Edited version of private advice

Authorisation Number: 4110076928667

Date of advice: 6 December 2019

Ruling

Subject: Income tax exemption

Question

Is the entity 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 an industrial resource of Australian under item 8.2(d) of section 50-40 of the ITAA 1997?

Answer

Yes

This ruling applies for the following periods:

Years ended 30 June 2011 to 30 June 2025

The scheme commences on:

1 July 2010

Relevant facts and circumstances

1. The entity is a company limited by guarantee.

2. The entity's objects as stated in its governing document are to promote the development of manufacturing resources in Australia.

3. The entity undertakes activities in accordance with its objects.

4. The entity has appropriate not-for-profit income and property and winding up clauses in its constitution.

5. The entity provides different levels of membership.

Relevant legislative provisions

Charities Act 2013 Section 5

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 Section 995 (1)

Australian Charities and Not-for profits Commission Act 2012 Section 25-5 (5)

Reasons for decision

Summary

The total ordinary income and statutory income of the entity is exempt from income tax pursuant to section 50-1 of ITAA 1997 as it is an association established for the promotion of the development of manufacturing resources of Australia, pursuant to item 8.2 (d) of section 50-40 of the ITAA 1997. The entity's dominant purpose is the promotion of the development of an Australian resource.

Detailed reasoning

Section 50-1 of the ITAA 1997 provides that the ordinary income and statutory income of certain entities is exempt from income tax. Item 8.2 (d) of section 50-40 of the ITAA 1997 provides that a society or association established for the purpose of promoting the development of Australian manufacturing resources shall be exempt from income tax subject to the special condition that it is not carried on for the profit or gain of its individual members.

Accordingly, to be an exempt entity described in item 8.2 of section 50-40 of the ITAA 1997:

·        The entity is a non-profit society or association; and

·        The dominant or principal purpose for which the entity is established is promoting resource development; and

·        The resources whose development is being promoted are manufacturing resources; and

·        The resources are resources of Australia

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

Society or association

One of the requirements of section 50-40 of the ITAA 1997 is that the entity is a society or an association.

The words 'society' and 'association' are not defined in the ITAA1997 and therefore take their ordinary meaning.

Guidance on the terms 'society' and 'association' can be found in Pro-camp Ltd. V. Commr of Land Tax (NSW) 81 ATC 4270; (1981) 12 ATR 26. In that case the court made the following comments on the meaning of society and association (at 4279):

In Theosophical Foundation Pty Ltd v. Commr of Land Tax (NSW) [1996] 67 SR (NSW)... Suherman JA stand 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' (Oxford English Dictionary, 'Society'...

The meaning of "society" as the Oxford 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... In short the...words are describing bodies made up of groups of persons who have come together to implement common purposes and objects...

The interpretations of 'society' and 'association' as described above emphasise a 'body of persons' and 'an organisations of people' with a 'common purpose'. The entity is a public company limited by guarantee. It is an organisation of people with a formal structure, formed to pursue a common purpose as stated in the entity's constitution. The entity is a society or association.

Resources of Australia

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.

It is considered that this requirement is satisfied.

To meet the requirements of Section 50-40 of the ITAA 1997, an entity must be established for the purpose of promoting the development of specific resources. Of the items listed under Section 50-40 item 8.2(d) is relevant to the entity.

Manufacturing Resource item 8.2 (d) of section 50-40

The term 'manufacturing resource' is not defined in the legislation. It takes its ordinary meaning.

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': Australian Insurance Association at 79 ATC 4574; 10 ATR 339.

This requirement is met.

Established principally or predominantly for the purpose of promoting the development of specified Australian resources

Item 8.2 of the table in section 50-40 of the ITAA 1997 is directed to the promotion of the development of the specified resources. The term 'development' is used in a commercial or business sense. It comprehends all the elements which must be taken into account to ensure that the resources are best used (as discussed in paragraph 8 of Taxation Ruling IT 2415 Income Tax: associations promoting development of Australian resources).

The promotion of development may be direct or indirect. Methods of promoting development can be by various means, including research, providing facilities, training, improving marketing methods, facilitating cooperation and similar activities.

In Co-operative Bulk handling Ltd v Federal Commissioner of Taxation 2010 ATC 20-183, 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 Service 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 bring 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)

It is not sufficient that one of an Association's purposes falls within section 50-40 of the ITAA 1997. Nor is it enough that resource development is incidental to, involved with or a consequence of an Association's purposes. The Association must be established for the required purposes. The term 'established' is not used in a narrow sense. It is necessary to consider an Association's constituent documents, operations and activities.

Not all activities connected with a resource will necessarily be for its development. For example, the improvement of marketing will ground an exemption only where it is undertaken as a means of promoting development of the particular resources. If the marketing or other purported means is not sufficiently connected or integrated with resource development, it will not be for the purpose of promoting development of those resources. It is not enough that a consequence of the activities may be resource development.

The entity has been established for the purpose of promoting manufacturing resources in Australia.

Benefits to members

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.

In Case 46/94 at 94 ATC 417; 29 ATR 1108 the tribunal found, as an alternative ground, that the association was not exempt under 23(h) because it was principally to promote the interests of its members. It operated to look after the needs of consulting surveyors through such activities 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.

In Australia Insurance Association v. Federal Commissioner of Taxation (1979) 10 ATR 333 (1979) 41 FLR 256, the Association comprised the majority of general insurance companies carrying on business in Australia. At issue was inter alia, whether it primarily promoted the interests of its members, or whether the benefits to members were incidental to the purpose of being established to develop a particular resource. Sheppard J in concluding said, at ATC 4572:

In my opinion the difference between the parties in the way that each views the evidence is one of emphasis. The very nature of the appellant's undertaking is such that it must further the more selfish interests of its members by engaging in the various activities which it does. But that, in my opinion, is a consequence of what it does and in any event itself leads to a situation pursuant to which the appellant's endeavours do have the overall effect of promotion the protection and furthermore of Australian Insurance business.

An organisation must be able to demonstrate that it has a predominant purpose of promoting resource development of the resource rather than the interests of its own members.

Promoting Development Conclusion

The main activities are undertaken by the entity is to promote the development of Australian resources. The entity does have the predominant purpose of promoting the development of manufacturing resources in Australia. This requirement is met.

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

In Federal Commissioner of Taxation v Co-operative Bulk Handling Ltd (Supra) Mansfield and McKerracher JJ stated the following about the meaning of 'not 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 to the body to disburse any profits or dividends to members. (at paragraph 95)

The entity's governing documents prohibit it from applying its assets for the benefit of individuals while it operated and on winding-up.

We accept that the entity is not carried on for the profit or gain of its individual members.

ACNC type entity condition

Section 50-47 of the ITAA 1997 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 type of entity' is defined in subsection 995-1 (1) of the ITAA 1997 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 Australian Charities and Not-for profits Commission Act 2012. Column 1 of the table in subsection 25-5(5) of the Australian Charities and Not-for-profits Commission Act 2012 describes a charity. The Charities Act 2013 provides a definition of "charity" that applies to all Commonwealth laws.

The definition of 'charity' in 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 of which are disqualifying purposes; and

(d)   That is not an individual, a political party or a government entity

It has been concluded that the entity is a not-for-profit entity. Charitable purposes are listed in section 12 of the Charities Act 2013. It has also been concluded that the entity's purpose is to promote the development of manufacturing resources. This will not qualify as one of the charitable purposes listed and the entity will not be an 'ACNC type of entity'.

Accordingly, section 50-47 of the ITAA 1997 will not apply to the entity.

Conclusion

A review of the entity's application and supporting documents demonstrates that the entity is a non-profit association which has been established principally or predominantly for the purpose of promoting development of Australian manufacturing resources. It therefore qualifies for income tax exemption under section 50-1 of the ITAA 1997 as an association established for the purpose of promoting the development of an Australian resource under section 50-40 of the ITAA 1997.

ATO view documents

Taxation Ruling IT 2415

Other references (non ATO view, such as court cases)

Australian Insurance Association v. Federal Commissioner of Taxation (1979) 10 ATR 333 41 FLR 256

Australian Insurance Association v. Federal Commissioner of Taxation (1979) 10 ATR 333 339

Case 46/94 at 94 ATC 417:29 ATR 1108

Co-operative Bullk Handling Ltd v Federal Commissioner of Taxation (2010) ATC 20-183

Federal Commissioner of Taxation v Broken Hill Proprietary Company (1969) 120 CLR 240

Pro-campo Ltd v Commr of Land Tax (NSW) 81 ATC 4270 (1981) 12 ATR 26