Edited version of your written advice

Authorisation Number: 1012937823124

Date of advice: 18 January 2016

Subject: Special Conditions for Income Tax Exemption as a Charity

Question 1

Has the Charity satisfied the 'physical presence in Australia' special condition in:

(i) subsection 50-60(1) of the Income Tax Assessment Act 1997 from July 19XX to December 20YY, and

(ii) subsection 50-50(1) of the Income Tax Assessment Act 1997 from December 20YY to present?

Answer

Yes

Question 2

Has the Charity satisfied the following special conditions:

(i) the requirement for the trust's fund 'to be applied for the purposes for which it was established', per section 50-60 of the Income Tax Assessment Act 1997, from July 19XX to December 20YY, and

(ii) the requirement for the trust to 'apply its income and assets for the purposes for which the entity is established' per paragraph 50-50(2)(b) of the Income Tax Assessment Act 1997 from December 20YY to present?

Answer

Yes

This ruling applies for the following periods

1 July 19XX to 30 June 20ZZ

The scheme commenced on

1 July 19XX

Relevant facts and circumstances

1. The Charity was established in a past year and the purposes stated in the trust deed are charitable.

2. If it is not practicable and reasonable to use the capital and income for the purposes solely within Australia, the trustees are authorised under the trust deed to apply the whole or part of the capital or capital and income for the same purposes outside Australia.

3. The Charity's funds have been applied both in Australia and overseas.

4. The Charity has received funds as gifts from individuals and other charities.

5. The total funds at market value at March 20ZZ held by the Charity were a certain amount.

6. Income and gains for each year from prior to 19XX to present were provided.

7. The distributions made offshore, grants made in Australia, administration and fund management costs for each year were provided.

Assumptions

The amounts described as "Gift Income" in paragraph 7 above are all 'gifts' within the ordinary meaning of the word, or are 'receipts from fund raising by means of raffles, dinners, auctions, jumble sales and the like by non-commercial or non-business organisations'.

The amounts described as "Gift Income" in paragraph 7 above are 'gifts' capable of being distributed offshore. For example a gift of money to the Charity is capable of being distributed offshore however a gift of Australian real property to the Charity is not capable of being distributed offshore.

Reasons for decision

Issue 1

Question 1

Does the Charity satisfy the 'physical presence in Australia' special condition in:

(i) subsection 50-60(1) of the Income Tax Assessment Act 1997 from July 19XX to December 20YY, and

(ii) subsection 50-50(1) of the Income Tax Assessment Act 1997 from December 20YY to 30 June 20ZZ?

Answer

Yes

Reasoning

In a period prior to December 20YY the Charity was endorsed as an entity exempt from income tax under Subdivision 50-B of the Income Tax Assessment Act 1997 (ITAA 1997) as charitable fund established in Australia for public charitable purposes by will or instrument of trust (listed at item 1.5 of the table in section 50-5 of ITAA 1997).

Since December 20YY the Charity has been endorsed as an entity exempt from income tax under Subdivision 50-B of the Income Tax Assessment Act 1997 (ITAA 1997) as a 'registered charity'. A 'registered charity' is listed at item 1.1 in the table in section 50-5 of ITAA 1997 and means an entity that is registered under the Australian Charities and Not-for profits Commission Act 2012.

The charity has a charitable purpose and distributed funds consistent with its purpose in Australia and overseas.

Physical presence in Australia under subsection 50-60(a)

From 1 July 19XX to December 20YY a charitable fund established in Australia for public charitable purposes by will or instrument of trust will be exempt from income tax, under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997), if it meets the special conditions in sections 50-52 and 50-60 of the ITAA 1997. Section 50-60 required such a fund to be applied for purposes for which it was established and:

(a) 'incurs, and at all times since July 19XX incurred, its expenditure principally in Australia and pursues, and has all times since July 19XX pursued, its charitable purposes solely in Australia'

Under section 50-75 of ITAA 1997 certain distribution overseas may be disregarded when determining whether an entity incurs its expenditure or pursues its objectives principally in Australia.  Sub-section 50-75(1) states:

'In determining for the purposes of this Subdivision whether an institution, fund or other body incurs its expenditure or pursues its objectives principally in Australia, distributions of any amount received by the institution, fund or other body as a gift (whether of money or other property) or by way of government grant are to be disregarded.'

The explanatory memorandum to Taxation Laws Amendment Bill (No 4) 1997 makes the following statements regarding the operation of section 50-75:

5.42 The test as to whether a gift is income in the ordinary sense of the word is whether it is made in relation to some activity or occupation of the donee of an income producing character. Therefore, the character of the receipt in the hands of the recipient becomes the determinative issue in each particular case in deciding whether the 'gift' constitutes income.

5.43 Accordingly, gifts received by either Australian or offshore organisations which are not made in relation to some activity of the organisation of an income producing character will not constitute income in the hands of the organisation and will not be assessable.

5.44 These gifts will be disregarded when determining whether an organisation incurs its expenditure and pursues its objectives principally in Australia and, therefore, can be applied overseas without affecting an organisation's income tax exempt status. Government grants may also be applied offshore without affecting the tax exempt status of organisations.

5.70 The legislation is silent about whether an institution has to monitor the source of the funds that it applies overseas - ie. whether they are obtained from income or gifts.  While it would be expected that an institution would have strict procedures in place to account separately for government grants and/or approved fund moneys under section 78, money is fungible and it loses its particular identity when combined with other money.

5.71 In these circumstances it would be reasonable to assume, that with the exception of government grants and section 78 fund moneys, money applied overseas would firstly be applied from "gifts" and that the "activity test" would only need to be applied if the total funds applied overseas exceeded the sum of the gifts and donations received.

This suggests strict tracing of funds is not required and, despite being fungible, gifts of money should not lose its character as a 'gift' and should be assumed to be distributed in the ways that are most conducive to the exemption.

Section 50-60(a) requires an examination of purpose and expenditure incurred "at all times since July 19XX". Therefore when applying section 50-75 in the course of determining purpose under section 50-60 only 'gifts' received since July 19XX are relevant.

Further only gifts capable of distribution overseas can be included in the disregarded amounts and therefore gifts such as Australia real property, or proceeds from the sale of a gift of Australian real property, would not be included.

Physical presence in Australia under paragraph 50-50(1)(a)

From December 20YY a registered charity will be exempt from income tax, under section 50-1 of ITAA 1997, if it meets the special conditions in sections 50-50 and 50-52 of the ITAA 1997.  Paragraph 50-50(1)(a) of ITAA 1997 requires that the registered charity 'has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia'.

The Income Tax (Transitional Provisions) Act 1997 states at section 50-50:

Section 50-50 Charities established prior to July 19XX

50-50 Disregard the use of the following amounts in determining (for the purposes of Subdivision 50-A of the Income Tax Assessment Act) whether a fund established before July 19XX operates and pursues its purposes in Australia:

(a) An amount received by the entity before July 19XX

(b) An amount derived from an amount mentioned in paragraph (a) or this paragraph

History

S50-50 inserted by No. 169 of 2012, s 3 and Sch 2 item 40 effective December 20YY

The effect of this provision is that for funds established before July 19XX any amount received by the fund before July 19XX, and any income derived from such an amount, is disregarded when determining whether the fund operates or pursues its purposes in Australia. This provision ensures that charitable funds have similar treatment under section 50-50 as they had under the now repealed section 50-60 and section 50-57 (funds established by will prior to July 19XX).

Therefore, when considering purpose under section 50-50 for charitable funds established prior to July 19XX, only income and expenditure post July 19XX is relevant. Similarly when applying section 50-75 in determining purpose under section 50-50 for funds established prior to July 19XX only gifts received since July 19XX are relevant.

Application of section 50-75 of ITAA 1997

Since July 19XX the Charity has received a certain amount in gifts and has distributed a certain amount overseas. At no point in that period has the amount distributed offshore been greater than the amount of gifts received. In applying section 50-75 all the funds distributed overseas are considered to be made from gifts and therefore are disregarded in determining purpose under both section 50-60 of ITAA 1997, from July 19XX to December 20YY, and section 50-50 of ITAA 1997, from December 20YY to June 20ZZ.

Conclusion

In this instance all the distributions made overseas by the Charity since July 19XX may be disregarded. Therefore it is concluded that the Charity has incurred its expenditure and pursued its purposes principally in Australia and satisfy the 'physical presence in Australia' special condition in both section 50-60 of ITAA 1997, from July 19XX to December 20YY, and section 50-50 of ITAA 1997, from December 20YY to 30 June 20ZZ.

Question 2

Has the Charity satisfied the following special conditions:

(i) the requirement for the trust's fund 'to be applied for the purposes for which it was established', per section 50-60 of the Income Tax Assessment Act 1997, from July 19XX to December 20YY, and

(ii) the requirement for the trust to 'apply its income and assets for the purposes for which the entity is established' per paragraph 50-50(2)(b) of the Income Tax Assessment Act 1997 from December 20YY to June 20ZZ?

Taxation Ruling 2015/1 Income tax: special conditions for various entities whose ordinary and statutory income is exempt (TR 2015/1) states the Commissioner's opinion on the meaning of special conditions in section 50-50(2) of ITAA 1997.

Paragraph 30 of TR 2015/1 states the requirement to 'apply' its income and assets for the purpose it was established means that an entity must make use of all of its income and assets solely for the purpose for which it was established. Further if some of the entity's income is accumulated over a number of years the entity will need to show on a year by year basis that the accumulation is consistent with the purpose for which the entity is established (see paragraphs 31 and 32 of TR 2015/1).

Since 19XX the Charity's combined income (gift and earned) and net capital gain totals a certain amount. In that same period the Charity has spent a certain amount on distributions (consistent with its purpose), administration cost and fund fees, and the distributions and expenditure has been spread consistently throughout the years. Further there is no evidence of any distributions that are inconsistent with the Charity's purpose.

At March 20ZZ the Charity had a certain amount of retained capital.

Conclusion

The distributions made by the Charity and level of accumulation are consistent with the Charity's purpose and therefore the Charity has satisfied the requirement that its income and assets are applied for 'the purposes for which it was established' under section 50-60 of ITAA 1997 from July 19XX to December 20YY and under paragraph 50-50(2)(b) of ITAA 1997 from December 20YY to June 20ZZ.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 50-50

Income Tax Assessment Act 1997 Section 50-60 (Repealed by No 169 of 2012)

Income Tax Assessment Act 1997 Section 50-75

Income Tax (Transitional Provisions) Act 1997 Section 50.50

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