Private ruling: Exemption from income tax
Published: April 2014
Ruling period: Year ended 30 June 2013 | Year ended 30 June 2014 | Year ended 30 June 2015
Date scheme commenced: 1 July 2012

Ruling: Q1: Is the X Association (XA) exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as an association established for the purpose of promoting the development of a manufacturing resource of Australia under item 8.2(d) of section 50-40 of the ITAA 1997? | A1: Yes.

Relevant facts and circumstances: The entity is a not for profit company limited by guarantee. The entity is a peak industry body. XA has applied for a private ruling on the basis that they are an association established for the promotion of the development of Australian manufacturing resources pursuant to section 50-40 of the ITAA 1997. The entity has provided their Constitution. Their Constitution has appropriate non-profit and dissolution clauses for a non profit entity. The primary objects of its Constitution provide that the entity is established to promote their industry and further the standards, reputation and ethics of their industry.

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

Reasons for decision: Summary: Under section 50-1 of Income Tax Assessment Act 1997 (ITAA 1997) the ordinary and statutory income of entities covered by the tables in sections 50-5 to 50-45 is exempt from income tax. The appropriate section for consideration in this ruling is item 8.2(d) of the table in section 50-40 of the ITAA 1997. Item 8.2 of the table in section 50-40 of the ITAA 1997 states the following as being an exempt entity: 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 special condition of the section is that the society or association is not carried on for the profit or gain of its individual members. The entity has applied for consideration as a society or association established for the purpose of promoting the development of Australian manufacturing resources pursuant to item 8.2(d) of the table in section 50-40 of the ITAA 1997. The conditions of section 50-40 of the ITAA 1997 are discussed below: | Detailed Reasoning - 1. It must be a society or association.: The term society, association or club is not defined in the ITAA 1997. The term is therefore construed according to the ordinary meaning of the words. In Theosophical Foundation Pty Ltd v. Commissioner of Land Tax (NSW) [1966] 67 SR (NSW), Sugerman JA defines society 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" 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. Paragraph 2 of Taxation Determination TD 95/56 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 Macquarie Dictionary 2001, 5th edition (The Macquarie Library Pty Ltd, Macquarie University) defines 'club' as a group of persons organised for a social, literary, sporting, political, or other purpose, regulated by rules agreed by its members. The interpretations of society, association or club as described above, emphasise on a 'body of persons' and 'an organisation of people' with a 'common purpose'. The entity is a company limited by guarantee, an organisation of people with a common purpose (as per its objects) and a formal structure. It is considered to be a society or association. | Detailed Reasoning - 2. It must be established for the purpose of promoting the development of Australian manufacturing resources.: The term 'development' is used in section 50-40 of the ITAA 1997 in a commercial or business sense. It comprehends all the elements which must be taken into account to ensure that the specified resources are best used. The meaning of 'development' was examined by the High Court in the case of FC of T v. Broken Hill Pty Co. Ltd 69 ATC 4028; 1 ATR 40 where, in considering the phrase 'development of mining property' the majority of the High Court accepted the interpretation of Kitto J: 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, adaption or equipment of the property for the exploration of an inherent potentiality which cannot be exploited or fully exploited, without some such preliminary treatment. The promotion of development may be direct or indirect. Methods of promoting resources include marketing, training, research, education, introduction of new and improved classes of product and facilitation of cooperation, and similar activities (refer page 22 of the Income tax guide for non-profit organisations ). 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 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 be used unless the draftsman has intended that the expression "industrial resources" would allow a wider and different range of resources from those which are manufacturing resources. …[T]he words "industrial resources" were inserted to cover such resources as those of the building industry or mining or quarrying industries. The word "industrial" was thus said to have been used in its traditional or conventional sense. The entity, as set out in its Constitution and incorporating the activities of promoting safety, professionalism and integrity of its industry, advocating and responding on national issues of importance to its industry, creating strategies to enhance the credibility and longevity of the industry in a pro-active sense, is established to promote their industry's manufacturing resources in Australia. We now will consider if their industry qualifies as a manufacturing resource of Australia. Pursuant to item 8.2(d) of section 50-40 of the ITAA 1997 the manufacturing resource must be a resource of Australia. It is a matter of fact and degree whether an association is predominantly for the purpose of promoting the development of Australian resources. Taxation Ruling IT 2415 emphasises that the section refers to the development of resources of Australia. It states at paragraph 8: It is important 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 the specified resources are used in the best interests of Australia. The entity is considered to be promoting, in a business sense, the development of an Australian resource. 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. Sheppard J said in Australian Insurance Association at 79 ATC 4573; 10 ATR 337: '... the undertakings of the Australian insurance companies, viewed as a whole, are a resource of Australia. I use the word "undertakings" in the broadest sense. I include within it not only the businesses of the various companies but also their assets and the knowledge and skill of their staffs.' Based upon the above discussion, it is accepted that the entity has a purpose to promote the development of Australian manufacturing resources through their activities representing the businesses and expertise of their members. To qualify for exemption under item 8.2(d) of the table in section 50-40 of the ITAA 1997, that purpose must be the dominant purpose for which the association was established. Therefore, both the entity's dominant objects as per its Constitution and its dominant activity must be for this purpose. The entity's primary purpose in its Constitution is that the entity is established to promote their industry and further the standards, reputation and ethics of their industry This is achieved by representation of its member organisations, advancement of professional standards and ethics to ensure acceptable operational standards are met in their industry. In addition, the entity partners with training providers as described in the facts of this case. In accordance with paragraphs 9 and 10 of IT 2415 industry training is an acceptable activity for purposes of promotion of a specified resource of Australia, in this case manufacturing resources of Australia. It is accepted that the entity is established principally for the purpose of promoting the development of Australian manufacturing resources. Special Condition. The entity must not be carried on for the profit or gain of its individual members. Where an association operates principally to confer benefits to its members jointly or as a group, it is unlikely to be predominantly for promotion of resource development and therefore not exempt from income tax under item 8.2(c) of section 50-40 of the ITAA 1997. If an association is carried on for the profit or gain of its individual members, it will fail the non-profit requirement. Such a purpose is unlikely to be consistent with the purpose of promoting resource development. It is necessary to distinguish from the dominant purpose of providing benefits to members as a group from the incidental benefit which will often flow to members from activities promoting the development of resources with which they are involved. An association usually ensures they operate on a non-profit basis by including non-profit clauses in their constituent documents. It is considered that the entity has acceptable non-profit clauses in its Constitution. It is also necessary that the association's actions are consistent with their constituent documents. As the cases below illustrate, there are instances where benefits to members have been accepted. However, what is important to distinguish is whether benefits are conferred to members along with others in the community or as individual members. The phrase 'profit or gain of its individual members' was considered in the case Commissioner of Taxation v Co-operative Bulk Handling limited [2010] FCAFC 155 ( CBH case). In the CBH case, the members had to be customers of CBH. However, CBH's services were not restricted to members; non-members could also contract for CBH's bulk handling services. It was held that CBH made its facilities available to any grain trader or miller, whether or not they were members. Further, it was held at 112: While members do benefit from the activities of CBH, in its grain handling and storage activities, they do so at no greater extent than, and have no preference over, non-members who deal with the company, and on these circumstances such benefits do not accrue to them as 'individual members'. From the information provided the members of the entity do receive benefits. However, apart from industry information and improvement in their industry from the actions of the entity, members do not appear to benefit to a greater extent than non-members. It is considered that the benefits provided to members do not accrue to them as 'individual members'. However, benefits which are received jointly as members and which are incidental to the pursuit of the association's objects, will not prevent it from passing the non-profit test. For example business members will commonly receive some advantages, including financial advantages, as an incidental result of resource development ( Australian Insurance Association case). In the case of Inland Revenue Commissioners v Yorkshire Agricultural Society (1928) 1 KB 611, the provision of specific benefits to members to induce membership were disregarded. Although the Society applied as a charitable institution, it was found that the benefits to the members in the form of various privileges attaching to membership could be disregarded. The fact that benefits accrued to members of the Society did not detract from the fact that the Society had been established for the purpose of improvement of agriculture as a whole and not for any confined purpose of benefiting only the particular members of the Society. His Lordship said at 631: …If the benefit given to members is only given to them with a view of giving encouragement and carrying out the main purpose which is a charitable purpose, then I think the mere fact that the members are benefited in the course of promoting the charitable purpose would not prevent the society being established for charitable purposes only. It can be seen from the entity's website and information provided that member benefits are designed to add to the member's industry knowledge and assist them to learn the latest industry trends and methods by way of exhibitions, training and award ceremonies. These benefits are directly related to the greater purpose of promoting their industry.as a whole, a manufacturing resource of Australia. It is considered that the entity does not exist principally to confer benefits on its members. | Detailed Reasoning - Conclusion: It is considered that the entity is a non-profit association that meets the requirements of item 8.2(d) of the table in section 50-40 of the ITAA 1997 and its ordinary and statutory income is exempt from income tax under section 50-1 of the ITAA 1997.