Edited version of private advice

Authorisation Number: 1051537500896

Date of advice: 5 July 2019

Ruling

Subject: Tax treatment of the entity's specific purpose trusts

Question 1

Is the income of the Entity's Common Fund into which the Other Trust money is brought, income of the Entity?

Answer

No

Question 2

If the answer to the above question is no, is the Entity's Common Fund entitled to endorsement as income tax exempt under Division 50 of the Income Tax Assessment Act 1997 if it is registered as a charity by the Australian Charities and Not-for-profits Commission (ACNC)?

Answer

Yes

Question 3

If the accumulated income of the Entity's Common Fund is applied for the purposes of the Other Trust, or paid to the other Trust, is that amount assessable income to the Other Trust?

Answer

No

This ruling applies for the following period:

3 December 2012 to 3 December 2022

The scheme commences on:

3 December 2012

Relevant facts and circumstances

1.                 The Entity holds a significant proportion of its portfolio of gifts and bequests as trustee on charitable trusts. These charitable trusts (Other Trusts) typically arise because the entity accepts a gift subject to a condition which has been expressed by a donor in his or her will or under the terms of an inter vivos gift. The trust which then arises may arise by operation of law or express words of trust.

2.                  Such trusts are for the purposes of the Entity, and being charitable trusts they are not required to have beneficiaries and may be 'for purposes'. The Entity is typically the only party that can benefit from the application of the donated funds and when the donated funds are spent by the Entity, this money is spent on the Entity's purposes.

The Entity is an endorsed charity regulated by ACNC

3.                  The Entity is an entity endorsed by the Commissioner of Taxation under Division 30-BA of the Income Tax Assessment Act 1997 (ITAA 1997) as a deductible gift recipient (DGR)under Item 1 of the table in section 30-15 of the ITAA 1997.

4.                  The Entity is also registered as a charity with the Australian Charities and Not-for-profits Commission (ACNC) and is endorsed by the Commissioner of Taxation as an income tax exempt charitable entity.

5.                 The Entity does not have separate ACNC registrations for itself as trustee of each of the Other Trusts. Were it to do so, the compliance costs would be very substantial, as there are many trusts and ACNC reporting and other compliance steps would likely be required in respect of each trust.

The Entity may create and administer trust funds under the Act

6.                  A Division of the Act governs 'trust funds and related matters'. A specific section allows the Entity to create and administer any trust fund or any funds for any other purpose.

7.                  The Act states:

Establishment of investment common funds

(1)  The Entity may establish one or more investment common funds for the collective investment of any trust funds and other funds held by or in the custody of the Entity.

(2)  Without liability for breach of trust, the Entity may bring into or withdraw from any investment common fund the whole or any part of any trust fund or other fund held by or in the custody of the Entity.

(3)  Subsection (2) applies despite any direction to the contrary, whether express or implied, contained in the trust instrument.

(4)  This section applies with any necessary modifications to the governing body of a college.

Distribution of income of investment common funds

(1)  Subject to subsection (2), the Entity must periodically distribute the income of each investment common fund among the funds participating in the pool having regard to the extent of the participation by each fund during the relevant accounting period.

(2)  From time to time, the Entity, if it considers it expedient to do so, may--

a.    add some portion of the income of each investment common fund to the capital of the common fund; or

b.    establish a fund or funds as a provision against capital depreciation or reduction in income.

(3)  This section applies with any necessary modifications to the governing body of a college.

Commissions etc

(1)  Out of the annual income of a trust fund in an investment common fund, the Entity may periodically deduct an amount not exceeding 5% of the annual income of that trust fund as commission for the administration of that trust fund.

(2)  The commission deducted in accordance with subsection (1) is to be received and accepted by the Entity as full payment to it for the cost of administration of the trust fund.

(3)  The Entity must not make any other charges on the trust fund in addition to the commission received under subsection (2) except in accordance with the trust instrument.

(4)  This section applies with any necessary modifications to the governing body of a college.

Delegation

Despite the terms of any trust, the Council may delegate all or any of its powers, functions and duties as trustee under this Division, other than this power of delegation, to--

(a) a committee of the Council; or

(b) a designated staff member of the Entity.

Division X - Finance

Revenue

Subject to this Act, all fees and all other money received by or on behalf of the Entity under this Act or otherwise must be applied by the Entity solely for the objects or purposes of the Entity.

Donated funds are maintained in the Common Fund taking them outside the Other Trusts

8.                  All moneys received from the individual Other Trusts are pooled into a common fund (Common Fund) created under the Act.

9.                  The Act permits funds that are not trust funds to be pooled with donated money in this way. Money received as ordinary income of the Entity, may be pooled and mixed with donated trust and non-trust money. The Common Fund is a means of pooling the donated trust funds, and occasionally other funds, so that they can be invested efficiently.

10.              The Common Fund is notionally unitised and funds available for the purpose of each Other Trust are represented by notional units.

11.              The Entity values units on a quarterly basis and also applies a 'spend rule' to preserve capital and to determine how much of the Common Fund may be regarded as income to be applied to the Other Trusts.

12.             When units are redeemed the notional liquidity created is credited in the Entity's ledgers as money to be spent on the relevant charitable purposes. The Entity also credits to the available money a notional interest amount determined with reference to the RBA cash rate.

13.             The common fund framework allows the Entity to track investment and expenditure on its purposes.

14.              The money in the Common Fund is made available for the purposes of the particular Other Trust concerned through a process of accounting for gains and attributing them to the relevant purposes. The funds are truly common in that they contain mixed funds of the Entity whether or not held on trust and the Entity credits the ledger available to each trust purpose with interest which may be calculated at the RBA cash rate regardless of any lower rate that may be earned. Accordingly, there is complete integration of the donated moneys and income thereon with other donated money and the Entity's other funds.

Relevant legislative provisions

Division 50 of the Income Tax Assessment Act 1997

Reasons for decision

Question 1

Is the income of the Entity's Fund into which the Entity's Other Trust money is brought, income of the Entity?

Summary

The Fund is established, under an Act, as a resultant trust, separate to the Entity and separate to the Other Trusts, for the combined purposes of both the Entity and the objects of the Other Trusts. Any income of the Fund will be assessable to the Fund.

Detailed reasoning

A Division of the Act concerns the Entity's trust funds and related matters.

A section of the Act enables the Entity to create trust funds.

Under a subsection of the Act the Fund is established for the collective investment of the funds of Other Trusts and any other funds the Entity decides to invest in the Fund.

Various clauses in the Division of the Act indicate that the Fund is distinct from the Entity.

Therefore under the Act, when all moneys received from the Other Trusts are pooled, the Fund is established as a resultant trust with the fiduciary duties and terms implied or imported from the Other Trusts. The Fund has its own capital separate to the Entity and the Other Trusts, and the Trustee holds the capital as trustee for the benefit of the purposes of the Other Trusts, and where other funds of the Entity are held in the Fund, for the benefit of the Entity. The income of the Fund is assessable to the Fund.

Question 2

If the answer to the above question is no, is the Entity's Fund entitled to endorsement as income tax exempt under Division 50 of the ITAA 1997 if it is registered as a charity by the Australian Charities and Not-for-profits Commission (ACNC)?

Summary

Since the special conditions under Division 50 of the ITAA 1997 are met, the Fund will be entitled to endorsement for income tax exemption if it is registered as a charity by the Commissioner of the ACNC.

Detailed reasoning

Section 50-1 of the ITAA 1997 provides that the ordinary and statutory income of entities covered by the tables in Division 50 of the ITAA 1997 is exempt from income tax, subject to certain special conditions contained within Division 50 of the ITAA 1997 being met.

A 'registered charity' is covered by item 1.1 to the table in section 50-5 of the ITAA 1997 and subject to the special conditions stated in sections 50-50 and 50-52 of the ITAA 1997

Under section 50-50 of the ITAA 1997 a registered charity must satisfy one of the following special conditions:

·         have a physical presence in Australia and to that extent incurs its expenditure and pursues its objectives principally in Australia; or

·         is a deductible gift recipient; or

·         is prescribed by law.

The Entity's Fund will satisfy the requirements of section 50-50 because it has a physical presence in Australia and incurs its expenditure and pursues its objectives principally in Australia.

Section 50-52 of the ITAA 1997 requires the registered charity to be endorsed as income tax exempt by the Commissioner of Taxation under Division 50-B of the ITAA 1997. Under section 50-110 of the ITAA 1997 an entity is entitled to be endorsed if it:

·         is a 'registered charity' under item 1.1 of the table in section 50-5 of the ITAA 1997, and

·         has an ABN, and

·         meets the special conditions of item 1.1 of the table in section 50-5 of the ITAA 1997.

Therefore, if the Entity's Fund has an ABN and is registered as a charity with the ACNC, it will be entitled to be endorsed as exempt from income tax by the Commissioner of Taxation.

Question 3

If the accumulated income of the Entity's Fund is applied for the purposes of a one of the Other Trusts, or paid to one of the Other Trusts, is that amount assessable income to the Other Trust?

Summary

Accumulated income which is withdrawn from the Fund and applied for purpose of one of the Other Trusts, or paid to one of the Other Trusts, will be a withdrawal of corpus of the Fund and therefore capital, and not income, in the hands of the Other Trust.

Detailed reasoning

The Act requires the Entity to periodically distribute the income of the Fund among the funds participating in the pool. There is no requirement that this occurs annually. In practice the Entity only makes an accounting provision and an actual distribution is made from the Fund when funds are applied towards a purpose of one of the Other Trusts. The distribution from the Fund by applying the distribution for the purpose of the Other Trust is made from the original capital contributed to the Fund and any accumulated income added to the capital under Act. Therefore, the distributions from the Fund for the purposes of one of the Other Trusts will be an application of corpus from the Fund towards the purposes of the Other Trust. Therefore, the amounts distributed are capital and there is no income distributed to the Other Trust.

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