Private ruling: Income tax exemption, GST concession, DGR
Date of advice: 10 September 2018
Published: October 2018
Ruling period: Income years ending 30 June 20XX to 30 June 20XX
Date scheme commenced: 01 July 20XX

Ruling: Q1: In undertaking certain transactions, would the entity continue to quality as an entity covered by item 1.1 of the table in section 50-5 of the Income Tax Assessment Act 1997 (ITAA 1997) so that its ordinary and statutory income is exempt from income tax under section 50-5 of the ITAA 1997? | A1: Yes | Q2: In undertaking certain transactions, would the entity maintain its status as a deductible gift recipient (DGR) for purpose of Division 30 of the ITAA 1997? | A2: Yes Issue 2 | Q3: In undertaking certain transactions, would the entity continue to be endorsed as a charity under Division 176 of the A New Tax System (Goods and Services Tax) Act 1999 in order to access GST concession? | A3: Yes

Relevant facts and circumstances: The entity is currently a registered charity with Australian Charities and Not-for-profits Commission (ACNC). It has a physical presence at a number of locations in Australia. The entity was established with the object of promotion, within the limits of its resources, of certain charitable purpose. The entity is currently a charity endorsed to access income tax exemption and GST concession. It is currently endorsed as a Deductible Gift Recipient (DGR) covered by Item 1 of the table in section 30-15 of the Income Tax Assessment Act 1997 . The entity is in the process of conducting certain transactions under certain structured arrangement with a view to serve its establishment purposes as well as to create income streams towards its charitable purpose.

Relevant legislative provisions: Income Tax Assessment Act 1997 | A New Tax System (Goods and Services Tax) Act 1999 Issue 1 | Unless otherwise stated, all legislative references under Issue 1 are to the Income Tax Assessment Act 1997 (ITAA 1997). Question 1

Reasons for decision: Summary: In accordance with item 1.1 of the table in section 50-5, a registered charity is exempt from income tax, if the special conditions as listed in sections 50-50 and 50-52 are satisfied. Pursuant to sections 50-50 and 50-52, a registered charity is exempt from income tax if the entity: ● has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia: paragraph 50-50(1)(a); and ● comply with all the substantive requirements in its governing rules: paragraph 50-50(2)(a); and ● apply its income and assets solely for the purpose for which the entity is established: paragraph 50-50(2)(b); and ● is endorsed as exempt from income tax under Subdivision 50-B: paragraph 50-52(1). In this case, the entity is an ACNC registered charity, it passes the physical presence test in paragraph 50-50(1)(a), and to that extent, it incurs expenditure and pursues its objectives principally in Australia. Subsection 50-50(2) requires the entity to comply with all the substantive requirements in its governing rules (governing rules condition) and to apply its income and assets solely for its establishment purpose (income and assets condition). Taxation Ruling TR 2015/1 Income Tax: special conditions for various entities whose ordinary and statutory income is exempt (TR 2015/1) considers the two special conditions, governing rules condition and income and assets condition. To consider and determine whether an entity satisfies the governing rules condition, paragraph 8 of the TR 2015/1 asks the following three questions: ● what are the entity’s governing rules? ● what are the substantive requirements in the entity’s governing rules? ● at what time must the entity comply with all of the substantive requirements in its governing rules? In this case, the entity was established by its formation document, which constitutes the main source of its governing rules. Its governing rules set out a number of substantive requirements. On the basis that there is nothing that could be otherwise indicative that the entity has breached any of the substantive requirements in its governing rules, it is considered that the entity satisfies the governing rules condition as required in paragraph 50-50(2)(a). To consider and determine whether an entity satisfies the income and asset condition, paragraph 23 of the TR 2015/1 applies the following two steps: ● what is the purpose for which the entity is established? ● has the entity applied its income and assets solely for the purpose for which it was established? | Detailed Reasoning - What is the purpose for which the entity is established?: The first step is to ascertain the entity’s establishment purpose, which is clearly stated in its governing rules. Paragraph 136 of the TR 2015/1 requires the consideration of the entity’s circumstances during the income year in which the income and assets condition is applied. This includes a number of factors: the periodic operation of the provisions in Division 50, the use of the present tense in the income and assets condition, and the interpretation of the term ‘established’. Periodic operation of the provisions of Division 50 requires the entity’s current purpose in a particular year of income to be considered in addition to its purpose at formation: paragraph 139 of the TR 2015/1. The use of the present tense in the phrase ‘ is established ’ under the income and assets condition means that, regard must be given to the current circumstances of the entity: paragraph 141 of the TR 2015/1. The interpretation of the term ‘established’ by the courts further supports the view that subsequent activities of the entity are an important consideration for determining purpose: paragraph 143 of the TR 2015/1. It is necessary to look at circumstances of the entity in the relevant years of income in which the income and assets condition test is applied, as well as the circumstances surrounding the entity’s formation: paragraph 144 of the TR 2015/1. In this case, provided that, in the relevant years of the transactions, the entity’s purpose continues to be the same as its formation purpose as well as the circumstances and activities of the entity do not indicate or support any other different purpose from its formation purpose, the entity’s purpose continues to be its formation purpose at the time of its establishment. | Detailed Reasoning - Has the entity applied its income and assets solely for the purpose for which it was established?: The final step is to determine whether the entity has ‘applied’ its income and assets ‘solely’ for the purpose for which it is established: paragraph 158 of the TR 20015/1. In the context of the income and assets condition, ‘apply’ means that an entity must make use of all of its income and assets solely for its purpose or purposes. Consequently, income received by an entity must be put to use within a reasonable period of receipt: paragraph 160 of the TR 2015/1. Meaning of the word ‘apply’ was considered by the High Court in Federal Commissioner of Taxation v. Bargwanna (2012) 244 CLR 655; [2012] HCA 11; 2012 ATC 20-312; (2012) 82 ATR 273 ( Bargwanna ), where the High Court said that the term ‘applied’ is used in the sense of ‘so administered as to give effect to the trusts established by the relevant instrument’, rejecting an argument that ‘applied’ means ‘substantially applied’ or ‘on the whole, applied’: paragraph 162 of the TR 2015/1. In the income and assets condition, ‘Income’ refers to both ‘net’ income and ‘gross’ income. That is, the requirement that an entity must apply its income solely for the purpose for which it is established relates to both the income received during a financial year, as well any surplus left over at the end of that year: paragraph 164 of the TR 2015/1. In respect of accumulation of income, paragraph 165 of the TR 2015/1 states that, an entity can accumulate income provided the accumulation is consistent with the purpose or purposes for which the entity is established. An entity may use some of its income to acquire assets which, in future, will produce income for its purpose, and may accumulate some of its income for later distribution. However, this does not mean that excessive or indefinite accumulation is permissible. An entity’s entitlement to income tax exemption is a year by year assessment. An entity that accumulates most of its income over a number of years will need to show that this accumulation is consistent with its purpose: paragraph 169 of the TR 2015/1. Relevant factors to be considered include whether the entity has identified when and how its income is to be applied to its purpose and, if accumulation is to continue for an extended period, the reason for this: paragraph 170 of the TR 2015/1. Under the ‘solely’ test, an entity must apply its income and assets exclusively or only for the purpose for which the entity is established. The income and assets condition requires that none of the income and assets of the entity be applied for purposes that are not in accordance with, or incidental or ancillary to, the purpose for which the entity is established. An entity will not comply with the income and assets condition if it applies any of its income or assets for a private purpose: paragraph 173 of the TR 2015/1. The income and assets condition is applied continuously thorough the income years. In order for the entity to be exempt from income tax for all of an income year, the entity must (among other things) satisfy the income and assets condition at all times during that year: paragraph 178 of the TR 2015/1. In this case, the entity was established for its charitable purpose. In conducting the transactions under the structured arrangement, all profits and surplus are strictly required to be directed to the entity and to be used by the entity in furtherance of its charitable purpose. Provided that, income and assets utilised in and generated from the transactions are applied strictly in accordance with the entity’s governing rules and are not directed or applied for any other purpose than the entity’s establishment purpose and objects continuously through the relevant income years, it is considered that the entity applies its income and assets solely for the purpose for which it was established. Therefore, on the basis that, in the relevant years of the transactions, the entity’s purpose continues to be the same as its formation purpose as well as the circumstances and activities of the entity do not indicate or support any other different purpose from its formation purpose, all income and assets utilised in and generated from the transactions are not directed or applied for any other purpose than the entity’s establishment purpose and objects continuously through the relevant income years, it is considered that the entity continues to qualify as an income tax exempt entity under item 1.1 of the table in section 50-5. | Detailed Reasoning - Reasons for decision: In accordance with item 2.1.3 of the table in subsection 30-25(1), an institution that is a higher education provider within the meaning of the Higher Education Support Act 2003 is a Deductible Gift Recipient (DGR) under the general categories of education recipients, if the following special conditions are satisfied: (a) the institution must be an Australian government agency; or (b) the institution must be a registered charity. The entity is currently an endorsed Deductible Gift Recipient (DGR) under item 2.1.3 of the table in section 30-25(1) since 01 July 2000. On the basis that the transactions will not result in the entity being removed from the Table A providers in subsection 16-15(1) of the Higher Education Support Act 2003 (Cth), and the entity continues to be an ACNC-registered charity, it is considered that the transactions, however effected, should not affect the status of the entity as an endorsed DGR. | Detailed Reasoning - Issue 2: Unless otherwise stated, all legislative references under Issue 2 are to the A New Tax System (Goods and Services Tax) Act 1999 ( GST Act). | Detailed Reasoning - Reasons for decision: Pursuant to Division 176 charities have to be endorsed by the ATO in order to claim their special GST concession. The Commissioner must endorse a charity if the entity: ● is entitled to be endorsed as a charity: paragraph 176-1(1)(a); and ● has applied for the endorsement in accordance with the procedures contained in Division 426 of Schedule 1 to the Taxation Administration Act 1953 (TAA): paragraph 176-1(1)(b). Under subsection 176-1(2), an entity is entitled to be endorsed as a charity, if it is an ACNC-registered charity and it has an ABN. On the basis that the entity continues to be an ACNC-registered charity and has a valid ABN, the entity is entitled to be endorsed as a charity under subsection 176-1(2); and upon the entity’s written application for the endorsement in accordance with Division 426 in Schedule 1 to the TAA, it continues to maintain its endorsement as a charity under Division 176 to access GST concession.