Private ruling: Income Tax Exemption and DGR Endorsement
Date of advice: 15 November 2016
Published: January 2017
Ruling period: 01 July 20XX to 30 June 20YY
Date scheme commenced: 1 July 20XX

Ruling: Q1: If a Research Institute (RI) enters into and receives an upfront lump sum under the proposed partial commercial income monetisation agreement, will it cause RI to cease being a tax exempt entity under Division 50 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No, providing RI remains registered as a charity with the Australian Charities and Not-for-profits Commission (ACNC). | Q2: If RI enters into and receives an upfront lump sum under the proposed partial commercial income monetisation agreement, will it cause RI to cease being a Deductible Gift Recipient (DGR) under Division 30 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A2: No, providing RI remains registered as a specific type of charity with the Australian Charities and Not-for-profits Commission (ACNC).

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. Background facts 1. RI is an Australian research institute. 2. RI is registered as a 'charity' with the Australian Charities and Not-for-profits Commission (ACNC). 3. RI is currently endorsed as income tax exempt as a 'registered charity' under item 1.1 of section 50-5 of the ITAA 1997. 4. RI is currently endorsed as a Deductible Gift Recipient (DGR) under Division 30 of the ITAA 1997. 5. RI's objects are stated in its constitution. 6. RI has undertaken research in relation to a range of areas. Overview of the Proposed Commercial Income Monetisation agreement 7. RI was involved in a discovery which has now been commercialised. 8. Pursuant to an agreement, RI is entitled to commercial income which will be used by RI to further its objects. 9. RI intends to enter into a partial monetisation agreement, and would receive an upfront lump sum payment. 10. If RI decides to enter into negotiations for the proposed partial commercial income monetisation agreement it will appoint an independent financial adviser to assist in identifying a preferred third party, negotiation terms and implementing the agreement. Question 1 If RI enters into and receives an upfront lump sum under the proposed partial commercial income monetisation agreement, will it cause RI to cease being a tax exempt entity under Division 50 of the Income Tax Assessment Act 1997 (ITAA 1997)? 1. An entity is exempt from income tax under section 50-1 of ITAA if it is covered by the tables in Subdivision 50-A. 2. RI is registered as a charity with the Australian Charities and Not-for Profits Commission (ACNC) and therefore is covered by the item 1.1 'registered charity' in the table in section 50-5. 3. A registered charity in section 50-5 must also comply with the special conditions in sections 50-50 and 50-52 of ITAA 1997. 4. Subsection 50-50(1) will be met by RI if it has a physical presence in Australia, and to that extent incurs its expenditure and pursues its objects principally in Australia, or is a Deductible Gift Recipient (DGR) under item 1 in the table in section 30-15 of the ITAA 1997. 5. RI is currently endorsed as an item 1 DGR, in the table in section 30-15, therefore RI meets the special condition in subsection 50-50(1) by virtue of being a DGR. (See Question 2 regarding RI maintaining its DGR status under the proposed commercial income monetisation agreement.) 6. Subsection 50-50(2) requires that an entity must comply with all the substantive requirements in its governing documents and apply all its income and assets solely for the purposes for which the entity is established. 7. RI has stated that the proceeds from the proposed monetisation agreement will be used to further RI's objects in line with its Constitution. 8. RI will appoint a financial adviser to assist in negotiating fair market value for the sale of its right to a proportion of commercial income. 9. Therefore, on the facts provided, there is nothing to indicate that RI would cease to meet the special conditions under subsection 50(2). 10. Section 50-52 states that an entity covered by item 1.1 in the section 50-5 is not exempt from income tax unless it is endorsed as exempt under Subdivision 50-B. 11. To be entitled to be endorsed as exempt under Subdivision 50-B RI must: ● be a charity registered with the ACNC, ● have an ABN, and ● meet the special conditions under sections 50-50 and 50-52 12. RI currently meets all the requirements to be entitled to be endorsed. 13. On the facts provided, if RI enters into the proposed partial commercial income monetisation agreement it will still be entitled to be endorsed provided that it continues to be registered as a charity with the ACNC. Question 2 If RI enters into and receives an upfront lump sum under the proposed partial commercial income monetisation agreement, will it cause RI to cease being a Deductible Gift Recipient (DGR) under Division 30 of the Income Tax Assessment Act 1997 (ITAA 1997)? 14. Under section 30-125 of the ITAA 1997 RI is entitled to be endorsed as a DGR if: a) it has an Australian Business Number (ABN), b) it is an institution described in item 1, 2 or 4 of the table in section 30-15 of ITAA 1997, and c) meets the 'special conditions' relevant to the item of that table in which it is described. 15. RI has an ABN and is currently endorsed as an item 1 DGR, in the table in section 30-15 of the ITAA 1997. 16. The only special condition relevant to this item is that RI must be 'in Australia'. Since RI was established and is operated in Australia this requirement is met. 17. RI is currently registered with the ACNC as a 'charity' and a specific type of charity. 18. On the facts provided, if RI enters into the proposed partial commercial income monetisation agreement it will still be entitled to be endorsed as a DGR provided that it continues to be registered as a 'charity' and also registered as that specific type of charity with the ACNC.

Relevant legislative provisions: Income Tax Assessment Act Section 50-1 | Income Tax Assessment Act Section 50-5 | Income Tax Assessment Act Section 50-50 | Income Tax Assessment Act Section 50-52 | Income Tax Assessment Act Section 50-110 | Income Tax Assessment Act Section 30-15 | Income Tax Assessment Act Section 30-20 | Income Tax Assessment Act Section 30-125 | Income Tax Assessment Act Section 995-1