Private ruling: Exemption from income tax
Published: June 2013
Ruling period: Income year ended 30 June 2013 | Income year ended 30 June 2014 | Income year ended 30 June 2015
Date scheme commenced: 2009

Ruling: Q1: Is the entity a non-profit organisation established for the purpose of promoting the development of Australian industrial resources pursuant to item 8.2(c) of the table in section 50-40 of the Income Tax Assessment Act 1997 (ITAA 1997) and therefore exempt from income tax under section 50-1 of the ITAA 1997? | A1: Yes

Relevant facts and circumstances: 1. The entity is an Australian public company limited by guarantee and registered with the Australian Securities and Investments Commission (ASIC). 2. The entity was established to address a significant challenge facing Australian industry. The entity conducts research with the aim of developing new technologies that will ensure the future of Australian industry and have applications for similar industries in other countries. 3. The entity has been established with the overall objective to develop effective technologies for Australia. 4. The entity's constitution states it objects and activities. 5. The entity's constitution prevents the distribution of income and profits to members during its operation, and also applies this prohibition to surplus assets remaining upon winding up. 6. The entity may as part of carrying out its objects create intellectual property (IP). Agreements exist that specifically deal with the ownership, vesting and use of IP. 7. Under the Agreement legal interest in IP is owned by the entity and beneficial interest is owned by member entities and the entity as tenants in common. 8. The use of IP through commercialisation projects will be subject to an arm's length licence fee arrangement that is commensurate with the market value of the IP. 9. Where commercialisation income is derived by member entities in IP this is held on trust for the member entities as tenants in common in proportion to their respective interests in the research project from which the IP is derived. 10. Any money derived by the entity from the commercialisation of IP is to be reinvested by the entity in the activities of the entity in order to achieve stated outcomes.

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

Reasons for decision: Summary: The entity is a non-profit organisation established for the purpose of promoting the development of Australian industrial resources pursuant to item 8.2(c) of the table in section 50-40 of the Income Tax Assessment Act 1997 (ITAA 1997) and is exempt from income tax under section 50-1 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: The statutory conditions that the applicant must meet before being entitled to exemption from income tax are set out in sections 50-1 and 50-40 of the ITAA 1997 as follows: Section 50-1 of the ITAA 1997 exempts from income tax the total ordinary and statutory income of an entity covered by section 50-40 of the ITAA 1997. Item 8.2(c) of the table in section 50-40 of the ITAA 1997 provides that a society or association established for the purpose of promoting the development of Australian industrial resources shall be exempt from income tax subject to the special condition that it is not carried on for the profit or gain of its individual members. The matters to be satisfied under section 50-40 of the ITAA 1997 are: · the organisation is a society or association · the dominant or principal purpose for which the organisation is established is promoting resource development; and · the resources whose development is being promoted are within the umbrella of resources specified in the relevant section; · the resources, are resources of Australia, and · the organisation is not carried on for the profit or gain of its individual members | Detailed Reasoning - Society or Association: The terms association and society are not defined and therefore take on their ordinary meaning. The Macquarie Dictionary defines 'association' as 'an organisation of people with a common purpose and having a formal structure.' 'Society' has an equivalent meaning (Pro-campo Ltd v. Commr of Land Tax (NSW) 81 ATC 4270 at 4279; (1981) 12 ATR 26 at 35). An association may be incorporated or unincorporated. The entity is: · an Australian public company limited by guarantee and registered with the Australian Securities and Investments Commission (ASIC), and · an organised body of members instituted for the purposes of its constitution. It is accepted that the entity is a 'society or association' for the purposes of section 50-40 of the ITAA 1997. | Detailed Reasoning - Principal purpose of promoting development: 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. Nor is it enough that resource development is incidental to, involved with, or a consequence of an association's purposes. Determining the dominant purpose will be largely a matter of fact and degree. It is necessary to consider an association's constituent documents and operations and activities. Promoting development can be by various means, including research, providing facilities, training, improving marketing methods, facilitating cooperation and similar activities. The entity has been established with the overall objective to develop new technologies for Australia to ensure the long/medium term viability of the sector. In pursuit of this purpose the entity will undertake the various activities. From a consideration of the objects and activities, it is accepted that the principle purpose of the entity is to promote the development of the industry primarily by means of research activities into new technologies and promotion of education in the field. | Detailed Reasoning - Australian Resources: 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 of both Australian and foreign resources the test for exemption is not met. Exemption is not limited to associations whose activities extend, or are intended to extend, throughout the whole of Australia. An association promoting the development of a particular region's resources may also be exempt. The ATO's Income tax guide for non-profit organisations (the Guide) states that: Industrial resources include building, mining, quarrying, shipping and transport, but do not include business and commercial resources, such as insurance, and services, such as surveying. As described in the ruling application and on their website, the entity has been established to address a significant challenge facing the industry in Australia. The entity conducts research with the aim of developing new technologies that will ensure the future of Australian industry and have applications for similar industries in other countries. Based on its objects and activities as cited earlier, and other supporting information provided, it is considered that the entity is involved in researching and developing new technologies in Australia. Though results from research may be applied internationally in the future, it is clear that the main aim of their activities is directed toward developing Australian industry. | Detailed Reasoning - Special conditions - Non-profit: If an association is carried on for the profit or gain of its individual members, it will fail to be exempt for income tax under section 50-40 of the ITAA 1997. Such a purpose is inconsistent with a predominant purpose of promoting the development of Australian resources. However, it is necessary to distinguish a purpose of providing benefits to members from the incidental benefits which will often flow to members as a result of the activities with which they are involved. Organisations will not be exempt where they have a purpose to protect of promote the interests of members. The Guide states: · If the organisation's main purpose is merely to provide services to its members, it will not be exempt. This is the case even if the services result in better use of resources by those members. · We accept 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. · Any profit made by the organisation goes back into the operation of the organisation to carry out its purposes and is not distributed to any of its members. To meet the non-profit requirement firstly, an entity's constituent documents must display a non-profit character and secondly, the entity's actions must be consistent with this non-profit character. The entity's constitution prevents the distribution of income and profits to members during its operation, and also applies this prohibition to surplus assets remaining upon winding up. | Detailed Reasoning - Ownership of intellectual property and commercialisation: An Agreement provides for the ownership of intellectual property and the commercialisation of such property by member entities. Under the Agreement the entity holds legal interest in IP and the beneficial interest is owned by member entities and the entity as tenants in common. The Agreement outlines the rules for commercialisation of IP. The use of IP through commercialisation projects will be subjects to an arm's length licence fee arrangement that is commensurate with the market value of the IP. Where commercialisation income is derived by member entities in IP this is held on trust for the member entities as tenants in common in proportion to their respective interests in the research project from which the IP is derived. Any money derived by the entity from the commercialisation of IP is to be reinvested by the entity in the activities of the entity in order to achieve stated outcomes. Given that the use of intellectual property will be subject to an arms length licence fee arrangement commensurate with the market value of that property, any benefits to members derived by way of the commercialisation arrangement are considered incidental to the overall purpose of promoting the development of industrial resources, and not a purpose in itself. The entity's constitution contains acceptable clauses showing its non-profit character. Benefits to member entities in the form of ownership of intellectual property or commercialisation of intellectual property are considered incidental benefits and does not prevent the entity from having a non-profit character. | Detailed Reasoning - Conclusion: It is accepted that the research and educational activities conducted by the entity are of benefit to the development of Australian industry. Based on the above, the total ordinary and statutory income of the entity is exempt from income tax pursuant to section 50-1 of the ITAA 1997 as it is considered to be an association established for promoting the development of Australian industrial resources, pursuant to item 8.2(c) of the table in section 50-40 of the ITAA 1997.