Private ruling: Exemption from income tax
Published: July 2013
Ruling period: Year ended 30 June 2012 | Year ended 30 June 2013 | Year ended 30 June 2014
Date scheme commenced: 1 July 2011

Ruling: Q1: Will the income of the association be exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) on the basis that it is an association established for the purpose of promoting the development of a listed Australian resource under item 8.2 in the table in section 50-40 of the ITAA 1997? | A1: No.

Relevant facts and circumstances: The Association was formed as a company limited by guarantee. The Association has supplied its Constitution. You state that the association promotes the development of your industry by providing awards of excellence in your business and associated issues. The Association provides training and education of its member businesses and their employees. The Association has its own website. The Association has an appropriate dissolution clause for a non profit entity in its Constitution and is considered to be a non-profit entity. The Association provides various benefits for its members. These include but are not limited to: · Industrial relations, HR Management, employment information and advice with access to employment law experts; · Dispute and Arbitration support - mediation for unresolved issues; · Mentoring program; · Supply to members a Terms of Trade Agreement; · Business publication for members; · Assistance for insurance and home warranty issues; · Co-ordinate and delivery of an Annual Industry Awards Event for Excellence - recognising achievements in the relevant industry; and · Member Referral Service - where it recommends and refers its members to consumers as a trustworthy and reputable business person. The Association offers membership services and recognition to those companies who continually update their skills in the relevant Industry. The Association manages and administer a Certified Professional Development Program. (CPD) The program recognises the professionalism and expertise of the relevant businesses and encourages the public to seek out business professionals and emphasises the need for on-going skills development. The purposes and aims of the CPD program are: · acknowledge members' commitment to improving their skills and abilities in order to both enrich their personal experience of work and to meet the needs of their customers; · encourage a highly skilled industry; · provide members with networking opportunities and access to professional development activities; · provide high level of professional practice in the relevant business; · facilitate ethical and technically competent business practice; and · maintain and improve technical and business competence in the relevant businesses. · The continuing professional development requirements are aimed at maximising professional practice outcomes, by ensuring that industry participants are continually up-dating their skills, raising the quality of the relevant business service, improving safety, and reducing disputes in the relevant industry.. You have advised that the Association developed the program for the following reasons: · there is rapid technological change in the type of materials, machinery and installation techniques that require industry to maintain currency with regard to these changes; · the development of an industry pathway is critical for retention of staff in the industry, including trade and post trade level training and articulated career paths; · a skills shortage of employees with a high level of technical business management and supervisory skills; · there is an ageing workforce creating an increasing need for attracting and retaining new entrants and providing for advanced training in trade and post trade areas for new and current people in the relevant Industry; · the professional profile of the relevant businesses needs to be promoted to the general public in order that the market fully understands the scope and complexity required within the industry; and · to aid small business growth and profitability. You have provided the Association's financial reports for the last two financial years. Key information provided in those reports are: · a large majority of the Association's income is generated from member subscriptions and awards and sponsorship; and · main expenditure was salary and wages and annual award expenditure.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 40-520(2) | Income Tax Assessment Act 1997 subsection 40-535(1) | Income Tax Assessment Act 1997 section 50-1 | Income Tax Assessment Act 1997 section 50-40 | Income Tax Assessment Act 1997 section 960-100

Reasons for decision: Summary: The Association's income is not exempt from income tax under section 50-1 of the ITAA 1997 as the association is not established for the purpose of promoting the development of an Australian resource pursuant to item 8.2 in the table in section 50-40 of the ITAA 1997. It is considered that the Association does not have as its dominant purpose the promotion of the development of a specified Australian resource. Its dominant purpose is considered to be the benefit of its members and the promotion of their interests. | Detailed Reasoning - Detailed reasoning: The Association has stated that most of the members they represent are from the relevant industry. The statutory conditions that the Association must meet before its income is entitled to exemption from income tax are set out in sections 50-1 and 50-40 of the ITAA 1997 as follows: Section 50-1 of the ITAA 1997 exempts from income tax the total ordinary and statutory income of an entity covered by section 50-40 of the ITAA 1997. Item 8.2 in the table in section 50-40 of the ITAA 1997 covers non-profit societies or associations established for the purpose of promoting the development of Australian agricultural, horticultural, industrial, manufacturing, pastoral, viticultural, aquacultural or fishing resources. The matters to be satisfied under section 50-40 of the ITAA 1997 are: § the organisation is a non-profit association or society; and § the dominant or principal purpose for which the organisation is established is promoting resource development; and § the resources whose development is being promoted are within the umbrella of resources specified in the relevant section; and § the resources, are resources of Australia. | Detailed Reasoning - Entity: The term 'entity' is defined in section 960-100 of the ITAA 1997 to include a body corporate. The Association is registered as a public company limited by guarantee which is considered to be a body corporate. | Detailed Reasoning - Society or Association: The terms association and society are not defined and therefore take on their ordinary meaning. The Macquarie Dictionary [Online edition] defines 'association' as 'an organisation of people with a common purpose and having a formal structure.' 'Society' has an equivalent meaning ( Pro-Campo Ltd v. Commissioner of Land Tax (NSW) 81 ATC 4270 at 4279; (1981) 12 ATR 26 at 35). An association may be incorporated or unincorporated. It does not include a body formed and controlled by government and performing functions on behalf of government (Taxation Determination TD 95/56). The association is a body of members organised for a common purpose as set out in its Constitution and effectuated by its activities. The association can be classified as a society or association for the purposes of item 8.2 in the table in section 50-40 of the ITAA 1997. | Detailed Reasoning - Non profit: The Association must also meet the special condition in item 8.2 in the table in section 50-40 of the ITAA 1997 that it is: "not carried on for the profit or gain of its individual members". To meet this special condition the constituent documents and any governing legislation of the entity must prevent it from ever distributing profits or assets for the benefit of members and the organisation must act in accordance with those governing clauses. If an association operates principally to confer benefits on its members, it is unlikely to be predominantly for promoting resource development and thus not exempt. The Association's constitution satisfies the non-profit requirement. | Detailed Reasoning - Australian resources: The Association is seeking income tax exemption on the basis that it is established for the purpose of promoting the development of Australian resources listed in item 8.2 in the table in section 50-40 of the ITAA 1997. 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. The term "industrial resources" refers to resources of industries such as the building, mining, quarrying, shipping and transport industries. It is accepted that part of the role of the Association would include the relevant industry and its elements. As such it can be considered that LNA is involved with specified resources of Australia, as listed in item 8.2 in the table in section 50-40 of the ITAA 1997. | Detailed Reasoning - Established principally or predominantly for the purpose of promoting the development of specified Australian resources.: Section 50-40 of the ITAA 1997 does not refer to the promotion of the specified resources. It is directed to being established principally or predominantly for the promotion of the development of the specified resources. Taxation Ruling IT 2415 Income tax: Associations promoting development of Australian resources states the following in paragraph 8 on the meaning of development: 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. The meaning of 'development' was examined in FC of T v. Broken Hill Pty Co. Ltd 69 ATC 4028 at 4031-4032; (1969) 1 ATR 40 at 45 . In considering the phrase 'development of the mining property' the majority of the High Court accepted the interpretation of Kitto J: 'It covers, I think, any preparation, adaptation or equipment of the property for the exploitation of an inherent potentiality which cannot be exploited, or fully exploited, without some such preliminary treatment.' Their Honours also said: For instance, we do not doubt that expenditure of bringing water to that mining property to enable the taxpayer's mining operations by sluicing to take place thereon is both expenditure in connexion with mining operations on a mining property and is expenditure on the development of that property 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. The Financial Statements provided do not provide any Director's Report regarding the activities and direction of the Association. However, a large majority of the association's income is generated from member subscriptions, awards and sponsorship. The main expenditure was salary and wages expenditure and annual award expenditure | Detailed Reasoning - Benefits to members include:: · Industrial relations, HR Management, employment information and advice with access to employment law experts; · Dispute and Arbitration support - mediation for unresolved issues; · Mentoring program; · Supply to members a Terms of Trade Agreement; · Publication to enable members to keep up to date with current trends, events and information; · Assistance for insurance and home warranty issues; · Co-ordinate and delivery of an Annual Industry Awards Event for Excellence - recognising achievements in the relevant industry; and · Member Referral Service - where the Association recommends and refers its members to consumers as a trustworthy and reputable business. A review of the application, supporting documents and the Association's website fail to demonstrate that the association is established principally or predominantly for the purpose of promoting the development of a specified Australian resource. Even though your entity manages and administers the CPD program, together with co-ordination of the Industry Award Event, it is held you also have a purpose of providing benefits to your member associations. This purpose of providing a benefit to your members cannot be considered as an ancillary purpose. Therefore, it is considered that the promotion of the development of an Australian resource or resources is not the Association's predominant purpose. The purpose referred to in section 50-40 of the ITAA 1997 must be the principal or dominant purpose for which the entity is established. The information supplied and the information from the Association's website suggests that the dominant purpose for which it was established is something other than the promotion of the development of an Australian industrial or horticultural resource, or a combination of the two. This requirement is not satisfied. | Detailed Reasoning - Resources of Australia: Taxation Ruling IT 2415 requires that the resources be used in the best interests of Australia. Referring to paragraph 23(h) of the Income Tax Assessment Act 1936 (the predecessor of section 50-40 of the ITAA 1997), paragraph 8 states: 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 the commercial 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. Based upon the information supplied, the association's activities are directed towards the members of the relevant industry. It is therefore accepted that the entity deals with resources of Australia. As such this criterion is satisfied. | Detailed Reasoning - CONCLUSION: In conclusion, the Association is non-profit and some of its activities are undertaken in promoting Australian resources. It is considered that the Association does not have as its dominant purpose the promotion of the development of a specified Australian resource. Its dominant purpose is considered to be for the benefit of its members and promoting their interests. The Association's income is not exempt under section 50-1 of the ITAA 1997 as it is not considered to be an association established for the purpose of promoting the development of an Australian resource pursuant to item 8.2 in the table in section 50-40 of the ITAA 1997.