Private ruling: Exempt Entity status
Published: July 2012
Ruling period: 1 July 2012 to 30 June 2013 | 1 July 2013 to 30 June 2014 | 1 July 2014 to 30 June 2015
Date scheme commenced: 1 July 2001

Ruling: Q1: Are you exempt from Income Tax under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as an association not carried on for the purpose of profit or gain to the individual members, established for the purpose of promoting the development of a manufacturing resource of Australia under item 8.2(d) in section 50-40 of the ITAA 1997? | A1: You are entitled to income tax exemption under section 50-1 ITAA 1997 as you satisfy the requirements under item 8.2(d) of section 50-40 ITAA 1997.


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

Reasons for decision: Summary: In order for you to be eligible for income tax exemption under section 50-1 ITAA 1997 the requirements under item 8.2 of section 50-40 must be satisfied. 'A society or association established for the purpose of promoting the development of any of the following Australian resources: · agricultural resources; · horticultural resources; · industrial resources; · manufacturing resources; · pastoral resources; · viticultural resources; · aquacultural resources; · fishing resources. Special conditions: not carried on for the profit or gain of its individual members. National Office Minute 96/3107-1: Resource Development Associations , dated 3 June 1997 (the Minute), provide the following requirements in more detail: · the organisation is a non-profit association; · the dominant or principle purpose is promoting resource … development; · the resources are within the umbrella of resources specified in the paragraph; · the resources, apart from aviation and tourism, are resources of Australia. | Detailed Reasoning - Non-profit requirement: You are required to be a non-profit association under section 50-40 of the ITAA 1997. This means that it must not be carried on for the purpose of profit or gain to its individual members. Paragraph 25 of the Minute states: "… benefits which are received by members jointly as members and are incidental to the pursuit of the association's objects will not prevent it from passing the "non-profit test". The benefits which are received by the members are not received in their individual capacity as members, but jointly as members and are incidental to the pursuit of the association's objects; thus the non-profit requirement is satisfied." You will not be exempt where their main objects and activities are to protect or promote the interests of your members as it will not satisfy the dominant or principal purpose requirement under section 50-40 ITAA 1997. Similarly, if you are carried on for the profit or gain of your individual members, it will fail the non-profit requirement. Such purposes are unlikely to be consistent with the purpose of promoting resource development. It is necessary to determine whether your dominant purpose is to provide benefits to members as a group or whether the benefits to members are incidental benefits which will often flow to members from activities that entail promoting the development of resources of the industry in which they are involved. The objects as stated in your Memorandum indicate that you are established to promote the industry and not the members. In this case, the members of your association derive benefits as a result of their membership. However, based on the above information benefits to members are derived jointly and are incidental to the pursuit of the association's objects. Any indirect benefit that may flow on to members is secondary to the overall purpose. Your Memorandum has a suitable non-profit clause and a suitable dissolution clause for income tax exempt entities. As your association is not considered to be an association that operates principally to confer benefits on its members jointly or as a group, and your Memorandum contains suitable non-profit clauses, it satisfies the non-profit requirement and does not fail the dominant purpose test. | Detailed Reasoning - Promoting resource development: Section 50-40 requires your principal or dominant purpose is to promote the development of one or more of the resources specified under the section. The legislation does not define 'aviation', 'tourism', 'agricultural', 'pastoral', 'horticultural', 'viticultural', 'manufacturing' or 'industrial' resources. Sheppard J in Australian Insurance Association v FCT 79 ATC 4569 ( Insurance Association case ) provides the following on the distinction between the various resources at page 4574: It would seem to have been the draftsmen's intention to distinguish between [resources in of the primary industry and manufacturing resources] and the final category of industrial resources. There is a question as to whether there are two separate and distinct categories, or whether there may not be some overlapping between the two… If, as I think is the case, plant and equipment, manpower, skill and know-how in manufacturing such articles as steel products, clothing and furniture, and such non-tangible commodities as gas and electricity, are "manufacturing resources", one has to ask oneself what kinds of other resources there are which are industrial as distinct from manufacturing. As a matter of the ordinary use of language, the resources I have mentioned could properly be described as industrial resources as well as manufacturing resources. But I do not think that the two expressions would have been used unless the draftsman had intended that the expression "industrial resources" would include a wider and different range of resources form those which are manufacturing resources. … [T]he words "industrial resources" were inserted to cover such resources as those of the building industry or the mining or quarrying industries. The word "industrial" was thus said to have been used in its traditional or conventional sense. The Minute also provides the following: Resources or their elements include infrastructure, personnel, knowledge, expertise and skills. An industry's business and its assets may be resources. (Paragraph 33) Manufacturing resources extend to "plan and equipment, manpower skills and know-how in manufacturing such articles as steal products, clothing and furniture, and such non-tangible commodities as gas and electricity" as per Sheppard J's judgment from above. (Paragraph 35) Section 50-40 concerns the promotion of the development of such resources, not the direct promotion of the specified resources. The High Court in FCT v Broken Hill Pty Co Ltd (1969) 120 CLR 240 upheld Kitto J's definition of 'development' in the phrase 'development of the mining property' as follows: In its ordinary English sense the word "development" when used in relation to a property. Refers to the unfolding, the bringing out, of some latent capability of that property…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. Paragraphs 44 to 52 of the Minute specifies that 'promoting development' a wide definition. It includes direct activities, such as research projects, education in particular methods, introduction of new and improved products. It also includes indirect activities, such as promotion by improved marketing methods, co-operative buying and selling, or solution of labour disputes. However, if your purpose is properly categorised as promotion of the development of resources that are not within the scope of section 50-40 ITAA 1997, then you would not be exempt under this section regardless of its effects on resources that may be within the scope of this section. In Boating Industries Association of New South Wales v FCT 85 ATC 4224 ( Boating Industries case ), the Supreme Court of New South Wales held that a body whose activities have the effect or result of promoting the development of manufacturing resources in Australia is not necessarily established for that purpose. It was found that the Boating Industries Association's principal activity was the promotion of safe boating, not the promotion of Australian manufactured boats. In dismissing the appeal, Lusher J considered that the relevant legislative provision required the organisation be established for the purpose stated. Mere involvement in the promotion for the purpose stated is insufficient. The object of your association is to promote the development of the respective industries through marketing, cooperation between businesses, innovation and development of improved materials, products and design of the products. | Detailed Reasoning - Dominant or principle purpose: To be exempt under section 50-40 of the ITAA 1997, your association must be established principally or predominantly for the purpose of resource development. It is not sufficient that one of the association's purposes falls within section 50-40, nor is it enough that resource development is incidental to, involved with, or a consequence of an association's purposes. The Minute states (at paragraphs 20 to 22): To be exempt under (this section) an association must be established principally or predominantly for the purpose of promoting resource development. It is not sufficient one of the association's purpose falls within (this section). The association must be established for the required purposes. The term "established" are used in a narrow sense. In determining the predominant purpose of an organisation, its actual activities must be taken into account. The Minute, which discusses the term resources, explains that determining the 'Dominant purpose' is largely a matter of fact and degree. It may involve a weighing of the various elements: objects, activities, history, proposed directions, etc. In the Boating Industries case found it necessary to consider each association on the merits of its particular circumstance and as circumstances may change, an association's eligibility for exemption under section 50-40 ITAA 1997 may vary over time. Taxation Ruling IT 2415, by reference to the case Australian Insurance Association v. FC of T 79 ATC 4569; 10 ATR 333; (1979) 41 FLR 256, ( Insurance Association case) states at paragraphs 6 to 8: The Court concludes that the expression "industrial resources" in paragraph 23(h) that refers to resources such as those of the building, mining, quarrying, shipping and transport industries - it does not extend to business or commercial resources' Promotion of the specified resources must be the predominant purpose for which the particular body is established. The resources, the development of which is being promoted, must come within the umbrella of the specified resources. In the context of paragraph 23(h) in the above ruling the term "development" must be taken to be used in a commercial or business sense, that is, it comprehends all the elements which must be taken into account to ensure that specified resources are used in the best interests of Australia. Paragraph 23(h) of the Income Tax Assessment Act 1936 (ITAA 1936) is the predecessor to section 50-40 of ITAA 1997. The language used is essentially similar and all dicta is still applicable to the new provisions under section 50-40 ITAA 1997. Statements in your Memorandum indicate that, on balance, the predominant purpose of your association is to promote the industry generally. | Detailed Reasoning - Resources of Australia: Other than aviation and tourism the resources must be resources of Australia. The Minute states at paragraph 15: The words "of Australia" limit the exemption to associations whose activities are directed to Australian resources, thereby excluding associations whose activities are directed to the resources of places beyond Australia. Where an association is established for the purpose of promoting the development of a foreign resource, or for both Australian and foreign resources the test for exemption is not met. Whether or not an association is predominantly for the purpose of promoting the development of Australian resources is a matter of fact and degree. Taxation Ruling IT 2415 emphasises that the section refers to the development of resources of Australia in paragraph 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. You are promoting, in a business sense, the development of an Australian resource.

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