Private ruling: Exempt entities - General Requirements; Charity, education, science and religion - Other - Special conditions
Date of advice: 15 April 2016
Published: June 2016
Ruling period: Income year ended 30 June 2016 | Income year ended 30 June 2017 | Income year ended 30 June 2018
Date scheme commenced: 1 July 2015

Ruling: Q1: Is the taxpayer an entity covered by item 1.7 of the table in section 50-5 of the Income Tax Assessment Act 1997 so that its ordinary and statutory income is exempt from income tax under section 50-1 of the ITAA 1997? | A1: Yes.

Relevant facts and circumstances: The taxpayer is an entity established in Australia that has at all relevant times undertaken its activities in Australia. The objects of the taxpayer are stated to be the advancement of surgery in Australia by contact and discussion among its members and to aid and stimulate interest in the problems of surgery in medical practice. The governing documents of the taxpayer prevent it from distributing profits or assets for the benefit of its members both while it is operating and when it winds up. The taxpayer has different classes of members. The governing documents of the taxpayer require that one annual meeting, comprising of a business meeting and a scientific meeting, be held each year. The taxpayer conducts seminars and conferences on the science of surgery. The taxpayer sponsors and hosts specialists in the science of surgery from overseas. The taxpayer co-ordinates technical journals and produces position statements and guidance papers on the efficacy of certain surgical procedures and investigations. The taxpayer raises funds from member subscriptions; conference fees; registration fees and sponsorship from companies operating in the relevant manufacturing industry. The taxpayer directs its finances to scientific conference costs; sponsorship of specialist speakers and travelling fellows and its administration. The taxpayer has complied with all the substantive requirements in its governing rules and has applied its income and assets solely for the purpose for which it was established.

Relevant legislative provisions: Income Tax Assessment Act 1936 subsection 23(g) | Income Tax Assessment Act 1997 section 30-15 | Income Tax Assessment Act 1997 section 50-1 | Income Tax Assessment Act 1997 section 50-5 | Income Tax Assessment Act 1997 section 50-70 | Income Tax Assessment Act 1997 subsection 50-70(1) | Income Tax Assessment Act 1997 subsection 50-70(2)

Reasons for decision: Summary: Pursuant to section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) and item 1.7 of the table in section 50-5 of the ITAA 1997, the ordinary income and statutory income of an entity that is a society, association or club established for the encouragement of science is exempt from income tax provided the special conditions in section 50-70 of the ITAA 1997 are satisfied. Subsection 50-70(1) of the ITAA 1997 provides that an entity covered by item 1.7 of the table in section 50-5 of the ITAA 1997 is not exempt unless it is a society, association or club that is not carried on for the purpose of profit or gain to its members (the non-profit requirement) and it either has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia; or meets the description and requirements in item 1 of the table in section 30-15 of the ITAA 1997; or is a prescribed society, association or club which is located outside Australia and is exempt from income tax in the country in which it is resident. Subsection 50-70(2) of the ITAA 1997 provides that the entity must comply with all the substantive requirements in its governing rules (governing rules condition) and apply its income and assets for the purpose it was established for (income and assets condition). The threshold question in order to qualify for exemption under section 50-1 of the ITAA 1997 as an entity covered by item 1.7 of the table in section 50-5 of the ITAA 1997 is whether the entity is a society, association or club established for the encouragement of science. | Detailed Reasoning - Established: The meaning of the word 'established' in former subsection 23(g) of the Income Tax Assessment Act 1936 (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. | Detailed Reasoning - Encouragement of science: The words 'encouragement' and 'science' and the composite phrase 'encouragement of science' are not defined in the ITAA 1997 or the ITAA 1936 and for the purposes of section 50-5 of the ITAA 1997 the words take on their ordinary meaning. The word 'science' is defined in the Macquarie Dictionary as the systematic study of the nature and behaviour of the material and physical universe, based on observation, experiment, and measurement, often leading to the formulation of laws to describe the results of such procedures in general terms. As noted in https://www.ato.gov.au/Non-profit/Your-organisation/Do-you-have-to-pay-income-tax-/Types-of-income-tax-exempt-organisations/Scientific-organisations/ (QC 46343), science is not limited to the physical sciences and includes the human and applied sciences. It follows from the above that the knowledge and studied techniques associated with surgery qualify as science. In paragraph 11 of Taxation Ruling TR 97/22 Income tax: exempt sporting clubs the Macquarie Dictionary meaning of 'encouragement' is adopted, being 'stimulation by assistance'. The promotion of surgical science was discussed in Royal Australasian College of Surgeons v. FCT (1943) 2 AITR 490 where it was held that as the principal activities of the organisation had been the holding of periodical conferences of surgeons for the discussion and study of surgical matters and the dissemination of surgical knowledge, the collection and collation of records of clinical cases occurring in hospital and private practice, the giving of evening lectures in surgical subjects, the provision of a technical library upon surgical subjects, the publication and distribution of a quarterly periodical known as the Australian and New Zealand Journal of Surgery, and research work in surgery, the primary object of the organisation was the promotion of surgical science. In this case the objects of the taxpayer are stated to be the advancement of the standard of surgery in Australia by contact and discussion among its members and to aid and stimulate interest in the problems surgery in medical practice. The taxpayer conducts seminars and conferences on the science of surgery, sponsors and hosts specialists in the science of surgery from overseas and co-ordinates technical journals and produces position statements and guidance papers on the efficacy of certain surgical procedures and investigations. These activities promote and assist the advancement and knowledge and skills in the area of surgery and give effect to the taxpayer's stated purpose. Accordingly, it is considered that the taxpayer is an entity established for the encouragement of science. | Detailed Reasoning - Special conditions: The taxpayer was established in Australia and has at all relevant times operated in Australia. Further, the taxpayer 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 conditions in section 50-70 of the ITAA 1997 will be satisfied if the non-profit requirement is satisfied. The non-profit requirement is explained in TR 97/22. In accordance with this explanation an organisation will be accepted as being non-profit where it is prevented by its constituent or governing documents from distributing profits or assets for the benefit of its members, both while it is operating and when it winds up; its actions must be consistent with this prohibition. In this case, the governing documents of the taxpayer prevent it from distributing profits or assets for the benefit of its members both while it is operating and when it winds up. This ensures that the funds and assets of the taxpayer are applied only to carry out its purposes and are not applied for the benefit of its members. The directing of the funds of the taxpayer to scientific conference costs; sponsorship of specialist speakers and travelling fellows and its administration is consistent with this prohibition. Accordingly, the non-profit requirement is satisfied.