House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Chapter 6 - Endorsement of deductible gift recipients and tax exempt charities

Overview

6.1 Schedules 7, 8 and 9 to this Bill will amend the ITAA 1997 to implement the Government's proposal to register charities, announced on 13 August 1998, in ANTS.

6.2 The amendments will:

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require an entity seeking deductible gift recipient status to obtain an ABN and be endorsed by the Commissioner as gift deductible [Schedule 7, items 6 and 7, new section 30-17 new Subdivision 30-BA] . The Registrar will then register the endorsed entity in the ABN register as a deductible gift recipient [Schedule 7, item 8, new section 30-229] ; and

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require any charity seeking to claim income tax exemption to obtain an ABN and be endorsed by the Commissioner as exempt from income tax [Schedule 8, item 15, new Subdivision 50-B] .

6.3 Although this measure introduces a requirement to approach the Commissioner for the relevant endorsement, there is no change to the current requirements for concessional status. Previously implicit obligations about use of funds, reporting of certain changes, and in relation to the issue of receipts, will now be contained in the tax law.

6.4 The amendments apply in relation to:

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gifts made on or after 1 July 2000 [Schedule 7, item 18] ; and

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income for the period 1 July 2000 onwards [Schedule 7, item 18 and Schedule 8, item 16] .

6.5 Deductible gift recipients who are specifically listed by name in the ITAA 1997 (or ITAR 1997 in the case of prescribed private funds) are exempt from seeking deductible gift recipient endorsement. However, they may apply for an ABN for other purposes, including if they require income tax exempt status. [Schedule 7, item 6, new paragraphs 30-17(1)(a), (b) and (c)]

6.6 Abbreviations used throughout this Chapter are summarised in the glossary following the Table of contents for this Explanatory Memorandum.

Summary of the amendments

Purpose of the amendments

6.7 The purpose of the measure is to protect the integrity of the taxation system in respect of deductible gift recipients and income tax exempt charities.

6.8 The amendments will do this by:

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extending the existing gift deductibility provisions to specify that a taxpayer can deduct only a gift made to a recipient that is endorsed by the Commissioner or listed by name in the income tax law [Schedule 7, item 6, new section 30-17] ; and

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extending the existing income tax exempt entities provisions to add, as a further special condition, that an entity is not exempt from income tax unless it is endorsed as exempt from income tax [Schedule 8, item 9, new section 50-52] .

To be endorsed:

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deductible gift recipients must identify themselves to the Commissioner by applying for an ABN and endorsement [Schedule 7, item 7, new section 30-130] and meet certain relevant conditions. The conditions include maintaining a gift fund and limiting its use to the deductible gift recipient's principal purpose and, upon winding up or revocation of endorsement, to transfer any surplus assets of the fund to another deductible gift recipient [Schedule 7, item 7, new section 30-125] ; and

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income tax exempt charities will also be required to identify themselves by seeking an ABN and endorsement and be able to meet the relevant conditions as outlined in the current law [Schedule 8, item 15, new sections 50-110 and 50-115] .

Date of effect

6.9 The amendments to the gift deductibility provisions will apply from 1 July 2000 [Schedule 7, item 18] . The amendments to the income tax exempt entity provisions will apply in relation to income for 1 July 2000 and onwards. [Schedule 7, item 18 and Schedule 8, item 16]

Background to the legislation

Current law

Gifts or contributions

6.10 Taxpayers are entitled to income tax deductions for certain gifts or contributions. The rules relating to these deductions are contained in Division 30 of the ITAA 1997. The structure of Division 30 is as follows:

6.11 Under section 30-15 of the ITAA 1997 the monetary value of certain gifts made to listed recipients are eligible for tax deductibility. The table in section 30-15 specifies the type of recipient, the type of gift or contribution, how much can be deducted and any special conditions that apply. The type of recipient includes public hospitals, public libraries, public museums and public benevolent institutions. These entities are entitled to receive gifts that are tax deductible to the donor and, after meeting endorsement requirements (if required to), are referred to as deductible gift recipients [Schedule 7, item 8, new section 30-227] . The Commissioner proposes to adopt the term deductible gift recipient when referring to entities he endorses/has endorsed and those named in the tax law.

Exempt Entities

6.12 Certain entities are exempt from income tax, some under special conditions. The rules relating to these entities are contained in Division 50 of the ITAA 1997. The structure of Division 50 is as follows:

6.13 Most of the above entities must satisfy certain special conditions before being income tax exempt. These special conditions vary depending on the nature of entity being exempted. Generally, however, the conditions cover the entity's physical presence and operations in Australia, whether the entity is a deductible gift recipient, or whether the entity is specifically prescribed if located outside Australia. These special conditions are covered in sections 50-50, 50-55, 50-60, 50-65 and 50-70 of the ITAA 1997.

Explanation of the legislation

SECTION 1: ENDORSEMENT OF DEDUCTIBLE GIFT RECIPIENTS (SCHEDULE 7)

Requirement for endorsement

6.14 Schedule 7 to this Bill inserts new section 30-17 in Division 30 of the ITAA 1997 which provides that a donor cannot deduct a gift made to a fund, authority or institution unless the Commissioner has endorsed an entity that is, or operates, the fund, authority or institution as a deductible gift recipient.

6.15 A deductible gift recipient is an entity that:

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is endorsed as such by the Commissioner

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to be endorsed the entity must have an ABN and be or have a fund, authority or institution that meets a specified description and satisfies certain requirements in the law; or

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is mentioned by name in the law as entitled to receive gifts that are tax deductible to the donor.

[Item 8, new section 30-227]

6.16 As outlined above in the discussion of the current law, the requirements in the law to be met by the entity or its fund, authority or institution (described in items 1, 2 or 4 of the 'Recipient' column of the table in section 30-15 of the ITAA 1997) are identified in the 'Special conditions' column of the table in section 30-15. Also the entity must meet further, formerly implicit, requirements such as:

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maintaining a fund (called a 'gift fund' in the legislation) for its principal purpose (including purposes incidental to the principal purpose), in which gifts of property and money (and moneys received because of such gifts) must be placed [item 7, new subsection 30-125(4)]

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new subsection 30-125(4) is structured similarly to paragraphs 30-265(2)(a) and 30-300(3)(a) of the ITAA 1997 dealing with funds maintained by environmental and cultural organisations. Two technical amendments are also made to paragraphs 30-265(2)(a) and 30-300(3)(a) of the ITAA 1997 to make it clear that gifts of property must also be credited to the fund, as in new subsection 30-125(4) [items 10 and 11] ; and

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only using the contents of the gift fund for the principal purpose of the entity [item 7, new subsection 30-125(5)] ; and

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upon winding up or revocation of endorsement, surplus assets of the gift fund being transferred to another deductible gift recipient [item 7, new subsections 30-125(6) and (7)] .

6.18 If an entity is entitled and applies for endorsement, the Commissioner must endorse it. [Item 7, new section 30-120]

6.19 An entity that is not named in the tax law as entitled to receive gifts that are tax deductible to the donor must be endorsed by the Commissioner as a deductible gift recipient by 1 July 2000 if the entity's deductible gift recipient status is to continue unbroken. [Item 6, new section 30-17 and item 18]

Applying for endorsement

6.20 In applying for endorsement, the entity must apply in a form approved by the Commissioner (signed or containing the entity's electronic signature if lodged electronically). The application must be lodged at, or posted to, an office or facility designated by the Commissioner as a receiving centre for an application of that kind. [Item 7, new section 30-130]

6.21 The Commissioner must give the applicant written notice whether the applicant is endorsed or refused endorsement. [Item 7, new section 30-140]

6.22 If a decision cannot be made whether an applicant is entitled to be endorsed, the Commissioner may request the applicant provide certain specified information or documents. [Item 7, new subsection 30-135(1)]

6.23 The Commissioner must specify a date of effect of endorsement. The date may be any date including a date before application for endorsement was made. Where an entity finds, for whatever reason, that it fails to lodge an application for endorsement, so that the entity is not a deductible gift recipient from 1 July 2000, this provision provides the Commissioner with the ability to backdate the endorsement of the entity to the date the entity first became entitled to endorsement. [Item 7, new section 30-145]

Refusal of endorsement

6.24 The applicant may object against a refusal of endorsement in the manner set in Part IVC of the TAA 1953. The applicant may object where it was seeking endorsement for a particular period and, although endorsed for other periods, was not endorsed for a date or dates it desired [item 7, new section 30-150] . Part IVC applies to taxation objections, reviews and appeals.

6.25 An applicant may treat his or her application as refused, by giving the Commissioner written notice of that fact, if the Commissioner has not given the applicant written notice of a decision by the later of:

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the end of the 60th day after the application was made; or

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the end of the 28th day after the last day on which the applicant gives the Commissioner further information or documentation as requested.

[Item 7, new subsections 30-135(2) and (3)]

6.26 If the applicant has given such a notice, the review of refusal of endorsement operates as if the Commissioner had refused the application on the day on which the notice is given. [Item 7, new subsection 30-135(4)]

Recording an endorsed deductible gift recipient on the Australian Business Register (ABR)

6.27 The deductible gift recipient does not have to apply to be recorded on the ABR. The Registrar will enter a statement on the ABR as to whether an entity is a deductible gift recipient. Where a deductible gift recipient has an ABN and is listed by name in the income tax gift deductibility provisions, the Registrar will also enter a statement on the ABR that the entity is a deductible gift recipient. [Item 8, new section 30-229]

6.28 The notation on the ABR will assist business and the public in targeting their philanthropy and facilitate publicity. There will be no statement on the ABR as to whether an entity is tax exempt or not. If an entity is endorsed for the operation of a fund, authority or institution the ABN registration will also show the fund's, authority's or institution's name. [Item 8, new subsection 30-229(2)]

Issuing receipts to donors

6.29 When a deductible gift recipient issues a receipt for a gift, it must state the name of the fund, authority or institution to which the gift is being made, the entity's ABN and the fact that the receipt is for a gift [Item 8, new section 30-228] . Failure in this requirement provides cause for the Commissioner to revoke an entity's endorsement. [Item 7, paragraph 30-170(1)(c)]

Checking entitlement to an endorsement

6.30 The Commissioner may request an endorsed entity provide information relevant to its entitlement for continued endorsement. The entity must comply with that request [Item 7, new section 30-155] . Failure in this obligation may attract prosecution under section 8C of the TAA 1953 and loss of endorsement [Item 7, new paragraph 30-170(1)(b)] .

6.31 An entity must give the Commissioner written notice before, or as soon as practicable after, it is no longer entitled to be endorsed [Item 7, new section 30-160] . Failure in this obligation may also attract prosecution under section 8C of the TAA 1953.

6.32 The Commissioner may revoke an entity's endorsement if that entity:

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is no longer entitled to be endorsed as a deductible gift recipient; or

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has not provided requested information relevant to its endorsement; or

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has not ensured that the required things are stated on receipts issued for gifts.

[Item 7, new section 30-170)]

6.33 The Commissioner must give the entity written or electronic notice if its endorsement is revoked. The revocation date is the date specified by the Commissioner but cannot be before a date on which the entity first ceased to be entitled. [Item 7, new section 30-170]

6.34 The entity may object if it is dissatisfied with the revocation of its endorsement as a deductible gift recipient. [Item 7, new section 30-175]

Partnerships and unincorporated bodies

6.35 The obligations, mentioned above, to comply with the Commissioner's request to provide information relevant to an entity's entitlement to endorsement or, informing the Commissioner when the entity has ceased to be entitled to be endorsed, are imposed on each partner in a partnership and each member of the committee of management of the association. The obligations may be discharged by any of the partners or any of the members of the committee. [Item 7, new subsections 30-165(1) and (2)]

6.36 Where the obligations are not met, there will be an offence under section 8C of the TAA 1953. However, this Bill does not, on its own, create any offence. Nor does it reverse the onus of proof set out under section 8C, for example, that it is incumbent upon the Commissioner to prove that the person was capable of providing the required information.

6.37 Because of the need to extend the information obligations to cover each member of a partnership or each member of a management committee of an unincorporated association (to attach to the legal persons behind such entities), this Bill provides an additional safeguard to those members. Essentially, the proposed defence provided by new subsection 30-165(3) ensures that no offence will have occurred where the person proves that they did not knowingly fail to give the information. Of course, this defence will not be necessary if the Commissioner cannot prove that the person was capable of providing the required information.

Government entities (Schedule 9)

6.38 Schedule 9 to this Bill extends the concept of 'government entity' in the A New Tax System (Australian Business Number) Act 1999 (ABN Act 1999) [Schedule 9, Part 1] . The amendment allows the ABN Registrar to allocate the ABN to a Government organisation where he is satisfied of a sufficiently discrete identity and level of management sophistication such that it would be appropriate to do so. This enables, for example, a public school to be endorsed as a deductible gift recipient in respect of its school building fund.

6.39 New section 30-180 ensures that 'government entities' are treated like entities for the purpose of deductible gift endorsement.

Consequential amendments

6.40 Items 1, 2 and 4 of the column headed 'Special conditions' of the table in subsection 30-15(2) of the ITAA 1997 are amended to add the requirement that the fund, authority or institution must be endorsed [Schedule 7, items 2, 4 and 5] . The column headed 'Recipient' at table item 2 of subsection 30-15(2) is amended to ensure that the fund, authority or institution is endorsed [Schedule 7, item 3] . A similar change is made to section 30-230 to ensure a gift under the Cultural Bequests Program is to an endorsed fund, authority or institution [Schedule 7, item 9, new subsection 30-230(2A)] .

SECTION 2: ENDORSEMENT OF CHARITABLE ENTITIES AS EXEMPT FROM INCOME TAX (SCHEDULE 8)

Requirement for endorsement

6.41 Schedule 8 to this Bill inserts new section 50-52 in Division 50 of the ITAA 1997 which provides that a charitable entity covered by the following items in the table in section 50-5:

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item 1.1 (charitable institution);

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item 1.5 (fund established for public charitable purposes by will before 1 July 1997;

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item 1.5A (trust covered by paragraph 50-80(1)(c)); and

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item 1.5B (fund established in Australia for public charitable purposes by will or instrument of trust, and not covered by items 1.5 and 1.5A);

will not be exempt from income tax under any provision of the income tax law unless it is endorsed as such by the Commissioner under new Subdivision 50-B .

6.42 An entity is entitled to be endorsed under new Subdivision 50-B if it has an ABN, is covered by item 1.1, 1.5, 1.5A or 1.5B of the table in section 50-5 of the ITAA 1997 and meets the 'special conditions' applicable to each of those items. For entities that have not started any activity as a charitable institution, there must be reasonable grounds for believing that the entity will meet the relevant conditions referred to in the column headed 'Special conditions'. [Item 15, new section 50-110]

6.43 Where a trust is deemed to consist of a 'new trust' and an 'old trust' under section 50-80 of the ITAA 1997, each trust will need to apply for endorsement to be income tax exempt. The ABN of the actual trust entity is to be used by both deemed trusts.

6.44 If an entity is entitled and applies for endorsement, the Commissioner must endorse it as exempt from income tax. [Item 15, new section 50-105]

6.45 The amendments to the income tax exempt charitable entity provisions will apply in relation to income for 1 July 2000 and onwards. [Schedule 7, item 18 and Schedule 8, item 16]

Applying for endorsement

6.46 In applying for endorsement, the entity must apply in a form approved by the Commissioner (signed or containing the entity's electronic signature if lodged electronically). The application must be lodged at, or posted to, an office or facility designated by the Commissioner as a receiving centre for an application of that kind. [Item 15, new section 50-115]

6.47 The Commissioner must give the applicant written notice whether the applicant is endorsed or is refused endorsement. [Item 15, new section 50-125]

6.48 The Commissioner must specify a date of effect of endorsement. This date may be any date including a date before application for endorsement was made. Where an entity finds, for whatever reason, that it fails to lodge an application for endorsement, so that the entity's income is not exempt from income tax from 1 July 2000, this provision provides the Commissioner with the ability to backdate the endorsement of the entity to the date the entity first became entitled to endorsement. [Item 15, new section 50-130]

6.49 If a decision cannot be made whether an applicant is entitled to be endorsed, the Commissioner may request the applicant provide certain specified information or documents. [Item 15, new subsection 50-120(1)]

Refusal of endorsement

6.50 The applicant may object against a refusal for endorsement in the manner set in Part IVC of the TAA 1953. The applicant may object where it was seeking endorsement for a particular period and, although was endorsed for other periods, was not endorsed for a date or dates it desired [item 15, new section 50-135] . Part IVC applies to taxation objections, reviews and appeals.

6.51 An applicant may treat his or her application as refused by giving the Commissioner written notice of that fact, if the Commissioner has not given the applicant written notice of a decision by the later of:

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the end of the 60th day after the application was made; or

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the end of the 28th day after the last day on which the applicant gives the Commissioner further information or documentation as requested.

[Item 15, new subsections 50-120(2) and (3)]

6.52 If the applicant has given such a notice, the review of refusal of endorsement operates as it the Commissioner had refused the application on the day on which the notice is given. [Item 15, new subsection 50-120(4)]

Checking entitlement to an endorsement

6.53 The Commissioner may request an endorsed entity provide information relevant to its entitlement for continued endorsement. The entity must comply with that request [item 15, new section 50-140] . Failure in this obligation may attract prosecution under section 8C of the TAA 1953 and loss of endorsement [item 15, new section 50-155] .

6.54 An entity must give the Commissioner written notice before, or as soon as practicable after, it is no longer entitled to be endorsed [item 15, new section 50-145] . Failure in this obligation may also attract prosecution under section 8C of the TAA 1953.

6.55 The Commissioner may revoke an entity's endorsement if that entity:

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is no longer entitled to be endorsed as exempt from income tax; or

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has not provided requested information relevant to its endorsement.

[Item 15, new section 50-155)]

6.56 The Commissioner must give the entity written or electronic notice if its endorsement is revoked. The revocation date is the date specified by the Commissioner but cannot be before a date on which the entity first ceased to be entitled. [Item 15, new section 50-155]

6.57 The entity may object if it is dissatisfied with the revocation of its endorsement as exempt from income tax. [Item 15, new section 50-160]

Partnerships and unincorporated bodies

6.58 The obligations to comply with the Commissioner's request to provide information relevant to an entity's entitlement to endorsement or, informing the Commissioner when the entity has ceased to be entitled to be endorsed, are imposed on each partner in a partnership and each member of the committee of management of an association. The obligations may be discharged by any of the partners or any of the members of the committee. [Item 15, new subsections 50-150(1) and (2)]

6.59 Where the obligations are not met, there will be an offence under section 8C of the TAA 1953. This Bill again provides a defence to these persons identical to that provided to partners or members of a deductible gift recipient (see paragraphs 6.36 and 6.37). [Item 15, new subsection 50-150(3)]

Consequential amendments

6.60 The column headed 'Special conditions' at table items 1.1, 1.5, 1.5A and 1.5B of subsection 50-5 of the ITAA 1997 is amended to refer to new section 50-52 [items 1 to 4] . The note at subsection 50-5 is repealed and in its place is a new note explaining the effect of the new section 50-52 on charitable institutions, funds or trusts [item 5] . Also a new note is added at end of section 50-50 to indicate that the entity has to meet a further condition, covered in new section 50-52, to be exempt from income tax. [Items 7 and 8]

Other amendments (Schedules 7 and 8)

6.61 Certain special conditions are required to be met for an entity to be exempt from income tax under Division 50 of the ITAA 1997. To avoid any misunderstanding that a fund could be exempt from income tax without meeting the 'special conditions' that apply to such a fund for gift deductibility, as was required under the ITAA 6, paragraph 50-60(d) of the ITAA 1997 is repealed and new paragraph 50-60(d) is inserted to ensure that the fund meets the description and requirements in item 1 or 2 of the table in section 30-15 [Schedule 7, item 15] . Similar repeal and new insertions are required for paragraphs 50-50(b), 50-55(b), 50-65(b) and 50-70(b) of the ITAA 1997 [Schedule 7, items 16 and 17; Schedule 8, items 6 and 10] . New section 50-57 is inserted to make item 1.5 in the table in section 50-5 of the ITAA 1997 consistent with the other items as amended. [Schedule 8, item 11]

The ABN Act 1999 (Schedule 9)

6.62 The amendments to the ABN Act 1999 described above (see paragraph 6.38) have provided the opportunity to:

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insert a provision enabling the time limit, before an applicant for an ABN can force a deemed refusal, to be extended. This enables the Registrar, in requesting extra information in respect of an application for an ABN, sufficient time to properly consider the material before the matter is taken to the Administrative Appeals Tribunal. This amendment will bring closer alignment with similar provisions regarding applications for endorsement [Schedule 9, Part 2, items 3 and 4] ; and

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correct an error in 'Note (1)' below section 14 of the ABN Act 1999. [Schedule 9, Part 3, item 6]