Private ruling: Income Tax Exemption
Date of advice: 9 December 2015
Published: February 2016
Ruling period: Year ended 30 June 2016
Date scheme commenced: 1 January 20XX

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 ITAA 1997? | A1: Yes

Relevant facts and circumstances: Background The entity is a registered Australian company was created under an Act of Parliament. The entity is currently endorsed as a charitable institution by the Australian Charities and Not-for-profits Commission (ACNC) and the Australian Tax Office (ATO) with the following concessions: • Goods and Services Tax concession; • Fringe Benefits Tax rebatable; and • Income tax exempt. Currently, funds are owned by similar legal entities in several other counties. It is proposed to consolidate funds away from several overseas countries and into Australia. It is proposed to gift an amount of money from an overseas entity to the Australian entity.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 50-1, | Income Tax Assessment Act 1997 Section 50-5, | Income Tax Assessment Act 1997 Section 50-50, | Income Tax Assessment Act 1997 Subsection 50-50(1), | Income Tax Assessment Act 1997 Subsection 50-50(2) and | Income Tax Assessment Act 1997 Subsection 50-75(1).

Reasons for decision: Summary: The proposed gift will not affect the existing endorsement of the entity as exempt from income tax pursuant to Division 50 of the Income Tax Assessment Act 1997. | Detailed Reasoning - Detailed reasoning: 1. Section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the income of certain types of organisations is exempt from income tax. 2. Exception from income tax as a registered Charity under item 1.1 of section 50-5 of the ITAA 1997 is subject to the special conditions contained in sections 50-50 and 50-52 of the ITAA 1997. 3. A registered Charity is endorsed as such by the Australian Charities and Not-for-profits commission (ACNC) and for the purposes of income tax, is defined in section 995-1 of the ITAA 1997: registered charity means 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. 4. Section 50-50 of the ITAA 1997 provides that an entity is not exempt from income tax unless it has a physical presence in Australia, and to that extent, incurs its expenditure principally in Australia. 5. Section 50-52 of the ITAA 1997 stipulates that an entity is not exempt unless it is endorsed. 6. An entity is entitled to be endorsed pursuant to section 50-110 of the ITAA 1997 if it has an ABN and meets the special conditions described in sections 50-50 and 50-52 of the ITAA 1997. 7. The entity is presently exempt from income tax as it is registered charity, has an ABN, is located in and incurs its expenditure in Australia and is endorsed. 8. Section 50-50 of the ITAA 1997 requires that an entity: 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; 9. In determining whether an entity has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia, we also need to consider 'disregarded amounts' which are referred to in Section 50-75 of the ITAA 1997. 10. Section 50-75 of the ITAA 1997 deals with certain distributions that may be made overseas 11. The entity also satisfies section 50-50 of the ITAA 1997 by way of the disregarded amounts concept described in section 50-75 of the ITAA 1997. It states in part: 50-75(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. 12. The Explanatory Memorandum to the Taxation Laws Amendment Act (No 4) 1997 (regarding 'disregarded amounts') says: '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. 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. This assumption does not apply if a 'gift' cannot be distributed overseas. For example a gift of land, physically in Australia, is not assumed to be distributed overseas. The effect of this assumption is that overseas distributions, up to the total of these amounts, can be disregarded when working out whether a charity pursues its objectives and incurs its expenses in Australia. 14. Therefore an entity can distribute funds to another entity located overseas or within Australia, but which pursues its purposes overseas, and still meets the requirements of section 50-50 of the ITAA 1997, as it assumed that any distributions are from gifts or government grants. | Detailed Reasoning - Conclusion: 15. As a result of the gift, the entity's endorsement as a tax concessional charity will remain unaffected when receiving the funds from the overseas entity and the distributions made by the entity to charitable entities overseas will be disregarded, up to the amount of the gift when determining whether the 'in Australia' test in paragraph 50-50(1)(a) of the ITAA 1997 is satisfied. 16. Therefore, the proposed gift by the overseas entity will not affect the existing endorsement of the entity as exempt from income tax pursuant to Division 50 of the ITAA 1997. The distribution of the gift to charities overseas will also not affect the entity's entitlement to endorsement as a charity.