Private ruling: Exempt entities - special conditions
Date of advice: 21 October 2021
Published: January 2022
Ruling period: 1 July 20xx to 30 June 20xx
Date scheme commenced: 1 July 20xx

Ruling: Q1: Is the taxpayer 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 Australian industrial and manufacturing resources pursuant to items 8.2(c) and (d) of the table in section 50-40 of the ITAA 1997? | A1: Yes

Relevant facts and circumstances: The entity (X) is a not-for-profit public company limited by guarantee. X was established through the merger of national and state associations that represented and served businesses in an industry segment. X is not registered with the Australian Charities and Not-for-profits Commission (ACNC) as a charity and is not a charity. X is the peak national industry association representing the Australian relevant manufacturers and their industry suppliers (the Industry). Governing Documents X has a constitution which set out its objects and powers, and provides for categories of membership. X is a non-profit organisation on the basis that its constitution prevents it from distributing income or assets for the benefit of its members both while it is operating and when it winds up. Mission Goals Activities X's website lists its mission, goals in order to achieve its purpose and activities that achieves its objects. A copy of X's audited annual reports were provided with the application. The Directors' Report states the principal activities of X. X has adopted strategies to achieve its objectives. The Directors' Report also included how X's principal activities assisted in achieving the objectives Source of revenue X derives its revenue primarily from membership fees, in addition to the following main sources of income:

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 50-47 | Income Tax Assessment Act 1997 subsection 995-1(1) | Australian Charities and Not-for-profits Commission Act 2012 subsection 25-5(5) | Charities Act 2013 section 5 | Charities Act 2013 section 12

Reasons for decision: Summary: Unless otherwise stated, all legislative references are to the Income Tax Assessment Act 1997 . X was established to promote the development of industrial and manufacturing resources of Australia pursuant to items 8.2(c) and (d) of the table in section 50-40. X's objects under its constitution, and the activities that it carries out to support those objects, also show that 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: The ordinary and statutory 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 The exemption is subject to the special condition in item 8.2 of section 50-40, that the society or association is not carried on for the profit or gain of individual members. Further, the exemption is subject to the special condition in section 50-47, that where an entity is covered by an exempt entity category but also meets the description of an 'ACNC type entity', it will not be exempt from income tax unless it is registered as a charity with the ACNC and endorsed by the ATO. The matters to be satisfied before this exemption applies are: • the entity is a non-profit association or society; and • the dominant or principal purpose for which the entity 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; and • the entity is not an 'ACNC type of entity'. If the association fails to satisfy these requirements, its income will not be exempt under this provision. | Detailed Reasoning - Special condition - 'ACNC type of entity': Section 50-47 provides a special condition that if an entity that is covered by one of the items in subdivision 50-A is an 'ACNC type of entity', they will not be exempt from income tax unless they are registered under the Australia Charities and Not-for-profits Commission Act 2012 . 'ACNC type of entity' is defined in subsection 995-1(1) as an entity that meets the description of a type of entity in column 1 of the table in subsection 25-5(5) of the Australian Charities and Not-for-profits Commission Act 2012 . Column 1 of the table in subsection 25-5(5) of the Australian Charities and Not-for-profits Commission Act 2012 describes a charity. The Charities Act 2013 provides a definition of 'charity' that applies to all Commonwealth laws. Section 5 of the Charities Act 2013 provides that 'charity' means an entity: a) that is a not-for-profit entity; and b) all of the purposes of which are: i. charitable purposes that are for the public benefit; or ii. purposes that are incidental or ancillary to, and in furtherance or in aid of, purposes of the entity covered by subparagraph (i); and c) none of the purposes of which are disqualifying purposes; and d) that is not an individual, a political party or a government entity X is a not-for-profit entity. Section 12 of the Charities Act 2013 lists charitable purposes. X's objects in its Constitution are not charitable purposes. Furthermore, one of X's purposes is to provide services for the benefit of its members. Therefore, X is not an 'ACNC type of entity' and section 50-47 will not apply. | Detailed Reasoning - Society or Association: The terms 'association' and 'society' are not defined in the ITAA 1997 and take on their ordinary meaning. The Macquarie Dictionary (online version https ://www.macquariedictionary.com.au/ ) defines association as: an organisation of people with a common purpose and having a formal structure ........... (Macquarie Dictionary Publishers, 2020) 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). X is a public company limited by guarantee. It is considered to be 'an organisation of people with a common purpose' and has a formal structure. It is accepted that X is a 'society or association' for the purposes of section 50-40. | Detailed Reasoning - Non-profit: Section 50-40 requires that the association not be carried on for the purposes of profit or gain to its individual members. This is known as the non-profit requirement. Evidence that an association operates on a non-profit basis can be found in its constituent documents which should contain a prohibition against distribution of profit and assets among members while the association is functioning, and on its winding up. The association's actions must also be consistent with this prohibition. X's Constitution prevents it from distributing profits or assets for the benefit of its members both while it is operating and when it winds up. X provides minor benefits to members such as public relations and promotional opportunities, marketing tools and trade discounts. These benefits are received jointly and are incidental to its main purpose of promoting the development of Australian industrial and manufacturing resources, a benefit which flows to members from activities promoting the development of resources with which they are involved. Most of the benefits provided by X to its members are designed to add to the member's industry knowledge and assist them to learn the latest industry trends, standards, and methods by way of accreditation, training, and support services. As X's Constitution contains appropriate prohibitions on making distributions to its members during operation and upon winding up, it is accepted that the Association is a non-profit association. | Detailed Reasoning - Australian resources: The use of the word "Australian" applied to resources in section 50-40 limits the income tax exemption to associations whose activities are directed towards Australian resources. The income tax exemption only relates to specified Australian resources (including resources of a particular region of Australia). Where an entity's activities are directed at promoting the development of a relevant Australian resource(s) and foreign resources, it will not be entitled to the exemption. Taxation Ruling IT 2415 Income tax: associations promoting development of Australia resources, discusses paragraph 23(h) of the Income Tax Assessment Act 1936 , and provides the following at paragraphs 6 to 9: 6. The operation of paragraph 23(h) was considered by the Supreme Court of New South Wales in Australian Insurance Association v. FCT, 79 ATC 4569; 10 ATR 333. The Court found the Association did not qualify for exemption under paragraph 23(h) because it was established for the predominant purpose of protecting and furthering the interests of Australian insurance companies. Furthermore, the Court concluded that the expression "industrial resources" in paragraph 23(h) refers to resources such as those of the building , mining, quarrying, shipping and transport industries - it does not extend to business or commercial resources or resources of the kind promoted by the Association. 7. The reasoning in the decision in the Australian Insurance Association casehighlights 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. 8. 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. Reference might usefully be made to the observations of the High Court in FCT v. Broken Hill Pty. Co. Ltd., 69 ATC 4029; 1 ATR 40 on the meaning of the term "development" in relation to the development of a mining property. 9. There can be little doubt that the identification of, and programmes to overcome, manpower needs and the establishment of systematic training schemes in a particular industry are necessary for the efficient operation of the industry - they are part and parcel of the development of the resources specified in paragraph 23(h). Although the connection may not be as readily apparent the development of marketing techniques may also be relevant to the development of resources - it could be said that there is little point in developing resources if the products of the resources cannot be sold. Another area where the connection with development of resources may not be direct is the development of tourism - but it does play a part in the development of the resources specified in paragraph 23(h). | Detailed Reasoning - Industrial resources: The term industrial resource is not defined in the legislation. It takes its ordinary meaning. Based on paragraph 6 of IT 2415 above, the expression industrial resources in section 50-40, refers to resources such as those of the building, mining, quarrying, shipping and transport industries. In Co-operative Bulk handling Ltd v Federal Commissioner of Taxation 2010 ATC 20-183, Gilmour J (at first instance) accepted that 'promoting the development of resources' under section 50-40 entails "unlocking, exploiting or bringing out the inherent potentialities and latent capabilities" of the resources (at paragraph 80) This reflects the meaning of 'development' given by Kitto J in Federal Commissioner of Taxation v Broken Hill Proprietary Company (1969) 120 CLR 240 in the phrase 'development of mining property' used in section 122 of the Income Tax and Social Services Contribution Assessment Act 1936-1964 (Cth): 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 the property... It covers, I think, any preparation, adaption or equipment of the property for the exploitation of an inherent potentiality which cannot be exploited, or fully exploited, without some such preliminary treatment. (at 247) | Detailed Reasoning - These resources are not defined in the ITAA 1997 and so take on their ordinary meaning.: The term 'manufacturing resources' is discussed in Australian Insurance Association v FCT (1979) 10 ATR 333; 79 ATC 4574. It was determined that manufacturing resources extend to 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. | Detailed Reasoning - Dominant Purpose: To be exempt under Item 8.2(c) and (d) of the table in section 50-40, an association must be established principally or predominantly for the purpose of promoting the resource development. It is not sufficient that promoting the development of the resource(s) may be incidental to, involved with, or a consequence of an association's purpose. Promoting development can be by various means, including research, providing facilities, training, improving marketing methods, facilitating cooperation and similar activities. The main purpose of the society or association must be promoting the development of the specified resources. Any other purpose of the organisation must be incidental, ancillary or secondary. Determining the association's dominant purpose is largely a matter of fact and degree. It can involve a weighing up the association's objects, activities, history, operation, and use of funds. | Detailed Reasoning - Application to your circumstances: X's constitution sets out its objects. The primary object of X is to be the peak national industry association representing manufacturers and industry suppliers. It provides education and training programs, influences industry and product sustainability, promotes product conformity and compliance to ensure acceptable operational standards and provides representation for the Industry. X's principal activities are stated in its Financials. A dominant purpose of X according to its governing documents is to promote the development of Australian industrial and manufacturing resources. Its principal activities support this purpose. Although X has an independent purpose of providing benefits to its members, this purpose is incidental to its main and dominant purpose of promoting the development of Australian industrial and manufacturing resources. | Detailed Reasoning - Conclusion: X is established for the dominant purpose of promoting the development of Australian industrial and manufacturing resources. It is a non-profit association that meets the requirements of items 8.2(c) and (d) of the table in section 50-40. Accordingly, its ordinary and statutory income is exempt from income tax under section 50-1.

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