Private ruling: Income tax exemption
Date of advice: 16 January 2018
Published: May 2018
Ruling period: 1 July 2017 to 1 July 2019
Date scheme commenced: 1 July 2017

Ruling: Q1: Will the changed objects allow for the Taxpayer to qualify as a tax exempt entity under the provisions of section 50-40 of the Income Tax Assessment Act 1997 (ITAA 1997) as an Association established for the purpose of promoting the development of Australian industrial resources? | A1: Yes.

Relevant facts and circumstances: The primary purpose of the Taxpayer is currently that of a registered Industrial Association of Employers. It is registered under the provisions of Chapter 5 of the Industrial Relations Act (NSW) 1996 (IRA 1996) as a State Industrial Organisation of Employers. The Taxpayer is established in connection with a specific industrial services industry. The Taxpayer now wishes to change its objects so that it will no longer qualify to be registered as an Industrial Association of Employers. Rather, The Taxpayer plans to become an Incorporated Association. All support, operations, income and expenditure are in Australia and would benefit Australian members of the specific industrial industry only. The proposed new main purpose for which the Association exists is promoting the development of the local specific industrial industry.

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 50-40 Item 8.2.

Reasons for decision: Summary: Section 50-1 of the ITAA 1997 provides that the ordinary and statutory income of certain entities is exempt from income tax. The entities are those listed in the tables contained in sections 50-5 to 50-45 of the ITAA 1997. The appropriate section for consideration in this ruling is section 50-40 of the ITAA 1997. Where an entity falls within the description contained in Item 8.2 of the table in section 50-40 of the ITAA 1997 its total ordinary income and statutory income will be exempt from income tax. Item 8.2 of the table in section 50-40 of the ITAA 1997 states: a society or association established for the purpose of promoting the development of any of the following Australian resources: (a) agricultural resources; (b) horticultural resources; (c) industrial resources; (d) manufacturing resources; (e) pastoral resources; (f) viticultural resources; (g) aquacultural resources; (h) fishing resources The exemption is subject to a special condition that the society or association is not carried on for the profit or gain of its individual members. Accordingly, to be exempt from income tax under section 50-1 of the ITAA 1997 the Taxpayer must meet the relevant conditions of item 8.2(c) in the table in section 50-40 of the ITAA 1997. The conditions are as follows: ● It must be a society or association; ● It must be established for the purpose of promoting the development of Australian industrial resources; ● It must not be carried on for the profit or gain of its individual members; and ● It must not be a charity. | Detailed Reasoning - Society or association: The terms ‘society' and ‘association' are not defined in the ITAA 1997 . These terms are therefore construed according to their ordinary meaning. In Theosophical Foundation Pty Ltd v. Commissioner of Land Tax (1966) 67 SR (NSW) 70, Sugerman JA stated at 82: A society, in the relevant sense, is “a number of persons associated together by some common interest or purpose, united by a common vow, holding the same belief or opinion, following the same trade or profession, etc.; an association” In Pro-Campo Limited v. Commissioner of Land Tax (N.S.W.) 81 ATC 4270, Lee J stated at 4279: The meaning of "society" as the Oxford English Dictionary definition shows can be the equivalent of "association" and I do not think that any relevant distinction in nature exists between the two. It merely seems to have happened that some organisations are called "associations", others are called "societies" but no meaningful difference can be detected between the two. Taxation Determination TD 95/56 at paragraph 2 considers the definition of ‘association' as follows: …The Shorter Oxford English Dictionary defines the term 'association' to be 'a body of persons associated for a common purpose; the organisation formed to effect their purpose'. The Macquarie Dictionary defines 'association' as being 'an organisation of people with a common purpose and having a formal structure'. Olsson J, in Quinton v. South Australian Psychological Board (1985) 38 SASR 523, also stated that the term 'association' has come to be regarded as attaching to a body of persons associated for a common purpose. The Taxpayer plans to become an Incorporated Association. We consider that it will be an organisation of people with a common purpose which has a formal structure. Accordingly, it is considered to be a society or association. | Detailed Reasoning - Promoting development: Item 8.2 of the table in section 50-40 of the ITAA 1997 is directed to the promotion of the development of the specified resources. The term ‘development' is used in a commercial or business sense. It comprehends all the elements which must be taken into account to ensure that the resources are best used (as discussed in paragraph 8 of Taxation Ruling IT 2415 Income tax: associations promoting development of Australian resources ). The promotion of development may be direct or indirect. Methods of promoting development can be by various means, including research, providing facilities, training, improving marketing methods, facilitating cooperation and similar activities. It is considered that the Taxpayer’s proposed new purpose is promoting the development of the specific industrial industry and hence this requirement is satisfied. | Detailed Reasoning - Industrial resources: The term ‘industrial resource' is not defined in the legislation. It takes its ordinary meaning. Paragraph 6 of IT 2415 provides that industrial resources include building, mining, quarrying, shipping and transport industries but do not include business or commercial resources or resources of the kind promoted by the Association. The Taxpayer’s proposed new purpose for which the Taxpayer exists is promoting a specific industrial industry, which is considered to be an industrial resource, so this requirement is satisfied. | Detailed Reasoning - Resources of Australia: 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. The rules of the Taxpayer define its principal area of operation being in Australia. It is considered that this requirement is satisfied. | Detailed Reasoning - Dominant Purpose: To be exempt under Item 8.2(d) of the table in section 50-40 of the ITAA 1997, an association must be established principally or predominantly for the purpose of promoting the resource development. Determining the association's dominant purpose will be largely a matter of fact and degree ( Boating Industries Association of New South Wales at 85 ATC 4229; 16 ATR 399). It may involve a weighing up of the association's objects, activities, history, operation, and use of funds. As stated in the proposed objects, it is intended that the Taxpayer’s proposed new purpose for which the Taxpayer exists is promoting the development of a specific industrial industry locally. Based upon the above discussion, it is considered that the Taxpayer is established for the dominant purpose of promoting the development of Australian industrial resources. | Detailed Reasoning - Not carried on for the profit or gain of its individual members: Section 50-40 of the ITAA 1997 requires that the society or association not be carried on for the purpose of profit or gain to its individual members. The not for profit requirement is explained in Taxation Ruling 97/ 22 Income Tax: exempt sporting clubs . Whilst explained in relation to sporting clubs it is also applicable to other types of organisations. TR 97/22 states the following: 9. A club must not be carried on for the purpose of profit or gain to its individual members. 10. A club's Memorandum and/or Articles of Association or other constituent documents should contain a prohibition against a distribution of profits and assets among members while the club is functional and on its winding-up. Alternatively, a club satisfies the test if the law governing its activities prevents the club from making distributions to members. The club's activities should conform to the prohibition. It has been stated that the Taxpayer intends to become an Incorporated Association. Clause 40 of the Associations Incorporation Act 2009 contains the requirement that an Incorporated Association must be an Association that does not provide pecuniary gain for its members. The rules of the Taxpayer also have the required clauses in its rules in relation to the distribution of assets upon winding up. It is considered that while there are some member benefits, the Taxpayer does not exist principally to confer benefits on its members. Provided that the Taxpayer becomes an Incorporated Association and it conforms to the requirements governed in the relevant legislation, it will be considered that the Taxpayer will not be carried on for the profit or gain of its individual members. | Detailed Reasoning - It must not be a charity: A resource development entity described in section 50-40 of the ITAA 1997 will not be exempt from income tax as such if it is an entity that is also a charity. The Taxpayer is not a charity and therefore satisfies this requirement. | Detailed Reasoning - Conclusion: It is considered that the new objections of Taxpayer will meet the requirements of item 8.2(d) of the table in section 50-40 of the ITAA 1997. Accordingly, its ordinary and statutory income is exempt from income tax under section 50-1 of the ITAA 1997.