Edited version of your written advice

Authorisation Number: 1013036445821

Date of advice: 21 June 2016

Ruling

Subject: A Charity as member of a primary individual's family group in a family trust

Question 1

Does section 78A of the Income Tax Assessment Act 1936 (ITAA 1936) apply in such a manner to prevent a Charitable Trust from being considered part of the family group of the primary individual (as defined under section 272-90 of Schedule 2F of the ITAA 1936 (Schedule F)) named in the family trust election?

Answer

No, section 78A does not apply to prevent the Charitable Trust from being part of the family group of the primary individual

This ruling applies for the following periods:

1 July 2015 to 30 June 2016

1 July 2016 to 30 June 2017

The scheme commences on:

1 July 2015

Relevant facts and circumstances

1. Family Trust is a family trust in accordance with the definition in Schedule 2F of ITAA 1936.

2. Private Company is a private company, wholly owned by Family Trust.

3. A primary individual is named in the family trust election.

4. The Charitable Trust has been established and registered with the Australian Charities and Not-for-profits Commission (ACNC) as a charity.

5. The Charitable Trust is endorsed by the Commissioner of Taxation as an income tax exempt charity.

6. The Individual acquired the Property for an amount.

7. Private Company has a significant amount of retained earnings and will pay a fully franked dividend the Family Trust.

8. The Family Trust will make the Charitable Trust specifically entitled to the dividend income in the Family Trust.

9. The Charitable Trust shall use a portion of the distribution from the Family Trust to acquire the Property from the Individual for consideration of less than or equal to the market value of the Property.

10. The Charitable Trust will use the Property for its charitable purpose.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 272-90 of Schedule F and

Income Tax Assessment Act 1936 Section 78A.

Reasons for decision

Question 1

All legislative references are references to Income Tax Assessment Act 1936 unless stated otherwise.

Sub-section 272-90(7) of Schedule F states:

An institution, hospital, trustee, society, association, club, or fund, all of whose income is exempt under:

(a) section 50-5 or 50-10 on the Income Tax Assessment Act 1997;

(b) item 6.1 or 6.2 of the table in section 50-30, or item 9.1 or 9.2 of the table in section 50-45, of the Income Tax Assessment Act 1997;

is a member of the primary individual's family group in relation to the conferral or distribution if, assuming that a deduction were allowable under Division 30 of that Act in respect of the conferral or distribution, section 78A would not prevent any of the deduction being allowable.

Under section 78A 'any act, transaction or circumstance that has occurred, will occur, or may reasonably be expected to occur, being an act, transaction or circumstance occurring as part of, in connexion with or as a result of the making of a gift, or any agreement or scheme entered into in association with the making or receipt of the gift', is taken into account in determining if the gift is an allowable deduction.

The scheme entered into, in association with making the 'assumed' gift (ie the distribution make by the Family Trust to the Charitable Trust), is described above in the 'Relevant facts and circumstances'.

Under the scheme, and with the assumption made by sub-section 272-90(7), the 'donor' is the Family and the 'gift' is the amount of distribution made by the Family Trust to the Charitable Trust. Using part of the distribution the Charitable Trust will purchase the Property from the Individual.

Section 78A is an anti-avoidance provision. Broadly it aims to ensure that the benefit to the donee will equal the deduction allowed to the donor. Section 78A applies where:

• the amount or value of the benefit derived by the recipient of the gift is, or will be, or may reasonably be expected to be, diminished subsequent to the receipt of the gift (paragraph 78A(2)(a));

• another fund, authority, institution or person other than the recipient, becomes liable to make a payment, or transfer property to any person, or incurs any other detriment, disadvantage, liability or obligation (paragraph 78A(2)(b));

• the giver or the giver's associate obtains, or will obtain, or may reasonably be expected to obtain any benefit, advantage, right or privilege apart from the benefit of a tax saving associated with the gift deduction (paragraph 78A(2)(c));

• the recipient, or another fund, authority, institution or person, acquires or will acquire property (other than the gift), directly or indirectly, from the donor or an associate of the donor (paragraph 78A(2)(d)).

The definition of 'associate' in subsection 78A(1) only refers to situations where the donor is a natural person or a company. Since the 'donor' in this arrangement is a trust (ie. the Family Trust) there can be no associate of the donor.

Paragraph 78A(2)(a)

Paragraph 78A(2)(a) applies where the amount or value of the benefit obtained by the donee is reduced, or will be reduced, due to any circumstance, transaction or arrangement associated with the gift.

Under the scheme the Charitable Trust is to purchase the Property from the Individual for the lesser of the market value of the Property or the cost base of the Property. The Charitable Trust's decision to purchase the Property with some of the funds distributed from Family Trust will further its charitable purposes. The purchase price of the Property will be at market value or less than market value. The value of the benefit obtained by the Charitable Trust from the 'gift' (ie the distribution from Family Trust) will not be reduced due to the decision to purchase the Property from the Individual. Therefore paragraph 78A(2)(a) will not apply.

Paragraph 78A(2)(b)

Paragraph 78A(2)(b) provides that no deduction is available where an entity other than the donee becomes liable to make, or may be reasonably be expected to make a payment or transfer of property or incur any other detriment, disadvantage, liability or obligation. However paragraph 213 of Taxation Ruling 2005/13 Income tax: tax deductible gifts - what is a gift (TR 2005/13) states that 78A(2)(b) will only apply where "as a result of the arrangement, the amount or value of the benefit derived as a consequence of the gift is less than the amount or value of the property comprising the gift at the time the gift is made".

Under the scheme the Individual may reasonably be expected to transfer or have an obligation to transfer the Property to the Charitable Trust. However paragraph 78A(2)(b) will not apply since the transfer of the Property to the Charitable Trust for market value does not reduce the value of the distribution made by the Family Trust to the Charitable Trust. The transfer of the Property, being at market value or less than market value, and being to advance the charitable purposes of the Charitable Trust, will not reduce the value of the benefit derived by the Charitable Trust as a consequence of receiving the 'gift' (ie the distribution from Family Trust).

Paragraph 78A(2)(c)

Paragraph 78A(2)(c) denies a deduction where, by reason of the circumstances surrounding a donation, the donor or an associate of the donor receives any benefit, advantage, right or privilege other than the benefit of a taxation deduction.

Paragraph 78A(2)(c) will not apply since under the scheme neither the donor or an associate of the donor receives any benefit, advantage, right or privilege in connection with the making of the 'gift'. (Note: As explained above the donor is a trust and cannot have associates as per the definition of associates in subsection 78A(1).)

Paragraph 78A(2)(d)

Paragraph 78A(2)(d) applies where a gift is made on the basis that the money will be used to by the recipient or another fund, authority or institution to acquire property from the donor or the donor's associate.

Under the scheme the donor is the Family Trust and, as a result of the definition of 'associate' in subsection 78A(1), the donor, the Family Trust, does not have any associates. Under the scheme the only property acquired from the donor, the Family Trust, is the distribution to the Charitable Trust. Since this is 'property comprising the gift' paragraph 78A(2)(d) cannot apply.

Conclusion

Section 78A of the Income Tax Assessment Act 1936 (ITAA 1936) does not apply in such a manner to prevent the Charitable Trust from being considered part of the family group of the primary individual (as defined under section 272-90 of Schedule 2F of the ITAA 1936 (Schedule F)) named in the Family Trust's family trust election

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).