Private ruling: Income tax exemption
Published: October 2013
Ruling period: Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016 | Year ended 30 June 2017 | Year ended 30 June 2018

Ruling: Q1: Will the proposed investment affect the existing endorsement of the entity as an income tax exempt entity pursuant to Division 50 of the Income Tax Assessment Act 1997 ? | A1: No | Q2: Will the proposed investment affect the existing endorsements of the entity as a deductible gift recipient for the operation of a public fund and institution? | A2: No

Relevant facts and circumstances: The Entity is an Australian incorporated company limited by guarantee. The Entity was established to advance education. The Entity is non profit and a Registered Charity. The Entity is endorsed as a tax concession charity and is exempt from income tax. The Entity is also endorsed for Goods and Services Tax (GST) and Fringe Benefits Tax (FBT) concessions. The Entity operates two deductible gift recipients (DGR). Proposed Investment A related entity, which is also a charity, has an opportunity to invest in educational facilities located overseas. The Entity will provide funding to the related entity to pursue the overseas opportunity by way of a 'gift" of money.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 30-25 | Income Tax Assessment Act 1997 section 30-100 | Income Tax Assessment Act 1997 subsection 30-125(1) | Income Tax Assessment Act 1997 section 50-50 | Income Tax Assessment Act 1997 section 50-52 | Income Tax Assessment Act 1997 section 50-75 | Income Tax Assessment Act 1997 section 50-110 | Income Tax Assessment Act 1997 section 995-1 Cases | Federal Commissioner of Taxation v. Word Investments Limited (2008) 236 CLR 204; [2008] HCA 55 | ATO view documents | Taxation Ruling TR 2000/11 Income tax: endorsement of income tax exempt charities | Decision Impact Statement (M 41/3008)

Reasons for decision: Summary: The Proposed Investment will not affect the existing status of the Entity as an income tax exempt entity 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. Exemption from income tax as a Registered Charity under item 1.1 of the table in 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 that Act. 4. Section 50-50 of the ITAA 1997 provides that a Registered Charity 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 a Registered Charity 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 a Registered Charity, has an ABN, is located in and incurs its expenditure in Australia, and is endorsed. 8. As the status of whether an entity is a Registered Charity is determined by the ACNC, this ruling can only address whether the Proposed Investment will affect whether the Entity meets the special conditions specified in sections 50-50 and 50-52 of the ITAA 1997. | Detailed Reasoning - Section 50-50 of the ITAA 1997: 9. Paragraph 50-50(1) (a) of the ITAA 1997 requires that an entity: (a) has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia; 10. In Federal Commissioner of Taxation v. Word Investments Limited (2008) 236 CLR 204; [2008] HCA 55 (Word Investments) the Commissioner argued, inter alia , that Word Investments did not meet all of the requirements for endorsement as a charitable institution as it did not satisfy the requirements of paragraph 50-50 (1) (a) of the ITAA 1997. The Commissioner considered that because the entities to which Word Investments distributed its funds primarily carried out their purposes outside Australia, Word Investments therefore did not pursue its purposes principally in Australia. 11. The High Court disagreed with the Commissioner and by a majority judgment (Gummow, Hayne, Heydon and Crennan JJ, Kirby J dissenting), held that Word Investments did meet the special conditions in paragraph 50-50 (1) (a) of the ITAA 1997. It found that Word Investments could pursue its charitable objectives by "…making payments to other institutions which have charitable purposes", and that: Section 50-50(a) also requires that, to that extent, Word incur its expenditure and pursue its objectives principally in Australia. That it did. The decisions to pay were made in Australia, the payments were made in Australia, the payments were made to Australian organisations, and the objects of Word included giving financial assistance to those organisations. The incurring of the expenditure and the pursuit of Word's objectives in this way took place nowhere but in Australia. Section 50-50(a) does not impose a prohibition on distributing to other charitable institutions. Nor does it require the money, when ultimately expended by Wycliffe and the other institutions, to be expended in Australia. 12. The present case shares many similarities with the facts in Word Investments. The Entity's constitution like that in Word Investments permits it to make payments and donations to other organisations. 13. In addition, the related entity, like Wycliffe (a recipient entity in Word Investments), is endorsed as a charitable institution and located in Australia. 14. While the Entity will provide a "gift" of money to the related entity to undertake the Proposed Scheme, as per the decision in Word Investments, this "gift" will not prevent the Entity from meeting the requirements of paragraph 50-50 (1) (a) of the ITAA 1997, even though the related entity will expend the funds outside Australia. 15. Accordingly, a distribution or gift by the Entity to the related entity will not prevent the Entity from meeting the requirements of section 50-50 of the ITAA 1997. | Detailed Reasoning - Disregarded amounts Section - 50-75 of the ITAA 1997: 16. The Entity can also satisfy the requirements of section 50-50 of the ITAA 1997 by way of the disregarded amounts concept described in section 50-75 of the ITAA 1997. Its states in part: | Detailed Reasoning - 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. 17. As discussed in Taxation Ruling TR 2000/11 Income tax: endorsement of income tax exempt charities , section 50-75 of the ITAA 1997 operates to disregard any gifts or government grants when considering whether an entity meets section 50-50 of the ITAA 1997. Paragraph 16 of TR 2000/11 states: Distributions of gifts or government grants that an entity has received in its own right or for a gift deductible fund, authority or institution it operates, are disregarded when determining whether it incurs its expenditure or pursues its purposes or objectives in Australia: section 50-75. The gifts do not need to be tax deductible. For the purposes of this provision the word 'gifts' is taken broadly to include receipts from fund raising by means of raffles, dinners, auctions, jumble sales and the like. However, receipts from commercial activities or under contract for services are not 'gifts'. 18. Therefore an entity can distribute funds to another entity located overseas or in Australia but which pursues its purposes overseas, and still meet the requirements of section 50-50 of the ITAA 1997 as it is assumed that any distributions are from gifts or government grants. 19. However it should be noted that deductible gifts are not permitted to be distributed offshore except in the case of an overseas aid fund as paragraph 17 of TR 2000/11 explains: If a government grant is, in fact, applied offshore it does not affect exemption. A strict tracing of money received as gifts is not required. We assume that gifts are distributed in the ways most conducive to exemption, unless the circumstances indicate otherwise. For tax deductible gifts, we do not assume they are distributed offshore (see the 'in Australia' requirement in special condition (a) in item 1 in the table in section 30-15), except for overseas aid funds under item 9.1.1 in section 30-80. For the activity test the assumption means non-deductible gifts are the first monies distributed offshore. Accordingly, a charitable institution meets the activity test in relation to expenditure if, after excluding the government grants it distributes offshore and non-deductible gifts, its expenditure is incurred principally in Australia. 20. Therefore while the Entity can distribute government grants or non-deductible gifts to a related entity to pursue the Proposed Scheme, it is not permissible for the Entity to use funds from either of its Deductible Gift Recipients (DGR) for this purpose. | Detailed Reasoning - Conclusion: 21. Providing "gifts" or funds to the related entity will not prevent the Entity meeting the special conditions listed in sections 50-50 and 50-52 of the ITAA 1997. The decision in Word Investments confirmed that charitable institutions can provide funds to other entities that are located in Australia but pursue charitable purposes overseas. In addition the disregarded amounts concept specified in section 50-75 of the ITAA 1997, will also operate to allow the Entity to continue to meet the special conditions in sections 50-50 and 50-52 of the ITAA 1997. 22. Therefore, provided the Entity remains a Registered Charity, providing funds to a related entity for the Proposed Investment will not affect its endorsement as a tax concession charity. | Summary: 1. The proposed investment will not affect the existing endorsement of the entity as a DGR for the operation of a public fund and institution. | Detailed Reasoning - Detailed reasoning: 2. Subsection 30-125(2) of the ITAA1997 provides that an entity is entitled to be endorsed as a DGR for a fund, authority or institution it operates if: · the entity has an ABN. · the entity legally owns the fund or includes the authority or institution; · the fund, authority or institution meets any relevant special conditions; and · has suitable rules in relation to the transfer of gifts, contributions and other money received because of such gifts or contributions. | Detailed Reasoning - School Building Fund: 3. The Entity operates a school building fund. The requirements for a school building fund are specified in item 2.1.10 of the table in section 30-25 of the ITAA 1997. Endorsement requires: a public fund established and maintained solely for providing money for the acquisition, construction or maintenance of a building used, or to be used, as a school or college by: a) a government; or b) a public authority; or c) a society or association which is carried on otherwise than for the purposes of profit or gain to the individual members of the society or association 4. The special conditions require that the public fund: a) be registered under the Australian Charities and Not-for-profits Commission Act 2012 ; or b) not be an *ACNC type of entity: 5. The Entity is currently endorsed as a DGR for the school building fund and therefore meets the special conditions of section 30-25 of the ITAA 1997. 6. Regarding the expenditure of funds from the school building fund, all expenditure must be used solely for the purposes described in item 2.1.10 of the table in section 30-25 of the ITAA 1997. 7. Therefore provided the Entity does not use any funds derived from its school building fund for the purpose of the Proposed Investment, the endorsement of the Entity as a DGR for the operation of the school building fund will not be affected. | Detailed Reasoning - Library: 8. In regard to the endorsement requirements for the Entity's other DGR endorsement for a Library, the requirements that must be satisfied for this endorsement are outlined in item 12.1.2 of the table in section 30-100 of the ITAA 1997. Of relevance to this ruling are the special conditions listed in item 12.1.2 which require that: the public library must: a) be: b) (i) an *Australian government agency; or (ii) a *registered charity; or c) (b) be operated by: (i) an Australian government agency; or (ii) a registered charity 9. To remain endorsed for the operation of a public library, the Entity must continue to be a Registered Charity to meet the special conditions in section 30-100 of the ITAA 1997. 10. Therefore as discussed at question 1, provided the Entity remains a Registered Charity and does not use any funds derived from its Library for the purpose of the Proposed Investment, the endorsement as a DGR for the operation of its Library will not be affected.