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Edited version of your written advice
Authorisation Number: 1012788981631
Ruling
Subject: Membership of a private foundation and income tax
Question 1
Does membership of a private foundation mean that the taxpayer is an 'exempt entity' or that their income from employment is 'exempt income' for income tax purposes?
Answer
No
This ruling applies for the following period(s)
1 July 2011 to 30 June 2012
1 July 2012 to 30 June 2013
1 July 2013 to 30 June 2014
1 July 2014 to 30 June 2015
The scheme commences on
The taxpayer states they have participated in a tax scheme since 20XX.
Relevant facts and circumstances
The taxpayer formed a private foundation. They paid a 'Community Foundation' to strike the private foundation.
The taxpayer provided Articles of Association of a similar private foundation and 'Information for Private Foundations Only' from the 'Community Foundation.'
The 'Community Foundation' document states:
This means that the private foundation may offer services to other private foundations, incorporated bodies (entities) and even government departments. A regular invoice is required to be sent, and at the time of first invoicing, include completed ATO form 3346, with the box ticked that says the 'whole of payment is tax-exempt.' There is to be no withholding of taxes or other payments or deductions, such as Medicare or superannuation.
The Articles of Association provided state:
Article Three
This Foundation is a Private Foundation, 'not-for -profit', 'tax-exempt',
...
'tax-exempt means tax exempt and free from all forms of financial and involuntary servitude, limitations and imposts by way of, taxation, usury, stamp or other duties, levies, where appropriate indirect taxation, and any other imposts of governments, administrations, or any other purported authority or directive authority, either present or future.
The taxpayer stated that their only income for the relevant period was earnings from their employment.
Relevant legislative provisions
Section 6-5 of the Income Tax Assessment Act 1997(ITAA 1997)
Section 11-5 of the ITAA 1997
Section 11-15 of the ITAA 1997
Reasons for decision
Question 1
Summary
Ordinary Income
Section 6-5 of the ITAA 1997 provides that assessable income includes income according to ordinary concepts, which is called ordinary income.
There is a substantial body of case law which indicates whether an amount is income according to ordinary concepts. Remuneration from personal services, whether received in the capacity as an employee or otherwise in connection with employment is generally income according to ordinary concepts.
As the taxpayer has not stated any other argument, their income from employment is considered to be ordinary income.
Exempt entities
Section 11-5 of the ITAA 1997 lists the entities that are exempt, no matter what kind of ordinary or statutory income they have. Section 11-5 references the relevant provisions in the ITAA 1997 and Income Tax Assessment Act 1936 which define these tax-exempt entities.
The taxpayer states they are participant of the private foundation. In the ATO view, membership of the private foundation would not mean an individual qualified as a tax-exempt entity pursuant to section 11-5 of the ITAA 1997.
Exempt income
Section 6-20 of the ITAA 1997 defines exempt income and refers to lists of provisions about exempt income at sections 11-5 and 11-15 of the ITAA 1997.
The taxpayer has not advised under which provision they consider their income exempt. In the ATO view, income from employment does not meet any of the provisions for exempt income.
Statement by a supplier (NAT 3346)
The 'Community Foundation' document refers to ATO Form 3346 which is taken to be 'NAT 3346'. This form does not provide any reasons why income from earnings is 'exempt income.'
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