Private ruling: Income Tax Exemption
Date of advice: 18 December 2015
Published: March 2016
Ruling period: Year ended 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017 | Year ending 30 June 2018
Date scheme commenced: 1 July 2014

Ruling: Q1: Is the Company exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as a "society or association established for the purpose of promoting the development of Australia's industrial resources" in accordance with item 8.2(c) of the table in section 50-40 of the ITAA 1997? | A1: Yes

Relevant facts and circumstances: The Company has applied for a private ruling on the basis that the Company is an exempt entity under item 8.2(c) of section 50-40 of the Income Tax Assessment Act 1997 (ITAA 1997). The Company has provided the following documents in support of this ruling application: • its constitution; • Funding Submission; • Contribution Deed. Constitution The constitution contains the Objects, a Winding up clause and a Non-profit clause. An agreement between the Company and the State it operates in has been provided. It sets out the terms under which they will work together on on developing and implementing projects. The projects are carried out by research agencies, registered research agencies and Demonstration Project agencies. A funding agreement has been provided. All members of the Company are required to pay contributions or levies to the Company for application to its objects. Accordingly it is concluded that members would also be contributors. The projects to be funded are selected by a Council which then makes a recommendation to the Premier of the State on the project and the amount of funding that should be provided. The Premier advises the Company if the recommendation is accepted. The Company has stated the following facts in relation to the scheme: • The Company receives monetary contributions from its contributors, to fund the Program, which the Company manages. Funding for the Program is provided by way of levies on its contributors. The levies are calculated by reference to the Company's Contributors' share of production. The Company holds those contributions in its own right and applies them for the purpose of the Program in accordance with the Contribution Deed. An example of a Funding Agreement has been provided by the Company. In summary of the Agreement: • the Company has the right to commercialise any generated IP if the recipient fails to take steps to commercialise the generated IP. The rights accrue to the Company and not to the members. • the Company has the right to receive from the recipient a royalty, being an agreed percentage of the net proceeds from commercialisation R&D. The Agreement stipulates that the royalty provided for reflects the relative contributions towards R&D which results in generated intellectual property of the Company and the recipient to the project, identified at the time of entering the project funding agreement. On this basis the Company and the recipient are entitled to share in the proceeds arising from the commercial exploitation of any intellectual property. These rights accrue to the Company and not its members. • All intellectual property generated from the Project is owned by the recipient. The Company and the Contributors do not own any intellectual property. • The recipient grants to the Company a worldwide non-exclusive royalty-free licence to use any intellectual property developed by the project and IP of the recipient needed to be used to utilise the IP developed by the project, for the Company's internal non-commercial purposes.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 50-1. | Income Tax Assessment Act 1997 section 50-40.

Reasons for decision: Summary: The Company is an association established for the purpose of promoting the development of Australia's industrial resources in accordance with item 8.2(c) of the table in section 50-40 of the Income Tax Assessment Act 1997 (ITAA 1997). The Company is therefore exempt from income tax under section 50-1 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: The Company has applied for a private ruling for income tax exemption under item 8.2(c) in the table in section 50-40 of the ITAA 1997 which states: | Detailed Reasoning - Special conditions: 8.2 a society or association established for the purpose of promoting the development of any of the following Australian resources: … not carried on for the profit or gain of its individual members (c) industrial resources; … Accordingly to be exempt from income tax as an exempt entity under section 50-40 of the ITAA 1997, the Company must: • be a society, or association; • be established for promoting the development of Australian industrial resources; and • not be carried on for the profit or gain of its individual members. | Detailed Reasoning - Society or association: The Company is an incorporated entity under the Corporation Act 2001 and has more than one member. It is accepted that the Company is an 'association or society' for the purposes of item 8.2(c) in section 50-40 of the ITAA 1997. | Detailed Reasoning - Established for the purpose of promoting the development of Australian industrial resources: Scheme Outline The Parliament enacted an Act which gives the Premier the right to enter into an agreement with the Company. The agreement provides for the Company and the State to work together on developing and implementing projects. All members of the Company are required to pay contributions or levies to the Company for application to its objects. Accordingly it is concluded that members would also be contributors. An amount equal to the levy collected is then contributed by the Company to approved projects. The projects are carried out by research agencies, registered research agencies and Demonstration Project agencies. The projects to be funded are selected by a Council which then makes a recommendation to the Premier on the project and the amount of funding that should be provided. The Premier advises the Company if the recommendation is accepted. The members (and contributors) benefit from the knowledge of the technologies and obtain the rights to exploit intellectual property derived from the research and development and/or demonstration of those technologies for their internal non-commercial use. However the main benefit to members (and contributors) is the potential expansion of the market as a result of project developments. The Company's purpose, drawn from its agreements, would broadly be considered to be the development, demonstration, widespread implementation and use of technology by encouraging collaborative investment, by the state and industry, in these areas. Taxation Ruling IT 2415 Income tax: association promoting development of Australian resources states that: 6. The operation of paragraph 23(h) was considered by the Supreme Court of New South Wales in Australian Insurance Association v. FCT , 79 ATC 4569 ; 10 ATR 333. … Furthermore, the Court concluded that the expression "industrial resources" in paragraph 23(h) refers to resources such as those of the building, mining, quarrying, shipping and transport industries - it does not extend to business or commercial resources or resources of the kind promoted by the Association. 7. The reasoning in the decision in the Australian Insurance Association case highlights the matters that need to be satisfied in any case before exemption under paragraph 23(h) applies:- a) Promotion of the specified resources must be the predominant purpose for which a particular body is established. b) The resources, the development of which is being promoted, must come within the umbrella of the specified resources. 8. 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 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. Reference might usefully be made to the observations of the High Court in FCT v. Broken Hill Pty. Co. Ltd ., 69 ATC 4029 ; 1 ATR 40 on the meaning of the term "development" in relation to the development of a mining property. It is considered that the Company is meeting the requirement of being established for a purpose of promoting the development of Australian industrial resources. | Detailed Reasoning - Not be carried on for the profit or gain of its individual members: The Income tax guide for non-profit organisations at page 6 states that: The Tax Office accepts an organisation as non-profit where its constituent or governing documents prevent it from distributing profits or assets for the benefit of particular people - both while it is operating and when it winds up. These documents should contain acceptable clauses showing the organisation's non- profit character. The organisation's actions must be consistent with this requirement. A non-profit organisation can still make a profit, but this profit must be used to carry out its purposes. …... the profits must not be distributed to owners, members or other private people. There are two requirements in the statement of non-profit character above. First, an entity's constituent documents must display a non-profit character. Second, the entity's actions must be consistent with this non-profit character. The constitution of the Company contains acceptable clauses prohibiting the distribution of income and property to its members directly or indirectly during its operations and when it winds up. The first requirement that constituent documents must display a non-profit character is therefore satisfied. Members of the Company are participating organisations, predominantly coal producing entities but can also include other industrial enterprises. The Company's constitution requires that the members pay contributions or levies to the Company which will be applied towards the promotion of the objects of the Company. Therefore all members of the Company make a financial contribution to the Company and are accordingly, contributors. A clause of the Contribution Deed between a contributor and the Company provides for the results of the projects to be provided to contributors where possible under the funding agreements. Accordingly members receive benefits from the Company through the receipt of outputs (in the form of intellectual property). However another clause of the Contribution Deed restricts the rights of the contributors in the Company. Further clauses in a Funding Agreement restrict the use of any intellectual property and project outputs by contributors for use only in activities other than commercialisation. The projects undertaken are not determined by the members. Rather the projects undertaken by the Company are determined on the basis of recommendations to the Premier by a Council. The Premier retains the right to the final decision in relation to any project and the amount of funding to be provided by the Company to the project. In Australian Insurance Association v. Federal Commissioner of Taxation 10 ATR 333;(1979) 41 FLR 256;79 ATC 4569 ( Australian Insurance ) Sheppard J concluded, at 79 ATC 4572; 10 ATR 336, that …many of the activities of the appellant have been concerned with the protection and furtherance, directly and indirectly, of the interests and businesses of its members, not in the sense of protecting or furthering the interests of any one of them but rather in the sense of protecting and furthering the interests of Australian insurance companies generally and as a whole… And that 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 only 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 promoting the protection and furtherance of Australian insurance business. While the Company's members will receive advantages through reports and intellectual property that result from the projects undertaken they will not have the right to commercialise the project outputs. The rights in this regard accrue to the Company, as per the Agreement. All intellectual property generated is owned by the recipient, not the Company or Contributors. Neither do the Contributors have exclusive rights to the project outputs as the Funding Agreement requires the recipient to grant to the Company a worldwide non-exclusive right to sub-licence any IP developed by the project for activities other than commercialisation. Further the Contributors do not choose the projects to be undertaken by the Company - this is done by a Council with the Premier's approval. The Company's overall purpose as determined from its constitution and the agreements provided is the promotion and development projects that have the potential to aid an Australian industry as a whole. As found in Australian Insurance while the activities that the Company undertake do further the interests of its members, it mainly furthers their interests as a consequence of what it does, by its activities in developing and implementing research projects into the production of technology. This furthers the market in Australia, not just for the members of the Company but the Australian industry as a whole. Accordingly the Company is not set up to primarily promote the interests of its members, rather to further the development of an industry in Australia. It is therefore concluded that the Company's constituent documents and activities are consistent with the requirement that it is not carried on for the profit and gain of its individual members. | Detailed Reasoning - Conclusion: The Company is an association established for the purpose of promoting the development of Australia's industrial resources in accordance with item 8.2(c) of the table in section 50-40 of the ITAA 1997. The Company is therefore exempt from income tax under section 50-1 of the ITAA 1997.