Private ruling: Exempt entities - deductible gift recipients - private ancillary fund - special conditions
Date of advice: 2 November 2018
Published: February 2019
Ruling period: 1 July 2018 – 30 June 2019 | 1 July 2019 – 30 June 2020 | 1 July 2020 – 30 June 2021 | 1 July 2021 – 30 June 2022 | 1 July 2022 – 30 June 2023
Date scheme commenced: 1 July 2018

Ruling: Q1: Will the Foundation comply with Guideline 46 of the Private Ancillary Fund Guidelines 2009 (Guidelines) if it accepts donations totalling more than 20 per cent of the market value of its assets (20 per cent cap) in any financial year after the founder’s death from entities which were associates of the founder immediately prior to, or as at their death on the basis that such entities will continue to be associates of the founder for the purposes of Guideline 46? | A1: No | Q2: Will the Foundation comply with Guideline 46 of the Guidelines if it accepts donations exceeding the 20 per cent cap in any financial year after the death of both the founder and their spouse from entities which were associates of the founder immediately prior to, or as at, the death of the survivor of the founder and their spouse on the basis that such entities will continue to be associates of the founder for the purposes of Guideline 46? | A2: No

Relevant facts and circumstances: 1. The Foundation is a trust established by trust deed (Trust). 2. The trust deed was varied and a new deed (Deed) adopted. 3. The Foundation’s trustee is XXX (Trustee). 4. The Trustee was registered and is an unlisted non-profit company which is limited by guarantee. 5. The Foundation is endorsed as a Deductible Gift Recipient (DGR). It is a private ancillary fund covered by Item 2 of the table in section 30-15 of the Income Tax Assessment Act 1997 (ITAA 1997). 6. Guideline 46 of the Private Ancillary Fund Guidelines 2009 (Guidelines) requires a private ancillary fund not to accept donations totalling more than 20 per cent of the market value of its assets (20 per cent cap) in any financial year from entities other than the founder, associates, employees or deceased estates of any of those entities. 7. The Deed states that the Trust maintains a management account: 8. AA is the founder (Founder). 9. BB is the Founder’s spouse (Spouse). 10. The Founder and their Spouse have no children. 11. The company is the trustee for the Trust. 12. The company is an associate of the Founder for the purposes of the ITAA 1997. 13. The company’s members each hold one ordinary share. 14. The company wholly owns group entities. 15. Group Entities own shares in other companies and units in unit trusts. 16. The company (as trustee of the Trust) and the group entities may decide to make donations to the Foundation after the Founder’s death, or after the death of the survivor of the Founder and their Spouse, which in total may exceed the 20 per cent Cap in a financial year.

Relevant legislative provisions: Income Tax Assessment Act 1936 , section 318 | Income Tax Assessment Act 1997 , section 30-15 | Income Tax Assessment Act 1997 , section 30-125 | Income Tax Assessment Act 1997 , section 995-1 | Tax Administration Act 1953, section 426-110

Reasons for decision: Summary: An ‘associate’ for the purposes of Guideline 46 is definitively defined in section 318 of the Income Tax Assessment Act 1936 ( ITAA 1936) and as the Founder is an individual only subsection 318(1) may apply. However, subsection 318(1) requires that the individual is a natural person and once the Founder is deceased, while remaining natural, he will no longer be a natural person. The Foundation will not comply with Guideline 46 of the Guidelines if a donation exceeding the 20 per cent cap is accepted after the Founder’s death from an entity who was an associate immediately prior to their death. This is because, at their death, the Founder is no longer a natural person for the purposes of section 318(1) of the ITAA 1936. | Detailed Reasoning - Detailed reasoning: Under section 30-125 of the ITAA 1997 the Foundation is entitled to be endorsed as a DGR if: a) it has an Australian Business Number (ABN), b) it is a fund described in item 2 of the table in section 30-15 of ITAA 1997 and meets the 'special conditions’ relevant to the item of that table in which it is described, and c) its constituent document has suitable winding up and revocation clauses, and d) as an ancillary fund it complies with the Private Ancillary Fund Guidelines 2009 and all of the trustees of the fund comply with those guidelines. The Guidelines are made under section 426-110 of the Schedule 1 of the Tax Administration Act 1953 (TAA 1953). The Guidelines set out rules that a private ancillary fund and their trustees must comply with if the fund is to be endorsed, and remain endorsed, as a DGR. The Guidelines state that a private ancillary fund must be established, maintained and wound up in accordance with the following principles: ● it is an ancillary fund, it is philanthropic in character and it is a vehicle for private philanthropy; and ● it is a trust that: ○ seeks to comply with all relevant laws and obligations; and ○ is open, transparent and accountable to the public (through the Commissioner and the Commissioner of the Australian Charities and Not-for-profits Commission (if a registered charity)”. The Guidelines advise that private ancillary funds must be private in nature implying that there must be a close relationship between those who establish the fund and those who donate to it. Guideline 46 of the Guidelines state (italics added): In any financial year, the fund must not accept donations totalling more than 20 per cent (in total) of the market value of its assets (determined at the end of the previous financial year) from entities other than: ● a founder of the fund; or ● associates of the founder ; or ● employees of the founder; or ● a deceased estate of any of those entities. The 20 per cent donation limit is referred to in the Guidelines as the 20 per cent cap. Guideline 3 of the Guidelines states that the expressions used in the Guidelines have the same meanings as the ITAA 1997. An ‘associate’ is defined in section 995-1 of the ITAA 1997 as having the meaning given by section 318 of the ITAA 1936. Therein subsections 318(1), (2), (3) and (4) define associates of a natural person, a company, a trustee and a partnership. The founder is an individual, therefore it is considered the only relevant subsection is 318(1) of the ITAA 1936 - associates of a natural person. Subsection 318(1) of the ITAA 1936 states (italics added). For the purposes of this Part, the following are associates of an entity (in this subsection called the primary entity) that is a natural person (otherwise than in the capacity of trustee): a) a relative of the primary entity b) a partner of the primary entity or a partnership in which the primary entity is a partner c) if a partner of the primary entity is a natural person otherwise than in the capacity of trustee - the spouse or a child of that partner d) a trustee of a trust where the primary entity, or another entity that is an associate of the primary entity because of another paragraph of this subsection, benefits under the trust e) a company where i. the company is sufficiently influenced by: A. the primary entity; or B. another entity that is an associate of the primary entity because of another paragraph of this subsection; or C. another company that is an associate of the primary entity because of another application of this paragraph; or D. 2 or more entities covered by the preceding sub-subparagraphs; or ii. a majority voting interest in the company is held by: A. the primary entity; or B. the entities that are associates of the primary entity because of subparagraph (i) of this paragraph and the preceding paragraphs of this subsection; or C. the primary entity and the entities that are associates of the primary entity because of subparagraph (i) of this paragraph and because of the preceding paragraphs of this subsection. Subsection 318(1) of the ITAA 1936 is expressly and unequivocally limited to associates of a ‘natural person’. Neither the expression ‘natural person’ nor the term ‘natural’ is defined in either the ITAA 1936 or the ITAA 1997 for the purposes of subsection 318(1). The term ‘person’ is defined in subsection 995-1(1) to include ‘a company’. It is, therefore, necessary to consider the ordinary meanings of the terms ‘natural’ and ‘person’. The Macquarie Dictionary (Online 2018) defines ‘natural’ as ‘existing in or formed by nature; not artificial’ and ‘person’ as ‘a human being, whether man, woman, or child; a self-conscious or rational being; and the living body of a human being’. Once a person is deceased, while remaining natural, they will no longer have a living body. They can therefore no longer be considered to be a natural person. On a plain and ordinary reading of subsection 318(1) of the ITAA 1936 a deceased is not a natural person and therefore cannot have associates as defined. This outcome is consistent with the context and purpose of section 318 where associates of a natural person, a company, a trustee and a partnership are defined. | Detailed Reasoning - Conclusion: After the passing of the Founder donations cannot be made by an entity as an associate because the Founder, no longer being a natural person, will have no associates for the purposes of subsection 318(1) of the ITAA 1936. Therefore the Foundation will not comply with Guideline 46 of the Guidelines if it accepts in any financial year after the Founder’s death donations in total exceeding the 20 per cent cap from entities who were associates immediately prior to their death. | Detailed Reasoning - Question 2: Will the Foundation comply with Guideline 46 of the Guidelines if it accepts donations exceeding the 20 per cent cap in any financial year after the death of both the founder and their spouse from entities which were associates of the founder immediately prior to, or as at, the death of the survivor of the founder and their spouse on the basis that such entities will continue to be associates of the founder for the purposes of Guideline 46? | Summary: The Foundation will not comply with Guideline 46 of the Guidelines if a donation, exceeding the 20 per cent cap, is accepted after the death of both the Founder and their Spouse from an entity who was an associate immediately prior to the Founder’s death. This is because, at their death, the Founder no longer meets the definition of a natural person for the purposes of subsection 318(1) of the ITAA 1936. | Detailed Reasoning - Detailed reasoning: As discussed earlier associates defined in subsection 318(1) of the ITAA 1936 are only applicable to a natural person. Once the Founder is deceased he can no longer be considered to be a natural person. On their death the Founder will have no associates as defined in subsection 318(1) of the ITAA 1936. | Detailed Reasoning - Conclusion: After the death of both the Founder and their Spouse, the Foundation will not comply with Guideline 46 of the Guidelines if it accepts donations, exceeding the 20 per cent cap, from an entity who was an associate immediately prior to the Founder’s death. This is because, at the Founder’s death, the Founder no longer meets the definition of a natural person to whom subsection 318(1) of the ITAA 1936 applies.

Question 1: Will the Foundation comply with Guideline 46 of the Guidelines if it accepts donations totalling more than 20 per cent of the market value of its assets (20 per cent cap) in any financial year after the founder’s death from entities which were associates of the founder immediately prior to, or as at, their death on the basis that such entities will continue to be associates of the founder for the purposes of Guideline 46?