Private ruling: Not-for-profit - income tax - exemption from tax. not-for-profit - fringe benefits tax
Date of advice: 29 June 2018
Published: September 2018
Ruling period: For Issue 1 | Year ended 30 June 2018 | For Issue 2 | Year ended 31 March 2018
Date scheme commenced: 1 April 2017

Ruling: Q1: Is the entity a non-profit organisation established for the purpose of promoting the development of Australian agricultural and/or pastoral resources pursuant to items 8.2(a) and (e) respectively 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 Issue 2 Fringe Benefit Tax – rebatable employer | Q2: Is the entity a rebatable employer pursuant to subsection 65J(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986)? | A2: Yes

Relevant facts and circumstances: The entity is registered with the Australian Securities and Investments Commission (ASIC) as an Australian Public Company limited by guarantee. The Constitution of the entity contains a clause that states one of the objects for which the entity is established are to be a charitable entity and to advance the Australian agriculture and primary production industries. The entity’s Constitution has a clause which deals with the income and property of the company and states that the income and property of the entity will only be applied towards the promotion of the Objects and no portion thereof will be paid or transferred directly or indirectly by way of dividend, bonus or otherwise to the Members of the Company. The winding up clause in the Constitution of the entity states: If, upon the winding up or dissolution of the entity and after satisfaction of all the entity’s debts and liabilities, any property or surplus remains, the surplus and property must not be paid to or distributed amongst Members, but will be given or transferred to another organisation which, by its constitution is: ● a not-for-profit organisation; ● required to pursue charitable purposes only; ● required to apply its profits (if any) or other income in promoting its objects similar to those of the Company; ● endorsed as a deductible gift recipient; and ● prohibited from making any distribution to its members, The number of membership is unlimited.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 50-1 | Income Tax Assessment Act 1997 section 50-40 | Fringe Benefit Tax Assessment Act 1986 section 65J

Reasons for decision: Summary: While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision. Unless otherwise stated, all legislative references are to the Income Tax Assessment Act 1997 . | Detailed Reasoning - Issue 1: Income tax - Exemption from tax | Summary: The entity is established to promote the development of agricultural and pastoral resources of Australia pursuant to items 8.2(a) and (e) of the table in section 50-40. The object and activities under the constitution show it does not operate principally for the benefit of its members jointly or as a group. Therefore its ordinary and statutory income is exempt from tax under section 50-1. | Detailed Reasoning - Detailed reasoning: Assessable income of an entity is exempt under section 50-1 where the entity falls within the following description contained in item 8.2 of section 50-40: 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 Items 8.2(a) and 8.2(e) of the table in section 50-40 provides that a society or association established for the purpose of promoting the development of Australian agricultural and pastoral resources shall be exempt from income tax subject to the special conditions contained in the table in section 50-40. The exemption is subject to a special condition that the society or association is not carried on for the profit or gain of individual members. In order for the entity to satisfy the requirements in item 8.2 of the table in section 50-40 it must: 1. be a society or association; 2. be established for the purpose of promoting the development of an Australian resource (listed under Item 8.2 of section 50-40); and 3. not carried on for the profit or gain of its individual members. If the association fails to satisfy these requirements, it will not be exempt from income tax under section 50-1. | Detailed Reasoning - 1. Society or Association: One of the requirements of section 50-40 is that the entity be a society or association. The terms “society” and “association” are not defined in the ITAA 1997. The Macquarie Dictionary (online version of 26 June 2018 on https://www.macquariedictionary.com.au/ ) defines association as: an organisation of people with a common purpose and having a formal structure ……….. (Macquarie Dictionary Publishers, 2017) The meaning of “association” was considered by Olney J in Douglas & Ors v FCT 97 ATC 4722 in relation to section 23(g)(v) of the Income Tax Assessment Act 1936 (ITAA 1936) and the following was found: As the section contains no definition of either ‘society, association or club’ or “community services purposes” it should be construed according to the ordinary meaning of the words used and, if necessary, after resort to the relevant explanatory memorandum and second reading speech. Unassisted by authority I would construe the collation “society, association or club” to refer to a voluntary organisation having members associated together for a common or shared purpose. Such a description is consistent with various dictionary definitions of the several words used. The following examples can be found in the Concise Oxford Dictionary: ● Society: Association of persons united by a common aim or interest or principle; ● Association: Organised body of persons for a joint purpose: ● Club: Association of persons united for some common interest, usually meeting periodically for shared activity. The entity is registered with the Australian Securities and Investments Commission (ASIC) as an Australian Public Company limited by guarantee. The Constitution of the entity states that the number of members is unlimited and works towards a common goal as expressed in their Constitution. In applying the definition, the entity is considered to be an ‘association’ or ‘society’ for the purpose of section 50-40. | Detailed Reasoning - 2. Established for the purpose of promoting the development of Australian resources: It is a requirement under section 50-40 that the primary or predominant purpose of the entity must be directed at promoting the development of a specific resource. It will not be sufficiently satisfied if the promotion or development is incidental to the entity’s operations. In all cases the ‘association’ or ‘society’ must be established for “the purposes of promoting development” of the particular resource. This is not only a matter of having such promotion as its main object in its constituent documents (the Rules), but also it must be its main activity for the particular income year in question. The entity is seeking income tax exemption on the basis that it tis established for the purpose of promoting the development of agricultural and pastoral resources as listed under items 8.2(a) and (e) respectively of the table in section 50-40. Australian agricultural or pastoral resource The use of the word "Australian" applied to resources in section 50-40 limits the exemption to associations whose activities are directed towards Australian resources. The Macquarie Dictionary (online version viewed on 26 June 2018 on https://www.macquariedictionary.com.au/ ) defines: Agriculture as: the cultivation of land, including crop-raising, forestry, stock-raising, etc.; farming (Macquarie Dictionary Publishers, 2017) Pastoral as: adjective 1. of or relating to the raising of stock, especially sheep or cattle, on rural properties: pastoral occupations; pastoral leases. ……….. (Macquarie Dictionary Publishers, 2017) In Cooperative Bulk Handling v FCT [2010] FCAFC 155 Mansfield and McKerracher JJ state, at paragraph 72: ‘the expression “agricultural resources“ is broader than “agriculture”. It may reasonably be understood to mean the range of resources available to facilitate and support agriculture.” At paragraph 73 they state; ‘This approach of dissecting “agriculture” from “agricultural resources” does not give full meaning to the expression. What is to be “promoted” is not agriculture or a specific agricultural activity but “the development of Australian agricultural resources.” Neither “agriculture’ nor “agricultural” stands alone. The “development of Australian agricultural resources” extends beyond cultivation of land as agriculture. Taxation Ruling IT 2415 – Income Tax: associations promoting development of Australian resources (IT 2415) states at paragraphs 7 & 8: 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. 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. In Australian Insurance Association v. FC of T 79 ATC 4569, the case concerned the issue of whether an association 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. In reference to the former paragraph 23(h) of the Income Tax Assessment Act 1936 (ITAA 1936) Sheppard J, Supreme Court of New South Wales concluded at ATC 4576: …In my opinion the Commissioner is correct in his submission that the purpose which is referred to in sec. 23(h) must be the principal or dominant purpose for which the association or society was established Determining the dominant purpose will be largely a matter of fact and degree. It is necessary to consider an association's constituent documents, activities, history and proposed directions, etc. ‘Established’ refers not only to the motives and objectives which lead to the formation of the association but to its purpose since that time. The object of the entity aims to improve the agricultural and pastoral resources. Promoting the development of an agricultural or pastoral resource In Cooperative Bulk Handling v FCT [2010] FCA 508 Gilmour J, primary judge in the Federal Court, provided the following definitions of “promoting” and “development”: ● promoting – to further the growth, development, progress, etc; ● development – the act, process or result of developing, evolution, growth, expansion; In the full Federal Court decision, Cooperative Bulk Handling v FCT [2010] FCAFC 155 at paragraph 81, Mansfield and McKerracher JJ found that CBH had promoted the development of the grain growing industry through the development of innovative practices, including new crops, new technology and new methods, such that “its business [was] continually open to development by advancement rather than having matured to the point of being static” The activities of the entity are directed towards improving and promoting the agricultural and pastoral resources. | Detailed Reasoning - 3. Not carried on for the profit or gain of its individual members: The exemption under item 8.2 of section 50-40 is also subject to the special condition that the entity is “not carried on for the purposes of profit or gain of its individual members”. An association or society will fail the non-profit test if the members, in their individual capacity, are to receive any benefits. If an association operates principally to confer benefits on its members jointly or as a group, its predominant purpose may not be considered to be promoting resource development and thus not exempt under section 50-40. The Commissioner considers that to qualify, the entity must be prevented by law or its constitution documents from distributing its profits or assets among members, either while the entity is functional or on its winding up, and it must act consistently with those restrictions. Paragraph 23 of the Taxation Ruling TR 97/22 – Income Tax: exempt sporting club (TR 97/22) states that: Where it is clear from the objects, policy statements, history, activities and proposed future directions of the club that there will be no distributions to members, the Commissioner accepts that the non-profit test has been satisfied. It is evident from the entity’s objects and activities that it operates for the benefit of all agriculture and pastoral services in Australia and its services are not limited to members but for the community. The entity’s Constitution contains non-profit and dissolution clauses which prevents them from distributing its profits and assets among members while it is operating and on winding up. Therefore, it is accepted that the entity operates on a non-profit basis and does not make any distributions to its members and therefore meets the non-profit test. | Detailed Reasoning - Conclusion: It is considered that the entity meets the requirements for tax exempt status under items 8.2(a) or (e) of the table in section 50-40 as an association promoting the development of an Australian agricultural and pastoral resources. Therefore the ordinary and statutory income of the entity will be exempt under section 50-1. | Detailed Reasoning - Summary:: The Commissioner accepts that the entity is an exempt entity for income tax purpose and is not a government body. the entity therefore satisfies all the necessary conditions to be considered a rebatable employer under subsection 65J(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA). | Detailed Reasoning - Detailed reasoning:: Subsection 65J(1) of the FBTAA states in part: An employer is a rebatable employer for a year of tax if the employer: (a) is exempt from income tax at any time during the year of tax under any of the provisions set out in the table; and (b) satisfies the special conditions (if any) set out in the table. Specifically, item 9 under the table states that: a society, or association (a) established for the purpose of promoting the development of any of the following Australian resources: (i). agricultural resources: (ii). horticultural resources; (iii). industrial resources; (iv). manufacturing resources; (v). pastoral resources; (vi). viticultural resources; (vii). aquacultural resources; (viii). fishing resources; and (b) covered by item 8.2 of the table in section 50-40 of the Income Tax Assessment Act 1997 . Further, a rebatable employer under item 9, must also satisfies the special condition set out in subsection 65J(5). Paragraph 65J(5)(b) states: (a) an incorporated company where the company is limited by guarantee and the interests and rights of the members in or in relation to the company are beneficially owned by: (i). the Commonwealth, a State or a Territory; or (ii). an authority or institution of the Commonwealth, a State or a Territory. Therefore, to qualify as a rebatable employer under subsection 65J(1) of the FBTAA, an entity must: ● be a non-profit society or association; ● be established for the purpose of promoting the development of at least one of the resources of Australia as specified in this paragraph; and ● must not be a company that is owned, controlled or established by the Commonwealth, a State or a Territory. | Detailed Reasoning - Non-profit: As discussed above, the entity is considered to be non-profit as its Constitution contains appropriate non-profit and dissolution clauses. the entity qualifies as an exempt entity for income tax purposes as it is established for the purpose of promoting the development of at least one of the resources of Australia. | Detailed Reasoning - Society, association or club: As discussed in Question 1 in relation to the entity’s income tax exemption status, it meets the ordinary meaning of an association. However, Taxation Determination TD 95/56 - Fringe benefits tax: can a body which is formed by government, is controlled by government and performs functions on behalf of government be an 'association' for the purposes of section 65J of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)? (TD 95/56) serves to slightly modify the ordinary meaning of an “association” for the purpose of section 65J of the FBTAA. It states that a body cannot be an association where it is: ● formed by government; ● controlled by government; and ● performs functions on behalf of government The reasoning being that such body is clearly not formed to give effect to the purposes of the members of that body, but to give effect to the purpose of government. The entity is a public company limited by guarantee formed pursuant to the provisions of the Corporations Act 2001 . The Commissioner accepts that the entity is not a body formed by government. It effectively controls and manages its affairs without any requirement to take direction from the government. Therefore, the entity is not considered to be controlled by the government or performs functions on behalf of the government. The entity is considered to be an association for the purposes of subsection 65J(1) of the FBTAA as well as TD 95/56. | Detailed Reasoning - Conclusion: The entity is an exempt entity for income tax purpose as it is a non-profit entity established for the purpose of promoting the development of Australian resources. The Commissioner also accepts that the entity is not a Government body and therefore satisfies all the necessary conditions to be considered as a rebatable employer under subsection 65J(1) of the FBTAA.

Reasons for decision: These reasons for decision accompany the Notice of private ruling for the entity.