Private ruling: Deductible Gift Recipient (DGR)
Date of advice: 24 August 2016
Published: October 2016
Ruling period: From the date the donation is made and accepted, to the date the developed land is sold.
Date scheme commenced: From the date the donation is made and accepted

Ruling: Q1: Is The Foundation considered to be carrying on a business, by accepting the land as a donation and undertaking the proposed development and sale, thereby being unable to maintain its endorsement as a deductible gift recipient (DGR) as an ancillary fund as described in item 2 of the table in section 30-15 of the Income Tax assessment Act 1997 (ITAA 1997)? | A1: No | Q2: Is The Foundation's endorsement as a DGR, as an ancillary fund as described in item 2 of the table in section 30-15 of the ITAA 1997, affected if the donated land and proposed undertaken development does not result in the donor entity, the Founder or their Associates, receiving a benefit either directly or indirectly from the arrangement? | A2: No

Relevant facts and circumstances: The Foundation is a trust established under a Trust Deed to be a Private Ancillary Fund. The Trust Deed is governed by the laws of the relevant State. The Trustee for Foundation applied for Deductible Gift Recipient (DGR) endorsement for the Foundation as a whole as a private ancillary fund, undertaking to comply with the current Private Ancillary Fund Guidelines 2009 as formulated under section 426-110 in Schedule 1 of the Taxation Administration Act 1953. The Foundation was eligible for endorsement and was endorsed as a DGR. The Foundation is currently endorsed as a DGR, subject to the Foundation complying with the current Private Ancillary Fund Guidelines 2009 as formulated and in force, under section 426-110 in Schedule 1 of the Taxation Administration Act 1953. The Founder of The Foundation wholly owns the donor company which owns the identified land to be donated to the Foundation. This land is the sole remaining asset of the donor company which is being treated as trading stock. The block of land has always been treated and brought to account in the books of the company as trading stock The land was part of a larger land parcel purchased by the donor company with the intent to develop and sell. The larger parcel was subdivided into more than five lots of which some were sold and the largest one kept for future development. The donor company intends to gift this remaining land to the Foundation. The land is vacant and has had no improvements made to it apart from some boundary fencing. Electricity, town water, sewage and telephone services are available but not connected. The site is access by a dirt road linked to a nearby sealed road. At this stage the environmental issues associated with development has been approved and to develop the land the Foundation would need to: • Prepare and submit a development plan to the Local council • Carry out the full works after development approval (clear land, install all utilities, construct sealed road and apply for change in land title) This would allow the Foundation to sell the individual blocks of land The development would be carried out in two to three stages over a period of twelve to twenty four months. The land will yield approximately X blocks. A developer has not been approached as yet. The Foundation confirms that neither the Founder, the donor company will play a role in the further development and sale of the developed land. The gift of the land to the Foundation will be made as a voluntary gift on an arm's length basis, and there will be no interference or control exercised by the donor company over the land after its gifting, which may reasonably be expected to attract or create any benefits, advantages, rights or privileges to the donor company or any associate of the donor. The Foundation wants to accept the land as a donation but needs to incur expenses to clear the land of trees and shrubs and put in place the necessary infrastructure such as roads and services, in order to bring the land to the point for sale either, in one lot or in subdivided lots. The land will be a liability to the Foundation, unless it can be developed to the stage where it can be sold due to the need for continued maintenance and high rates, as the land is in a raw state covered in trees, bushes and native fauna. Neither, the donor company, or any associated entity will be involved, benefit, or take any part in the development or sale of the land. The founder of the Foundation has no dependants to whom they would bequeath their shares in the donor company and they have no one willing to act as a director to enable the company to complete the development and sale. The company will be wound up following the donation of the last asset which is the land. The owner of the donor company has failing health. They have absolutely no interest in devoting the few remaining years of their life in undertaking any stressful undertakings relating to land development. The undertaking and completion of the development once the land is donated will enable the Foundation to realise the maximum value of the land and apply funds for the purposes of its existence and establishment which is to provide funds to other DGRs. The Foundation considered the alternative of selling the donated unimproved land for a much lower market price. However such action may result in long delays as the demand for undeveloped land is poor in the area and the incurring of holding costs will be costly; resulting in the loss of opportunity to obtain the maximum value to generate additional funds to apply for its charitable purposes. The Foundation states its investment strategy will be in accordance with its rules and guidelines and will not affect its minimum distribution amount requirement. The projected estimated selling value of the land is $X,XXX,XXX. The estimated development costs (within one year) are $X,XXX,XXX. The projected additional funds to the foundation once the land is donated and developed is $X,XXX,XXX. Detailed reasoning The Private Ancillary Fund Guidelines 2009 set out the rules that a private ancillary fund must comply with in order to be endorsed and remained endorsed as a DGR. Failure to comply with these guidelines will mean that: • the trustee of the fund and directors of trustees may incur administrative penalties; and • the Private Ancillary Fund (PAF) would cease to be entitled for endorsement as a DGR. Of these guidelines is guideline 40 which is also reflected in rule 11.7 of the Foundation's Trust Deed, which prohibits the Foundation from carrying on a business. In addition guideline 42 prohibits the Foundation from providing benefits to: • the trustee • a member, director, employee, agent or officer of the trustee • a donor to the fund • a founder of the fund; or • an associate of any of those entities (other than a DGR). On the basis of the information provided and compliance with the Private Ancillary Fund Guidelines 2009, the Foundation's undertaking the proposed development of the gifted land is not considered to be the carrying on of a business, as explained below. Carrying on a business of land development Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) defines: • Carrying on an enterprise includes doing anything in the course of the commencement or termination of the enterprise • Enterprise has the meaning given by section 9-20 of the GST Act. An enterprise is exhaustively defined in section 9-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to mean an activity, or series of activities, done: (a) in the form of a business, (b) in the form of an adventure or concern in the nature of trade, (c) on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property, (d) by the trustee of a fund, authority or institution covered by Subdivision 30-B of the ITAA 1997 and to which deductible gifts can be made, (e) by a trustee of a complying superannuation fund or, if there is no trustee of the fund, by a person who manages the fund, (f) by a charity, (g) by the Commonwealth, a state or a territory, or by a body corporate, or corporation sole, established for a public purpose by one of these entities, or (h) by a non-charitable public ancillary fund or prescribed private fund where the fund is covered by item 2 of the table in section 30-15 of ITAA 1997 or would be covered by that item if it had an Australian Business Number (ABN). Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (MT 2006/1) provides assistance to entities in determining their entitlement to an ABN and in doing so considers the meaning of an enterprise. Whilst MT 2006/1 is specifically relevant in relation to ABN entitlement it is also relevant to the issue of whether the proposed land development will be the carrying on of a business. In looking at the proposed land development this will be an isolated activity and in respect of an isolated activity paragraph 125 of MT 2006/1 states: 125. An enterprise must start somewhere and the first step or steps may be minor. In Ferguson v. Federal Commissioner of Taxation Bowen CJ and Franki J expressed the point in this way: Repetition and regularity of the activities is also important. However, every business has to begin and even isolated activities may in the circumstances be held to be the commencement of carrying on business. Paragraphs 262 to 302 of MT 2006/1 specifically address isolated transactions and sales of real property. Paragraphs 263 to 267 state: 263. The issue to be decided is whether the activities are an enterprise in that they are of a revenue nature as they are considered to be activities of carrying on a business or an adventure or concern in the nature of trade (profit making undertaking or scheme) as opposed to the mere realisation of a capital asset. (In an income tax context a number of public rulings have issued outlining relevant factors and principles from judicial decisions. See, for example, TR 92/3, TD 92/124, TD 92/125, TD 92/126, TD 92/127 and TD 92/128.) 264. The cases of Statham & Anor v. Federal Commissioner of Taxation ( Statham ) and Casimaty v. FC of T ( Casimaty ) provide some guidance on when activities to subdivide land amount to a business or a profit-making undertaking or scheme. In these cases, farm land was subdivided and sold. Minimal development work was undertaken to meet council requirements and to improve the presentation of certain allotments. On the particular facts of these cases the courts held that the sales were a mere realisation of a capital asset. 265. From the Statham and Casimaty cases a list of factors can be ascertained that provide assistance in determining whether activities are a business or an adventure or concern in the nature of trade (a profit-making undertaking or scheme being the Australian equivalent, see paragraphs 233 to 242 of this Ruling). If several of these factors are present it may be an indication that a business or an adventure or concern in the nature of trade is being carried on. These factors are as follows: • there is a change of purpose for which the land is held; • additional land is acquired to be added to the original parcel of land; • the parcel of land is brought into account as a business asset; • there is a coherent plan for the subdivision of the land; • there is a business organisation - for example a manager, office and letterhead; • borrowed funds financed the acquisition or subdivision; • interest on money borrowed to defray subdivisional costs was claimed as a business expense; • there is a level of development of the land beyond that necessary to secure council approval for the subdivision; and • buildings have been erected on the land. 266. In determining whether activities relating to isolated transactions are an enterprise or are the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each particular case. This may require a consideration of the factors outlined above, however there may also be other relevant factors that need to be weighed up as part of the process of reaching an overall conclusion. No single factor will be determinative rather it will be a combination of factors that will lead to a conclusion as to the character of the activities. 267. No two cases are likely to be exactly the same. For instance, while the conclusions reached in the Statham and Casimaty cases were similar, different facts and factors were considered to reach the respective conclusions. Paragraph 41 of Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income (which is quoted in paragraph 262 of MT 2006/1) states: 41. The taxpayer must have the requisite purpose at the time of entering into the relevant transaction or operation. If a transaction or operation involves the sale of property, it is usually necessary that the taxpayer has the purpose of profit-making at the time of acquiring the property. However, as the High Court decisions in White v. FC of T (1968) 120 CLR 191; 15 ATD 173 and Whitfords Beach demonstrate, that is not always the case. (See also Menzies J in FC of T v. N.F. Williams (1972) 127 CLR 226 at 245; 72 ATC 4188 at 4192-4193; 3 ATR 283 at 289 and Whitfords Beach Pty Ltd v. FC of T (F.C.) 79 ATC 4648 at 4659; 10 ATR 549 at 567). The above paragraph references the decision in Federal Commissioner of Taxation v. NF Williams 72 ATC 4188; (1972) 46 ALJR 611; (1972) 3 ATR 283, (1972); 127 CLR 226 ( Williams ) which also dealt with a gift of undeveloped land. In the decision at ATC 4194-4195; CLR 249, Gibbs J explained the mere realisation of land as follows: An owner of land who holds it until the price of land has risen and then subdivides and sells it is not thereby engaging in an adventure in the nature of trade, or carrying out a profit-making scheme. The situation is not altered by the fact that the landowner seeks and acts upon the advice of an expert as to the best method of subdivision and sale or by the fact that he carries out work such as grading, levelling, road-building and the provision of reticulation for water and power to enable the land to be sold to its best advantage. The proceeds resulting from the mere realization of a capital asset are not income either in accordance with ordinary concepts…even though the realization is carried out in an enterprising way so as to secure the best price… The difference between the facts in this case to those in Williams is that the taxpayer in Williams held onto the land for a period of time before subdividing the land whereas the Foundation plans to begin to subdivide as soon as it received it. Gutwenger v. Commissioner of Taxation (1995) 55 FCR 95; (1995) 30 ATR 82; (1995) 95 ATC 4008 ( Gutwenger ) also dealt with a gift of land. In Gutwenger the land had already been subdivided by the person making the gift of a parcel of subdivided lots. The taxpayer then sold the subdividing lots individually. In this case the donor company acquired a large parcel of land which it subdivided into more five lots of which some were sold and the largest one kept for future development. It is the remaining lot that the company is gifting to the Foundation. Like the entity that made the gift in Gutwenger, the donor company had already incurred costs associated with the development of the land (although no physical work had begun) and was treating the land as trading stock. The decisions in both Williams and Gutwenger held that income received from the eventual sale of the gifted land was not ordinary income. In other words the sale of the land received as a gift was considered to be a mere realisation rather than the carrying on of a business. In looking at the Foundation's planned subdivision it is also a mere realisation of an asset rather than carrying on a business. The Foundation will receive the land as a gift and in order to maximize the amount of money available to pursue its charitable purpose the Foundation has decided to subdivide the land rather than sell it as a whole. Therefore following the decisions in Williams and Gutwenger, the Foundation is not carrying on a business when it subdivides the land. Does the donor benefit from the development of the land? As the donor company originally held the land as trading stock with the intent to subdivide, when the Foundation undertakes its own subdivision the Foundation has to ensure that the donor company does not benefit from the subdivision. The Foundation has stated that the donor company will have no involvement in the subdivision and sale of the land once it has been gifted therefore they cannot benefit from that subdivision. Guideline 40 of the Private Ancillary Fund Guidelines 2009 also prohibits others from benefiting and the Foundation has stated that the owner of the donor company and as a Founder of the Foundation, will also play no role in the development and sale of the land. However there is nothing to stop individuals covered by Guideline 40 from volunteering their expertise to a PAF. However the trustee of the PAF would have to ensure that they are providing that expertise as a volunteer and do not benefit from providing their expertise.