-47 does not apply to Company A.

Conclusion

It is considered that Company A meets the requirements for tax exempt status under items 8.2(c) and 8.2(d) of the table in section 50-40 as an association promoting the development of an Australian industrial and manufacturing resources. Therefore, the ordinary and statutory income of Company A will be exempt under section 50-1.