Edited version of your written advice

Authorisation Number: 1012749481534

Rulling

Subject: Interest

Exempt entities ~~ Charity, education, science and religion

Exempt entities ~~ Not for profit and mutual organisations

Issue 1

Question 1

Is X, a not-for-profit organisation, exempt from tax on the interest earned on various amounts that were paid under an agreement with Y Co where those amounts are held on trust for an interest group, Z?

Answer

No

Issue 2

Question 1

Is X required to lodge income tax returns for the amounts held on trust for Z?

Answer

Yes

This ruling applies for the following period(s)

1 July 200x to 30 June 20xx

The scheme commenced on

Xx November 200x

Relevant facts and circumstances

X is a not-for-profit organisation established under a specific Commonwealth legislation.

X has been endorsed as a deductible gift recipient in its capacity as a Public Benevolent Institution (PBI).

X is a body that represents the interests of Z, which is comprised of multiple groups.

X and Y Co entered into an agreement (Agreement) where X is to provide facilitation services to Y Co and Z to carry out agreements entered into between Y Co and Z. Under the Agreement, Y Co is to carry out certain infrastructure development activities in an area that Z has recognised interests. However, the Agreement includes areas on which the interest of Z is yet to be determined and so remains unclaimed.

Under the Agreement, Y Co agreed to provide certain defined benefits (Benefits) to X in its capacity as a representative body for Z for development works undertaken in the unclaimed area.

The Benefits are to be held by X in a bank account (Benefit Account) until they are distributed to Z in accordance with the Agreement.

The Agreement stipulates that X can only distribute the Benefits to a trust established for the benefit of Z when Z's rights in relation to the unclaimed area is certified and registered during the term of the Agreement. Any Benefits not distributed by X will revert back to Y Co upon the expiry or termination of the Agreement.

Y Co has already made payment of certain amounts to the Benefit Account in relation development done in the unclaimed area.

To date, no interest has been certified or registered to Z in relation to the unclaimed area and X continues to hold the Benefits in the Benefit Account until the Benefits can be distributed pursuant to the Agreement.

X's constitution makes it clear that X has power to act as a trustee for Z.

There is no written trust agreement between X and Z.

The Benefits that X holds on trust in the Benefits Account for Z earn interest income.

X, in its capacity as trustee for Z, is not registered as a charity with the Australian Charities and Not-for-profit Commission and has not been endorsed as exempt from income tax pursuant to Division 50 of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 50

Income Tax Assessment Act 1997 section 960-100

Income Tax Assessment Act 1936 section 99A

Reasons for decision

Issue 1

Question 1

In holding the interest on trust for Z, X is acting in the capacity of trustee, which is an entity separate from X in its capacity as a PBI. Since X as trustee for Z is not a registered charity and has not been granted tax exemption status, it is not currently exempt from tax.

Subsection 960-100(1) of the ITAA1997 provides that an entity includes a trust. Subsection 960-100(2) of the ITAA 1997 provides that the trustee of a trust is taken to be an entity consisting of the person who is the trustee at any given time.

Subsection 960-100(3) of the ITAA 1997 states that

A legal person can have a number of different capacities in which the person does things. In each of those capacities; the person is taken to be a different entity.

The case Di Lorenzo Ceramics Pty Ltd & Anor v Federal Commissioner of Taxation 2007 ATC 4662 at 4676 applied this provision in support of its decision that a legal person that has more than one capacity is taken to be a different entity in each such capacity.

X holds the Benefits on trust for Z.

The interest on the Benefits constitutes net income of the trust pursuant to section 95 of the Income Tax Assessment Act 1936 (ITAA 1936).

Subsection 99A(4) of the ITAA 1936 provides that

Where there is no part of the net income of a resident trust estate:

(a) that is included in the assessable income of a beneficiary of the trust estate in pursuance of section 97;

(b) in respect of which the trustee of the trust is assessed and liable to pay tax in pursuance of section 98; or

(c) that represents income to which a beneficiary is presently entitled that is attributable to a period when the beneficiary was not a resident and is also attributable to sources outside Australia;

the trustee shall be assessed and liable to pay tax on the net income of the trust estate ….

Z was not made presently entitled to the net income of the trust, namely the interest for the years ended 30 June 200x to 30 June 20xx inclusive and therefore, X would ordinarily be assessable on this net income of the trust pursuant to section 99A of the ITAA 1936.

Section 50-1 of the ITAA 1997 provides that the total ordinary income and statutory income of an entity endorsed under the tables that follow in Division 50 of the ITAA 1997 is exempt from income tax.

As X is acting in the capacity of trustee for Z in holding the interest on trust, it is in this capacity that X is required to be an entity endorsed to be exempt pursuant to Division 50 of the ITAA 1997.

X in its capacity of trustee for Z is not yet been endorsed as exempt from income tax.

Until such time as it is endorsed as exempt pursuant to Division 50 of the ITAA 1997, X will be liable to income tax pursuant to the ITAA 1936 and ITAA 1997 including but not limited to, section 99A of the ITAA 1936.

Issue 2

Question 1

Subsection 161(1) of the ITAA 1936 provides that every person must, if required by the Commissioner by notice published in the Gazette, give to the Commissioner a return for a year of income within the period specified in the notice.

Subsection 161(1A) of the ITAA 1936 provides that the Commissioner may, in the notice, exempt from liability to furnish returns such classes of persons not liable to pay income tax as the Commissioner thinks fit. A person so exempted need not furnish a return unless the person is required by the Commissioner to do so,

The Legislative Instrument made for the purposes of section 161 of the ITAA 1936, Lodgement of returns for the year of income ended 30 June 2014 in accordance with the Income Tax Assessment Act 1936, the Income Tax Assessment Act 1997, the Taxation Administration Act 1953, the Superannuation Industry (Supervision) Act 1993 and the Income Tax (Transitional Provisions) Act 1997 (the Legislative Instrument) provides in Table L:

Where the trustee of a trust estate has derived income (including capital gains) and the trustee is not covered by Tables M, N or O, a trust return is required to be lodged by the trustee resident in Australia…

Table N provides that any non-profit association, organisation, institution, society or club which is exempt from liability to income tax under Division 50 of the ITAA 1997 is not required to lodge an income tax return.

As X in its capacity as trustee is not exempt under Division 50 of the ITAA 1997, it is required to lodge income tax returns for the interests earned on the Benefits held on trust for Z.

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