Private ruling: Income tax, exempt entities - Charity, education, science and religion.
Date of advice: 22 January 2016
Published: March 2016
Ruling period: Year ended 30 June 2016 to year ended 30 June 2026

Ruling: Q1: Will the entity be able to receive a gift and disburse it to charitable entities overseas and meet the 'in Australia' test in paragraph 50-50(1)(a) of the Income Tax Assessment Act 1997(ITAA 1997) ? | A1: Yes | Q2: In determining whether the entity meets the special conditions and the "in Australia" test in paragraph 50-50(1)(a) of the ITAA 1997, will the interest earned from the investment of the gifted money be disregarded under section 50-75 of the ITAA 1997? | A2: No

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 The entity is a registered Australian company. The entity is currently registered by the Australian Charities and Not-for-profits Commission (ACNC) and endorsed by the Australian Tax Office (ATO). The aims of receiving the gift are to increase diversity and hence spread risk in terms of country of ownership, management optic and currency as opposed to the alternate strategy of spreading funds across existing entities. It is also intended that the entity will disburse funds to charitable entities overseas.

Relevant legislative provisions: Section 50-1 of the Income Tax Assessment Act 1997 | Section 50-5 of the Income Tax Assessment Act 1997 | Section 50-50 of the Income Tax Assessment Act 1997 | Subsection 50-50(1) of the Income Tax Assessment Act 1997 | Section 50-52 of the Income Tax Assessment Act 1997 | Section 50-75(1) of the Income Tax Assessment Act 1997

Reasons for decision: Summary: 1. The proposed gift to the entity will not affect the endorsement of the entity as exempt from income tax pursuant to Division 50 of the ITAA 1997. 2. Provided the entity remains registered as a charity, its distribution of all or part of the gift to overseas charities will not affect their entitlement to endorsement as exempt from income tax. | Detailed Reasoning - Detailed reasoning: 3. Section 50-1 of the ITAA 1997 provides that the income of certain types of entities is exempt from income tax. 4. Item 1.1 of the table in section 50-5 of the ITAA 1997 provides for exemption from income tax for entities that are 'registered charities' as defined in section 995-1 of the ITAA 1997: an entity that is registered under the Australian Charities and Not-for-profits Commission Act 2012 as the type of entity mentioned in column 1 of item 1 of the table in subsection 25-5(5) of the Act 5. To be exempt from income tax as a 'registered charity' under item 1.1 of section 50-5 of the ITAA 1997 an entity must meet the conditions contained in sections 50-50 and 50-52 of the ITAA 1997. 6. Section 50-50 of the ITAA 1997 provides: (1) An entity covered by item 1.1 is not exempt from income tax unless the entity: (a) has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia; or (b) is an institution that meets the description and requirements in item 1 of the table in section 30-15; or (c) is a prescribed institution which is located outside Australia and is exempt from income tax in the country in which it is resident; or (d) is a prescribed institution that has a physical presence in Australia but which incurs its expenditure and pursues its objectives principally outside Australia; and the entity satisfies the conditions in subsection (2) (2) the entity must: (a) comply with all the substantive requirements in its governing rules; and (b) apply its income and assets solely for the purpose for which the entity is established 7. Section 50-52 of the ITAA 1997 provides: An entity covered by item 1.1 is not exempt from income tax unless the entity is endorsed as exempt from income tax under subdivision 50-B. 8. This ruling will only consider the requirement in paragraph 50-50(1)(a) of the ITAA 1997. | Detailed Reasoning - Physical Presence in Australia and expenditure: 9. An entity has a physical presence in Australia if it is wholly in Australia, or has a division or branch in Australia. An entity will not have a physical presence in Australia if it is present in Australia through an agent or it merely owns an investment property in Australia. 10. The entity is incorporated and has operated in Australia for a long time. The entity has a physical presence in Australia for the purposes of section 50-50 of the ITAA 1997. 11. In determining whether an entity that is in Australia, incurs its expenditure and pursues its objectives principally in Australia, regard must be had to section 50-75 of the ITAA 1997: (1) In determining for the purposes of this Subdivision whether an institution, fund or other body incurs its expenditure or pursues its objectives principally in Australia, distributions of any amount received by the institution, fund or other body as a gift (whether of money or other property) or by way of government grant are to be disregarded. (2) In determining for the purposes of this Subdivision whether an institution, fund or other body incurs its expenditure or pursues its objectives principally in Australia, distributions of any amount from a fund that is referred to in Subdivision 30-B and operated by the institution fund or other body are to be disregarded. (3) … 12. The Explanatory Memorandum to the Taxation Laws Amendment Act (No 4) 1997 (regarding 'disregarded amounts') states: '5.70 The legislation is silent about whether an institution has to monitor the source of the funds that it applies overseas - ie. whether they are obtained from income or gifts. While it would be expected that an institution would have strict procedures in place to account separately for government grants and/or approved fund moneys under section 78, money is fungible and it loses its particular identity when combined with other money. 5.71 In these circumstances it would be reasonable to assume, that with the exception of government grants and section 78 fund moneys, money applied overseas would firstly be applied from "gifts" and that the "activity test" would only need to be applied if the total funds applied overseas exceeded the sum of the gifts and donations received.' 13. In terms of tracking the funds that have been disregarded under section 50-75, a strict tracing of the money received as gifts is not required. The Commissioner will assume that the overseas distributions are made first from 'gifts' that are able to be distributed overseas (a gift of land that is physically in Australia, for example, cannot be distributed overseas). The effect of this assumption is that overseas distributions, up to the total of distributable gifts received, can be disregarded when working out whether a charity pursues its objectives and incurs its expenses in Australia. 14. Subsection 50-75(2) confirms that the disregarding of gifts extends to gifts made to a gift deductible fund that the institution operates. This situation can arise where the charity is not gift deductible in its own right but it operates a fund that is. 15. As such, an entity can distribute funds to overseas entities, or to an entities in Australia which pursues their purposes overseas, and satisfy the requirements of section 50-50 of the ITAA 1997, provided that the distributions for overseas purposes is not greater than the amount of distributable gifts or government grants received by the entity. 16. The entity will be able to receive and distribute the money both within and outside of Australia without affecting their endorsement as income tax exempt provided the total of the amount of money expended overseas is not greater than the total of the amount of distributable gifts they have received. | Detailed Reasoning - Conclusion: 17. In determining whether the entity satisfies the requirement of paragraph 50-50(1)(a), section 50-75 will cause any amounts of distributable gifts sent overseas to be disregarded. If the total of the amount of money distributed overseas by the entity is equal to or less than the total of the amount of distributable gifts they receive, the entity will satisfy the requirements of paragraph 50-50(1)(a). 18. Provided the entity remains registered as a charity with the Australian Charities and Not-for-profits Commission, its receipt and distribution of all or part of the gift to overseas charities will not affect their entitlement to endorsement as exempt from income tax. | Summary: 1. The interest earned from the investment of the gifted money will not be disregarded under section 50-75 of the ITAA 1997. 2. The interest will remain exempt in the hands of the entity provided they remain registered as a charity with the ACNC and endorsed as income tax exempt under section 50-105 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: 19. As stated in question 1, section 50-75 of the ITAA 1997 applies to disregard gifts and government grants in determining whether an entity incurs its expenditure or pursues its objectives principally in Australia. 20. Taxation Ruling TR 2005/13 Income tax: tax deductible gifts - what is a gift , sets out the Commissioners view on the meaning of 'gift', and provides that a 'gift has the following characteristics': 13. Rather than attempting a definition of gift, the courts have described a gift as having the following characteristics and features: • there is a transfer of the beneficial interest in property; • the transfer is made voluntarily; • the transfer arises by way of benefaction; and • no material benefit or advantage is received by the giver by way of return. 21. Interest earned from the investment of a gift does not have the characteristics of a gift, and is considered to be income according to ordinary concepts. 22. As such, section 50-75 of the ITAA 1997 will not apply to disregard the interest received from the investment of a gift in determining whether an entity incurs its expenditure or pursues its objectives principally in Australia. | Detailed Reasoning - Conclusion: 23. Any income that the entity receives from investing the money will not be disregarded by the operation of section 50-75 of the ITAA 1997 in determining whether the entity incurs its expenditure or pursues its objectives principally in Australia for the purposes of section 50-50 of the ITAA 1997 or any other special condition in Division 50 of the ITAA 1997. 24. Any income that the entity receives from investing the money will be exempt from income tax provided that the entity remains registered as a charity with the ACNC and endorsed as income tax exempt under section 50-105 of the ITAA 1997.

Reasons for decision: These reasons for decision accompany the Notice of private ruling for the entity | While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.