Private ruling: Exempt entities for the promotion of the development of an Australian resource
Published: July 2012
Ruling period: Year ended 30 June 2012 | Year ended 30 June 2013
Date scheme commenced: 1 July 2011

Ruling: Q1: Is the ordinary and statutory income of the entity exempt from income tax under section 50-1 of the ITAA 1997 pursuant to item 8.2 of the table in section 50-40 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No

Relevant facts and circumstances: The entity is an industry wide association that promotes the development of an Australian market segment at a national level and are seeking exemption as promoting the development of an Australian industrial and/or manufacturing resource. The entity represents the entire industry including manufacturers, distributors, importers and retailers. A copy its constituent documents were provided as well as details of the activities undertaken in pursuit of its objects.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 50-1 | Income Tax Assessment Act 1997 section 50-40 | Income Tax Assessment Act 1997 section 960-100

Reasons for decision: Summary: For this exemption to apply the purpose of an entity has to be the promotion of the development a particular Australian resource. In this case as will be explained later this would have to be manufacturing resources. However the documents provided show that the entity promotes entire market including manufacturers, distributors, importers and retailers within that market. This demonstrates that the purpose of entity is to further the interests of the entire market within that industry and following the decision in Australian Insurance Association v. Federal Commissioner of Taxation, 79 ATC 4569; 10 ATR 333, ( Australian Insurance ) a purpose to further an industry is not one that is covered by the exemption under item 8.2 of the table in section 50-40 of the ITAA 1997 In addition an entity established to promote the development of one of the listed Australian resources would not also be promoting importation of competing resources from overseas. However the entity in this case also promotes importers of foreign products. Therefore the exemption under item 8.2 of the table in section 50-40 of the ITAA 1997 does not apply. | Detailed Reasoning - Detailed reasoning: Item 8.2 of the table in section 50-40 of the ITAA 1997 exempts the ordinary and statutory income of an entity under Section 50-1 of the ITAA 1997 if it: · is a society or association established for the purpose of promoting the development of specified Australian resources; and · is not carried on for the profit or gain of its individual members. In looking at item 8.2 in section 50-40 we should begin by looking at Taxation Ruling IT 2415 Income tax: Associations promoting the development of Australian resources which looked at the application of paragraph 23(h) of the Income Tax Assessment Act 1936 (ITAA 1936), which is the exemption item 8.2 replaced, and paragraphs 6-9 of that ruling states: 6. The operation of paragraph 23(h) was considered by the Supreme Court of New South Wales in Australian Insurance Association v. F.C. of T ., 79 ATC 4569 ; 10 ATR 333. The Court found the Association did not qualify for exemption under paragraph 23(h) because it was established for the predominant purpose of protecting and furthering the interests of Australian insurance companies. 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 F.C. of T. 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. 9. There can be little doubt that the identification of, and programmes to overcome, manpower needs and the establishment of systematic training schemes in a particular industry are necessary for the efficient operation of the industry - they are part and parcel of the development of the resources specified in paragraph 23(h). Although the connection may not be as readily apparent the development of marketing techniques may also be relevant to the development of resources - it could be said that there is little point in developing resources if the products of the resources cannot be sold. Another area where the connection with development of resources may not be direct is the development of tourism - but it does play a part in the development of the resources specified in paragraph 23(h). Therefore to satisfy item 8.2 of the table in section 50-40 of the ITAA 1997 AAAA must be: · An entity · An association · Established for the purpose of promoting the development of specified Australian resources; and · Whose predominant purpose is promoting the development of specified Australian resources · Entity · This condition is satisfied · Association · This condition is satisfied. Resources specified in section 50-40 of the ITAA 1997 There is a finite list of Australian resources which fall for consideration under item 8.2 of section 50-40 of the ITAA 1997 these are agricultural, horticultural, industrial, manufacturing, pastoral, viticultural, agricultural or fishing resources. These terms are not defined in the ITAA 1997 and have their ordinary meaning. Assistance in determining their meaning can be provided by dictionary meanings and by court and tribunal decisions. Judicial interpretations of similar terms in different statutes and common usage of terms, may be useful but are not determinative. In this case the entity is specifically seeking exemption under either the promotion of the development of an Australian industrial resource or the promotion of the development of an Australian manufacturing resource. | Detailed Reasoning - Industrial resource: In Australian Insurance , Sheppard J made the following comments (at 4574 and 4575): There is a degree of specificity in the words used in the section [Paragraph 23(h)]. It refers to aviation then to four resources of primary industry, then to manufacturing and finally to industrial resources. The use of these various expressions does not suggest that the draftsman intended to give the word "industrial" any wide meaning intended to embrace business or commercial resources. If it had been intended to do so, it would have been quite unnecessary to use the word "manufacturing" or to be as specific in relation to the primary industry resources which are mentioned. Even if the word "industrial" had been used alone (that is, without the word "manufacturing") I think there would have been a question as to whether commercial or business resources were included. The building, mining and quarrying industries and the resources which these industries have, are not aptly described as manufacturing industries, but they are industries in the accepted sense of the word. Industries in a similar category are the shipping and transport industries. As specified in Australian Insurance, industrial resources cover such resources as those of the building industry or the mining or the quarrying industries and also the shipping and transport industries. In Australian Insurance , Sheppard J further stated at 4576 the reasons why the association was not promoting an industrial resource: Much of the businesses of the insurance companies which make up the membership of the appellant are concerned with domestic (particularly household) insurance, motor vehicle insurances where the vehicles are used for private purposes or business purposes which could not be said to be industrial, marine insurance in respect of privately owned craft of various kinds not under in industry, and other types of insurances which would be difficult to connect with industry, however widely one were to define that expression. Therefore when looking at an 'industrial' for the purposes of the exemption under section 50-40 of the ITAA 1997 we are not looking at business or commercial resources which is part of the industry which the entity is supporting. The members of the entity include people involved across and who service the entire industry and the .objects and activities of the entity show it exists to develop a market Although that market can include customers in industries such as those listed above the entity does not target these types of industries or resources in these industries. Their target is the entire industry it is more likely that these will be people with private or commercial purposes. Therefore it would be difficult to be able conclude that the entity was established to promote an industrial resource in the sense required by Australian Insurance . | Detailed Reasoning - Manufacturing resource: In Australian Insurance , manufacturing resources were considered to extend to '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'. As the entity is concerned with the whole industry this will include those involved in the industry who manufacture products used in that industry.. Established for the purpose of promoting the development of an Australian resource The word 'Australian' applied to the term 'resources' in the table in section 50-40 of the ITAA 1997, limits 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. The term development is used in section 50-40 in a commercial or business sense. It comprehends all the elements which must be taken into account to ensure the specified resources are best used. A similar approach to 'development' is used in Federal Commissioner of Taxation v. Broken Hill Pty Co Ltd (1969) 120 CLR 240; 69 ATC 4028; (1969) 1 ATR 40. In considering the phrase 'development of the mining property' the majority of the High Court accepted the interpretation of Kitto J; It covers, I think, any preparation, adaption, or equipment of the property for the exploitation of an inherent potentiality which cannot be exploited, or fully exploited without some preliminary treatment. Development entails increase in operations, unlocking of potentialities, advancement of activity; not just conduct of ongoing activity ( FC of T v. Broken Hill Pty Co Ltd (1969) 120 CLR 240 per Kitto J at page 248. The promotion of development may be direct or indirect. For example, the development of agricultural resources might be directly promoted by research, experimental farms, control of pests, education in farming methods, or the introduction of new and improved classes of products. It might be indirectly promoted by improved marketing methods, cooperative buying and selling, solution of labour disputes, or ameliorative legislation. Development of resources can be promoted by facilitating the cooperation of businesses and instrumentalities. Chambers of commerce and regional development bodies may help promote resource development in these ways. The Tax Office publication Income Tax Guide for Non Profit Organisations (NAT 7967-03.2007) states at page 22 in relation to methods of promotion: · Promoting development can be by various means, including research, providing facilities, training, improving marketing methods, facilitating cooperation and similar activities. · Given the broad purpose of the entity part of what the do is promote the development of the manufacturing resources within that industry. However for the exemption to apply this has to be the dominant purpose. | Detailed Reasoning - Dominant purpose: To be exempt under section 50-40 of the ITAA 1997, an association must be established principally or predominantly for the purpose of promoting resource development. It is not sufficient that one of an association's purposes falls within section 50-40 of the ITAA 1997. Nor is it enough that resource development is incidental to, involved with or a consequence of an association's purposes. The association must be established for required purposes. The term 'established' is not used in a narrow sense. It is necessary to consider an association's constituent documents, and operations and activities. | Detailed Reasoning - Determining the dominant purpose will be largely a matter of fact and degree.: If an association operates principally to confer benefits on its members jointly or as a group, it is unlikely to be predominantly for promoting resource development and thus will not be exempt under section 50-40 of the ITAA 1997. Exemption will not be lost merely because benefits which are incidental to promoting the resource development are received by members. In order to consider whether entity is in fact established for the purpose of promoting the development of an Australian manufacturing resources, we need to examine the purposes for which the entity was established and its actual activities. In Boating Industries Association of NSW v FC of T 85 ATC 4224; (1985) 16 ATR 383 ( Boating Industries ) it was held that the Association's principal purpose was the promotion of safe boating and not the promotion of a manufacturing resource. | Detailed Reasoning - In Boating Industries Lusher J said, at 85 ATC 4228' 16 ATR 387 - 8:: It is argued and accepted that although the basic fundamental objective or purpose is safe boating, safe boating in turn leads to sales which in turn require standards, particularly in manufacture so that there is a nexus between safe boating and sales through to manufacture so that in substance, the requirement of the section for promoting the development and manufacturing of resources of Australia is obtained. This approach rather ignores the basic requirement of the section that its application is to associations established for the purpose set out in the section…The requirement is "established" not "involved"…It does not follow that a body whose activities or involvement have the effect or result of promoting the development of manufacturing resources of Australia, who otherwise are within the section as to the disposition of income, is necessarily established for that purpose. They could be established for another purpose altogether but still have the result mentioned. In Co-operative Bulk Handling Ltd v F C of T [2010] FCAFC 155; 2010 ATC 20-231 (CBH), the Association was a major bulk handler of grain in Western Australia with the principal object of establishing, maintaining and conducting schemes for bulk handling of grain. The Court took the view that that the expression "promoting the development of" includes developing the resources to facilitate and support agriculture and that the purpose for which CBH was established must be determined by considering the totality of all its activities. It was concluded in that case that "promoting the development of agricultural resources" also extends to the development of resources available to facilitate and support agriculture. From the information provided by the applicant, it is not evident that the entity is established for promoting manufacturing resources. The promotion of Australian manufacturing resources is just one facet of what it does. The entity's purpose is to promote an entire industry and this includes importers of non-Australian manufactured products. This is supported by their objects and activities. In looking at an entity established to promote the development of an Australian resource in the manner required to be exempt it would not be undertaking activities that help develop rival non-Australian resources as these activities would be contrary to that purpose. Therefore although the entity does promote Australian manufacturers and at times may promote the development of their resources it was not established to do this. The entity has equally been established to promote importers, wholesalers and retailers which fall outside the scope of the exemption. | Detailed Reasoning - Member Benefits: If an association operates principally to confer benefits on its members jointly or as a group, it is unlikely to be predominantly for promoting resource development and thus not exempt under section 50-40 of the ITAA 1997. It is therefore necessary to distinguish a dominant purpose of providing benefits to members from the incidental benefits which will often flow. In case 46/94 94 ATC 412; (1994) 29 ATR 1102 at ATC 417; ATR 1108, the Tribunal found, that the association was not exempt because it principally promoted the interests of its members. It operated to look after the needs of consulting surveyors though such matter as public liability insurance, professional development, training of employees, assuring quality client service, publishing business practice and technical material, and lobbying to obtain work for members particularly from government. In Australian Insurance , the Association comprised the majority of general insurance companies carrying on business in Australia. At issue was inter alia, whether it 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. Sheppard J in concluding said, at ATC 4572; ATR 336: In my opinion the difference between the parties in the way that each views the evidence is one of emphasis. 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 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. Case W49 89 ATC 469; at 474 states: The enlargement of the market is one of the objectives of "promoting the development" of any relevant industry. In my view the relevant test is satisfied provided that members do not benefit "as members". I find that the association does not have as an object the generation of increased profits to any one or more members to the exclusion of others or have as an object the equal or equitable distribution of any increase market profit between its members to the exclusion of others. Although individual benefits are available and members may benefit from the activities of the entity these benefits would be an incident of the purpose of the entity which is to promote the entire industry. For example, if we return to the importers versus Australian manufacturers, in Australia, both are effectively in competition for the same business and the entity can't promote one without it being to the detriment of the other. Therefore any benefits an individual member might receive is an incident of promoting the industry as a whole. | Detailed Reasoning - Non 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. The Income Tax Guide for Non Profit Organisations at page 6 states: The basic premise of a non profit organisation is that it is not operating for the profit or gain of its individual members, whether these gains would have been direct or indirect. This applies both while the organisation is operating and when it winds up. 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 organisations 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. There are two requirements in the statement of non profit character above. First an entity's constituent document must display a non profit character. Second, the entity's actions must be consistent with this non profit character. The entity's constituent documents contain clauses which prevent the distribution of profit or assets to its members and there is no evidence to suggest that these are not being followed.

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