Private ruling: Exemption from income tax, and Goods and Services Tax .
Date of advice: 19 June 2018
Published: August 2018
Ruling period: Year ending 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will the income tax exempt status of MC and OC, as a registered charity, be affected if MC rents the premises to OC below market rates? | A1: No | Q2: Will there be any Goods and Services Tax (GST) consequences if MC leases the premises to OC below market rates? | A2: Yes | Q3: Will the income tax exempt status of MC, as a registered charity, be affected if MC rents part of the premises to another charitable organisation below market rates? | A3: No | Q4: Will there be any GST consequences if MC leases the premises to another charitable organisation below market rates? | A4: Yes | Q5: Will the income tax exempt status of MC, as a registered charity, be affected if MC rents part of the premises to an unrelated business or community organisation below market rates? | A5: No | Q6: Will there be any GST consequences if MC leases the premises to an unrelated business or community organisation below market rates? | A6: Yes | Q7: Will the income tax exempt status of MC, as a registered charity, be affected if MC rents the premises (in whole or in part) to another organisation for use other than for charitable purposes, at market rates? | A7: No

Relevant facts and circumstances: MC is a registered charity and is endorsed for income tax, GST and FBT concessions. The sole member of MC is OC. OC is also a registered charity and endorsed for income tax, GST and FBT concessions. In 20XX, MC purchased a commercial property that will be converted into a school. The development and construction of the school will commence in the 20XX financial year. The development will be carried out by OC which will also operate the school. MC will lease the premises to OC. MC will lease the premises to OC at a rate of rent below the market rate. MC may also lease part of the premises to other charities, community organisations or businesses (either related or non-related). MC have not determined what they will charge for the lease of the premises or part of the premises. The building will be used predominantly as a school.

Relevant legislative provisions: Section 50-5 of the Income Tax Assessment Act 1997 | Section 50-50 of the Income Tax Assessment Act 1997 | Section 50-105 of the Income Tax Assessment Act 1997 | Section 50-110 of the Income Tax Assessment Act 1997 | Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 | Section 9-20 of the A New Tax System (Goods and Services Tax) Act 1999 | Section 11-15 of the A New Tax System (Goods and Services Tax) Act 1999 | Section 38-250 of the A New Tax System (Goods and Services Tax) Act 1999 | Section 72-70 of the A New Tax System (Goods and Services Tax) Act 1999 | Section 318 of the Income Tax Assessment Act 1936

Reasons for decision: Summary: To be exempt from income tax as a registered charity under item 1.1 of the table in section 50-5 of the Income Tax Assessment Act 1997 (ITAA 1997) an entity must be endorsed as exempt from income tax under section 50-105 of the ITAA 1997. To be endorsed under section 50-105 of the ITAA 1997, section 50-110 of the ITAA 1997 relevantly requires that the entity is covered by item 1.1 (that is, it is a registered charity), the entity has an ABN, and the entity satisfies the special conditions in item 1.1 of the table in section 50-5 of the ITAA 1997. Covered by item 1.1 To be a registered charity an entity must be registered under the Australian Charities and Not-for-profits Commission Act 2012 (ACNC Act) as a charity. The Commissioner of the Australian Charities and Not-for-profits Commission (ACNC) is responsible for determining if an entity can be registered as a charity (section 15-5 of the ACNC Act). MC and OC are both currently registered as a charity with the ACNC. Provided MC and OC both continue to be registered as a charity with the ACNC, they will be covered by item 1.1 of the table in section 50-5 of the ITAA 1997. | Detailed Reasoning - Has an ABN: MC and OC both have an ABN | Detailed Reasoning - Special Conditions: The special conditions at item 1.1 of the table in section 50-5 of the ITAA 1997 are sections 50-50 and 50-52 of the ITAA 1997 (although subsection 50-110(6) of the ITAA 1997 states that the condition in section 50-52 is not a relevant condition for the purposes of section 50-110). Subsection 50-50(1) of the ITAA 1997 relevantly provides that an entity covered by item 1.1 is not exempt from income tax unless it has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia. Subsection 50-50(2) of the ITAA 1997 also requires that the entity comply with the substantive requirements in its governing documents, and apply its income and assets solely for its purpose. MC and OC are both currently endorsed as income tax exempt under section 50-105 of the ITAA 1997. The Commissioner accepts that MC and OC currently satisfy the special conditions in section 50-50 of the ITAA 1997, and will continue to satisfy the special conditions in section 50-50 following the lease of the premises. | Detailed Reasoning - Conclusion: Provided both MC and OC continue to be registered as a charity with the ACNC, their entitlement to endorsement as exempt from income tax will not be affected following the lease of the premises. MC and OC will continue to satisfy the requirements for endorsement in section 50-110 of the ITAA 1997. | Detailed Reasoning - Question 2: Section 9-5 of the ANTS(GST)A states: You make a taxable supply if: (a) You make the supply for consideration; and (b) The supply is made in the course or furtherance of an enterprise that you carry on; and (c) The supply is connected with the indirect tax zone; and (d) You are registered or required to be registered. However, the supply is not a taxable supply to the extent that it is GST-free or input taxed. Paragraph 9-20(1)(e) of the ANTS(GST)A provides that an enterprise includes an activity or series of activities done by a charity. MC is a registered charity that is registered for GST. MC will lease the premises to OC for consideration (rent) in the course of carrying on an enterprise as a charity. The lease of the premises will be a taxable supply for the purposes of section 9-5 of the ANTS(GST)A. Section 72-70 of the ANTS(GST)A provides a rule for determining the value of a taxable supply made to an associate below market value. Section 72-70 states: (1) If a supply to your associate for consideration that is less than the GST inclusive market value is a taxable supply, its value is the GST exclusive market value of the supply (2) Subsection 1 does not apply if: a. Your associate is registered or required to be registered; and b. Your associate acquires the thing supplied solely for a creditable purpose. … Section 318 of the Income Tax Assessment Act 1936 (ITAA 1936) provides the meaning of associate (section 195-1 of the ANTS(GST)A. An associate of a company includes another company that has a majority of the voting interests in in the first company (Subsection 318(2) of the ITAA 1936). OC is the sole member of MC, and has all of the voting interests in MC. OC is an associate of MC. Subsection 72-70(1) of the ANTS(GST)A will apply to the lease of the premises unless the lease is acquired by OC for a creditable purpose (subsection 72-70(2) of the ANTS(GST)A). The meaning of creditable purpose is provided in section 11-15 of the ANTS(GST)A; (1) You acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise. (2) However, you do not acquire the thing for a creditable purpose to the extent that: a. the acquisition relates to making supplies that would be input taxed; or b. the acquisition is of a private or domestic nature. … OC is a registered charity which is registered for GST. OC will lease the premises to operate a school. OC is leasing the premises for a creditable purpose. As such, section 72-70 of the ANTS(GST)A will not apply to the lease. Although the lease of the premises is a taxable supply for the purposes of section 9-5 of the ANTS(GST)A, it will be a GST-free supply if subsection 38-250 of the ANTS(GST)A applies to the lease. Section 38-250 of the ANTS(GST)A relevantly provides: (1) A supply is GST-free if: a. the supplier is an endorsed charity, a gift-deductible entity or a government school; and b. the supply if for consideration that i. if the supply is a supply of accommodation – is less than 75% of the GST inclusive market value of the supply; or ii. if the supply is not a supply of accommodation – is less than 50% of the GST inclusive market value of the supply. The lease of the premises is a supply of accommodation. There is insufficient information to determine whether the consideration for the lease of the premises will be less than 75% of the market value of the lease (the amount of consideration for the lease of the premises has not been set). We are unable to determine if section 38-250 of the ANTS(GST)A will apply to the lease. | Detailed Reasoning - Question 3: As discussed in question 1, provided MC continues to be registered as a charity under the ACNC Act its entitlement to endorsement as exempt from income tax will not be affected following the lease of the premises. MC will continue to satisfy the requirements for endorsement in section 50-110 of the ITAA 1997. | Detailed Reasoning - Question 4: As discussed in question 2, the lease of part of the premises will be a taxable supply for the purposes of section 9-5 of the ANTS(GST)A. However, the lease will be a GST free supply if section 38-250 of the ANTS(GST)A applies to the lease. Currently there is insufficient information to determine whether section 38-250 of the ANTS(GST)A will apply to the lease (the amount of consideration for the lease of part of the premises has not been set). | Detailed Reasoning - Question 5: As discussed in question 1, provided MC continues to be registered as a charity under the ACNC Act its entitlement to endorsement as exempt from income tax will not be affected following the lease of the premises. MC will continue to satisfy the requirements for endorsement in section 50-110 of the ITAA 1997. | Detailed Reasoning - Question 6: As discussed in question 2, the lease of part of the premises will be a taxable supply for the purposes of section 9-5 of the ANTS(GST)A. However, the lease will be a GST free supply if section 38-250 of the ANTS(GST)A applies to the lease. Currently there is insufficient information to determine whether section 38-250 of the ANTS(GST)A will apply to the lease (the amount of consideration for the lease of part of the premises has not been set). | Detailed Reasoning - Question 7: As discussed in question 1, provided MC continues to be registered as a charity under the ACNC Act its entitlement to endorsement as exempt from income tax will not be affected following the lease of the premises. MC will continue to satisfy the requirements for endorsement in section 50-110 of the ITAA 1997.