Edited version of your written advice

Authorisation Number: 1051357416519

Date of advice: 30 April 2018

Ruling

Subject: Division 50 of the ITAA 1997

Question 1

Will the entity continue to satisfy paragraph 50-50(1)(a) of the ITAA 1997 immediately following completion of the sale of the Property to a third party?

Answer

Yes

Question 2

Will the entity continue to satisfy paragraph 50-50(1)(a) of the ITAA 1997 following completion of the sale of the Property while the sale proceeds are retained in an Australian bank account?

Answer

Yes

Question 3

Will the entity continue to satisfy paragraph 50-50(1)(a) of the ITAA 1997 following either

(a) the single transfer of proceeds from the sale of the Property from Australia to another country either:

(i) Directly from the purchaser; or

(ii) From the entity’s Australian branch, as an intra-entity transfer?

(b) the repatriation of proceeds from the entity to overseas over a period of years whereby the amount repatriated each year does not, in combination with all other expenditures of the entity taken to be outside Australia, cause those expenditures to represent more than 50% of the total expenditures of the entity’s Australian branch?

Answer

Yes

Question 4

Will the proposed transaction as a whole, or any other fact referenced in this ruling application cause the entity to cease to satisfy the “in Australia” conditions contained in paragraph 50-50(1)(a) of the ITAA 1997?

Answer

No

This ruling applies for the following periods

Income years ended 30 June 20XX to 30 June 20XX

The scheme commences on:

23 March 20XX

Relevant facts and circumstances

The head overseas entity is an exempt charity overseas.

The head overseas entity undertakes various trading activities around the world, including in Australia.

It maintains a large property portfolio to support its activities, one of which is the Property.

Status in Australia

The entity operates in Australia through a branch office and has done so for many years.

It is registered with the Australian Securities and Investments Commission (ASIC) and is registered as a charity with the ACNC. As such, the entity is a “registered charity” for the purposes of Item 1.1 of the table in section 50-5 of the ITAA 1997.

The entity is further endorsed as an income tax exempt entity in Australia by the Commissioner in accordance with Division 50 of the ITAA 1997.

The entity has approximately 180 full time, part time and casual employees in Australia. It operates in all Australian states and territories as well as countries overseas.

The entity’s head office in Australia is located at the Property. The Property is both an office space and warehouse.

Special purpose financial statements were provided with the Ruling application, outlining the entity’s gross income and expenditure for the 20XX year.

Expenditure for the 20XX financial year reports that 70% of expenditure was considered to be in Australia. Expenditure was comprised of:

(a) Employee expenses – all staff are employed in Australia.

(b) Interest payments. These finance amounts are incurred entirely within Australia.

(c) other expenses

Each year, the entity’s Australian branch seeks to “distribute” its surplus profits to its overseas head entity. This amount may vary from year to year.

Sale of the Property

In 20XX, the entity entered into an agreement for the sale of the Property. Leaseback provisions were included in the sale agreement to allow the entity to remain in the Property after purchase.

In planning for the sale of the Property, it was correctly anticipated that the purchaser of the Property would seek to redevelop the land. As this would be unable to occur immediately the Sale Agreement provided for settlement to occur X months after the contract was signed.

From the entity’s perspective, this delayed settlement provided time to find an alternative suitable location from which to conduct its business. While the entity has now secured alternative locations from which it will run its operations, it has not (at the date of this application) vacated the Property.

In the period between signing and settlement, an extension to the settlement date was proposed by the purchaser.

To accommodate the extension to the settlement date, the following variations have been proposed to the Sale Agreement:

(a) the settlement to be extended to a later date;

(b) a variation fee payable by the purchaser in order to vary the contract from its original terms;

(c) an additional amount of deposit will be payable to the entity; and

(d) removal of leaseback provisions, replaced with a different clause.

Post sale activities

Following the sale of the Property, it is expected that the entity will continue to incur expenditure in Australia and is considering extending its activities in Australia further.

The entity will also incur expenditures including:

(a) rental payments in Australia as a consequence of the leaseback payable to the purchaser as well as any future rental and premises payments to provide for the Australian office;

(b) possible acquisitions of other business or premises.

While the entity may retain a portion of the proceeds of the sale of the Property in Australia, it is also expected that a significant portion of the proceeds of the sale will be remitted to the overseas head entity to support its other (non-Australian) activities.

The entity has not yet determined how it will deal with the proceeds from the sale of the Property.

The current approaches being contemplated are as follows:

(a) To remit all or a substantial part of the funds in a single transfer to the overseas head entity. This transfer of funds may occur by way of either:

(i) The purchaser paying the funds directly into the overseas account; or

(ii) By way of an intra-entity transfer from the entity’s Australian branch.

(b) Alternatively, the entity’s Australian branch may remit funds over time to the extent funds are regarded as surplus to the needs of the Australian business. The Repatriation Schedule will be determined having regard to the expenditure of the Australian business over the previous financial years and taking into account the budget forecast proposed for the business for the coming financial years. The amount repatriated each year will be managed so as not to exceed 50% of the expenditure of the entity’s Australian branch for any financial year.

Relevant legislative provisions

Section 50-5 of the ITAA 1997

Section 50-50 of the ITAA 1997

Reasons for decision

The entity is registered as a charity with the ACNC. As such, the entity is a “registered charity” for the purposes of Item 1.1 of the table in section 50-5 of the ITAA 1997.

Paragraph 50-50(1)(a) of the ITAA 1997 provides special conditions for item 1.1:

An entity covered by item 1.1 is not exempt from income tax unless the entity:

(a) Has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia.

The entity has a physical presence in Australia through its Australian branch. It is therefore this branch whose expenditure and pursuit of objectives must be principally in Australia. This requirement needs to be met for each income year due to the periodic operation of Division 50 of the ITAA 1997.

‘Principally’ means mainly or chiefly. Less than 50% of expenditure is not considered ‘principally’.

The entity’s Australian branch operates from its head office at the Property and also operates in all other states and territories of Australia. The financial statements and other documentation provided with the Ruling application evidences that the entity’s Australian branch incurs its expenditure and pursues its objectives principally in Australia.

Question 1

Summary

The entity will continue to satisfy paragraph 50-50(1)(a) of the ITAA 1997 immediately following the sale of the Property to a third party.

Detailed reasoning

As a result of the rezoning of the Property, the entity has sold the Property. This is partly due to the fact that the nature of the area has changed substantially from when it was purchased and is no longer compatible with the entity’s usage of the Property.

It is relevant to note that the head entity overseas owned the Property, and the Australian branch paid “rent” to it for the use of this Property.

After the sale, the entity will move into new premises in Australia and will pay rent on these premises.

It is considered that the sale of the Property will not cause the entity to cease to satisfy paragraph 50-50(1)(a) of the ITAA 1997. It will retain its physical presence in Australia and, to that extent, continue to incur expenditure and pursue its objectives principally in Australia.

Question 2

Summary

The entity will continue to satisfy paragraph 50-50(1)(a) of the ITAA 1997 following the sale of the Property while the sale proceeds are retained in an Australian bank account.

Detailed reasoning

For the reasons given above, it is considered that the entity will continue to satisfy paragraph 50-50(1)(a) of the ITAA 1997 following the sale of the Property while the sale proceeds are retained in an Australian bank account.

The sale of the Property does not affect the entity retaining its physical presence in Australia and, to that extent, continuing to incur expenditure and pursuing its objectives principally in Australia.

Question 3

Summary

The entity will continue to satisfy paragraph 50-50(1)(a) of the ITAA 1997 whether the entity’s Australian branch repatriates the sale proceeds in a one-off transfer or whether they choose to repatriate the sale proceeds back to the UK over a number of years.

Detailed reasoning

As previously mentioned, the Property was owned by the overseas head entity. The Australian branch has always paid “rent” to them for the use of this Property.

On the proposed sale of this property, it is possible that there will be a single transfer of the sale proceeds from Australia to overseas, either directly from the purchaser, or from the Australian branch as an intra-entity transfer. Alternatively, they may choose to repatriate the sale proceeds over a number of years. The amount repatriated each year will not, in combination with other expenditures of the entity’s Australian branch, cause those expenditures to represent more than 50% of the total expenditures.

The underlying question is whether or not the repatriation of sale proceeds would be considered an “expenditure” of the entity, and whether it would cause the entity not to satisfy its expenditure being incurred principally in Australia.

The Commissioner does not consider that the repatriation of sale proceeds overseas will be “expenditure” incurred the entity for the purposes of paragraph 50-50(1)(a) of the ITAA 1997.

The overseas entity was the owner of the Property, and the repatriation of sale proceeds is simply a return of the original capital investment in the Property, as well as any profit associated with that investment.

The entity wishes to continue their activities in Australia, and will move into new premises upon vacating the Property. The entity’s activities within Australia will not change as a result of the sale.

The Commissioner considers that this remains the correct position whether or not the entity’s Australian branch repatriates the sale proceeds in a one-off transfer or whether they choose to repatriate the sale proceeds over a number of years, having regards to their own financial position when doing so.

The sale of the Property and repatriation of the proceeds of that sale back overseas as a one-off payment, or, alternatively over a number of years, does not affect the entity retaining its physical presence in Australia and, to that extent, continuing to incur expenditure and pursuing its objectives principally in Australia.

Question 4

Summary

The proposed transaction will not cause the entity to cease to satisfy paragraph 50-50(1)(a) of the ITAA 1997.

Detailed reasoning

All the individual steps of the proposed transaction have been discussed above. Considered either separately or as a whole, there is nothing in the proposed transaction that will affect the entity retaining its physical presence in Australia and, to that extent, continuing to incur expenditure and pursuing its objectives principally in Australia.

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).