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Edited version of your written advice
Authorisation Number: 1012975486601
Date of advice: 24 February 2016
Ruling
Subject: Application of Capital Gains Tax
Question 1
Will any capital gain or profit arising on the disposal of the lots from Company A to Company B be exempt from income tax on the basis that Company A is an income tax exempt entity under Division 50 of the ITAA 1997 (in particular section 50-50(2) of the ITAA 1997) are satisfied?
Answer
Yes
This ruling applies for the following periods:
1 July 2015 - 30 June 2016
1 July 2016 - 30 June 2017
1 July 2017 - 30 June 2018
The scheme commences on:
1 July 2015
Relevant facts and circumstances
• Company A is a registered community house provider, under Section 67D of the Housing Amendment (Community Housing Providers) Act 2007
• Company A is an endorsed charitable institution for income tax purposes in accordance with Subdivision 50-B of the Income Tax Assessment Act (ITAA) 1997. It is also an endorsed gift deductible entity under Subsection 30-15 of the ITAA 1997, item 1 of the table
• Company A is registered with the Australian Charities and Not-for-profits Commission (ACNC) as a charity
• Company A currently holds legal and beneficial title to real property lots. Of these, X lots contain existing dwellings and the remaining Y lots contain Z newly built dwellings
• The X lots were conditionally vested to Company A from a statutory authority, at no cost. Company A intends to raise financial facility using the security of the X lots and the underlying rental cash flows to service borrowing
• Company A wholly owns a subsidiary - Company B. For the purpose of obtaining a new financing facility, Company A incorporated Company B in 20XX. Company A intends to use Company B as a special purpose borrower.
• Company B is an endorsed charitable institution for income tax purposes in accordance with Subdivision 50-B of ITAA 1997 however, it is not an endorsed gift deductible entity
• Company B is registered with the ACNC as a charity
• Company A and Company B's objects are set out in the constitution of each company, as follows;
3.1(a) The Company is established for the public charitable object of providing relief against poverty, distress and helplessness in such localities within Australia as the Board may, from time to time, determine by providing, without limitation, secure, affordable and sensitively managed housing for people in housing for people in housing need and experiencing difficulties and maintaining appropriate housing
Relevant legislative provisions
Section 50-1 of the Income Tax Assessment Act 1997
Section 50-5 of the Income Tax Assessment Act 1997
Section 50-50 of the Income Tax Assessment Act 1997
Section 50-52 of the Income Tax Assessment Act 1997
Division 100 of the Income Tax Assessment Act 1997
Reasons for decision
Issue 1
Transfer of property and Capital Gains consequences
Question 1
Will any capital gain or profit arising on the disposal of the lots from Company A to Company B be exempt from income tax on the basis that Company A is an income tax exempt entity under Division 50 of the ITAA 1997 (in particular section 50-50(2) of the ITAA 1997) are satisfied?
Summary
Company A is income tax exempt, therefore, any capital gain is also exempt
Detailed reasoning
Section 50-1 of the ITAA 1997, in conjunction with item 1.1 of the table in section 50-5 of the ITAA 1997, specifies that the total ordinary income and statutory income of a charitable institution is exempt from income tax, subject to the special conditions contained in sections 50-50 and 50-52 of the ITAA 1997. Company A has already been endorsed as a charitable institution for income tax purposes, therefore it has already been determined that it meets the conditions contained in Division 50 of the ITAA 1997.
Although, Company A has already received income tax exempt status, this does not preclude a Capital Gains Tax (CGT) event from happening to the entity. Section 102-23 of the ITAA 1997 states that a CGT event still happens even if a gain or loss is disregarded.
Section 104-10 of the ITAA 1997 states that CGT event A1 occurs if you dispose of a CGT asset. Disposal occurs if ownership changes from one entity to another entity, however, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner.
Company B is your wholly owned subsidiary. Selling the lots to Company B does not change ownership of the assets as Company A remains the beneficial owner.
CGT is not considered a separate tax rather, any capital gain is included in the calculation of assessable income for income tax purposes. Company A is income tax exempt therefore any capital gain is also exempt.
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