Edited version of private advice

Authorisation Number: 1012622824579

Ruling

Subject: income tax consequences for a tax exempt body

Question 1

Will there be any income tax implications for Company B on the transfer of the properties from Company A?

Answer

No

Question 2

Will any capital gain or profit arising on the subsequent disposal of those transferred properties to Company B be exempt from income tax as provided for by section 6-20 of the Income Tax Assessment Act 1997 (ITAA 1997) subject to special conditions?

Answer

Yes

Question 3

Will the subsequent sale to third parties by Company B of newly purchased properties using funds borrowed against the equity of the properties transferred from Company A be exempt from income tax as provided for by section 6-20 of the ITAA 1997 subject to special conditions?

Answer

Yes

This ruling applies for the following period

Year ended 30 June XXXX

Year ended 30 June YYYY

The scheme commenced on

1 July ZZZZ

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.

Company B is a wholly owned subsidiary of Company A. Company A is proposing to transfer properties to Company B. The consideration to be paid by Company B is nominal.

Company B is an endorsed charitable institution for income tax purposes in accordance with Subdivision 50-B of the Income Tax Assessment Act 1997 (ITAA 1997) but is not an endorsed deductible gift recipient. Company A is an endorsed charitable institution and is an endorsed deductible gift recipient under item 1 of the table in section 30-15 of the ITAA 1997. Both Company A and Company B are registered with the Australian Charities and Not-for-profits Commission (ACNC).

Both Company A and Company B are registered providers of a particular service under the relevant government act subject to compliance with the act's regulations and registration conditions.

Company A currently holds legal and beneficial title to an X amount of properties.

These properties were vested to Company A by the government at no cost to Company A. The transfers were published in the government gazette.

One of several conditions for Company A receiving the properties from the government is that it must increase the aid in a certain service sector that it provides to the community. It can use the equity in the properties to secure funding from financial institutions to invest in new assets. It must leverage its assets at a rate that, in the opinion of the Registrar, delivers sustainable and optimal growth in that service sector.

The leveraging targets are set out in the agreement entered into between the government and Company A, whereby Company A will leverage off the properties to acquire through the purchase more properties over a number of years.

Company B is to fund the increase in aid by borrowing against the equity of the existing properties transferred to it. The intended use of the new properties by Company B is to carry out its activities as per its objectives for which it was established, and on the basis of which it received its tax exempt status.

Company B is to raise a financing facility using the security of the properties, and the underlying cash flows from other related sources of income to service the borrowing. Company A is currently in advanced discussions with the bank regarding obtaining the finance. Company B was specifically incorporated by Company A to obtain a new financing facility. The funding provided will be necessary to assist Company A's entities in meeting their objectives.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 50-1

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 6-20

Income Tax Assessment Act 1997 section 6-15

Income Tax Assessment Act 1997 section 118-12

Income Tax Assessment Act 1997 section 50-5

Income Tax Assessment Act 1997 section 50-50

Income Tax Assessment Act 1997 section 50-52

Income Tax Assessment Act 1997 section 50-110

Income Tax Assessment Act 1997 section 50-47

Reasons for decision

Section 50-1 of the ITAA 1997 provides that the total ordinary and statutory income of the entities covered by item 1.1 of the table in section 50-5 of the ITAA 1997 is exempt from income tax subject to special conditions.

Subsection 6-20(1) of the ITAA 1997 provides that an amount of ordinary or statutory income is exempt income if it is made exempt from income tax by a provision of this Act or another Commonwealth law.

Subsection 6-15(2) of the ITAA 1997 provides that if an amount is exempt income, it is not assessable income. It should be noted that if an amount is exempt income, there are other consequences besides it being exempt from income tax such as capital gains and losses on assets used solely to produce exempt income are disregarded as provided for by subsection 118-12(1) of the ITAA 1997.

Subsection 118-12(1) provides that a capital gain or capital loss you make from a CGT asset that you used solely to produce your exempt income is disregarded.

Subsection 50-50(1) of the ITAA 1997 provides that an entity covered by item 1.1 of the table in section 50-5 of ITAA 1997 is not exempt from income tax unless the entity has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia. In addition, the entity must also comply with all the substantive requirements in its governing rules and apply its income and assets solely for the purpose for which it is established as provided for by subsection 50-50 (2) of the ITAA 1997.

Subsection 50-52(1) of the ITAA 1997 provides that an entity covered by item 1.1 of the table in section 50-5 of the ITAA 1997 is not exempt from income tax unless the entity is endorsed as exempt from income tax under Subdivision 50-B.

Subsection 50-110(1) provides that an entity is entitled to be endorsed as exempt from income tax if the entity meets all the relevant requirements of this section.

Subsection 50-110(2) of the ITAA 1997 provides that the entity must be an entity covered by item 1.1 of the table in section 50-5 of the ITAA 1997.

Subsection 50-110(3) of the ITAA 1997 provides that the entity must have an ABN.

Subsection 50-110(5) of the ITAA 1997 provides that the entity must meet the relevant conditions referred to in the column headed "Special conditions" of item 1.1 of the table in section 50-5 of the ITAA 1997. The entity must also satisfy section 50-47 of the ITAA 1997, if the entity is an ACNC type of entity.

Subsection 50-47 of the ITAA 1997 provides that an entity that is covered by any item of the table in section 50-5 of the ITAA 1997, and is an ACNC type of entity, is not exempt from income tax unless the entity is registered under the Australian Charities and Not-for-profits Commission Act 2012.

To avoid doubt, subsection 50-110(6) of the ITAA 1997 provides that the condition set out in section 50-52 of the ITAA 1997, requiring the entity to be endorsed under Subdivision 50-B, is not a relevant condition for the purposes of subsection 50-110(5).

Applying the law

Company B is a registered provider as provided for by the relevant government act.

Company B is a registered charity covered by item 1.1 of the table in section 50-5 of the ITAA 1997. Therefore, its total ordinary and statutory income is exempt from income tax subject to special conditions as provided for by section 50-1 of the ITAA 1997.

Company B has met the relevant conditions referred to in the column headed "Special conditions" of item 1.1 of the table in section 50-5 of the ITAA 1997 as it has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia as provided for by subsection 50-50 (1) of the ITAA 1997. In addition, it also complies with all the substantive requirements in its governing rules and applies its income and assets solely for the purpose for which it is established as provided for by subsection 50-50(2) of the ITAA 1997.

Further, Company B has met all the relevant requirements under Subdivision 50-B as per Subsection 50-110(1).

Company B has met the requirement of subsection 50-110(2) of the ITAA 1997 as it is a registered charity covered by item 1.1 of the table in section 50-5 of the ITAA 1997.

Company B has met the requirement of subsection 50-110(3) of the ITAA 1997 as it has an ABN.

Company B has satisfied subsection 50-47 of the ITAA 1997 as it is a registered charity covered by item 1.1 of the table in section 50-5 of the ITAA 1997, and is registered under the Australian Charities and Not-for-profits Commission Act 2012 as an ACNC type of entity.

Therefore, the ordinary and statutory income of Company B is exempt income as provided for by subsection 6-20(1) of the ITAA 1997.

Further, any capital gain that Company B makes arising on the subsequent disposal of those transferred properties is exempt income and not assessable. Also, any capital gain made by Company B on the subsequent sale to third parties of newly purchased or constructed properties, using funds borrowed against the equities of the properties transferred from Company A is exempt income and not assessable.

Again, there will be no taxation implications for Company B for receipt of the properties transferred from Company A to be used in accordance with the purpose and objectives for which it was established. There might be taxation implications if Company B does not carry out its activities as per its objectives for which it was established, and on the basis of which it received its tax exempt status.

In the High Court decision in Federal Commissioner of Taxation v Bargwanna [2012] HCA 11, which deals with a similar but not identical to subsection 50-50(2) of the ITAA 1997, the High Court found at paragraph 55 that:

The quoted findings of Edmonds J were sufficient to justify his conclusion that s 50-60 had not been complied with. Part of the Trust Fund had been applied for purposes other than those for which it had been established. It followed that it could not be said that "the fund [had been] applied for those purposes. Part had been. But part had not."

If Company B uses its income from these properties or disposes of these assets not in accordance with its objects for which it is established, it will lose its tax exempt status and its ordinary and statutory income will be assessable income as provided for by section 6-5 of the ITAA 1997 or section 6-10 of the ITAA 1997.

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