Private ruling: Income Tax Exemption as a Scientific Institution
Date of advice: 14 December 2015
Published: February 2016
Ruling period: 1 July 20XX to 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is the entity a scientific institution under item 1.3 of the table in section 50-5 of the Income Tax Assessment Act 1997 (ITAA 1997) meaning that the ordinary income and statutory income of the entity is exempt from income tax under section 50-1 of the ITAA 1997? | A1: Yes

Relevant facts and circumstances: The entity is a company limited by guarantee and governed by the Constitution of the entity. The object of the entity is to operate as a not for profit scientific organisation which will engage in collaborative research with the assistance different funding bodies. The entity is prohibited from applying surplus assets to the benefit of members. Any surplus assets remaining following the winding up of the company will be transferred to another body corporate, which is required to pursue similar objectives. The entity has secured funding to support research and development.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 50-1 | Income Tax Assessment Act 1997 section 50-5 | Income Tax Assessment Act 1997 section 50-55

Reasons for decision: Summary: Section 50-1 of the ITAA 1997 provides the total ordinary income and statutory income of entities covered in section 50-5 is exempt from income tax. Section 50-5 of the ITAA 1997 lists the charitable, educational and scientific organisations exempt from income tax. Item 1.3 of the Table in section 50-5 of the ITAA 1997 identifies a scientific institution as a tax exempt entity. Section 50-55 of the ITAA 1997 contains the special conditions for items 1.3, 1.4, 6.1 and 6.2. An entity covered by these items is not tax exempt unless it satisfies the special conditions. Under item 1.3 of the table in section 50-5 of the ITAA 1997, an entity will be exempt if: 1. It is an institution 2. It is a scientific institution 3. It meets the special conditions contained in section 50-55. | Detailed Reasoning - Is the Entity an Institution?: 'Institution' is not defined in the ITAA 1997, but paragraph 4 of Taxation Ruling TR 92/17 Income tax and fringe benefits tax: exemptions for 'religious institutions' states: A body is an institution for the purposes of both the ITAA and the FBTAA if it is an establishment, organisation or association, instituted for the promotion of some object 9 especially one of public or general utility) that is religious, charitable, educational, etc. That definition was accepted by the High Court in YMCA of Melbourne v FC of T (1926) 37 CLR 351 and later in Stratton v Simpson (1970) 125 CLR 138. The entity is a company limited by guarantee and established with the assistance of various advisory bodies. The results of the findings will be made available for use by Government, industry and the Australian public at large. As the entity is an organisation instituted for the promotion of a public utility it will be considered to satisfy the definition of an institution. | Detailed Reasoning - Is the Entity a Scientific Institution?: The term 'scientific institution' is not defined in the ITAA and therefore takes on its ordinary meaning. The Macquarie dictionary defines 'science' as: 1. a. The systematic study of humans and their environment based on the deductions and inferences which can be made, and the general laws which can be formulated, from reproducible observations and measurements of events and parameters within the universe. b. the knowledge so obtained. And 'scientific' as: 1. Having to do with science or the sciences: scientific studies. 2. Occupied or concerned with science: scientific men. 3. Regulated by or conforming to the principles of exact science: a scientific method. 4. Systematic or accurate. In Royal Australasian College of Surgeons v Federal Commissioner of Taxation (1943) 68 CLR 436 it was held that the 'scientific' category includes associations of professionals in a scientific field, but only if their dominant purpose was scientific. The entity's primary objective is to undertake scientific research. The entity's objectives, framework and imperatives will be in the advancement of scientific knowledge. Given the scientific nature of activities of the entity and its primary objects it is considered that an entity satisfies the criterion to be a scientific institution. | Detailed Reasoning - Non-profit Requirement: The ITAA 1997 does not expressly require an entity to operate as a non-profit. However, Royal Australasian College of Surgeons v Federal Commissioner of Taxation (1943) 68 CLR 436 Latham CJ stated that a scientific institution is also akin to a charitable institution. Thus, the non-profit requirement applies. The entity is limited by guarantee. The entity states that it is a not for a profit organisation. The Constitution provides that no members will benefit from the winding down of the entity. Therefore, the entity satisfies the not for profit requirement. | Detailed Reasoning - Member benefits: Paragraph 47 of Taxation Ruling TR 2011/4 Income tax and fringe benefit tax states that if an organisation is carried on for the profit of its owners or members it is for their benefit and not for the community. The Constitution states that the entity must not exercise its powers for the benefit of members. The Constitution prohibits the application of any surplus assets for the benefit of its members. Consistent with Paragraph 47 of Taxation Ruling TR 2011/4 the entity does not operate for the benefit of its members. The operation of the entity is ultimately for the benefit of the public at large. Therefore, the entity meets the member benefits requirement. | Detailed Reasoning - Dissolution Clause: The Constitution, any surplus assets remaining following the winding up of the entity will not be paid to or distributed amongst members. The entity has the required dissolution clause in its Constitution. | Detailed Reasoning - Special Condition: Subsection 50-55(1) of ITAA 1997 states: An entity covered by item 1.3, 1.4, 6.1 or 6.2 is not exempt from income tax unless the entity: a) Has a physical presence in Australia and to that extent incurs its expenditure and pursues its objectives principally in Australia; or b) Is an institute that meets the description and requirements in item 1 of the table in section 30-15; or c) Is a prescribed institution which is located outside Australia and is exempt from income tax in the country in which, it is resident. And the entity satisfies the conditions in subsection (2). The entity is incorporated in Australia, has a physical presence in Australia, incurs its expenditure and pursues its objects in Australia. The entity therefore satisfies paragraph 50-55(1)(a) of the ITAA 1997 of the special condition. Under subsection 50-55(2) of the ITAA 1997 the entity must: a) Comply with all the substantive requirements in its governing rules; and b) Apply its income and assets solely for the purpose for which the entity is established. The entity has stated that the governing rules of the entity are determined by the Constitution, Members Agreement and Subscription Agreement. Operations and activities are guided by these governing rules. The entity has also stated income and assets of the entity are applied in the undertaking of its objectives. | Detailed Reasoning - Conclusion: As the entity is a scientific institution under item 1.3 of the table in section 50-5 of the ITAA 1997, the ordinary income and statutory income of the entity is exempt from income tax under section 50-1 of the ITAA 1997.