Private ruling: Public ancillary fund guidelines
Date of advice: 23 February 2022
Published: May 2022
Ruling period: Year ending 30 September 20XX | Year ending 30 September 20XX | Year ending 30 September 20XX | Year ending 30 September 20XX | Year ending 30 September 20XX
Date scheme commenced: XX Month 20XX

Ruling: Q1: If the Trustee enters into the arrangement described in this ruling, will the Trustee be in breach of the rules in the public ancillary fund guidelines for the purposes of paragraph 30-125(1)(d) of the Income Tax Assessment Act 1997? Answer No.

Relevant facts and circumstances: The XYZ Trust (the Applicant) is a public ancillary fund for the purposes of section 426-102 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953). The Applicant was established by deed on XX Month 19XX between its Founder and Trustee. The Applicant is endorsed as a deductible gift recipient (DGR) by the Commissioner of Taxation as a public ancillary fund covered by item 2 of the table in section 30-15 of the Income Tax Assessment Act 1997 (ITAA 97). The objects of the Applicant are to support DGR entities. The Applicant currently provides financial support to social enterprises through grants and wishes to implement an arrangement where it will provide loan guarantees over loans provided by an Australian bank to qualifying social enterprises who will be DGRs. Eligibility Social enterprises may provide a request in writing (Request) to the Applicant to participate in the Program provided that: • the social enterprise has received a grant from the Applicant for a least 1 year and probono and capacity building support from the Applicant; • the loan request is to support the growth of the social enterprise and growth in job opportunities. The Request may include: • the details of the loan which the social enterprise is proposing to seek from an Australian Bank, including the proposed Australian bank, amount and term of the loan; • a short description of why the social enterprise is seeking this funding and its impact; and • agreement to undertake a Financial Health Check. It is not a requirement for the social enterprise to have an exclusive relationship with any particular Australian bank. However, there is a general banking approach that the recipient of a loan maintain a transactional banking account with their lender. Assessment Process The Applicant will undertake an assessment process to determine whether the social enterprise is eligible to participate in the Program. The key purpose of the assessment process will be to undertake a 'financial health check' of the social enterprise to determine if they are an appropriate candidate to participate in the program, and to assess whether they are sufficiently mature in their governance and financial management processes to service a loan. The assessment process may include: • an interview with the social enterprise's CEO and financial controller or CFO; • the co-design of an investment readiness capacity building plan to strengthen the organisation prior to making a formal loan application; • the Applicant will review: i. the social enterprise's financial statements for the preceding financial years; and ii. key documents required to be submitted by the social enterprise for a loan application; iii. any other information which the Applicant requires to confirm whether the social enterprise is an appropriate candidate for the "Program." The Applicant will also share an agreement with the social enterprise which would need to be entered into by the social enterprise and the Applicant in the event the Applicant provides a guarantee to an Australian Bank in respect of the social enterprise's loan (Letter Agreement). The Applicant may determine in its sole discretion whether a social enterprise is eligible to participate in the Program. Referral Process Once the Applicant determines that the social enterprise is eligible to participate in the Program: • the social enterprise will: i. sign the Letter Agreement with the Applicant; and ii. apply for a loan with their nominated Australian Bank. The social enterprise may select their nominated Australian Bank in their sole discretion. • the Applicant: i. will work with the social enterprise and the relevant Australian Bank to provide the information which the Australian Bank requires in order to approve the loan and guarantee, including but not limited to: ii. referring the social enterprise to the nominated Australian Bank and banker (where possible); iii. confirming to the relevant Australian Bank that it will provide a corresponding guarantee for the social enterprise's loan. • The Australian Bank will: i. nominate a banker to work with the social enterprise in respect of their loan application (where possible); ii. determine whether the social enterprise meets its own eligibility requirements for a loan, and if so, the related terms of that loan and pricing; and iii. confirm whether the Applicant is required to provide a guarantee to support the loan, and if so the structure of that guarantee. The form of guarantee will need to be agreed with the relevant Australian Bank, and may include (but is not limited to): o the Applicant holding cash held on deposit with the relevant Australian Bank to cover the loan amount; or o an agreement between the relevant Australian Bank and the Applicant to secure the loan, which is not supported by cash on deposit. The Applicant will provide support to the relevant Australian Bank which is selected by the social enterprise, even where the proposed structure of the support is less favourable to the Applicant. Assumption The loan guarantee arrangement will be implemented as described in the 'relevant facts and circumstances' section of this ruling.

Relevant legislative provisions: Taxation Administration Act 1953 section 426-102 of Schedule 1 | Income Tax Assessment Act 1997 section 30-15 | Income Tax Assessment Act 1997 paragraph 30-125(1)(d) Public Ancillary Fund Guidelines 2011 Guideline 3 | Public Ancillary Fund Guidelines 2011 Guideline 42

Reasons for decision: Summary: A public ancillary fund is entitled to be endorsed as a deductible gift recipient if it satisfies the requirements in paragraph 30-125(1)(d) of the ITAA 1997, which provides: (d) in the case of an * ancillary fund: (i) the fund complies with the rules in the * public ancillary fund guidelines or the * private ancillary fund guidelines (whichever are applicable); and (ii) all of the trustees of the fund comply with those rules. Guideline 42 of the Public Ancillary Fund Guidelines 2011 (the Guidelines)provides: The fund must not *provide any material benefit (except as set out in guideline 43), directly or indirectly, to: • the trustee; or • a *member, director, employee, *agent or officer of the trustee; or • a donor to the fund; or • a founder of the fund; or • an *associate of any of those entities (other than a *deductible gift recipient). The Guidelines use both the term 'benefit' and 'material benefit'. Therefore, a distinction exists between a benefit that is material, and a benefit that is not material. Guideline 3 of the Guidelines provides: Expressions have the same meaning in these Guidelines as in the Income Tax Assessment Act 1997. The interpretation rules in Division 950 of that Act also apply to these Guidelines. Note 1: To find definitions of asterisked terms: see section 995-1 of the Income Tax Assessment Act 1997. However, some defined terms may not be asterisked: see section 2-15 of the Income Tax Assessment Act 1997. 'Benefit' is not defined in the ITAA 1997 which as a result will take its ordinary meaning. The Australian Oxford Dictionary, (2004) (2 ed), Oxford University Press defines ''benefit' as: 1. a favourable or helpful factor or circumstance; advantage, profit. The Founder will receive a benefit from the Applicant as a result of the proposed arrangement. 'Material' is not defined in the ITAA 1997 which as a result will take its ordinary meaning. The Australian Oxford Dictionary, (2004) (2 ed), Oxford University Press defines 'material' as: 4. often foll. by to important, essential, relevant Whether a benefit will be material will depend on the circumstances of the entity receiving it. The benefit to the Founder is merely contingent. On consideration of the characteristics of the Founder, the benefits it would receive as a result of the Applicant entering into the arrangement described in this ruling are not material. | Detailed Reasoning - Conclusion: The loan guarantee arrangement will not cause the Guidelines to be breached.