Private ruling: Income Tax Exemption
Published: April 2012
Ruling period: Year ended 30 June 2008 to 30 June 2016

Ruling: Q1: Is the Rulee exempt from taxation under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) on the basis that it is an exempt entity under Item 8.2 in the table in section 50-40 of the ITAA 1997? | A1: 

Relevant facts and circumstances: 1. The Rulee is registered as an Australian public company limited by guarantee. 2. The constitution provides the objects for which the Rulee is established. It is to act as a body authorised to provide resources to farmland in the area in accordance with the relevant Act and to promote the development of the agricultural, horticultural and pastoral resources in the area. 3. Formal members are charged the same price for resources as non-members. 4. The Rulee actively investigates and invests in new technologies to maximise the efficient provision of resources to farmers at the lowest cost possible. 5. The Rulee's Constitution contains acceptable non-profit and winding-up clauses.

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

Reasons for decision: Summary: Summary The Rulee is considered a non-profit society or association established for the purpose of promoting the development of Australian agricultural resources and is thus exempt from income tax under s 50-1 of the ITAA 1997. Detailed reasoning The statutory conditions that the applicant must meet before being entitled to exemption from income tax are set out in s 50-1 and s 50-40 of the ITAA 1997 as follows: Section 50-1 of the Income Tax Assessment Act 1997 (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 of the table in section 50-40 of the ITAA 1997 covers non-profit societies or associations established for the purpose of promoting the development of Australian agricultural, horticultural, industrial, manufacturing, pastoral, viticultural, aquacultural or fishing resources. The matters to be satisfied under section 50-40 of the ITAA 1997 are: § the organisation is a non-profit association or society; and § 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; and § the resources, are resources of Australia. 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. It does not include a body formed and controlled by government and performing functions on behalf of government (Taxation Determination TD 95/56). The Rulee is registered as an Australian public company limited by guarantee. It is governed by its constitution and conducts it activities in line with the objects stated in its constitution. It is accepted that the Company is a 'society or association' for the purposes of s 50-40 of the ITAA 1997. In order to constitute an entity exempt from income tax, the Company must also meet the special condition in Item 8.2 of s 50-40 that it is: "not carried on for the profit or gain of its individual members". To meet this special condition the constituent documents and any governing legislation of the entity must prevent it from ever distributing profits or assets for the benefit of members and the organisation must act in accordance with those governing clauses. If an association operates principally to confer benefits on its members, it is unlikely to be predominantly for promoting resource development and thus not exempt. The Rulee's constitution prevents the distribution of income to members in operation and upon winding up and directs income and property to be applied solely towards the promotion of the objects. Formal members are charged the same price for resources as non-members. Members are entitled to be appointed a member of the board, and to vote at meetings. The Rulee is a non-profit entity. Any benefits to members are incidental to its purpose. The Company is seeking income tax exemption on the basis that it is established for the purpose of promoting the development of pastoral, agricultural and horticultural resources. These resources are not defined in the ITAA and so take on their ordinary meaning. For agricultural and pastoral resources the Macquarie Concise Dictionary defines pastoral as 'used for pasture, as land', and the Shorter Oxford English Dictionary defines agriculture as 'the science and art of cultivating land; including the gathering in of the crops and the rearing of live stock; farming (in the widest sense)'. Resources or their elements include infrastructure, plant and equipment, livestock, personnel, knowledge, expertise and skills. An industry's businesses and their assets may be resources. The Rulee acts as a body authorised to provide resources to farmland in the area in accordance with the relevant Act. The infrastructure, knowledge, expertise and skills involved in managing and distributing the resources can be accepted as elements of agricultural, pastoral and horticultural resources. Section 50-40 of the ITAA 1997 does not refer to the promotion of the specified resources. It is directed to the promotion of the development of the specified resources. Taxation ruling IT 2415 Income tax: Associations promoting the development of Australian resources states the following on the meaning of development: The term "development" must be taken to be used in a commercial or business sense, i.e. it comprehends all elements which must be taken into account to ensure that the specified resources are used in the best interests of Australia. The meaning of 'development' was examined in FC of T v. Broken Hill Pty Co. Ltd 69 ATC 4028 at 4031-4032; (1969) 1 ATR 40 at 45 . 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, 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.' Their Honours also said: 'For instance, we do not doubt that expenditure of bringing water to that mining property to enable the taxpayer's mining operations by sluicing to take place thereon is both expenditure in connexion with mining operations on a mining property and is expenditure on the development of that property.' The definition of "unlocking, exploiting or bringing out the inherent potentialities and latent capabilities" of agricultural resources and the advancement of agricultural resources was also accepted by Gilmour J in Cooperative Bulk Handling Ltd V FC of T (2010) ATC 20-183 (CBH) 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. However, not all activities connected with a resource will necessarily be for its development. In line with the CBH decision, the Commissioner accepts that the statutory expression requiring the entity to be established for the purpose of "promoting the development of agricultural resources of Australia" is a composite expression with a broader application than its component words. Thus the reference to "promoting the development of agricultural resources" in that context is not limited to promoting activities on the farm side of the farm gate. The expression requires a global view of the activities of the relevant entity to determine the principal or dominant purpose for which it is established. In Tribunal Case U118 (1987) 18 ATR 3579 an association was set up by sugar cane growers for the purpose of financing the construction of a water storage facility to make additional water supplies available to irrigate their farms. This was accepted as a purpose of promoting the development of Australian resources. At paragraph 31 the tribunal stated: 31. The construction of the water storage seems easily to fit within the meaning of the words "promoting the development of... agricultural... resources of Australia" in sec. 23(h) of the Act. There can be little doubt that the construction of a water storage designed to provide additional water supplies for sugar-cane growers is the development of an agricultural resource. The ordinary meaning of the words must lead to that conclusion. The constitution provides the objects for which the Rulee is established. It is to act as a body authorised to provide resources to farmland in the area in accordance with the relevant Act and to promote the development of the agricultural, horticultural and pastoral resources in the area. Provision of resources in the area by the Rulee allows intensive agriculture that would not have otherwise been possible. The Rulee provides resources at a reduced cost by efficient management on a bulk scale. This is in the best interests of Australia as it minimises costs to farmers and allows them to remain competitive. In contrast to Case U118 , the Rulee is not involved in the construction of facilities. The Rulee undertakes structural and capital improvements, repairs and maintenance when needed. The Rulee also aims to enhance resource management by encouraging sound planning through the provision of technical advice and liaising with various bodies for new technology to ensure continual improvement in efficiency. The building, creating or setting up of new things clearly points to development, however the promotion of development need not be limited to merely physical things. As noted earlier there are many non-physical things that can promote resource development. Where physical things exist it is the operating of them that develops the agricultural resource. If such operations were not undertaken the physical infrastructure would continue to exist but there would be no development of the resources. There would only be potential for development. It is the operations themselves that most directly promote the development of the agricultural resources. In the CBH case the task and control of the handling of bulk wheat was granted to CBH by statute. Gilmore J comments at 92, "…I accept that, in taking this course, it was the purpose of the State of Western Australia to promote the development of Australian agricultural resources. This does not mean that within the meaning of s50-40 this could not also be CBH's purpose." He also states, "Without bulk handling such as was provided by CBH, the Western Australian wheat farming industry may well have collapsed." Continuing at 97 he concludes, "The principal or predominant activities of the CBH, including its involvement through subsidiaries and other investments to which I have referred, help to render growers, traders, millers and exporters more competitive in what is largely an export driven market. In so doing this necessarily promotes the development of Australian agricultural resources." Similarly, the provision of resources was initiated by government with similar intent, to develop agricultural resources in the area. Without this farmers would not be able to produce the same level of agriculture and would not have been able to remain competitive in the market. It is evident from the information provided that the operations of the Rulee are more than merely passive and they take an active role in decision making, planning, maintenance and improvement with the aim to provide resources in increasingly efficient and sustainable way which in turn helps Australian farmers remain competitive. The above falls within the meaning of 'promotion of development' in reference to the development of resources in section 50-40. Conclusion For the above reasons it is concluded that the Rulee is a non-profit society with the principal purpose of promoting the development of Australian agricultural, horticultural and pastoral resources and is thus eligible for exemption from income tax under section 50-1 of the ITAA 1997.

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