Private ruling: Income tax exemption for promoting the development of pastoral resources
Date of advice: 13 September 2019
Published: November 2019
Ruling period: 1 July 2019 - 30 June 2022
Date scheme commenced: 1 July 2019

Ruling: Q1: Is the Taxpayer (the Association) exempt from taxation under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) on the basis that it is an exempt entity under Item 8.2(e) of the table in section 50-40 of the ITAA 1997? | A1: Yes

Relevant facts and circumstances: The Association is an Australian public company limited by guarantee registered with ASIC since 1970's. It does not appear on the ACNC Charity Register and does not operate as a charity. The Association's constituent documents are comprised of The Constitution, the Memorandum and Articles of Association (the Memorandum), and the Rule Book. In applying for the private binding ruling, the Association provided an extract from the current Constitution containing a not-for-profit clause and a winding-up clause. A full copy of the Constitution is available at the Association's website. The Association Rule Book contains the Association's Mission Statement, which lists: · Recording and preserving pedigrees of the particular animal breed in Australia while maintaining the integrity of the breed; · Providing services for the benefit of its members which encourage ownership and participation of the specific breed; · Fostering growth and membership in the Association through promotion, recognition, advertisement and publicity of the breed; · Charter a regional and national network of clubs or associations and provide support and assistance to them in their efforts to promote the breed. Clause *** of the Constitution declares that the Association is not carried on for profit, and that any income of the Association shall be applied to promoting its objectives as set out in the Memorandum. The clause expressly states: 'dividends shall not be paid to, nor shall profits or income or property of the Association be distributed amongst the members otherwise than by way of prizes and trophies offered for competition and won in such competition held in furtherance of the said objects or in repayment of debts or liabilities incurred to any member for the benefit of the Association and in furtherance of such objects'. Clause *** provides for the Board, in case of the Association's dissolution, to realise the property of the Association and to apply the proceeds of sale to discharging the Association's debts and liabilities. Any money or property remaining after the discharge of debts and liabilities is to be transferred to a not-for-profit association, club or institution with similar objective, or to other charitable objects determined either by the Board or by a Judge of the Supreme Court of the state. The Association's Memorandum has been in existence for over 40 years. It provides a list of the Association's objects in Clause***. The list of objects is detailed and extensive and includes the research, breeding, protection, advancement, promotion or furtherance of the specific animal breeding industry and/or the breeders engaged in this industry, and in particular to promote the development of the breed in Australia The history and the current activities of the Association are described on their website. According to the website, the history of the Associating started over 70 years ago with a gathering of breeders and enthusiasts. Through the seventies, eighties and nineties, this breed's popularity in Australia enjoyed significant growth. A number of social and promotional events, shows and award ceremonies have been conducted monthly and annually. The Association has developed awards recognising and promoting the purity and the quality of the breed. For non-competing members, the Association conducts relevant Programs. The Association recognises outstanding animals and members by placing them in the Hall of Fame or onto the Roll of Honour. The Association has also formed a subcommittee for an amateur association and an affiliate for a youth association. The Association keeps a record book and awards Registration Certificates to the eligible animals. The Rule Book lists the eligibility criteria to be registered with the Association. The Association has developed a Code of Conduct and an Animal Welfare Statement prohibiting inhumane and cruel treatment of the animals. As per the information the taxpayer has provide, recently the Association has changed from being a large organisation with a reasonably large turnover and paid staff to a much smaller organisation run by volunteers.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 23(g) | Income Tax Assessment Act 1997 section 50-1 | Income Tax Assessment Act 1997 section 50-40

Reasons for decision: Summary: The statutory provisions which must be satisfied in order to be entitled to exemption for the total ordinary income and statutory income of entities are set out in sections 50-1 and 50-40 of the ITAA 1997. Section 50-1 of the ITAA 1997 states that total ordinary income and statutory income of the entities covered in the tables in Division 50 is exempt from income tax. In certain instances, exemption is subject to special conditions. Item 8.2(e) of the table in section 50-40 of the ITAA 1997 provides that a society, association or club established for the purpose of promoting the development of Australian pastoral resources shall be exempt from income tax subject to the special conditions contained in the table in section 50-40. In order for the entity to satisfy the requirements in item 8.2 of the table in section 50-40 ITAA 1997 it must: 1. be a society or association; 2. be established for the dominant or principle purpose of promoting the development of an Australian resource as described in item 8.2 of the table in section 50-40 of the ITAA 1997; and 3. Not carried on for the profit or gain of its individual members. These criteria are considered below. | Detailed Reasoning - Society, Association or Club: The terms 'society' and 'association' are not defined in the ITAA 1997. The meaning of 'association' was considered by Olney J in Douglas v FCT 97 ATC 4722 in relation to section 23(g)(v) of the Income Tax Assessment Act 1936 (ITAA 1936) and the following was found: As this section contains no definition of either 'society, association or club' it should be construed according to the ordinary meaning of the words used and, if necessary, after resort to the relevant explanatory memorandum and second reading speech. Unassisted by authority I would construe the collation society, association or club to refer to a voluntary organization having members associated together for a common or shared purpose. Such a description is consistent with various dictionary definitions of the several words used. The following examples can be found in the Concise Oxford Dictionary: · Society: Association of persons united by a common aim or interest or principal; · Association: Organised body of persons for a joint purpose: · Club: Association of persons united for some common interest, usually meeting periodically for shared activity. In Pro-Campo Limited v Commissioner of Land Tax (NSW) 81 ATC 4270 the meaning of 'association' and 'society' was considered within the context of section 23(g) of the ITAA 1936. It was held that a taxpayer which was a company incorporated under the Companies Act for the purpose of carrying on holiday activities could be a 'society' notwithstanding that is was a company. The Association is a company limited by guarantee without share capital and was incorporated for the purposes of its Constitution and the Memorandum. In applying the principles established in statute and case law, the Association is considered to be a 'society, association or club' for the purpose of section 50-40 of the ITAA 1997. | Detailed Reasoning - Not-for-profit: Section 50-40 of the ITAA 1997 requires that the association not be carried on for the purposes of profit or gain to its individual members. This is known as the not-for-profit requirement. Evidence that an association operates on a not-for-profit basis can be found in its constituent documents which should contain a prohibition against distribution of profit and assets among members while the association is functioning and on the association's winding up. The association's actions must also be consistent with this prohibition. As mentioned in the Relevant Facts and Circumstances (the Facts), the Association's constituent documents contain the required not-for-profit and dissolution clauses. Accordingly, the Association satisfies the requirements of being constituted a not-for-profit entity. | Detailed Reasoning - Established for the Dominant Purpose of Promoting the Development of Resources: It is a requirement under section 50-40 of the ITAA 1997 that the primary or predominant purpose of the entity must be directed at promoting the development of a specific resource. It will not be sufficiently satisfied if the promotion or development is incidental to the entity's operations. In Cooperative Bulk Handling v FCT [2010] FCA 506 (the CBH case) Gilmour J provided the following definitions of 'promoting' and 'development': · Promoting - to further the growth, development, progress, etc. · Development - the act, process or result of developing, evolution, growth, expansion. However, as per Lockhart J in Cronulla Sutherland Leagues Club Limited v Commissioner of Taxation (1990) 23 FCR 82 at 89: Section 23(g)(iii) is concerned with the periodic or recurrent, not the static, with the purposes of the relevant body in the year of income. It is relevant, however, to look at the objects or purposes for which the body was incorporated including the objects clauses in the memorandum of association, also any subsequent activities of the body which may throw light on its activities in the relevant year of income. A society, association or club is not a stationary entity. It may change its activities and perhaps its purposes during its life which together make up the body itself and enable the questions posed by the subparagraph to be answered in the year of income, namely, the identification of the objects or purposes for which the body is established. And then at 95-96: It is not sufficient to look to the formation of the body and to ascertain what was at the time, the purpose of its formation. The statute gives a periodic operation to the words and directs the enquiry to a particular time, namely, the year of income so that consideration must be given not only to the purpose for which the society was established but also the purpose for which it is currently conducted. Subsequently, while the Constitution is relevant, it is not conclusive of the entity's principal or dominant purpose. The absence of a purpose expressed in the language of section 50-40 of the ITAA 1997 is not necessarily an indication that the requisite statutory purpose is absent. In all cases the society must be established for 'the purposes of promoting development' of the particular activity or resource. This is not only a matter of having such promotion as its main object in its constitutional documents, but also it must be its main activity for the particular income year in question. The ATO publication Income tax exemption checklist - Resource development organisations (the Checklist) provides that the various resources referred to in item 8.2 of section 50-40 of the ITAA 1997 have their ordinary meaning. According to the Checklist, pastoral resources include infrastructure, facilities, plant and equipment, personnel, knowledge, expertise and skills and promoting development can be by various means, including research, providing facilities, training, improving marketing methods, facilitating cooperation, and the like. The Checklist states that, to be an association established for the purposes referred to in item 8.2 of section 50-40 of the ITAA 1997, the main purpose of the society, association or club must be promoting the development of the relevant resources. Any other purpose of the organisation must be incidental, ancillary or secondary to promoting development of the relevant resources. The main purpose is determined by looking at your constitution and activities. As has been mentioned in the Facts, the list of the Association's objects is quite detailed and covers activities that are part of the normal management and operation of an entity, such as buying and maintaining property, raising and investing money, renumerating employees and insuring the entity against possible accidents and liabilities. Those activities, however, are undertaken in furtherance of the objects that are related to promoting the development of the animal breeding industry. It should also be noted that the list of objects was compiled over 40 years ago. These days, the organisation has become a lot smaller and doesn't have any employees. The Association's mission statement in its Rule Book confirms the view that the dominant purpose of the Association is promoting the development of the animal breeding industry. This is also reflected by the activities discussed on the Association's website and listed in the Facts. | Detailed Reasoning - Australian Resources: Resources or their elements include infrastructure, plant and equipment, livestock, personnel, knowledge, expertise and skills. The use of the word 'Australian' applied to resources in section 50-40 of the ITAA 1997 limits the exemption to associations whose activities are directed towards Australian resources. The Association defines its activities as the promotion of the breed of animals in Australia. It is evident through analysis of the Association's constituent documents and its current activities that the resource promoted meets the definition of an Australian resource, being the particular breed, as required in item 8.2 of section 50-40 of the ITAA 1997. | Detailed Reasoning - Pastoral Resources: Item 8.2(e) of the table in section 50-40 of the ITAA 1997 provides that a society, association or club established for the purpose of promoting the development of Australian pastoral resources shall be exempt from income tax subject to the special conditions contained in the table in section 50-40. In Tribunal Case 56 [1987] 18 ATR 3360 it was determined that horse breeding and grazing fell within the term 'pastoral' when discussing exempt income. Horse breeding may be considered a pastoral resource where horses are grazed on land rather than being mainly kept in stalls. As per CJ Bannon QC 'It appears to me that horse breeding and grazing fall within the term 'pastoral pursuit'. True, horses can be stall fed and breeding may take place in stalls but this is not the normal method of breeding horses in Australia. The normal method is keeping them at a stud where they graze and breed on the pastures.' Further, the Tribunal held that the taxpayer in this case undertook other activities related to horse breeding, for instance the maintenance of a stud book, which is accepted as promoting the development of pastoral resources of Australia. Therefore it is accepted that the promotion of the development of horse breeding in Australia falls within the definition of pastoral resources for the purposes of item 8.2(e) of the table in section 50-40 of the ITAA 1997. | Detailed Reasoning - Conclusion: It is considered that the Association meets the requirements for tax exempt status under item 8.2(e) of the table in section 50-40 of the ITAA 1997 as a society, club or association promoting the development of an Australian pastoral resource.