Edited version of your written advice

Authorisation Number: 1012792681300

Ruling

Subject: Present entitlement arising from reimbursement agreement

Question 1

Does section 100A of the Income Tax Assessment Act 1936 (ITAA 1936) apply to a situation in which a charitable organisation (CHAR) requests and receives funds for the pursuit of its charitable purpose from a trustee capable of making such distributions, where:

• the funds resolved to be distributed actually pass between the trustee and CHAR and

• the funds are applied to other organisations to carry out charitable works and

• at present the funds are principally planned to be sent overseas to an already established international charity (INTER) which will then apply the funds to charitable purposes through an international network of charities?

Answer

No

Question 2

Does section 100A of the ITAA 1936 apply where the trustee of a trust which has agreed to distribute funds through a trust capable of making such distributions:

• becomes aware of the work carried out by INTER or an entity in the international network in one of the countries in which INTER operates and

• distributes funds to CHAR in the belief that the distribution will pass to INTER, understanding that it is the practice of CHAR to send funds to INTER and

• does not seek to confirm that procedure.

Answer

No

Question 3

Does section 100A of the ITAA 1936 apply where the trustee of a trust which has agreed to distribute funds through a trust capable of making such distributions:

• becomes aware of the work carried out by INTER or an entity in the international network in one of the countries in which INTER operates and

• distributes funds to CHAR in the belief that the distribution will pass to INTER

• subsequent to seeking assurance that the funds will be passed to INTER?

Answer

No

Question 4

Does section 100A of the ITAA 1936 apply if INTER enters into an arrangement with CHAR and/or the trustee of a trust with the effect that CHAR will not retain the funds from the trust but will simply pay them directly to INTER?

Answer

Decline to rule

Question 5

Does section 100A of the ITAA 1936 apply if there is more than a short delay explainable as 'in the course of an ordinary family or commercial dealing'?

• between the trustee's resolution to distribute to CHAR and the actual distribution being made

• where there is no arrangement between the trustee, CHAR and/or a third party

• where the trust or the third party enjoys a benefit from the trust retaining the funds?

Answer

No

This ruling applies for the following period

Dd/mm/yyyy to dd/mm/yyyy

The scheme commenced on

The scheme has commenced

Relevant facts

CHAR is an income tax exempt organisation which exists for a charitable purpose.

It is registered with the Australian Charities and Not for profits Commission (ACNC).

It is currently not a registered public benevolent institution or any other form of deductible gift recipient.

CHAR works as part of an international network of charities and intends to apply funds through a partnership arrangement with INTER.

INTER has played a significant role in helping CHAR to establish and begin the pursuit of its mission. It had a representative in Australia before CHAR existed and it is expected that the representative will continue to serve INTER and as far as practicable assist CHAR. Where INTER has contact with potential donors it is likely to introduce at least some of the donors to CHAR.

INTER is based overseas and is very well recognised having been established for a very long time and operating in many countries.

Whilst CHAR represents and actually carries out its charitable purposes in conjunction with INTER it is a separate legal entity and separately controlled. If it formed a view that working with INTER was not an appropriate way for it to discharge its charitable purpose it could choose to work with other international partners or deliver the charitable services itself.

CHAR wishes to be able to receive funds that are distributions from trusts and to apply those funds to its charitable purposes.

For the purposes of the ruling it is stated that in all circumstances:

• there is no suggestion that CHAR intends in any way to be involved in an income tax minimisation or avoidance scheme

• CHAR wishes to be able to receive funds that are distributions from trusts and to apply those funds to charitable purposes

• the trust must have the power to distribute to CHAR

• the distribution would be one of a real cash, not a notional amount such as a capital gain

• the amount resolved to be distributed by the relevant trust in the relevant income year either from capital or income is to actually be received by CHAR

• the distribution of funds to CHAR does not involve further benefit or distribution to another 'person' or entity

CHAR's constitution has been provided and it states the following:

• the objects of the fund is to provide overseas aid and in particular:

- help impoverished communities around the world, and

- strengthen responses to worldwide humanitarian crises and disasters

• all income and property of CHAR must be applied solely towards the promotion of the company's objects

• CHAR may not pay or transfer any of its income or property, directly or indirectly, by way of dividend, bonus or otherwise to any person who is, or has been, a member of the organisation

• if a tax deductible gift fund is set up and endorsed, any surplus funds held by that fund upon winding up must be transferred to a fund, authority or institution to which income tax deductible gifts may be made

• upon winding-up or dissolution of CHAR, if there remains any property subsequent to the satisfaction of all debts and liabilities, that property is not to be paid or distributed among its members. Instead it must be given or transferred to another institution which has similar objects and a constitution which prohibits the distribution of income and property among its members to the extent imposed by the constitution. Where a choice is not passed by a special resolution the choice may then be made by a judge or registrar of the Supreme Court or other such court of competent jurisdiction.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 97(1)

Income Tax Assessment Act 1936 section 99A

Income Tax Assessment Act 1936 section 100A

Income Tax Assessment Act 1936 subsection 100A(1)

Income Tax Assessment Act 1936 subsection 100A(2)

Income Tax Assessment Act 1936 subsection 100A(3A)

Income Tax Assessment Act 1936 subsection 100A(5)

Income Tax Assessment Act 1936 subsection 100A(7)

Income Tax Assessment Act 1936 subsection 100A(8)

Income Tax Assessment Act 1936 subsection 100A(9)

Income Tax Assessment Act 1936 subsection 100AA

Reasons for decision

Subsection 97(1) of the ITAA 1936 states that where a beneficiary is presently entitled to a share of the net income of a trust estate, the assessable income of the beneficiary includes the beneficiary's share of the net income of the trust estate.

Section 99A of the ITAA 1936 applies to assess the trustee on income to which no beneficiary is presently entitled at the highest marginal rate of tax.

Subsection 100A(1) of the ITAA 1936 states that where a beneficiary of a trust estate who is not under a legal disability, is presently entitled to trust income, and that present entitlement is linked either directly or indirectly to a reimbursement agreement, the beneficiary is deemed not to be presently entitled to the income. In accordance with subsection 100A(4), the trust distributions which fall within section 100A are assessed to the trustee under section 99A of the ITAA 1936.

Subsection 100A(5) of the ITAA 1936 further explains that this section also applies where an agreement is entered into by which a beneficiary receives an increased share of income from a trust estate than the beneficiary could reasonably have been expected to receive. This section will apply to treat the increased amount as a present entitlement which has arisen from a reimbursement agreement and that amount will be assessed to the trustee under section 99A of the ITAA 1936.

Subsection 100A(7) of the ITAA 1936 defines a reimbursement agreement as an agreement to include the payment of money or the transfer of property, or the provision of services or other benefits for a person or persons other than the beneficiary, or the beneficiary and another person or persons.

The term 'agreement' is defined in subsection 100A(13) of the ITAA 1936 to include any agreement, arrangement or understanding, whether formal or informal, express or implied, and either enforceable or unenforceable or intended to be enforceable, by legal proceedings. However, the term does not include any agreement entered into in the course of ordinary family or commercial dealing. For the purposes of clarity a definition of 'reimburse' was sought from the online Macquarie Dictionary and it is defined as the repayment for an expense or loss incurred, or to pay back, refund or repay.

The application of section 100A of the ITAA 1936 depends on the existence of a 'reimbursement agreement'. The reimbursement agreement as described in subsection 100A(7) is also subject to a purpose test which is outlined in subsections 100A(8) and 100A(9). Those subsections require that one of the purposes for which the reimbursement agreement was entered into by any of the parties to the agreement, must be the reduction or elimination of a tax liability that would have existed had the reimbursement agreement not been entered into. However, as already indicated, the definition further provides that an agreement, arrangement or understanding entered into in the course of ordinary family or commercial dealing is not to be an agreement for the purposes of the section.

The payment of money within definition of a reimbursement agreement includes:

• the payment of money by way of loan as described in subsection 100A(10) of the ITAA 1936, and,

• the release, abandonment, failure to demand payment, or the postponement of payment, of a debt as described in subsection 100A(12).

In order for section 100A of the ITAA 1936 to be applied to an arrangement it must be able to be established by considering the actions by which it was implemented that the intention was to avoid or reduce tax payable. If that intention cannot be established and the transactions are capable of explanation by reference to ordinary business or family dealing, without necessarily being labelled as a means to avoid or reduce tax, the arrangement does not come within the section.

In summary, for section 100A of the ITAA 1936 to apply to a trust distribution received by CHAR, deeming the beneficiary to never have been presently entitled to that distribution, and the trustee to be assessed on that amount under section 99A of the ITAA 1936, all of the relevant factors must apply to that distribution. Those factors are:

• the beneficiary must not be under a legal disability;

• the beneficiary must be deemed to be presently entitled to a share of income of a trust estate;

• the present entitlement arose from a reimbursement agreement in relation to a beneficiary (as defined in subsections 100A(7) and 100A(13) of the ITAA 1936);

• the reimbursement agreement results in the relevant funds to some extent benefitting persons other than the beneficiary;

• the purpose (even if it is established that it is not the sole purpose) of at least one of the parties of entering the agreement must be to pay less tax than would otherwise have been payable if the agreement had not been made, and

• the arrangement or agreement cannot be reasonably construed to be that of ordinary family or commercial dealings.

This ruling considers whether income which may be derived by CHAR through trust distributions could, under various circumstances, be interpreted to be received under a reimbursement agreement under section 100A of the ITAA 1936.

CHAR is an Australian resident, not under a legal disability which under some circumstances may become presently entitled to a distribution from a trust as the result of fund raising activities. The funds raised by CHAR are currently transferred to overseas aid projects (that is they are not applied for the benefit of CHAR) mainly conducted through another unrelated entity. That entity (INTER) has a connection to the applicant through:

• assistance provided by an Australian representative

• conducting similar fundraising activities and application of funds and

• being considered already in a position to provide assistance throughout many countries of the world to which funds raised in Australia may (but not compulsorily) be sent.

Information provided by the ACNC states:

Registered charities operating or sending money overseas need take reasonable steps to make sure that:

• their activities outside Australia are carried out in a way that is consistent with their purpose and character as a charity, and

• the resources (including funds) given to third parties outside Australia are applied in accordance with their purpose and character as a charity and with proper controls and risk management processes in place.

It is considered to be normal commercial dealing for Australian charities to remit funds to other organisations which have similar constitutional objects, where those other organisations already have the access or infrastructure to apply those funds where a need is determined.

The main factor therefore which requires consideration in determining whether CHAR can be considered to be a beneficiary which is deemed to not have a present entitlement would be where CHAR (or other parties to the transaction) participate in a 'reimbursement agreement' which gives another entity an income tax advantage.

Question 1

Summary

Section 100A of the ITAA 1936 does not apply.

Detailed reasoning

A discretionary trust which is enabled by its deed to make a donation to CHAR through a trust distribution is not considered to have entered into an arrangement in which funds donated through a trust distribution could be described as a reimbursement agreement in terms of subsection 100A(7) of the ITAA 1936 where the funds actually pass to CHAR for application to charitable works as determined by the objects in the constitution.

Question 2

Summary

Section 100A of the ITAA 1936 does not apply.

Detailed reasoning

A discretionary trust which is enabled by its deed to make a donation to CHAR through a trust distribution is not considered to have entered into an arrangement which could be described as a reimbursement agreement in terms of subsection 100A(7) of the ITAA 1936 where the funds made available through the trust distribution actually pass to CHAR for application to charitable works as determined by the constitution of CHAR.

That determination applies even where the donating trustee becomes aware that it is the usual practice of CHAR to pass the funds on to INTER and believes that their distribution will also be passed on to INTER.

Question 3

Summary

Section 100A of the ITAA 1936 does not apply.

Detailed reasoning

A discretionary trust which is enabled by its deed to make a donation to CHAR through a trust distribution is not considered to have entered into an arrangement which could be described as a reimbursement agreement in terms of subsection 100A(7) of the ITAA 1936 where the funds made available through the trust distribution actually pass to CHAR for application to charitable works as determined by the constitution of CHAR.

That determination applies even where the donating trustee becomes aware that it is the usual practice of CHAR to pass the funds on to INTER and seeks assurance that their distribution will be passed on to INTER.

Question 4

Summary

Decline to rule

Detailed reasoning

Whilst the constitution of CHAR has been provided and it can be verified that its objects are charitable, the Commissioner cannot determine that the funds have been applied for charitable purposes in accordance with the objects described in the constitution where CHAR acts as no more than a conduit for a payment from a trustee to INTER.

Question 5

Summary

Section 100A of the ITAA 1936 does not apply.

Detailed reasoning

Section 100A of the ITAA 1936 can only apply where the distribution is the subject of a reimbursement agreement.

Further issues for you to consider

The provisions found in section 100AA of the ITAA 1936 - FAILURE TO PAY OR NOTIFY PRESENT ENTITLEMENT OF EXEMPT ENTITY should be considered in relation to Question 5. That matter has not been addressed in this ruling.

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