Edited version of private advice

Authorisation Number: 1052331278527

Date of advice: 20 January 2025

Ruling

Subject: Income tax exemption

Question 1

If the Company implements the commercialisation arrangements, will it be entitled to still be endorsed as income tax exempt under section 50-110 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

Yes.

This ruling applies for the following periods:

1 July 20XX to 30 June 20XX

The scheme commences on:

1 July 2022

Relevant facts and circumstances

The Company is an Australian public company limited by guarantee and registered with the Australian Securities and Investments Commission (ASIC).

The Company was established to address certain environmental-related challenges The Company conducts research with the aim of developing new technologies that will continue into the future.

The Company was endorsed as a charity with the Australian Charities and Not-for-Profits Commission as a charity for the following charitable purposes:

•                     advancing education

•                     advancing health

•                     advancing the nature environment; and

•                     purposes beneficial to the general public that may reasonably be regarded as analogous to, or within the spirit of, any of the charitable purposes.

The Company's constitution states its objects and activities. The Company's constitution prevents the distribution of income and profits to members during its operation and also applies this prohibition to surplus assets remaining upon winding up.

The Company may, as part of carrying out its objects, create intellectual property (IP). An agreement exists that specifically deals with the ownership, vesting and use of IP. Under the Agreement legal interest in IP is owned by the Company. The use of IP through commercialisation projects will be subject to arm's length commercial terms.

The Parties have entered into an Agreement with the Company. This agreement includes principles and regulates the activities that are to be conducted by the Company. It sets out the obligations of the Parties, and details how the contributions of the Parties are dealt with.

Any money derived by the Company from the commercialisation of IP is to be reinvested by the Company in the activities of the entity in order to achieve stated objectives.

Assumptions

In the current income year and for the balance of the remaining period of the research project, the Company will review and continue to satisfy the eligibility requirements under which the income tax exemption is granted and ensure that they are monitored as part of the company's continuing compliance reporting requirements.

All governing documents, as they are relevant to the continuing operating objectives and activities of the Company and which support the company's continued compliance with the requirements of section 50-110 of the ITAA 1997, remain unchanged from the date that the income tax private ruling application was lodged.

There are no changes to the prescribed purpose, objects or activities of the Company since the income tax private ruling application.

There are no changes to the procedures and authorities arising from the winding up of the Company since the private ruling request.

There are no changes to the other document that is attached to the Agreement that sets out the principles for the use and management, including commercialisation, of Activity Material.

There are no changes to the ownership, use of, vesting or commercialisation of the IP since the private ruling request.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 30-15

Income Tax Assessment Act 1997 section 30-20

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 50-50

Income Tax Assessment Act 1997 section 50-52

Income Tax Assessment Act 1997 section 50-110

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

Reasons for decision

Summary

The implementation of the commercialisation arrangements does not prevent the Company from satisfying the requirements to still be endorsed as exempt from income tax under section 50-110 of the ITAA 1997.

Detailed reasoning

Endorsement as an income tax exempt charity

An entity is entitled to be endorsed pursuant to section 50-110 of the ITAA 1997 as an income tax exempt charity if it:

•                     has an ABN

•                     is covered by item 1.1 of the table in section 50-5 of the ITAA 1997

•                     satisfies section 50-47, and

•                     satisfies the special conditions in sections 50-50 and 50-52 of the ITAA 1997.

The condition in section 50-52 of the ITAA 1997 is not a relevant condition (subsection 50-110(6) of the ITAA 1997).

Section 50-1 of the ITAA 1997 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.

(as defined in subsection 995-1(1) of the ITAA 1997)

The tables referred to in section 50-1 of the ITAA 1997 are contained in sections 50-5 to 50-45 of the ITAA 1997. A registered charity is listed at item 1.1 in the table in section 50-5 of the ITAA 1997. The registered charity must meet the special conditions in sections 50-50, 50-52, and 50-47 of the ITAA 1997.

The Company has an ABN. As the Company is currently registered as a charity with the ACNC it is covered by the item 1.1 'registered charity' in the table under section 50-5 of the ITAA 1997.

Special conditions for registered charity

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 (ACNC Act).

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 a 'charitable purpose', and includes purposes such as advancing education and advancing health.

Application to these circumstances

The Company's objects indicate that it has charitable purposes, it is an ACNC type of entity. It is registered under the ACNC Act.

Section 50-47 of the ITAA 1997 applies to the Company. The Company satisfies the special condition in section 50-47 of the ITAA 1997.

A registered charity in section 50-5 of the ITAA 1997 must also comply with the special conditions in sections 50-50 and 50-52 of the ITAA 1997.

Sections 50-50 and 50-52 of the ITAA 1997

Has a physical presence in Australia and, to that extent it pursues its objectives and incurs its expenditure principally in Australia

Subsection 50-50(1) of the ITAA 1997 will be met by the Company if it has a physical presence in Australia, and to that extent incurs its expenditure and pursues its objects principally in Australia, or is a Deductible Gift Recipient (DGR) under item 1 in the table in section 30-15 of the ITAA 1997.

Taxation Ruling TR 2019/6 Income tax: the 'in Australia' requirement for certain deductible gift recipients and income tax exempt entities gives the Commissioner's view for certain conditions. Paragraph 53 of TR 2019/6 says that 'an entity has a physical presence in a place where it employs assets or people to conduct its range of physical operations'.

The Company is a resident of, and is located in, Australia. The Company carries on its activities in Australia. It pursues its objectives and incurs its expenditure in Australia and satisfies this requirement.

The Company is currently endorsed as an item 1 DGR, in the table under section 30-15, as a charity for charitable purposes under subsection 30-20(1) in Subdivision 30-B. The Company meets the special condition in subsection 50-50(1) by virtue of being a DGR.

Complies with substantive requirements in its governing rules and applies its income and assets for its purpose

Subsection 50-50(2) of the ITAA 1997 provides that the Company 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.

Taxation Ruling TR 2015/1 Income tax: special conditions for various entities whose ordinary and statutory income is exempt provides guidance in respect of the conditions in subsection 50-70(2) of the ITAA 1997. Paragraph 9 of TR 2015/1 provides that an entity's 'governing rules' are those rules that authorise the policy, actions and affairs of the entity. Paragraphs 18 and 19 of TR 2015/1 explain that the substantive requirements in an entity's governing rules are those rules that define the rights and duties of the entity and include rules such as those that:

•                     give effect to the object or purpose of the entity

•                     relate to the non-profit status of the entity

•                     set out the powers and duties of directors and officers of the entity

•                     require financial statements to be prepared and retained

•                     set out the criteria for admission as a member of an entity

•                     require an entity to maintain a register of members, and

•                     relate to the winding-up of the entity.

Paragraph 33 of TR 2015/1 states that:

The income and assets condition requires an entity to apply its income and assets 'solely' for the purpose for which the entity is established. This means that the entity must exclusively or only apply its income and assets for that purpose.

Taxation Ruling TR 2011/4 Income tax and fringe benefits tax: charities sets out the Commissioner's view on the meaning of 'charitable' and 'charitable institution'. The following paragraphs state, in relation to benefits for members:

49.  An institution set up to advance the interests of its members in their capacity as members cannot be charitable as it cannot satisfy the public benefit requirement. The members of such institutions do not, as members, constitute a section of the public in the relevant sense, and the benefits derived by the members are, as a result, private in nature.

50.  However, an institution that benefits its members can still be charitable if:

•                     the member benefits are simply incidental or ancillary to the purpose of benefiting the community; or

•                     the institution is an open and non-discriminatory self-help group that is deemed to have a purpose that is for the public benefit under the Extension of Charitable Purpose Act 2004.

Ownership of intellectual property and commercialisation

The Agreement regulates the activities, the obligations of the parties, and how contributions by the Parties are to be dealt with. The Agreement provides for the ownership of intellectual property and the commercialisation of such property by the Parties. Under that clause the Company holds legal interest in the Project IP. All right, title and interest in Other IP is assigned to the Company by the Parties.

The other document attached to the agreement outlines the rules for the use and management, including commercialisation, of the Activity Material. The Company has to commercialise the Activity Material in line with it.

The Company aims to put the Activity Material in the hands of companies and research institutions that would be best to develop and commercialise it. Assignment or licencing of the Activity Material to the organisation(s) that is leading the commercialisation will occur during the life of the Project, or shortly after its conclusion.

The Company will generally only consider covering some initial costs as part of the Projects under which it is being developed.

Any money derived by the Company from the commercialisation of it is to be reinvested by the Company in the research and development activities of the centre in order to achieve the Company's objectives as directed by the Agreement.

Given that any licencing or assignment of the use of the Activity Material to a member of the Company will be subject to arm's length commercial terms, with no standalone commercial value, any benefits to members derived by way of the commercialisation arrangements are considered incidental to the overall purpose of promoting the development of the Activity Material, and not a purpose in itself.

The Company's constitution contains acceptable clauses showing its non-profit character. Benefits to parties in the form of ownership of intellectual property or commercialisation of intellectual property resulting from the research project is considered an incidental benefit and does not prevent the Company from having a non-profit character. Based on the information provide it is concluded that the Company meets the requirement that it is not carried on for the profit and gain of its individual members.

Application to these circumstances

The Constitution includes clauses that prohibit the distribution of income and assets to its members or on winding up of the association.

The commercialisation arrangements have been set in place to assist in further developing the project and the Activity Material. There may be some benefit to the members of the Company from the commercialisation of the Activity Material but the main benefit will be to the community in general.

Based on the supporting evidence, the above analysis, and subject to the assumptions, the Company applies and will comply with the substantive requirements of its governing rules and apply its income and assets solely for the purpose for which it was established.

Section 50-52 of the ITAA 1997 states that an entity covered by item 1.1 in section 50-5 of the ITAA 1997 is not exempt from income tax unless it is endorsed as exempt under Subdivision 50-B.

As the Company is currently registered as a charity with the ACNC it satisfies section 50-52 of the ITAA 1997.

Conclusion

It is accepted that the research and educational activities conducted by the Company are of benefit to the Australian community.

On the facts provided, the Company will continue to be endorsed as an income tax exempt entity pursuant to section 50-110 of the ITAA 1997 provided it maintains the charity registration with the ACNC, keeps an ABN, and continues to meet the requirements of sections 50-47, 50-50, and 50-52 of the ITAA 1997. Further, as long as it continues to meet the assumptions until the end of the period, the implementation of the commercialisation arrangements for the Activity Material will not prevent this.