Private ruling: Not For Profit - Exemption from Income Tax
Published: August 2017
Ruling period: Income year ended 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Is Company A covered by Items 8.2(c) and 8.2(d) of the Table in section 50-40 of the Income Tax Assessment Act 1997 (ITAA 1997) so that its ordinary and statutory income is exempt from income tax under section 50-1 of the ITAA 1997? | A1: No. | Q2: Is the ordinary and statutory income of Company A that is derived from activities and participation of members assessable under section 6-5 of the ITAA 1997? | A2: No. | Q3: Is the ordinary and statutory income of Company A that is derived from activities and participation of non-members assessable under section 6-5 of the ITAA 1997? | A3: Yes. | Q4: Are receipts derived by Company A from mutual dealings with its' members non-assessable non-exempt income pursuant to section 59-35 of the ITAA 1997? | A4: Yes.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. Company A is a public company limited by Guarantee. Company A is governed by the rules in its constitution. Among other the constitution of Company A provides the following: Objects for which the Company A is established under Rule X The Company A organises talks, liaises with government, operates work groups, publishes document to further the activities of the Company as well as promoting ideas designed to represent the industry and its members. Funds - Source The Company A receives its income from membership subscriptions and membership activities. Funds Management as stated in Rule Y The income and property of the Company A wherever derived shall be applied solely towards the promotion of the objects of the Company as set forth in this Constitution; No portion thereof shall be paid or transferred directly or indirectly of by way of profit to the members of the Company provided that nothing herein shall prevent the payment in good faith of remuneration to any officer or servant of the Company or to any member of the Company or to the persons in return for services actually rendered to the Company nor prevent the payment of interest at commercial rates on money borrowed by the Company from any member or reasonable and proper rent for premises demised or let by any member of the Company; No Director shall be appointed to any salaried office of the Company A or any office of the Company A paid by fees and that no remuneration or other benefit in money or money's worth shall be given by the company to any Directors except repayment of out-of-pocket expenses and interest at the rate aforesaid on money lent; Surplus Property as stated in Rule Z If upon the winding up or dissolution of the Company A there remains after the satisfaction of all its debts and liabilities any property whatsoever the same shall not be paid to or distributed among the members of the company but shall be given or transferred to some other institution or institutions having objects altogether or in part similar to the objects of the Company A and which shall prohibit the distribution of its or their income and property among its or their members to an extent at least as great as is imposed by the Company A under or by virtue of a stated rule of the Constitution. The constitution has replaceable rules. The Company A employs consultants and staff to assist in day to day operation and specific initiatives of the Company A. Majority of the total income of the Company A is from its membership subscriptions and major expenses are the staff wages, travel costs, publication costs and conference costs. Membership clause is listed under the 'Replaceable Rules' of the constitution. The criteria used to increase or reduce the members of the association is generally a member based decision, with new members wishing to join completing the appropriate membership application form which is then assessed and approved or in some cases declined by the Board. Members may decide to leave the association due to lack of funds within their own organisation to warrant their membership or they may assess that the association does not provide their business with what they require. The association holds its major conference every few years. The purpose of the conference is to showcase the latest technology and update the industry with new innovations from Australia and from around the world. It is a unique opportunity for contractors and suppliers to network with peers and decision makers from the related authorities. The conference is open to anyone with an interest in the industry. Attendees at the major conference both members and non-members pay to attend. Company A hosts workshops and meetings, held as free information sessions covering various topics relevant to the industry including understanding contracts, employment and industrial obligations, etc. The magazine is published few times per year as a form of communicating with its members and key industry stakeholders. Company A employs an Executive who is responsible to run the Company's day to day activities, plan and run meetings, workshops as well as lobby government bodies on behalf of members of the association. This Executive is also required to design and provide marketing strategies to the board to increase membership of the Company, promote training and to raise the profile of Company A. Company A employs an administrative and a bookkeeper on casual basis. Company A further represent in their website the benefit of the membership. That includes featuring contact details of the members; promoting members capabilities; provide updates on industry standards; undertake representational role with the relevant authorises and other related bodies; arrange conferences and provide latest information on the industry.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 23(g) | Income Tax Assessment Act 1936 paragraph 23(g)(v) | Income Tax Assessment Act 1936 section 23(h) | Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 6-15 | Income Tax Assessment Act 1997 section 50-1 | Income Tax Assessment Act 1997 section 50-40 | Income Tax Assessment Act 1997 section 59-35

Reasons for decision: Summary: While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision. Unless otherwise stated, all legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997) The Company A is not exempt from income tax under section 50-1 as it does not satisfy Items 8.2(c) and 8.2(d) of section 50-40. However, membership subscriptions are non-assessable non-exempt income pursuant to section 59-35 and, as provided by subsection 6-15(3), will not form part of the assessable income of Company A. Similarly, other amounts derived by Company A from its members that are mutual receipts will be non-assessable non-exempt income pursuant to section 59-35. | Detailed Reasoning - Detailed reasoning: Pursuant to section 50-1 and Items 8.2(c) and 8.2(d) of the Table in section 50-40, the ordinary income and statutory income of an entity that is a society or association established for the purpose of promoting the development of Australian 'industrial resources' and 'manufacturing resources' is exempt from income tax provided the special conditions contained in the table in section 50-40 are satisfied. Item 8.2 of the Table in section 50-40 states that the society or association is exempt provided it is an entity that is not carried on for the profit or gain of individual members. In order for the entity to satisfy the requirements in item 8.2 of the Table in section 50-40 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; and 3. Not carried on for the profit or gain of its individual members. If the association fails to satisfy these requirements, it will not be exempt from income tax under section 50-1. | Detailed Reasoning - 1. Society or Association: The terms “society” and “association” are not defined in the ITAA 1997. The meaning of “association” was considered by Olney J in Douglas and Ors v FCT 97 ATC 4722 in relation to subparagraph 23(g)(v) of the Income Tax Assessment Act 1936 (ITAA 1936) and the following was found: As the section contains no definition of either 'society, association or club' or “community services purposes” 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 organisation 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 principle; Association: Organised body of persons for a joint purpose: Club: Association of persons united for some common interest, usually meeting periodically for shared activity. Company A was incorporated in NSW and is limited by Guarantee. Company A is therefore considered to be an 'association' or 'society' for the purpose of section 50-40. | Detailed Reasoning - 2. Established for the Dominant Purpose of Promoting the Development of Resources: The meaning of the word 'established in former paragraph 23(g) of the ITAA 1936 was considered in Cronulla Sutherland Leagues Club Limited V. FCT 90 ATC 4215 where it was held that it referred not only to the circumstances existing when the entity was initially formed but also to its subsequent activities and to the circumstances of the particular year under consideration. This is noted in paragraph 24 of Taxation Ruling TR 2015/1 Income tax: special conditions for various entities whose ordinary and statutory income is exempt which states that the purpose for which an entity is established is determined by a consideration of all the features of the entity. The main factors to be considered are the objects in the entity's constituent documents and the activities of the entity after its formation. It is a requirement under section 50-40 that the purpose of the entity must be 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. The 'association' or 'society' must be established for “the purposes of promoting development” of the specific resource. This is not only a matter of having such promotion as its main object in its constituent documents (the Rules), but also it must be its main activity for the particular income year in question. Taxation Ruling IT 2415 - Income Tax: associations promoting development of Australian resources (IT 2415) states at paragraphs 7 and 8: 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. 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. The case Australian Insurance Association v. FC of T 79 ATC 4569, concerned the issue of whether an association 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. In reference to the former paragraph 23(h) of the Income Tax Assessment Act 1936 (ITAA 1936) Sheppard J, Supreme Court of New South Wales concluded at ATC 4576: …In my opinion the Commissioner is correct in his submission that the purpose which is referred to in sec. 23(h) must be the principal or dominant purpose for which the association or society was established Determining the dominant purpose is a matter of fact and degree. It is necessary to consider an association's constituent documents, activities, history and proposed directions and the like. 'Established' refers not only to the motives and objectives which lead to the formation of the association but to its purpose since that time. In view of the constitution and website, Company A is an association involved in: Representing its members; Promoting its members capabilities and professionalism to industry representatives including the relevant state and local Government Authorities; Helping members setting industry standards and provide regular updates on changes to standards and regulations; Providing members with access to the latest information on materials, equipment, systems and technology; Marketing; Providing training, conferences and seminars; Providing updates on new innovations from Australia and from around the world; Hosting workshops and arranging meetings covering various topics relevant to the industry, that also includes understanding employment and industrial obligations; Publishing magazine as a form of communication with the members; Collectively from the Constitution, website and the activities of Company A, it is considered that Company A is engaged in providing a representation service to its members, market the industry and bring awareness about the industry to the members and is not established for the purpose of promoting the development of 'industrial resources' or 'manufacturing resources' as specified in Item 8.2 (c) and (d) of section 50-40. Company A is not entitled to the exemption provided in section 50-1. | Detailed Reasoning - 3. Special Conditions - not carried on for the profit or gain of its individual members: An association will be exempt under section 50-1 from income tax if it satisfies Items 8.2(c) and 8.2(d) provided the association has at all times complied with all the substantive requirements in its governing rules and applied its income and assets solely for the purpose for which it was established. Accordingly, the special condition in section 50-40 will be satisfied if the non-profit requirement is satisfied. The non-profit requirement is explained in Taxation Ruling 97/22 Income tax: exempt sporting clubs (TR 97/22). In accordance with this explanation an organisation will be accepted as being a non-profit where it is prevented by is constituent or its governing documents from distributing profit and assets for the benefit of tis members, both while it is operating and when it winds up; its actions must be consistent with this prohibition. In this case, Company A is required by Rules Y of the Constitution to apply its assets and income solely for the purposes it was established and is prohibited by the same from distributing any portion of its assets or income to its members during the course of its operations, except as genuine compensation for services rendered, or expenses incurred, on behalf of Company A. Rule Z of the Constitution limits the distribution of any amounts remaining after the satisfaction of all debts and liabilities to another organisation carried on predominantly having similar objects as Company A which is also not carried on for the profit or gain of its members; and which has rules prohibiting the distribution of its assets and income to its members. Accordingly, Company A satisfies the non-profit requirements. | Detailed Reasoning - Mutuality Principle and tax obligation of Company A: Section 6-5 provides that assessable income includes income according to ordinary concepts, which is called 'ordinary income'. Subsection 6-15(3) provides that if an amount is non-assessable non-exempt income, it is not assessable income. Under section 59-35 ordinary income is treated as non-assessable non-exempt income if it would have been a mutual receipt but for the entity's constituent document preventing the entity from making any distribution to its members, and it would have been assessable only because of section 6-5. The principle of mutuality is based on the proposition that an organisation cannot derive income from itself. The principle provides that where a number of persons contribute to a common fund created and controlled by them for a common purpose, any surplus arising from the use of that fund for the common purpose is not income. The characteristics of organisations that can access mutuality typically include organisations carried on for the benefit of their members collectively where the members share a common purpose and that purpose is the purpose for which the organisation was established and is operated. There is a common fund that the members contribute to and which is applied for the collective benefit of all members who have ownership and control of the fund. The contributors to the common fund must be entitled to participate in any surplus of the common fund. As a result of the mutuality principle, receipts derived by an organisation from mutual dealings with its members are not assessable income. Such receipts are called mutual receipts. The principle of mutuality does not however apply to dealings between an organisation and its members that go beyond a mutual arrangement and are in the nature of trade. It does not include 'any contributions to the fund derived from sources other than the contributors' payments, such as interest from the investment of part of the fund, or income from a business activity conducted by the members. Mutual receipts include: Member subscriptions and levies Fees from members using the organisation's facilities Amounts members pay to attend dinners, or social functions organised by the organisation Amounts members pay to attend a talk, workshop or presentation organised by the organisation Company A is a non-profit organisation carried on for the benefit of its members who are in a specific industry coming together for a common purpose, being the purpose and/or objects for which Company A has been established. All objectives of Company A aim to achieve a common benefit in which all members participate. Company A derives amounts from its members that are membership subscriptions, payments to attend functions and the like (mutual receipts). The payments (membership subscriptions, payments to attend conferences etc) received by Company A from its members would be mutual receipts but for Company A's Constitution preventing the Company A from making any distribution to its members; and the membership fees, payments for conferences and functions would be assessable income of Company A only because of section 6-5. The membership subscriptions are therefore non-assessable non-exempt income pursuant to section 59-35 and, as provided by subsection 6-15(3), will not form a part of the assessable income of Company A. Similarly, other amounts derived by Company A from its members that are mutual receipts will be non-assessable non-exempt income pursuant to section 59-35. | Detailed Reasoning - Note:: The ATO guide “Taxable Income and Mutuality” states that an organisation which can access the mutuality principle will have the following attributes: The organisation is for the benefit of its members collectively, not individually; There is a common purpose; The main purpose for which the organisation was established and is operated is for the common purpose of the members; Contributions to a common fund to give effect to that purpose; All the contributions to the common fund are applied for the collective benefit of the members for the common purpose of the members; Different classes of membership may exist with various subscription rates, right and entitlements; Ownership and control of the fund must vest in the contributors; and C ontributors to the common fund must be entitled to participate in any surplus and all participators in the surplus must be contributors to the common fund. (not carried on for the profit or gain of its individual member). If an organisation's constituent document prevents it from making any distribution to its members, and this is the only thing that prevents an amount of its income from being a mutual receipt, the organisation is not prevented from accessing mutuality for income tax purposes. The mutuality principle means that most receipts received from an organisation's members will be non-assessable and most expenses relating to an organisation's members will be non-deductible. Examples of items that would be considered mutual receipts (non-assessable): Membership subscriptions; Member conference and training fees; Fees from members using the organisation's facilities; and Amounts members pay to attend dinners/functions arranged by the organisation. Examples of items which would be considered assessable: Interest; Advertising income received for advertising in the organisation's magazine; Certain government grants; Non-member conference and training fees; and Amounts non-members pay to attend dinners/functions arranged by the organisation. Examples of items which are apportionable (both assessable and non-assessable income): Amounts members and non-members pay to attend dinners/functions arranged by the organisation; Amounts members and non-members pay to attend conferences or training. The principle does not extend to include income that is derived from sources other than the members of the common fund. For example, any income from non-members would not be mutual income and therefore taxable. Please access our website for more information in our publication, ' Mutuality and taxable income' (Publication number NAT 73436) or copy and paste the address below to access the document. https://www.ato.gov.au/law/view/print?DocID=SAV%2FMUTUAL%2F00001&PiT=99991231235958

Reasons for decision: These reasons for decision accompany the Notice of private ruling for Company A.