Private ruling: Deductible gift recipient endorsement
Published: March 2015
Ruling period: Year ended 30 July 2015

Ruling: Q1: Will the Commissioner continue to endorse the Taxpayer as a deductible gift recipient, under the category of necessitous circumstances fund, pursuant to section 30-125 of the Income Tax Assessment Act 1997 ('ITAA 1997') if its trust deed is varied as proposed? | A1: No. | Q2: Will the Commissioner continue to endorse the Taxpayer as an income tax exempt charity under item 1.1 of the table in section 50-5 of the Income Tax Assessment Act 1997 if its trust deed is varied as proposed? | A2: Unable to rule.

Relevant facts and circumstances: The Taxpayer has an Australian Business Number ('ABN') The Taxpayer is currently a registered charity with the Australian Charities and Not-for-profits Commission ('ACNC'). The Taxpayer is also currently endorsed as a DGR under the category of a necessitous circumstances fund, pursuant to item 4.1.3 of the table in subsection 30-45(1) of the ITAA 1997. The Taxpayer is governed by a trust deed. The trust deed contains clauses that meet the requirements of a necessitous circumstances fund. The Taxpayer seeks to vary its trust deed, the effect of which is to include the below entities as potential recipients of the Taxpayer's surplus in the event of its winding up or revocation of its endorsement as a DGR: • a public ancillary fund that is a registered charity and is endorsed as a DGR endorsed under item 2 of the table in subsection 30-15 of the ITAA 1997; and • a registered health promotion charity that operates an institution that is DGR endorsed under item 1 of the table in subsection 30-15 of the ITAA 1997.

Relevant legislative provisions: Australian Charities and Not-for-profits Commission Act 2012 . | Income Tax Assessment Act 1997 Subdivision 30-B. | Income Tax Assessment Act 1997 section 30-15. | Income Tax Assessment Act 1997 subsection 30-20(1) item 1.1.16. | Income Tax Assessment Act 1997 subsection 30-45(1) item 4.1.3. | Income Tax Assessment Act 1997 section 30-125. | Income Tax Assessment Act 1997 section 50-5 item 1.1.

Reasons for decision: Summary: The proposed variations to the Taxpayer's trust deed allow the distribution of its surplus to entities that do not have similar objects to the Taxpayer and do not come within the scope of section 30-45 of the ITAA 1997. The proposed variations would preclude the Taxpayer from being considered a public fund established for necessitous circumstances under item 4.1.3 of the table in subsection 30-45(1) of the ITAA 1997, and so it will not be entitled to continue as a DGR endorsed entity. | Detailed Reasoning - Detailed reasoning: Section 30-125 of the ITAA 1997 sets out the conditions that an entity must satisfy in order to be entitled to endorsement as a DGR. In accordance with section 30-125 of the ITAA 1997, an entity that is seeking to be endorsed as a DGR is entitled to endorsement if the following conditions are satisfied: (a) the entity has an ABN; (b) the entity is described in a category set out in item 1, 2 or 4 of the table in section 30-15 of the ITAA 1997; (c) the entity is not listed by name in Subdivision 30-B of the ITAA 1997; (d) the entity satisfies any special conditions for the category in which it is described; and (e) the entity satisfies the windup requirements described in subsection 30-125(6) of the ITAA 1997. | Detailed Reasoning - Requirement (a): The Taxpayer has an ABN and therefore this requirement is satisfied. | Detailed Reasoning - Requirement (b): The Taxpayer is seeking to remain endorsed as a DGR on the basis that it is a public fund established and maintained for the relief of persons in Australia who are in necessitous circumstances, as set out in item 4.1.3 of the table in subsection 30-45(1) of the ITAA 1997. | Detailed Reasoning - Public Fund: A fund is accepted as 'public' if it complies with paragraph 9 in Taxation Ruling TR 95/27: Income tax: public funds: For the ATO to accept a fund as a public fund, the founding documents of the public fund must reflect the following: (a) the objects of the fund must be clearly set out and reflect the purpose of the fund; (b) gifts to the fund must be kept separate from any other funds of the sponsoring organisation (if there is one). A separate bank account and clear accounting procedures are required; (c) receipts must be issued in the name of the fund; (d) the public must be invited to contribute to the fund; (e) the fund must operate on a non-profit basis. Moneys must not be distributed to members of the managing committee or trustees of the fund except as reimbursement for out-of-pocket expenses incurred on behalf of the fund or proper remuneration for administrative services; (f) the fund must be managed by members of a Committee, a majority of whom have a degree of responsibility to the general community (this requirement does not apply to funds established and controlled by governmental or quasi-governmental authority); and (g) should the fund be wound-up, any surplus money or other assets must be transferred to some other fund qualifying under subsection 78(4) or 78(5) (see Dissolution clause below). The ATO also requires an undertaking in writing, or the inclusion of a clause in the constituent documents, that the ATO is to be notified of any changes to the fund's constitution or other founding documents. While TR 95/27 refers to earlier DGR provisions in subsections 78(4) and 78(5) of the Income Tax Assessment Act 1936 , the current provisions in the ITAA 1997 are similarly worded and TR 95/27 can still be applied. Previously, we considered the clauses in the Taxpayer's trust deed and determined that its clauses were appropriate and would meet the public fund requirements in paragraph 9 of TR 95/27. The Taxpayer now proposes variations to the trust deed that would affect the outcome of our consideration of the requirement in subparagraph 9(g) of TR 95/27. Paragraphs 12 to 13 of TR 95/27 state the following in regard to dissolution clauses: 12. The precise form of wording of a dissolution clause is a matter for those in control of the fund. However, the wording must ensure that on dissolution, all remaining assets of the fund after all liabilities have been satisfied must be distributed: (a) to a fund, authority or institution specifically named in subsection 78(4); (b) to any fund, authority or institution falling under one or more of the items listed in the tables in subsection 78(4) of the Act, e.g., to a public benevolent institution under item 4.1.1 of table 4 in subsection 78(4); or (c) to a fund to which subsection 78(5) applies. 13. A fund, authority or institution seeking approval of its public fund under one of the items listed in the tables in subsection 78(4) must be mindful that in some instances the provisions require that upon dissolution of a fund any surplus assets are to be transferred to some other fund qualifying under the same item. Paragraph 29 of TR 95/27 further states: In some instances the legislation requires that moneys be transferred upon the dissolution of a fund to another fund or organisation of the same type… The Commissioner may also specify such a requirement as, for example, in paragraph 6(f) of Taxation Ruling TR 95/2 which concerns approval of overseas aid funds. Specifically, when considering the purpose of funds established for necessitous circumstances under item 4.1.3 of the table in subsection 30-45(1) of the ITAA 1997, paragraph 19 of Taxation Ruling TR 2000/9 Income tax: necessitous circumstances funds states: The constituent documents should contain an acceptable clause to deal with any surplus assets in the event the fund is wound up or ceases to be endorsed as a deductible gift recipient. Generally speaking, an acceptable clause is one which provides that, upon the winding up of the fund or the ceasing of endorsement, all surplus assets are to be transferred to one or more endorsed funds having similar objects and which come within the scope of section 30-45. Paragraph 51 of TR 2000/9 provides further explanation: These conditions help ensure that the fund is used only to provide relief and not merely for the private benefit of the individual, family or group... The Taxpayer seeks to vary its trust deed, the effect of which is to include the below entities as potential recipients of the Taxpayer's surplus in the event of its winding up or revocation of its endorsement as a DGR: • a public ancillary fund that is a registered charity and is endorsed as a DGR endorsed under item 2 of the table in subsection 30-15 of the ITAA 1997; and • a registered health promotion charity that operates an institution that is DGR endorsed under item 1 of the table in subsection 30-15 of the ITAA 1997. The entities listed above do not have similar objects to the Taxpayer, nor do they come within the scope of section 30-45 of the ITAA 1997, as required by TR 2000/9. As a result, the proposed variations to the Taxpayer's trust deed to allow the distribution of the Taxpayer's surplus to the above entities would preclude the Taxpayer from being considered a public fund established for necessitous circumstances under item 4.1.3 of the table in subsection 30-45(1) of the ITAA 1997. As a result, this requirement is not met. | Detailed Reasoning - Requirement (c): The Company is not listed by name in Subdivision 30-B of the ITAA 1997. Therefore this requirement is satisfied. | Detailed Reasoning - Requirement (d): The special conditions listed for item 4.1.3 in subsection 30-45(1) of the ITAA 1997 require that the Taxpayer is a 'registered charity' or is not an 'ACNC type of entity'. The Taxpayer is currently a registered charity with the ACNC. This requirement is met as long as the Taxpayer remains a registered charity with the ACNC. | Detailed Reasoning - Requirement (e): Subsection 30-125(6) requires that when endorsed DGRs are wound up, or if their endorsement is revoked, they must transfer all remaining gifts, deductible contributions and money received in relation to such gifts and contributions to another deductible fund, authority or institution. The Taxpayer's trust deed contains a clause satisfying this requirement. | Detailed Reasoning - Conclusion: As the Taxpayer is not considered to be a public fund established for necessitous circumstances under item 4.1.3 of the table in subsection 30-45(1) of the ITAA 1997, the Taxpayer does not meet the requirement that the entity is described in a category set out in item 1, 2 or 4 of the table in section 30-15 of the ITAA 1997; As this requirement is not met, the Taxpayer will not be entitled to continue as a DGR endorsed entity. | Detailed Reasoning - Question 2: We are unable to make a ruling on your client's endorsement as an income tax exempt charity under item 1.1 of the table in section 50-5 of the Income Tax Assessment Act 1997 . Such an endorsement is dependent on your client remaining registered with the Australian Charities and Not-for-profits Commission ('ACNC'). Registration with the ACNC is governed by the Australian Charities and Not-for-profits Commission Act 2012 ('ACNC Act'). As the Commissioner does not administer the ACNC Act, we are unable to rule on this question. Instead, an opinion should be sought from the ACNC regarding your client's registration as a charity.